Hochschule für Technik und Wirtschaft des Saarlandes
FACHBEREICH BETRIEBSWIRTSCHAFT

STUDIENGANG:

International Management, Master

3. Semester

Seminararbeit



THEMA:

A critical comparison of Internationalisation

theories: Eclectic Paradigm of Dunning vs.

Uppsala School

ABGABEDATUM:

07.12.2007

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I.

Table of Content

II.

List of Figures

III.

List of Acronyms

I.

Table of Content

1 Introduction

1

2 Definitions

3

2.1 Multinational

enterprise

3

2.2 Export

4

2.3

Foreign direct investment 5

2.4 International

contracts

6

3

The eclectic paradigm of international production 7

3.1

OLI advantages 8

3.1.1 Ownership advantages

8

3.1.2 Location advantages 8

3.1.3 Internationalisation advantages 9

3.2

Market Entry Strategies 9

3.3

Endowment/Market Failure Paradigm 10

3.4 Criticism

11

4

Uppsala-model of Internationalisation 14

4.1 Patterns

of

Internationalisation 15

4.1.1 Establishment

Chain

15

4.1.2 Psychic Distance Chain 16

4.2

Model of Internationalisation 18

4.2.1 State

Aspects

19

4.2.2 Change

Aspects 19

4.3 Criticism

20

5 Critical

Comparison

23

5.1

Comparison Eclectic Paradigm & Uppsala-model 23

5.1.1 Dynamic vs. static 23

5.1.2 Negligence of demand 23

5.1.3 Validation

24

5.1.4 At home and abroad 24

5.1.5 Mode & point of time 25

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5.1.6 Individuals

decide

26

5.1.7 Disregard industries and companies particularities 26

5.2

Eclectic Paradigm in favour of Uppsala-model 27

5.2.1 A simple vs. a complex approach 27

5.2.2 Uncertainty avoidance vs. rationality 27

5.3

Uppsala-model in favour of Eclectic Paradigm 28

5.3.1 Fast vs. slow Internationalisation process 28

5.3.2 Explanation of market entry strategies vs. gradual process 29

6 Conclusion

30

7 Outlook

31

7.1 Eclectic

Paradigm

31

7.2

Uppsala-Model of Internationalisation 32

IV.

Bibliography

V. Declaration

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II. List of Figures

Fig. 1:

Eclectic theory of international production

Fig. 2:

Psychic distance as a concept of geographical distance

Fig. 3: Establishment

Chain

Fig.4:

The Internationalisation Process of the Firm

III. List of Acronyms

Etc.

etcetera

FDI

foreign

direct

investment

Fig.

figure

FTO

foreign

total

operations

MNE

multinational enterprise

OLI

ownership advantages, internalisation advantages,

location advantages

R&D

research and development

SME

small and medium-sized enterprise

US

United States

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Daniela Margardt - A critical comparison of Internationalization theories

1

1 Introduction

Centuries ago it was out of question for companies to operate worldwide. The

costs to act global had been too high as well as the existent lack of

knowledge about other countries, cultures, languages, foreign demands etc.

But a few decades ago, companies started to run for globalisation which is

seen as a process of internationalisation. Globalisation can be defined as a

global network of economic processes. Today companies face less risk when

engaging in international activities than ever before. Nowadays markets are

easy accessible and the society faces a similar development concerning

living standards all over the world. Companies notice the existing possibilities

when passing national borders. Today internationalisation is an option for big

companies as well as for SME´s. Internationalisation can be defined more

exactly as the name "international" predicts as an international network

between companies of different nations which means in most cases

industrialised nations. Today almost all products and services are

internationalised and available on the world market. It is indispensable that

enterprises conduct business in host countries to remain competitive. Most

companies are aware of internationalisation processes. Multinational

companies are enterprises which operate in two or more countries.

Bundeszentrale für politische Bildung (1) states that in 1980, approximately

17.000 MNE´s existed. Further Bundeszentrale für politische Bildung (1)

explains that already in the year 2000, 63.000 MNE´s existed and in 2004

existed even 70.000 MNE´s. According to Bundeszentrale für politische

Bildung (1) belong MNE companies to the countries where their headquarter

is based in. Further Bundeszentrale für politische Bildung (1) estimates that

approximately 9.000 MNE´s belong to Germany and approximately 2.500

international firms belong to the United States. As it can be observed, the

trend in businesses is to become a multinational company. To become a

company which engages in international activities is a long time process

consisting of various steps. Therefore firms having international intentions

began to question under which circumstances they should internationalise its

activities and which market entry form they should choose.

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Daniela Margardt - A critical comparison of Internationalization theories

2

Methodology

Various theories exist which cover that topic for example: the product life

cycle of Vernon, Porters diamond model, the Eclectic Paradigm of

international production and the Uppsala-School Internationalisation

approach; only to name a few. This paper focuses on two approaches which

explain firms intention to establish activities outside their national borders: the

Eclectic Paradigm of international production and the Uppsala-model of

internationalisation and thus their comparison examining similarities and

differences. The basis of that paper is information from books, professional

journals and the Internet. Some information appear rather old but in fact the

important basic information of the theories comes from the seventies and

eighties. As a matter of course the most used literature is actual one. In first

place, some definitions are made to provide a common understanding of

fundamental terms used within this paper. Second the Eclectic Paradigm of

international production is described as a general framework to explain

multinational enterprise activities. Further the Uppsala-model of

internationalisation is examined which is one of the most popular approaches

in international management. Afterwards a critical comparison of the Eclectic

Paradigm of international production and the Uppsala School

Internationalisation-model is made. That critical juxtaposition is made in the

end; after the basics of the Eclectic Paradigm and the Uppsala School

internationalisation approach had been explained. Finally that paper will end

by the conclusion which focuses on the most important points. The end of

that seminar paper is the outlook which puts forward ideas of improvement

as well as possible changes of the theories.

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Daniela Margardt - A critical comparison of Internationalization theories

3

2 Definitions

In this chapter significant definitions are made to establish a common

understanding for basic terms used within this paper. The following terms are

playing a significant role in every chapter of the paper. The start definition is

the explaination of the term multinational enterprise, further a definition of

export is given, afterwards foreign direct investment is explained and finally a

definition of International contracts is provided.

2.1 Multinational enterprise

In the following section the term multinational enterprise is exclusively

explained. A broad definition of a MNE is the circumscription as a corporation

which acts in more than two countries by establishing its own subsidiaries in

production and sales. One widely spread criteria of a MNE is its quantitative

internationalisation degree that means that MNE´s activities in a home

country are compared to the activities abroad. Some measurement

categories could be the annual turnover, employees, incoming orders and

fullfilled orders. Dunning (1993, p. 3) defines more closely "A multinational or

transnational enterprise is an enterprise that engages in foreign direct

investment (FDI) and owns or controls value-adding activities in more than

one country." This definition of a MNE is the one which is mostly accepted by

scientists. Dunning (1993) speaks from six equal important criteria to

measure a companies multinationality:

1. the size and number of subsidiaries abroad,

2. the quantity of countries in which the enterprise operates on value-adding

activities,

3. the allotment of foreign branches to ratios of the total enterprise. Foreign to

total operations ratio (employees, revenues, income); f.ex. FTO

employees: describes the proportion of employees abroad in comparison

to the totality of employees,

4. the extent of internationalisation of management and share property; f.ex.

local employees know better about local markets,

5. the degree of internationalisation of higher value activities as R&D

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