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.

Outlines

00:00

🌐 Understanding International Business Expansion Strategies

This paragraph introduces the topic of international business expansion, focusing on the various strategies a company can adopt when entering a foreign market. It discusses common strategies such as exporting, licensing, franchising, strategic alliances, joint ventures, and wholly owned subsidiaries. The paragraph emphasizes the importance of choosing the right entry strategy and introduces the OLI (Ownership, Location, and Internalization) framework as a tool for decision-making. The OLI framework, based on internalization theory and developed by economist John Dunning, suggests that a company needs all three advantages to successfully engage in foreign direct investment. The paragraph outlines the three advantages and provides a real-world example to illustrate the concept.

05:02

🏭 Analyzing Tesla's Entry into the Chinese Market

In this paragraph, the OLI framework is applied to Tesla's decision to establish a factory in Shanghai, China. It examines Tesla's ownership advantage, highlighting the brand image and innovation focus that set Tesla apart in the automotive industry. The location advantage is explored through China's status as the largest market for electric vehicles and the strategic benefits of having a manufacturing presence there, such as reduced shipping costs and avoidance of import duties. The internalization advantage is discussed in terms of Tesla's control over its production process and protection of its intellectual property. The paragraph concludes by emphasizing the importance of the OLI framework in evaluating whether foreign direct investment is beneficial, suggesting that companies need all three advantages to successfully engage in such investments.

Keywords

💡Entry Strategies

Entry strategies refer to the methods a company uses to enter a foreign market. In the video, various strategies such as exporting, licensing, franchising, strategic alliances, joint ventures, and wholly owned subsidiaries are mentioned. These strategies are crucial for managers to consider when expanding their business internationally, as they each have unique advantages and disadvantages.

💡OLI Framework

The OLI Framework (Ownership, Location, and Internalization) is a theoretical model used to analyze a company's decision to engage in foreign direct investment. It is based on the internalization theory and was introduced by economist John H. Dunning in 1979. The video explains that a company needs all three advantages to successfully invest abroad, and the framework helps managers to evaluate and choose the appropriate entry strategy.

💡Ownership Advantage

Ownership advantage is one of the three elements of the OLI Framework. It refers to the proprietary assets and knowledge that a company possesses, such as brand, copyrights, patents, and unique technologies. In the video, it is discussed as a way for a company to overcome the 'liability of foreignness' by leveraging its intangible assets, like Tesla's strong brand and innovative technology.

💡Liability of Foreignness

The liability of foreignness is the inherent disadvantage that foreign firms face in host countries due to their non-native status. This can range from language barriers to a lack of understanding of local customer demands. The video uses this concept to explain why companies need ownership advantages to mitigate these disadvantages when expanding abroad.

💡Location Advantage

Location advantage is the second element of the OLI Framework and pertains to the benefits a host country offers that make internationalization worthwhile. These can include geographical advantages, access to cheap raw materials, low wages, or favorable tax policies. The video discusses how companies should assess these advantages when considering a foreign market, using China's market for electric vehicles as an example.

💡Internalization Advantage

Internalization advantage is the third element of the OLI Framework and it helps determine whether a company should perform a value chain activity in-house or contract it out to a third party. The video explains that if a company's core competencies and control over its activities are better maintained internally, it should consider foreign direct investment, as exemplified by Tesla's decision to establish a wholly owned subsidiary in Shanghai.

💡Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is a form of investment where a company invests in a foreign country by opening a new branch or acquiring a controlling stake in an existing company. The video discusses FDI as a potential entry strategy when a company has all three OLI advantages, allowing it to control its operations in the foreign market effectively.

💡Wholly Owned Subsidiary

A wholly owned subsidiary is a company that is completely controlled by another company, the parent company. The video uses Tesla's Giga Shanghai as an example of a wholly owned subsidiary, which allows Tesla to maintain full control over its operations and protect its intellectual property in the Chinese market.

