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
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