168 J.H.Dunning/International Business Review 9 2000)163-190 of its parts,with the contribution of each becoming increasingly interdependent of each other.Finally,the paper will give especial attention to the contribution of stra- tegic cum managerial approaches to understanding the growth and composition of MNE activity,while averring that the relevance and richness of these is enhanced if set within the overarching construct of the eclectic paradigm 2.The ownership sub-paradigm In explaining the growth of int several strands of economic and bu as s depe n the inve some nique and sustainab c itive advantage (or advantage relative to t that (or thos e)possessed by their foreign com pettors.Ind some woul argue that in tradition I neoclassical theory,in which the firm is a 'black box',no fdi is possible- as all firms have equal access to the same resources and capabilities within their own countries,while there is complete immobility of resources and capa- bilities berween countries. When the eclectic paradigm was first put forward (in 1977),4 it was assumed that such competitive or o specific advantages largely refected the resources and capabilities of the home countries of the investing firms;and that fdi would only occur when the benefits of exploiting,ie.adding value to,these advantages from a foreign location outweighed the opportunity costs of so doing Since the 1960s.the extant lite ature has come to identify three main kinds of firm or O specific competitive advantages 1.Those relating to the ossession and exploitation of mo power,as initially 1956 (1960 opoly org zatio (IO)scholar aves 197L. 2:P ,198 hese sten n from,or create some kind of barrier to entry to final product 2.Those relating to the possession of a bundle of scarce,unique and susta resources and capabilities,which essentially reflect the superior technical efficiency of a particular firm relative to those of its competitors. These advan- tages are presumed to stem from,or create,some kind of barrier to entry to factor or intermediate,product markets by firms not possessing them.Their identification The origins of the paradigm date back to 1958,when the distinction between the O advantages of irms and th advantages of count was irst made,in study by the author,of America of the reasons why firms p efer to in fdi rather thar der licens g et al agre were acknowledged by the author and other scholars in the early 199 d edition of Dunning. ted assets,and that factor markets are not fully contestable.Much earlier,several kinds of com
168 J.H. Dunning / International Business Review 9 (2000) 163–190 of its parts, with the contribution of each becoming increasingly interdependent of each other. Finally, the paper will give especial attention to the contribution of strategic cum managerial approaches to understanding the growth and composition of MNE activity, while averring that the relevance and richness of these is enhanced if set within the overarching construct of the eclectic paradigm. 2. The ownership sub-paradigm In explaining the growth of international production, several strands of economic and business theory assert that this is dependent on the investing firms possessing some kind of unique and sustainable competitive advantage (or set of advantages), relative to that (or those) possessed by their foreign competitors. Indeed, some would argue that in traditional neoclassical theory, in which the firm is a ‘black box’, no fdi is possible — as all firms have equal access to the same resources and capabilities within their own countries, while there is complete immobility of resources and capabilities between countries. When the eclectic paradigm was first put forward (in 1977),14 it was assumed that such competitive or O specific advantages largely reflected the resources and capabilities of the home countries of the investing firms; and that fdi would only occur when the benefits of exploiting, i.e. adding value to, these advantages from a foreign location outweighed the opportunity costs of so doing. Since the 1960s, the extant literature has come to identify three main kinds of firm or O specific competitive advantages. 1. Those relating to the possession and exploitation of monopoly power, as initially identified by Bain (1956) and Hymer (1960) — and the industrial organization (IO) scholars (e.g. Caves 1971, 1982; Porter 1980, 1985). These advantages are presumed to stem from, or create, some kind of barrier to entry to final product markets by firms not possessing them. 2. Those relating to the possession of a bundle of scarce, unique and sustainable resources and capabilities, which essentially reflect the superior technical efficiency of a particular firm relative to those of its competitors.15 These advantages are presumed to stem from, or create, some kind of barrier to entry to factor, or intermediate, product markets by firms not possessing them. Their identification 14 The origins of the paradigm date back to 1958, when the distinction between the O advantages of firms and the L advantages of countries was first made, in a study by the present author, of American investment in British manufacturing industry (Dunning, 1958, revised 1998). The I component was not explicitly added until 1977, although some of the reasons why firms prefer to engage in fdi rather than cross-border licensing et al agreements were acknowledged by the author and other scholars in the early 1970s. (See the 1998 revised edition of Dunning, 1958, Chapter 11) 15 Implicitly or explicitly, this assumes some immobility of factors of production, including created assets, and that factor markets are not fully contestable. Much earlier, several kinds of competitive advantages specific to foreign owned and domestic firms were identified by such scholars as Dunning (1958), Brash (1966) and Safarian (1966)