💡Joint Venture

A joint venture is a business agreement in which two or more companies pool their resources to undertake a new project. The video mentions joint ventures as one of the entry strategies a company might consider when entering a foreign market, although it also points out the risks of intellectual property loss.

💡Outsourcing

Outsourcing is the practice of hiring an external company to perform tasks or functions that were previously performed internally. The video discusses outsourcing as a potential strategy when a company decides that it is more cost-effective or efficient to have certain value chain activities performed by an external party, rather than internally.

💡Porter's Diamond Model

Porter's Diamond Model is a framework used to analyze the competitive advantage of a nation or a region. It considers four main determinants: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. The video suggests using this model to determine location advantages when considering entering a foreign market.

Highlights

A company needs to consider various entry strategies when expanding to a foreign country.

Common strategies include exporting, licensing, franchising, strategic alliances, joint ventures, and wholly owned subsidiaries.

The OLI framework (Ownership, Location, and Internalization) helps in choosing an appropriate entry strategy.

OLI is based on internalization theory and was introduced by economist John H. Dunning in 1979.

A company requires all three OLI advantages for successful foreign direct investment.

Ownership advantage helps overcome the liability of foreignness, which includes non-native status disadvantages.

Ownership advantages can include brand, copyright, trademark, patent rights, and internal use and skills.

Location advantage considers the benefits a host country offers, such as resources, costs, and market access.

Internalization advantage determines if it's more efficient to produce in-house or contract out.

Tesla's Shanghai factory is an example of applying the OLI model, leveraging its brand, China's EV market, and technology control.

Tesla's brand image is a core competitive advantage and a key differentiator in the automotive industry.

China's large EV market and import duties avoidance are part of Shanghai's location advantage for Tesla.

Internalization advantage for Tesla means controlling the production process to protect its technology and brand.

The OLI framework is a three-tiered evaluation tool for companies considering foreign direct investment.

If all OLI advantages are present, foreign direct investment is often a suitable strategy.

The video concludes by encouraging viewers to apply the OLI model to real-world business scenarios.

