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Extending the Eclectic Paradigm in International Business

Essays in Honor of John Dunning

Edited by H. Peter Gray

John Dunning is undoubtedly the world’s leading scholar on the subject of multinational corporations and international business. This collection of original essays is designed to honor this work, particularly his achievements during his association with Rutgers University.
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Chapter 3: Why Multinationality Matters: Exploring the ‘L’ in the OLI Paradigm

Lorraine Eden, Douglas E. Thomas and Kingsley O. Olibe


Lorraine Eden, Douglas E. Thomas and Kingsley O. Olibe INTRODUCTION Asking whether the degree of multinationality of a firm affects its performance is an old question in the international business literature. However, being an old topic does not imply the debate is settled. Sullivan (1994) reviews 17 studies; seven report a positive relationship, five negative and six indeterminate. Our own literature review found more than two dozen performance–multinationality studies using a wide variety of proxy variables. The studies show a generally positive relationship, but the results are not always significant nor of the expected sign. Hitt, Hoskisson and Ireland (1994) and Gomes and Ramaswamy (1999) argue that, while methodological problems are partly responsible for these inconsistent results, the real problem is the lack of theory building. Both papers address this lacuna by hypothesizing that multinationality has benefits and costs. Initially, benefits dominate costs because the multinational enterprise (MNE) chooses familiar locations and simple organizational structures, but eventually costs rise as locations become more culturally distant and the firm adopts a more complex structure. As a result, the multinationality–performance relationship should be inverse U-shaped, rising and then falling. We extend this research by nesting the theoretical foundations for the multinationality–performance relationship in the OLI paradigm (Dunning, 1993a), which argues that MNEs create value by using their ownership (O) advantages in conjunction with location (L) advantages of foreign countries. In the original OLI paradigm, L refers to country specific advantages; we reconceptualize L as...

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