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The “OLI” or “eclectic” approach to the study of foreign

direct investment (FDI) was developed by John Dunning
(1977)

“OLI” stands for Ownership, Location, and

Internalization, three potential sources of advantage
that may underlie a firm’s decision to become a
multinational

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Ownership
The ownership condition says that the firm must own
some asset that generates enough value to make it worth
the extra costs of multinational production. This asset
might be a blueprint, a patent, or copyright.
Other kinds of assets include things such as managerial
talent, a brand’s reputation, or some other intangible
capital owned by the firm

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Location
A multinational firm, by definition, operates in more
than one country. To make this worthwhile, there must
be some advantage from operating in that location.
 Advantage is a saving in transportation and tariff costs.
This kind of advantage is most important for goods
that are expensive to ship abroad.
 Another location advantage might arise from
differences in production costs across countries

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Internalization
The internalization advantage says that there must be a
gain from keeping the international expansion within
the firm.
 One way an internalization advantage arises is when
the firm’s assets are easy to copy.
 Producing within the firm, rather than licensing to an
outside firm, may make it easier for a firm to protect
its assets.

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 When these three conditions are met, it may be most
profitable to organize the firm as a multinational.

 Without a location advantage, the firm could produce in its

home country and export to serve other markets.

 Without an internalization advantage, the firm could

license its production process to a separate foreign firm
who produces the good or service.

 Without an ownership advantage, it is unlikely that the

firm can produce enough value to exist at all.

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 Competitiveness analysis can provide useful insight into
the dynamics of competitiveness of an industry.

Porter’s diamond framework has found to be the useful

model by many.

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Porter’s Diamond framework
The competitiveness of a nation is determined by the
superior and sustainable advantage it has in the long
run, these are:

 Superior skilled and trained man-power.

 Superior organisational structures.
 Entrepreneurial spirit in people and.
 Organisational capacity to innovate (porter 1990).

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  Porter developed the long perceived idea that low
factor endowments of a nation cannot be a source of
everlasting competitive advantages.
 Diamond model thus supplants the comparative
advantage model.

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 The sources of real competitive advantage lie in the
four major economic attributes (direct factors):

1. Advanced factor conditions (technology, skilled labour & capital)

2. Demand conditions (sophisticated customer base who demand high
quality goods and services)
3. Presence of related and supporting industries (which provide vital value
components in value chain)
4. Firm level strategy, structure and rivalries

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 Two indirect factors are:

5. Chance (population ecology, nature endowment)

6. Government

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Porter’s Diamond model
Firm strategy,
structure and
chance rivalry

Demand
Factor conditions
conditions

Related and
Source porter 1990 governmen
supporting
t
industries

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Factor conditions
 Basic factors
 Natural resources.
 Climate
 Location
 Demographic
 Advanced factors
 Communication & transport infrastructure.
 Sophisticated skills &
 Research facilities.

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Demand conditions
 Sophisticated nature of buyers is very important
element of demand condition.
 Customers must be able to distinguish between useful
and reliable products.
 Sophisticated buyers play a crucial role in enhancing
quality and functionality in Japanese products and
services.
 Innovation & technological advancement results for
superior skills and specialised workforce.
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Presence of related and supporting industries

 Pertain to high powered and forceful support

industries and suppliers.
 Provide innovative solution to technological and
logistical problems.
 Give threat for forward integration.
 Give way to constantly innovate and upgrade product
and services.

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Firm- level Strategy, Structure and Internal
Rivalries

 One of the key element is advanced management

strategy.
 Managements ability to position the firm at the most
advantageous position in the value chain.
 Strategies to overcome competitive barriers.
 Develop innovative strategy & innovative
organisational structure.

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30-07-2019 MS 203 MIB
 The “OLI” or “eclectic” approach to the study of foreign
direct investment (FDI) was developed by John Dunning
(1977)

“OLI” stands for Ownership, Location, and

Internalization, three potential sources of advantage
that may underlie a firm’s decision to become a
multinational

30-07-2019 MS 203 MIB

Ownership
The ownership condition says that the firm must own
some asset that generates enough value to make it worth
the extra costs of multinational production. This asset
might be a blueprint, a patent, or copyright.
Other kinds of assets include things such as managerial
talent, a brand’s reputation, or some other intangible
capital owned by the firm

30-07-2019 MS 203 MIB

Location
A multinational firm, by definition, operates in more
than one country. To make this worthwhile, there must
be some advantage from operating in that location.
 Advantage is a saving in transportation and tariff costs.
This kind of advantage is most important for goods
that are expensive to ship abroad.
 Another location advantage might arise from
differences in production costs across countries

30-07-2019 MS 203 MIB

Internalization
The internalization advantage says that there must be a
gain from keeping the international expansion within
the firm.
 One way an internalization advantage arises is when
the firm’s assets are easy to copy.
 Producing within the firm, rather than licensing to an
outside firm, may make it easier for a firm to protect
its assets.

30-07-2019 MS 203 MIB

 When these three conditions are met, it may be most
profitable to organize the firm as a multinational.

 Without a location advantage, the firm could produce in its

home country and export to serve other markets.

 Without an internalization advantage, the firm could

license its production process to a separate foreign firm
who produces the good or service.

 Without an ownership advantage, it is unlikely that the

firm can produce enough value to exist at all.

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 Thank you

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