The OLI Framework (The Eclectic Paradigm) | International Business | From A Business Professor

Summary

Dr. Yang's Business School 101 explores international business expansion strategies, focusing on the OLI framework—ownership, location, and internalization advantages. The video explains how companies like Tesla use this framework to decide on entry strategies, such as wholly owned subsidiaries, by assessing their competitive edge, market potential, and the benefits of controlling operations in foreign markets.

Takeaways

• 🌐 Companies considering international expansion have various entry strategies to choose from, each with its own pros and cons.
• 🔍 The OLI Framework (Ownership, Location, and Internalization Advantage) is a practical tool for managers to evaluate and choose the appropriate entry strategy.
• 🏢 Ownership Advantage helps overcome the 'liability of foreignness' and includes intangible assets like brand, copyrights, and unique technological capabilities.
• 🌍 Location Advantage refers to the compelling reasons a host country offers, such as cheap raw materials, low wages, skilled labor, and favorable tax policies.
• 🔄 Internalization Advantage determines whether it's more beneficial for a company to produce a product internally or contract it out to a third party.
• 🏭 Tesla's Shanghai Gigafactory is a real-world example of applying the OLI Framework, leveraging its brand strength, China's EV market size, and the need to protect its technology and brand image.
• 🚀 For a company to successfully engage in foreign direct investment, it needs all three OLI advantages; lacking any may suggest considering alternative entry strategies.
• 🤔 Management should ask if their firm has a competitive advantage that can offset the 'liability of foreignness' when expanding abroad.
• 🌟 If location advantages are absent in the target market, it might be more strategic to keep production at home and export.
• 🔑 If internalization is not advantageous, companies might opt for licensing or outsourcing to leverage local market knowledge or cost-effectiveness.
• 🏁 The OLI Framework provides a structured approach for companies to evaluate their readiness and strategy for foreign direct investment.

Q & A

What are the various entry strategies a company can choose when expanding to a foreign country?

Common entry strategies include exporting, licensing, franchising, strategic alliance, joint venture, and wholly owned subsidiary.

What is the OLI framework and who developed it?

The OLI framework, also known as the eclectic paradigm, stands for Ownership, Location, and Internalization advantages. It was developed by British economist John H. Dunning in 1979.

What is the significance of the three advantages in the OLI framework?

A company needs all three advantages (Ownership, Location, and Internalization) to successfully engage in foreign direct investment according to the OLI framework.

What is the liability of foreignness and how can a company overcome it?

The liability of foreignness refers to the inherent disadvantages foreign firms experience in host countries due to their non-native status. A company can overcome this by having an ownership advantage, such as proprietary information, brand, copyright, trademark, or patent rights.

What are some examples of ownership advantages that a company might possess?

Ownership advantages can include a strong brand name, unique technological capabilities, or significant economies of scale.

Why is location advantage important when considering international expansion?

Location advantage is important because it offers compelling reasons for internationalization, such as access to cheap raw materials, low wages, skilled labor force, special taxes, or lack of tariffs.

How can a company assess whether there is a comparative advantage to performing specific functions within a particular nation?

A company can assess comparative advantage by evaluating resources, costs, and availability, often using tools like Porter's Diamond Model.

What does internalization advantage indicate about a company's decision to produce a product internally or contract with a third party?

Internalization advantage indicates whether it is more attractive for a company to perform the value chain activity in-house or have it performed by an external party.

Why did Tesla decide to build its first foreign factory in China, according to the OLI model?

Tesla built its first foreign factory in China due to its strong brand image (ownership advantage), the large market for electric vehicles in China (location advantage), and the desire to control its production process and protect its core competitive advantages (internalization advantage).

What is the conclusion of the video regarding the OLI framework's usefulness in real business scenarios?

The video concludes that the OLI framework is a valuable tool for companies to evaluate whether pursuing foreign direct investment is beneficial, as it requires considering all three advantages for success.