OLI Paradigm (Dunning, 1977): Eclectic Theory of FDI OLI 折衷理論

The OLI Paradigm explains why firms engage in foreign direct investment (FDI) rather than exporting or licensing. Three conditions must hold simultaneously: the firm possesses Ownership advantages (proprietary assets), the foreign Location offers advantages over the home market, and Internalization is preferable to market-based transactions (licensing/franchising). The configuration of OLI advantages also determines the FDI mode.

Trigger conditions:

• User is deciding whether to invest in a foreign market via FDI
• User asks why a firm should own foreign operations rather than export or license
• User needs to choose between wholly-owned subsidiary, joint venture, or licensing
• User mentions "FDI decision", "OLI", "internationalization mode", or "eclectic theory"

When NOT to use:

• For gradual internationalization process -> use grad-uppsala
• For early-stage rapid internationalization -> use grad-born-global
• For national competitive advantage analysis -> use grad-diamond

IRON LAW: ALL Three OLI Advantages Must Be Present to Justify FDI

- Ownership (O) alone -> License or export (no need to be there)
- Ownership + Location (O+L) -> Export (no need to internalize)
- Ownership + Internalization (O+I) -> Domestic production (no location pull)

Only when O + L + I are ALL present does FDI make economic sense.
If ANY one is missing, a different entry mode is optimal.

• Firms are rational actors seeking to minimize transaction costs
• Market imperfections (information asymmetry, opportunism) drive internalization
• OLI advantages are firm-specific, industry-specific, and country-specific

Step 1: Assess Ownership Advantages (O)

Identify firm-specific advantages foreign competitors lack: asset-based (Oa: patents, technology, brand) and transaction-based (Ot: managerial capabilities, scale economies). If no clear O advantage exists, STOP -- the firm has no basis for FDI.

Step 2: Assess Location Advantages (L)

Evaluate why the foreign location is superior to serving from home:

• Market-seeking: Large market size, growing demand, trade barriers making export unviable
• Resource-seeking: Low-cost labor, raw materials, specialized talent
• Efficiency-seeking: Scale economies, favorable tax regimes, supply chain optimization
• Strategic asset-seeking: Access to technology clusters, R&D ecosystems, knowledge networks

If no clear L advantage exists -> Export from home is sufficient.

Step 3: Assess Internalization Advantages (I)

Evaluate why internal governance is preferable to licensing or franchising:

• High transaction costs: Tacit knowledge that is hard to codify and transfer
• Quality control: Brand reputation requires tight operational control
• Opportunism risk: Licensee may become a competitor or degrade quality
• Contractual incompleteness: Cannot write contracts covering all contingencies

If no clear I advantage exists -> License or franchise instead of FDI.

Step 4: Determine Entry Mode

# OLI Assessment: {Firm} -> {Target Country/Market}

• For OLI mathematical formalization and extensions, see references/oli-formalization.md
• For OLI application to service sector FDI, see references/oli-services.md