Advanced Corporate Strategy

ST104x

OLI

One of the most popular international strategy frameworks that explain the performance of
multi-national enterprises is the OLI framework. It was proposed by Prof. John Dunning in the
1970s, building on a lot of research on multi-national firms. The OLI framework consists of
three pillars – Ownership, Location, and Internalization that explain the configuration of
multi-national enterprises.

• Ownership

Ownership refers to those firm-specific advantages that allow it to overcome the costs
of operating in a foreign country. Examples of ownership advantages include patents,
specific marketing skills, or corporate-level product development processes. These
resources explain why some firms can diversify outside their home country easily,
while others could not. Take the example of the FMCG major, Proctor & Gamble,
which can leverage its product development capabilities and brand strength across
geographic markets. Having invested heavily in research and building strong brands,
P&G would be better off leveraging these investments across geographies.

• Location

Location refers to those geography-specific advantages that allow for firms to carry
out different activities in their value chain in different geographies. When the
American pharmaceutical major Pfizer decides to locate its manufacturing in Asia
apart from its home country, United States, it is seeking location advantage. In some
cases, firms shift manufacturing to low-cost locations; locate their design facilities in
countries that has a large supply of skilled designers; and even locate their corporate
offices in low-tax countries. These advantages are what are summarized as Location
advantages.

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 Advanced Corporate Strategy

ST104x

• Internalization

Internalization refers to those advantages gained by firms in organizing certain

activities within the firm, while contracting out some others to partners and vendors.
The decisions on which activities to internalize and which others to externalize, while
internationalization is a critical decision for the firm and its performance.
Internalization advantages arise out of the decisions around outsourcing in the
context of offshoring certain activities. For instance, some firms may outsource to an
offshore vendor; while others may want to internalize the activities while enjoying the
benefits of offshoring – these firms typically set up captive offshore centres in certain
locations. For instance, the Indian IT services industry has attracted a lot of outsourced
offshoring, as well as captive subsidiaries of multi-national enterprises located in India.

In summary, these three decisions on Ownership, Location and Internalization define a

configuration for internationalization decisions by an MNE. That is why this framework is also
popularly referred to as the eclectic paradigm.

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