International Market Entry Theory

The eclectic paradigm offers a general framework for explaining international production. The company’s advantages in organization, location and internationalization of processes influence the choice of foreign market entry strategy (John Dunning, 1989). This theory includes three assumptions: ownership-specific (O), location-specific (L), and internalization (I), all explained in earlier theories of trade and FDI. The theory is also called the OLI framework. The OLI theory offers three advantages that Dunning suggests are important for selecting a foreign market entry strategy. Ownership advantages or company specific assets are advantages that are exclusive for the company and assets that no competitors hold, in other words, competitive

Vernon believes that there are four phases of production cycle: innovation, growth, maturity and decline.
In the introduction stage, small quantities are produced with no standardization and costs are not a key factor, as firms focus on flexibility and communication. U.S. firms gained by exporting their products to new markets in other developed countries. In the growth stage, standardization increases and firms try to cut production costs and gain economies of scale. Here, U.S. companies make investments in middle-income developed countries. While the product enters the maturity stage, competitors in foreign countries produce similar products to gain a portion of the profit and market share. Vernon stated that U.S. firms would then move their production line to those markets in order to keep their position in the market. The company may locate their production in developing countries that offer competitive advantages and, sometimes, even import the products made by their own subsidiaries in the host markets. During the decline stage, market demand in developed markets such as the U.S. declines. Companies from host countries enter the U.S. market and compete with U.S. companies by offering cheaper and alternative

First, this theory does not show the effect of location advantages on the choice of entry mode. Second, the theory assumes that competition in the host country involves a monopolistic company with inferior technology that is inactive in dealing with the entrant, while in today’s markets the nature of competition is dissimilar and dynamic. Third, its focus on cost minimization is restrictive because it does not include companys motivated for entry to enhance their capabilities. In other words, this theory only discusses the situation in which companys enter foreign countries to seek new markets or gain access to a particular