preview

Advantages And Disadvantages Of Foreign Market Entry Strategies

Decent Essays

Another very common approach to explain foreign market entry strategies is Dunning’s (1980) famous OLI framework. In his view, companies become more actively involved in international business activities if they possess a set of three main advantages, namely ownership, location and internalization advantage. Ownership advantage refers to the unique firm-specific resources, including both tangible and intangible assets that contribute to enhancing the competitiveness of the firm in the foreign market. Location advantage refers to how firms choose the country or region where to engage in international activities with respect to the availability as well as the costs of resources such as raw materials or favourable wage levels. Location advantage …show more content…

The OLI framework suggests that a location advantage or an ownership advantage separately cannot provide sufficient justification for the selection of different internationalization strategies. Thus, these advantages are interconnected and only when all three of them are present international expansion activities may occur (Dunning, 1980; Galán and González-Benito, 2001). Although this model has been widely used in numerous research studies, it contains some evident weaknesses. Some scholars criticize it, arguing that there is no significant difference between ownership advantages and internalization advantages (Buckley, 1988). Pinho (2007) includes that the framework overlooks the importance of managerial-specific characteristics and Ekeledo and Sivakumar (2004) even claim that the OLI theory cannot provide an adequate prediction of entry mode choices since it cannot explain why firms with a similar set of advantages do not follow the same expansion strategy in the same target …show more content…

According to North (1990), a country’s institutional setting is determined by its formal and informal traditions and practices. Formal institutions refer to the judiciary system, property rights and contract enforcement laws, business and investment regulations, whereas informal institutions include socio-cultural values, ethical norms and socially shared customs and unwritten rules. Frances (2004) builds upon this classification, arguing that institutions include all establishments that create and enforce these laws and regulations, such as government agencies and legal system. In line with North’s study, Brouthers (2002) also attaches great importance to institutional theory as an explanatory framework for the international activities of firms, suggesting that the institutional structure significantly shapes firm strategies and decisions by either imposing entry mode barriers such as restriction laws on ownership in order to encourage local business or by enhancing their capabilities to overcome these barriers, mostly in regard with access to local resources. In contrast to North’s classifications of institutions into formal and informal, Scott (1995) takes different approach

Get Access