JH.Dunning/Intermational Business Review 9000)163-190 69 of the main contributions of the resource based 3 ting to the con of the managers of fir nout th nate the the a way which best advances the long term interests of the firm.These advantages, which are closely related to those set out in(2)are especially stressed by organiza- tional scholars,such as Prahalad and Doz(1987),Doz,Asakawa,Santos and Willi- amson (1997)and Bartlett and Ghoshal (1989,1993).They tend to be manage ment,rather than firm,specific in the sense that,even within the same corporation the intellectual et al.,competencies of the main decision takers may vary widely The relative significance of these three kinds of O specific advantages has changed over the past two decades,as markets have become more liberalized,and as wealth and assets and match these to existing market needs. At the ium. the emphasis is more on their ca abilities to and ensive sets from not only ghout the with their existing co inte but those of engaging in comple ue added advar activ an to undertake fi to protect aswell as toexploit their existing specific advantagesDunng or augmen 995).Hence too,the growing importance of multinationality,per se,as an intangible asset in its own right. The question at issue,then,is whether the changing character and boundaries of the O specific advantages of firms can be satisfactorily incorporated into the eclectic paradigm,as it was first put forward.We would argue that as long as they do not undermine the basic tenets of the paradigm,and are not mutually inconsistent.they can be,although most certainly,they do require some modification to existing sub- paradigms and theories In Tables I and 2.we set out some of the models and hypotheses which have pdso u pu divide these into two categories generating resources and capabilitiesp sessed by a firr at a given moment of tin static o ady and thos which tr such adv as the ability firm.to sustain and se its i time,i.e. mic advantages.Both kinds of d to be e.g espect on.Silverberg and Socte ()Fos nev(1995 1992)and of Iccce,Pisano g the tro and of maximizing the of in ing and accumulated knowledge
J.H. Dunning / International Business Review 9 (2000) 163–190 169 and evaluation has been one of the main contributions of the resource based and evolutionary theories of the firm.16 3. Those relating to the competencies of the managers of firms to identify, evaluate and harness resources and capabilities from throughout the world, and to coordinate these with the existing resources and capabilities under their jurisdiction in a way which best advances the long term interests of the firm.17 These advantages, which are closely related to those set out in (2) are especially stressed by organizational scholars, such as Prahalad and Doz (1987), Doz, Asakawa, Santos and Williamson (1997) and Bartlett and Ghoshal (1989, 1993). They tend to be management, rather than firm, specific in the sense that, even within the same corporation, the intellectual et al., competencies of the main decision takers may vary widely. The relative significance of these three kinds of O specific advantages has changed over the past two decades, as markets have become more liberalized, and as wealth creating activities have become more knowledge intensive. In the 1970s, the unique competitive advantages of firms primarily reflected their ability to internally produce and organize proprietary assets, and match these to existing market needs. At the turn of the millenium, the emphasis is more on their capabilities to access and organize knowledge intensive assets from throughout the world; and to integrate these, not only with their existing competitive advantages, but with those of other firms engaging in complementary value added activities. Hence, the emergence of alliance capitalism, and the need of firms to undertake fdi to protect, or augment, as well as to exploit, their existing O specific advantages (Dunning, 1995). Hence, too, the growing importance of multinationality, per se, as an intangible asset in its own right. The question at issue, then, is whether the changing character and boundaries of the O specific advantages of firms can be satisfactorily incorporated into the eclectic paradigm, as it was first put forward. We would argue that as long as they do not undermine the basic tenets of the paradigm, and are not mutually inconsistent, they can be, although most certainly, they do require some modification to existing subparadigms and theories. In Tables 1 and 2, we set out some of the models and hypotheses which have been sought to explain the origin, nature and extent of O specific advantages. We divide these into two categories, viz. those which view such advantages as the income generating resources and capabilities possessed by a firm, at a given moment of time, i.e. static O advantages; and those which treat such advantages as the ability of a firm, to sustain and increase its income generating assets over time, i.e. dynamic O advantages. Both kinds of advantage tend to be context specific, e.g. with respect 16 For a full bibliography, see Barney (1991), Conner (1991), Conner and Prahalad (1996), Cantwell (1994) and Dosi, Freeman, Nelson, Silverberg and Soete (1988); Foss, Knudsen, and Montgomery (1995); Saviotti and Metcalfe (1991). See also the writings of Teece (1981, 1984, 1992) and of Teece, Pisano and Shuen (1997). 17 Which includes minimizing the transaction costs and of maximizing the benefits of innovation, learning and accumulated knowledge
