OLI Paradigm (Dunning, 1977): Eclectic Theory of FDI

Overview

The OLI Paradigm explains why firms engage in foreign direct investment (FDI) rather than exporting or licensing. Three conditions must hold simultaneously: the firm possesses Ownership advantages (proprietary assets), the foreign Location offers advantages over the home market, and Internalization is preferable to market-based transactions (licensing/franchising). The configuration of OLI advantages also determines the FDI mode.

When to Use

Trigger conditions:

• User is deciding whether to invest in a foreign market via FDI
• User asks why a firm should own foreign operations rather than export or license
• User needs to choose between wholly-owned subsidiary, joint venture, or licensing
• User mentions "FDI decision", "OLI", "internationalization mode", or "eclectic theory"

When NOT to use:

• For gradual internationalization process -> use grad-uppsala
• For early-stage rapid internationalization -> use grad-born-global
• For national competitive advantage analysis -> use grad-diamond