The Ownership-Location-Internalization Model

The nature and extent of internationalization cannot be attributed to a single cause but is dependent on various factors. According to Dunning (1988) particularly, three factors are relevant, referred to as advantage categories. (Welge, 2006, p. 76) This eclectic OLI framework suggests that companies will select their entry mode structure by considering three factors, which are ownership advantages, location advantages and internationalization advantages. Dunning’s eclectic framework represents an improvement over transaction cost theory by adding locational owner-specific as well as transaction cost variables (Brouthers, 2002, p. 32).

In the following these three variables will be described in detail and applied to the context of high-tech start-ups.

Ownership advantages

These advantages are specific to the nature and nationality of the owner and are necessary to compete with host country companies in their own markets. In order to do this these companies must possess superior assets and skills that can earn higher economic rents to meet the higher cost of serving a foreign market. (Agarwal and Ramaswami, 1992, p. 4) For example several ownership advantages can be classified like management-know-how, access to resources, registered patent and governmental preferences.

There are also advantages, which result out of the multi-nationality of the investing company like currency management or synergies and economies of scale in procurement. These advantages might not be that relevant for start-ups as they do not poses the resources and capabilities to exploit these advantages.

According to Agarwal (1992) a firm’s asset power is reflected by its size, multinational experience, and its skills to develop differentiated products. Correspondingly they state that the impact of the firm size and its multinational experience is positive on foreign direct investment and the propensity to enter foreign markets in general. Accordingly

high-tech start-ups it can be said that small firms have traditionally been advised by scientific literature to pursue differentiation as a means of competing against larger competitors. This differentiation can be reached by relying on product innovation or by higher relative product quality and an increased emphasis on service. (Shrader, Oviatt, McDougall, 2000 p. 1233-1234) For high tech start-ups high asset power can be implied as they have the skills to develop differentiated products. Additionally it may be possible that founders and a managerial team possess multinational experience.

Location advantages

These advantages arise from the fact that different locations feature different recourses, cultures, institutions and different regulations.

These properties also reflect the investment risk in a host country. There can be changes in government policies that could be more restrictive like repatriation of earnings or in the worst case could lead to expropriation of assets. Additionally the market potential, which is determined by the market size and the growth, can also play an important role as all these factors influence the revenue and the cost of production.

One argument by Dunning (1995) is also that companies seek growth in international markets when growth in their home market stagnates or declines. As high-tech start-ups have a very unique product portfolio the potential market size is small from the beginning of their operations. As a consequence their opportunities are unavoidably international and it can be argued that they are constrained to go international as the market potential is only given in foreign countries. According to Agarwal and Ramaswami (1992) for example in high market potential countries investment modes are expected to provide greater long term profitability compared to non investment modes as the company may obtain the opportunity to establish long term market presence even if economies of scale are not that significant. This argument would imply that also high-tech start-ups, which have fewer chances to exploit economies of scale, should make use of investment modes.

Internationalization advantages

These advantages refer to ones that arise from transferring ownership advantages across national boundaries within the own organization. (Zhao and Decker, 2005) Internationalization advantages arise if transactions are carried out cheaper within the organization than if they are arranged externally on the market. (Welge, 2006, p. 76) This factor has its origins within the transaction cost theory that is already described in chapter 3.2.

Low control modes would be considered to be advantageous as a company can benefit from scale economies of the market without encountering the disadvantage of an extensive integration. However low control modes have the same drawbacks and obstacles as described in the transaction cost theory. Asset specifity, behavioral- and environmental uncertainties can make the creation and enforcement of contracts that specify every eventuality and response too expensive to stay with low control modes.

For high-tech start-ups the same arguments that were discussed in chapter 3.2. can be applied.

Implications

The more OLI advantages a company possesses the greater is the propensity of adopting a high control entry mode. In the following illustration the interrelation between the three OLI advantages is shown.

Figure 1: Decision Tree for foreign market development from Dunning (Welge, 2006, p. 77)

Dunning’s (1995) framework has been applied and is supported in various empirical studies to explain entry mode decisions. It was updated several times by Dunning who argued that competitive advantages, market failure and collaboration as well as dynamic environments should also be integrated when decisions on international productions are made. Although Brouthers (1999) found that the OLI framework does well at predicting entry mode choice and has a normative validity with its great explaining power Zhao and Decker (2005) state that it is still a static model. As it neglects strategic factors, characteristics and situational contingency surrounding of the decision maker and competition. (Zhao and Decker, 2005, p. 8)