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OLI: Choosing The Right Entry-Mode Strategy

The document discusses factors for companies to consider when choosing an entry strategy for expanding into foreign markets. It introduces the OLI paradigm, which suggests that to engage in foreign direct investment (FDI), a company needs an ownership advantage, a location advantage, and an internalization advantage. The ownership advantage refers to resources that give the company a competitive edge abroad. The location advantage considers benefits of investing in a foreign market. The internalization advantage determines whether it is better to perform activities internally through FDI or license them to external parties. By applying the OLI framework, management can evaluate their options and narrow down which entry strategies may be most suitable.

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475 views

OLI: Choosing The Right Entry-Mode Strategy

The document discusses factors for companies to consider when choosing an entry strategy for expanding into foreign markets. It introduces the OLI paradigm, which suggests that to engage in foreign direct investment (FDI), a company needs an ownership advantage, a location advantage, and an internalization advantage. The ownership advantage refers to resources that give the company a competitive edge abroad. The location advantage considers benefits of investing in a foreign market. The internalization advantage determines whether it is better to perform activities internally through FDI or license them to external parties. By applying the OLI framework, management can evaluate their options and narrow down which entry strategies may be most suitable.

Uploaded by

SADMAN AL FARABE Nirzor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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OLI: Choosing the Right Entry-Mode

Strategy
More and more companies nowadays decide to expand their business by crossing domestic
borders and by (re)locating certain value chain activities abroad. There are several motivations
for companies to do so. First of all, companies might be on the lookout for natural or strategic
resources such as physical, financial, technological or human resources that are more attractive
in foreign countries than at home. In other cases, the focal company might be simply looking for
new customers and sees a foreign market as a way to expand business and sell more products.
Finally it may be the case that the company seeks ways to increase efficiency in order to create
economies of scale and to cut costs per unit.

Whatever the reason might be, management will be faced with a tough decision: how are we
going to enter a foreign country?

There is a wide variety of entry-mode strategies to choose from and they all have their own pros
and cons. Often used strategies are exporting, licensing, franchising, forming a strategic alliance,
creating a joint venture, acquiring, or starting from scratch with a greenfield investment. These
last three involve large equity investment and are therefore considered forms of Foreign Direct
Investment (FDI). A good way to at least exclude some of them is by using the so called OLI
paradigm (also known as the eclectic paradigm). OLI is an acronym for Ownership-, Location-
and Internalization- advantage. According to this paradigm, a company needs all three
advantages in order to be able to successfully engage in FDI. If one or more of these advantages
are not present, the focal company might want to use a different entry-mode strategy. Each of the
three advantages will be elaborated on below:

Ownership advantage
First of all, a company needs an ownership advantage in order to overcome the liability of
foreignness. Ownership refers to the possession of a certain valuable, rare, hard-to-imitate, and
organizationally embedded resource that allows a company to have a competitive advantage
compared to foreign rivals. The liability of foreignness however can be defined as the inherent
disadvantage that foreign firms experience in host countries because of their non-native status.
These disadvantages could vary from simply not speaking the local language to having limited
knowledge on the local customer demands. The question that management should therefore ask
itself is: does our firm have a certain competitive advantage that can be transferred abroad in
order to offset our liability of foreignness? This could for example be a strong brand name with a
great reputation, unique technological capabilities or huge economies of scale. Obviously the
answer on this question should be YES in order to explain your motives for expanding abroad in
the first place.

Location advantage
Secondly, there must be some kind of location advantage in the market the company is trying to
enter. Again, given the well-known liability of foreignness, host countries must offer compelling
advantages to make it worthwhile to undertake FDI. These advantages can be simply
geographical (e.g. the Netherlands is in between great economies like the UK and Germany and
is moreover located next to the ocean) or are present because of the existence of cheap raw
materials, low wages, a skilled labor force or special taxes and tariffs. A great tool to determine
these location advantages is through Porter’s Diamond model. The question that management
should ask itself here is: are any of these location advantages present in the market we are
thinking of entering? If the answer on this question is NO, it might be wiser for management to
keep production at home and export products instead – assuming that there is demand in the
foreign market. If the answer is YES however, it might be interesting to perform certain value
chain activities abroad either through licensing/franchising or through FDI.

Internalization advantage
To choose between licensing and FDI management should look at the final advantage:
internalization advantage. Is it more attractive to perform the value chain activity in-house than
to have it performed by an external party? Reasons to outsource certain activities to different
companies abroad might be because they are better at it, are able to do it cheaper, have more
local market knowledge, or because management simply wants to focus on other activities in the
value chain such as marketing or design. In this case management might want to license its
product design to an independent foreign company or outsource production to an original
equipment manufacturer (OEM). If the answer is YES however, the firm should keep control
over its activities and engage in FDI. This could be done through forming joint ventures with
local partners, acquiring existing local companies, or by starting from scratch through a
greenfield investment.
After answering these three questions with the aid of the OLI paradigm, you should be able to at
least exclude some entry-mode strategies.

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