Moreover economics theory, there are a large range of theories that embed business world. One of them is the eclectic model of J.H.Dunning, that treated to explain us how companies internationalize their activities towards FDI (creating affiliates, he doesn´t include alliances, international joint ventures or merger and acquisitions.
The basis of this approach lies in the theoretical and empirical research conducted by Dunning (1974, 1981a). Dunning´s eclectic framework represents an improvement over transaction cost approaches, by including location and ownership – specific factors as well as transaction cost variables.
There have been numerous theories about internationalization process, but is the eclectic Theory (Dunning 1974, 1981a) the mostrelevant and recognized theory by its eclectic character, attempting to integrate the previous theories of internationalization and to provide a general analytical framework. Dunning argues and defends in his theory that the previous theories are partially correct and incorrect to explain every instance of IDE, but also they are incomplete.
In my opinion, the eclectic theory is the most complete (probably due to its eclectic characteristic) theory up to now, in order to explain the internationalization process. It concretes several steps of internationalization process that each company must comply in order to invest abroad properly. All the steps are necessary and they are interrelated, starting with microeconomic factors (internal) and finishing with macroeconomic factors (external) of the company.
Summarizing, Dunning recapitulates most of the previous studies and in an eclectic way presents his theory, explaining that in order to become in an international firm, firstly the company has to have competitive advantages in the national market. The assets that represents its core competences, make the company different comparing with its competitors, which give to the company the opportunity to survive in the national market and think about internationalize its activities in foreign markets. Once obtained the ownership advantages, the company have to value if internalize its advantages or not. If the company considers that internalize its advantages and activities in a foreign country is more profitable that subcontract them to other companies, then the company has to evaluate where it wants invest. In order to know where the company can develop its activity, it must study the macroeconomic environment that characterized to receptor country or countries, evaluating the viability to make business in different foreign countries. Once the company proves that the viability is positive, is time to take the decision to invest abroad and where.
So, this paper is based on the Eclectic Theory and it tries to explain the internationalization process of SMEs developing this theory, but being focus on location factors. The main hypothesis of the eclectic theory is that foreign direct investment will take place provided the following conditions:
1. Ownership specific advantages (O):
2. Location advantages (L)
3. Internalization advantages (I)
There are many types of ownership advantages (O) that the multinational can transfer within the multinational enterprise located abroad at low cost. The firms base on its competitive factors the internationalization process. Some of them are monopolist advantages that the company has in form of privileged, as for example access to scarce natural resources, patent rights, brand name… On the other hand, some advantages come from innovation activities, as for example, technology, knowledge broadly… These advantages must have some different and particular and give to the international firm the choice to compete abroad profitably, moreover to be transferable between countries and within the firm.
The internalization advantages (I) arise as answer to market failure, as for example which regards that buyers and sellers have asymmetric information, what creates uncertainty around the quality of the transactions and the proper price. Dunning explains that there should be an internalization advantage in that the firm believes that its ownership advantages are best exploited internally rather than sold directly through spot markets or offered to other firms through some contractual arrangement such as licensing, the establishment of a joint venture or management contracting. This advantage derives from the difficulties that arise in writing enforceable and controllable contracts with potential overseas partners that generate an income that approximates the true worth of the advantage being marketed.
The firm must use some foreign factors (L) in connexion with its national core competences, or as Dunning defined ownership advantages. Therefore the location advantages of different countries are keys in determining which will become host countries for the multinational firms. Definitively the relative attractiveness of various location factors can change over time so that a host country can to some extent engineer its competitive advantage as a location for foreign direct investment. We can differentiate the factors including all of them in several groups, but this paper separate them in three type of location factors according to:
- Economic advantages: Consist of the quantities and qualities of the factors of production, transport and telecommunications costs, scope and size of the market, etc…
- Political advantages: include the common and specific government policies that influence inwards Foreign Direct Investment flows, intra-firm trade and international production.
- Social, cultural advantages: include psychic distance between the home and host country, language and cultural diversities, general attitude towards foreigner ant the overall position towards free enterprise.
Summarizing, the propensity of enterprises of a particular nationality to engage in foreign activities will vary according to the economic characteristics of their host countries and home countries, but also depends on industry characteristics and it own characteristics, being specific considerations which influences in the internationalization decision.