Transcripts

hello everyone welcome to dr yang's

business school 101 when a company

decides to expand its business to a

foreign country there is a wide variety

of entry strategies to choose from and

they all have their pros and cons often

used strategies are exporting licensing

franchising strategic alliance joint

venture and wholly owned subsidiary so

how to choose an appropriate entry

strategy for managers one of the most

practical approaches to help them at

least exclude some options is by using

the oli framework also known as the

eclectic paradigm oli is an acronym for

ownership location and internalization

advantage it is based on internalization

theory and was first expounded upon in

1979 by the british economist john h

dunning according to this paradigm a

company needs all three advantages to be

able to successfully engage in foreign

direct investment if one or more of

these advantages are not present the

focal company might want to use a

different entry strategy in this video i

will introduce each of the three

advantages and provide a real world

example for you

section one ownership advantage

first a company needs an ownership

advantage to overcome the liability of

foreignness the liability of foreignness

is the inherent disadvantage that

foreign firms experience in host

countries because of their non-native

status these disadvantages vary from

simply not speaking the local language

to having limited knowledge on the local

customer demands ownership advantages

include proprietary information and

various ownership rights of a company

brand copyright trademark or patent

rights and the use and skills internally

available are factors that offer a

company this advantage hence ownership

advantages are typically considered

intangible these advantages should be

valuable rare hard to imitate and

organizationally embedded in other words

the resource should be so valuable that

a company can derive a competitive

advantage over foreign rivals therefore

the first question that management

should ask itself is does our firm have

a certain competitive advantage that can

be transferred abroad to offset our

liability of foreignness this could be a

strong brand name with a great

reputation unique technological

capabilities or huge economies of scale

obviously the answer to this question

should be yes in order to explain your

motives for expanding abroad in the

first place

section 2 location advantage considering

the liability of foreignness host

countries must offer compelling

advantages to make internationalization

worthwhile to undertake foreign direct

investment these advantages can be

simply geographical or exist because of

the cheap raw materials low wages

skilled labor force special taxes lack

of tariffs etc companies should assess

whether there is a comparative advantage

to performing specific functions within

a particular nation often these

considerations depend on resources costs

and availability furthermore the

attributes vary among the chosen

locations usually location advantage

refers to natural or manufactured

resources these resources are generally

immobile and require a partnership with

a foreign investor in the target

location to utilize them to their

fullest potential porter's diamond model

could be a great tool to determine these

location advantages therefore the second

question that management should ask

itself is are any of these location

advantages present in the market we are

thinking of entering if the answer is no

it might be wiser for management to keep

production within the home country and

export products instead however if the

answer is yes it might be better to

perform certain value chain activities

abroad either through licensing

franchising or foreign direct investment

section three internalization advantage

finally internalization advantages

signal whether an organization should

produce a particular product by itself

or contract with a third party therefore

the third question that management

should ask itself is is it more

attractive to perform the value chain

activity in-house than to have it

performed by an external party if the

answer is no then management might want

to license its product design to an

independent foreign company or outsource

production to an original equipment

manufacturer oem

reasons to outsource certain activities

to different companies abroad might be

because they are better at it can do it

cheaper have more local market knowledge

or because management simply wants to

focus on other activities in the value

chain such as marketing or design

however if the answer is yes the firm

should keep control over its activities

and engage in foreign direct investment

this could be done through forming joint

ventures with local partners acquiring

existing local companies or establishing

a wholly owned subsidiary please keep in

mind that if a company decides to

outsource production it may require

negotiating partnerships with local

suppliers however taking an outsourcing

route only makes financial sense if the

contracting company can comply with the

company's policies standards and quality

requirements at a significantly lower

cost

after answering these three questions

with the aid of the oli paradigm

companies should be able to at least

exclude some entry strategies when all

questions have been answered with yes it

should be a good option for companies to

engage in foreign direct investment and

stay in control over the activities

themselves

section four example tesla in shanghai

tesla giga shanghai is a factory in

shanghai china wholly owned by tesla

incorporated it is tesla's first factory

outside the us in 2021 tesla produced

484 130 cars from its shanghai factory

let's use the oli model to understand

why elon musk wants to build its first

foreign factory in china

first tesla's ownership advantage

tesla's brand image is one of its core

sources of competitive advantage it is

also one of the main differentiators for

the brand that sets it apart from the

world's crowd of automobile brands while

several auto brands are there in the

industry including those making electric

vehicles and hybrids tesla has acquired

a very distinct image tesla's

sustainable business model and its focus

on innovation have helped it acquire the

image of a transformation leader in the

world of mobility

second shanghai's location advantage

china is the world's largest market for

electric vehicles and tesla's second

largest market after the us having a

plant in china can help tesla lower

shipping costs and make sourcing

components more cost effective while

allowing tesla to avoid china's import

duties on u.s made cars amidst mounting

trade tensions between the two countries

third tesla shanghai's internalization

advantage as mentioned earlier tesla's

major competitive advantages come from

its unique technology management system

and brand image if tesla chooses to

license or form a joint venture with a

local auto company in china it increase

the risk of losing its intellectual

property to other companies by

internalizing all manufacturing

activities and business records tesla

can fully control its production process

and better protect its core competitive

advantages that's why tesla and most

other auto companies tend to prefer

wholly owned subsidiaries as their entry

strategies

section five conclusion the oli

framework or the eclectic paradigm is a

three-tiered evaluation framework that

companies can follow when attempting to

determine if it is beneficial to pursue

foreign direct investment according to

this paradigm a company needs all three

advantages to be able to successfully

engage in foreign direct investment if

one or more of these advantages are not

present the focal company might want to

use a different entry mode strategy

so what do you think about the oli model

can you apply it to the real business

world please leave your thoughts in a

comment below i hope that you guys have

enjoyed this video and if you did make

sure you give it a thumbs up and

subscribe to my channel thanks for

watching and i will see you next time