Essay On Vertical Integration

2.0 FACTORS DRIVING INTERNATIONALISATION
2.1 THE ELECTIC PARADIGM (DUNNING 1980, 1988, 1993). The origins of the electic paradigm can be traced back in the mid-1950, when John H. Dunnings was writing his PhD thesis. It was later published in 1958 in US direct investment in British Manufacturing industry. The electic paradigm is also referred to as the OLI framework.
2.1.1 Introducing the OLI Framework
The OLI framework is a variety of operational testable economic theories of the determinants of foreign direct investment (FDI) and the foreign activities of multinational enterprises (MNE’s). The set of interdependent variables, “O”, “L” and “I” explain the extent to which the geographical and industrial of foreign production is undertaken

If it is to be within a firm, it would take the form of vertical integration. If it is to take place outside the firm, then it would be by autonomous contractors, which is the market governance. Transaction cost theory assumes that taking the benefits of competition into consideration, vertical integration is less efficient than market governance. The transaction take place in integrated companies may be hidden from competitive pressures and therefore be subjected to bureaucratic phenomena. However, when there is market failure, vertical integration is more efficient than market governance. This is due to some dimension of transactions which push up the transaction costs. These dimensions are specific assets, uncertainty and transaction frequency (Williamson 1975, 1985). The transaction cost theory states that economic organisation align transactions which do not match their attributes with governance structures, which in turn differ in their costs and competences in a discriminating way (Williamson, 1991 :71). A further explanation on the dimensions are given below:

1. Transaction-specific assets
These are customised to a specific transaction and cannot be easily changed for another transaction. The personal nature of these result in a safeguarding problem, since market competition will not stop opportunistic exploitation. The solution to this problem is the vertical integration. Compared to markets, the strict relationship and hierarchical control pressures found in vertical integration are assumed to give greater safeguarding capabilities.

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