ABSTRACT
It has been about a quarter century since the eclectic paradigm (Dunning 1977) was originally introduced as a framework for examining the international production and foreign direct investment decisions of firms. The eclectic paradigm offered a comprehensive approach hypothesising that foreign direct investment would occur when three conditions are satisfied. First, firms possessed a competitive advantage (the ownership or O advantage). This advantage was relative to firms from the host country and assumed to be necessary in order to offset the disadvantage of not being a local firm. In other words, the O advantage offsets the liability of foreignness. Second, to benefit fully from the potential created by the O advantage, there must be some need to combine them with some location-specific (L) advantages of host countries. Third, to complete the triangle, given the O advantage, there must be some benefit to undertaking the relevant set of activities internally (the internalisation or I advantage) within the firm rather than through more arm’s-length contractual mechanisms like licensing or market mechanisms such as exports.
