A Critical Assessment of the Eclectic Theory of the Multinational Enterprise
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Abstract. The paper critically deals with the eclectic theory of the multinationalenterprise.It examines,firstly, the theoretical redundancyof the 'ownershipadvantage';secondly,the inseparabilityof the 'ownershipadvantage'fromthe 'locationadvantage'; thirdly, the conceptual ambiguity of the 'location advantage'; and, lastly, possible methodological dangers of a multi-factor analysis under the three headings of the eclectic theory. INTRODUCTION It is true of everything that the first steps are both the most importantand the most difficult. To begin with, theorizationconsists of a set of definitions of concepts. The basic concepts underlying the eclectic theory of the multinational enterprise (MNE)1 are currentlybeing criticized by the internalization theorists,2in thatthe 'ownership advantage' is 'double counting,' that is, the internalization and location factors are necessary and sufficient to explain the existence and growth of the MNE. The controversy seems to requirea thoroughexamination of the concept of the 'ownership advantage'. However, the examination should extend furtherafield. Ourobjective in this paper is to assess critically the three basic concepts in the eclectic theory, i.e., the 'ownership advantage,' the 'internalization advantage,' and the 'location advantage' and to suggest the beginnings of an alternative framework to deal with the MNE and FDI (i.e., foreign direct investment). REDUNDANCYOF THE 'OWNERSHIPADVANTAGE' Some Features of the Eclectic Theory First of all, we must set up the target of our examination. The eclectic theory, Mark I, as advocated by Dunning is as follows [Dunning 1981:79]:
*MasahikoItakiwasa VisitingResearchFellow,Departnentof Economics,University of Reading,andnow is Lecturer,Facultyof InternationalRelations,Ritsumeikan University,Kyoto,Japan. I would like to thank John Cantwell, Mark Casson, John Dunning, ChristianHodson, Mike Waterson, and anonymous reviewers of this journal for their helpful comments, and Elizabeth Reynolds for correcting my poor English. An earlier version was presented on February 8, 1989 at an Internal Workshop of the Department of Economics, University of Reading. Received: October 1989; Revised: March & December 1990; Accepted: February 1991. 445
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JOURNALOF INTERNATIONALBUSINESS STUDIES, THIRDQUARTER 1991
1.
It (i.e., the finr) possesses net ownership advantages vis-a-vis firms of other nationalities in serving particularmarkets.These ownership advantages largely take the form of the possession of intangible assets, that are, at least for a period of time, exclusive or specific to the firm possessing them. 2. Assuming condition 1 is satisfied, it must be more beneficial to the enterprisepossessing these advantages to use them itself ratherthan to sell or lease them to foreign finns, that is, for it to internalize its advantages through an extension of its own activities rather than
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