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170 J.H. Dunning / International Business Review 9 (2000) 163–190 Table 1 Theories explaining O specific advantages of firms. A: Group 1 Explaining Static O advantagesa 1) MSb 2) RSb 3) ESb 4) SASb Product cycle theory. (Vernon 1966, •Country (largely US) 1974) specific resources and capabilities of firms •All asset exploiting fdi •Further hypothesizes that competitive advantages of firms are likely to change as product moves through its cycle Industrial organization theories. •Largely Oa advantages initiated, or protected, •Oa advantages based on efficiency of investing firms also (Hymer, 1960; Caves 1971, 1974; by entry and/or mobility barriers to product described in various empirical studies from Dunning (1958) and Dunning 1958, 1993; Teece 1981, markets. These include patent protection, and Safarian (1966) onwards 1984) marketing, production and financial scale economies •All asset exploiting fdi •Little attention paid to asset augmenting fdi Multinationality, organizational and risk •Mainly Ot advantages, but also some Oa advantages arising from presence of investing firms in countries with diversification theories. (Vernon 1973, different economic political, cultural regimes. Ot advantages include ability to access, harness and integrate 1983; Rugman, 1979; Kogut 1983, differences in distribution of natural and created assets and of organizational and managerial experience related 1985; Kogut & Kulatilaka, 1994; Doz to these et al., 1997; Rangan, 1998) •(Potentially could be extended to include why markets for sustaining or increasing O specific advantages are best internalized.) (continued on next page)
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J.H. Dunning / International Business Review 9 (2000) 163–190 171 Table 1 (continued) 1) MSb 2) RSb 3) ESb 4) SASb Internalization theory. (Buckley & •Entirely confined to Oa and Ot advantages arising from internalization Casson, 1976, 1985, 1998a,b; Hennart of intermediate product markets 1982, 1989; Rugman 1982, 1996) •All asset exploiting fdi •Largely, though not exclusively, a static theory, though some acknowledgment that relative transaction costs of markets and hierarchies may vary as firms seek to exploit dynamic market imperfections Capital Imperfections theory. (Aliber, •Largely independent of type of fdi. The theory argues that firms from countries with strong exchange rates, or 1971) which discount capital at higher rates of interest will be tempted to invest, often by M and As, in countries which are economically weaker. The theory, as initially put forward, has no time (t) dimension; and, in essence, is a financial variant of internalization theory Follow my leader, tit for tat theory. •Mainly concerned with explaining fdi as a space related strategy among competing oligopolists. The main (Knickerbocker, 1973; Graham 1975, hypothesis is that fdi will be bunched in particular regions or countries over time; and that there is likely to be 1990; Flowers, 1976) an inter-penetration of the territories occupied by the oligopolists. Though originally applied to explain assetexploiting fdi, it is now also being used to explain some asset augmenting fdi a Oa=Ownership advantage based on the possession or privileged access to a specific asset. Ot=Ownership advantages based on capabilities to organize assets, both internal and external to the investing firm, in the most efficient way. b 1) Market seeking 2) Resource seeking 3) Efficiency seeking 4) Strategic asset seeking
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172 J.H. Dunning / International Business Review 9 (2000) 163–190 Table 2 Theories explaining O specific advantages of firms. B: Group 2 Explaining Dynamic O advantagesa 1) MSb 2) RSb 3) ESb 4) SASb 1. Resource based theory. (Wernerfelt •As initially formulated, mainly concerned with identifying and •FDI designed to augment domestic- 1984, 1995; Conner, 1991; Helleloid, evaluating variables influencing sustainability of competitive based resources and capabilities 1992; Montgomery, 1995; Conner & advantages of firms. Less attention given to traditional barriers to entry (Wesson 1993, 1997; Makino, 1998; Prahalad, 1996) and more to such variables as specificity, rareness and non-imitatability Dunning, 1996; Chen & Chen, 1999) of resources, and the capabilities of firms to create and utilize them. Mainly concerned with asset exploiting fdi and only limited recognition of Ot advantages 2. Evolutionary theory. (Nelson & •A holistic and time related approach, mainly directed to identifying and evaluating dynamic Oa advantages of Winter, 1982; Nelson, 1991; Cantwell firms. Basic proposition relates to the path dependency of accumulated competitive advantages, and that the 1989, 1994; Dosi et al., 1988, more efficient firms are in managing these advantages, the more likely they will have the capability to engage Saviotti & Metcalfe, 1991; Teece et al., in asset exploiting and asset augmenting fdi 1997) 3. Organizational (management related) •Essentially explain O advantages in terms of ability of managers to devise appropriate organizational structures theories. (Prahalad & Doz, 1987; and techniques to effectively access, coordinate and deploy resources and capabilities across the globe. These Bartlett & Ghoshal, 1989; Porter, 1991; theories, in recent years, have especially focused on the cross-border sourcing of intellectual assets and the Bartlett & Ghoshal, 1993; Doz and coordination of these assets with those purchased from within the MNE Santos, 1997; Doz et al., 1997) a Oa=ownership advantage based on the possession or privileged access to a specific asset. Ot=ownership advantages based on capabilities to organize assets, both internal and external to the investing firm, in the most efficient way. b 1) Market seeking 2) Resource seeking 3) Efficiency seeking 4) Strategic asset seeking