Dunning’s OLI Paradigm

The basic assumption behind this theory is that in order to invest in a foreign country a firm needs to have three different types of advantages, namely ownership, locational, and internalization advantages. In order for FDI to take place all three advantages must be present simultaneously. To cancel out the disadvantage of operating in a foreign country a firm must have an ownership advantage, such as superior technology. Ownership advantages are possible to move between different locations and can therefore be transferred to a foreign country. For FDI to take place the ownership advantage also has to be profitable to internalization by the firm rather than leaving the market to take care of the transaction. If an internalization advantage is missing the firm will serve the foreign market through exports rather than through investing in order to produce locally. There must also exist some forms of locational advantages that are specific for the geographical location and would eventually trigger the actual investment. An example of locational advantage can be the supply of cheap labor or a large market demand. Locational advantages can never be transferred to another location (Dunning 1977; Dunning 1988).