UGF Lecture 7

Management > Global Firm > Basis for I

Basis for I

The first two elements of Dunning's eclectic framework (1977) are ownership advantages (OA) and location advantages (LA). The question remains of why the firm would use the OA itself to become an MNE when it can use the OA as a commodity (an intermediate product, such as technology or managerial skills) and sell it (or its use). Indeed, Hymer argued that local firms have the advantages of their locality, so they may be able to use the OA more effectively.

When a firm licenses its OA, it is externalising it. Alternatively it can internalise its OA. Buckley and Casson (1976) introduced this concept, arguing that the markets for intermediate products are often inefficient, suffering from high transaction costs. These costs take the form of things like extensive negotiations and expensive legal contracts.

Many of the risks of transferring an OA between independent firms through a market are avoided if it is transferred between two parts of the same firm (internalised). This is also more efficient (costs less to organise).

Thus it seems that for a productive MNE, the firm must use its OA with an effective LA and then internalise its OA.