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establishing and operating in a foreign country, such as communication difficulties and

ignorance of institutions, customs and tastes.

Dunning (1977, 1988), on the other hand, has proposed three conditions necessary

for a firm to undertake FDI. His eclectic theory of FDI, often referred to as the OLI

framework, attempts to integrate other explanations of FDI mentioned earlier. OLI stands

for ownership advantages, location advantages and Internalization advantages, which are

conditions that determine whether a firm, industry or country will be a source or a host of

FDI

(or

perhaps,

neither).

First,

a

firm

must

have

an

ownership

advantage.

The

ownership advantage is anything that gives the firm enough valuable market power to

outweigh the disadvantages of doing business abroad. It could be a product or production

process that other firms do not have access to, such as a patent, trade secret or blueprint.

The advantage could also be intangible like a trademark or reputation for quality.

Second, the foreign market must offer location advantage that makes it more profitable to

produce in the foreign country than to produce at home and then export to the foreign

market. Such location-specific advantages offered by a host country include access to

local and regional markets, availability of comparatively cheap factors of production,

competitive transportation and communications costs, the opportunity to circumvent

import restrictions, and attractive investment incentives (Chery, 2001). Third, the MNC

must have an internalization advantage. Precisely, internalization involves the question

of why an MNC would want to exploit its assets abroad by opening or acquiring a

subsidiary versus simply selling or licensing the rights to exploit those assets to a foreign

firm. Though this theory has been criticized for only listing the conditions necessary for

6

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