I. Table of Content

II.  List of Figures  

III.  List of Acronyms  

I.  Table of Content  

1  Introduction  1

2  Definitions  3

2.1  Multinational enterprise  3

2.2  Export  4

2.3  Foreign direct investment  5

2.4  International contracts  6

3  The eclectic paradigm of international production  7

3.1  OLI advantages  8

3.1.1  Ownership advantages  8

3.1.2  Location advantages  8

3.1.3  Internationalisation advantages  9

3.2  Market Entry Strategies  9

3.3  Endowment/Market Failure Paradigm  10

3.4  Criticism  11

4  Uppsala-model of Internationalisation  14

4.1  Patterns of Internationalisation  15

4.1.1  Establishment Chain  15

4.1.2  Psychic Distance Chain  16

4.2  Model of Internationalisation  18

4.2.1  State Aspects  19

4.2.2  Change Aspects  19

4.3  Criticism  20

5  Critical Comparison  23

5.1  Comparison Eclectic Paradigm Uppsala-model  23

5.1.1  Dynamic vs. static  23

5.1.2  Negligence of demand  23

5.1.3  Validation  24

5.1.4  At home and abroad  24

5.1.5  Mode point of time  25

5.1.6  Individuals decide  26

5.1.7  Disregard industries and companies particularities  26

5.2  Eclectic Paradigm in favour of Uppsala-model  27

5.2.1  A simple vs. a complex approach  27

5.2.2  Uncertainty avoidance vs. rationality  27

5.3  Uppsala-model in favour of Eclectic Paradigm  28

5.3.1  Fast vs. slow Internationalisation process  28

5.3.2  Explanation of market entry strategies vs. gradual process  29

6  Conclusion  30

7  Outlook  31

7.1  Eclectic Paradigm  31

7.2  Uppsala-Model of Internationalisation  32

IV.  Bibliography  

V.  Declaration  

II. List of Figures

Fig. 1: Eclectic theory of international production

Fig. 2: Psychic distance as a concept of geographical distance

Fig. 3: Establishment Chain

Fig.4: The Internationalisation Process of the Firm

III. List of Acronyms

etcetera Etc. foreign direct investment FDI figure Fig. foreign total operations FTO multinational enterprise MNE

ownership advantages, internalisation advantages, OLI location advantages research and development R&D

small and medium-sized enterprise SME United States US

1 Introduction

Centuries ago it was out of question for companies to operate worldwide. The costs to act global had been too high as well as the existent lack of knowledge about other countries, cultures, languages, foreign demands etc. But a few decades ago, companies started to run for globalisation which is seen as a process of internationalisation. Globalisation can be defined as a global network of economic processes. Today companies face less risk when engaging in international activities than ever before. Nowadays markets are easy accessible and the society faces a similar development concerning living standards all over the world. Companies notice the existing possibilities when passing national borders. Today internationalisation is an option for big companies as well as for SME´s. Internationalisation can be defined more exactly as the name “international” predicts as an international network between companies of different nations which means in most cases industrialised nations. Today almost all products and services are internationalised and available on the world market. It is indispensable that enterprises conduct business in host countries to remain competitive. Most companies are aware of internationalisation processes. Multinational companies are enterprises which operate in two or more countries. Bundeszentrale für politische Bildung (1) states that in 1980, approximately 17.000 MNE´s existed. Further Bundeszentrale für politische Bildung (1) explains that already in the year 2000, 63.000 MNE´s existed and in 2004 existed even 70.000 MNE´s. According to Bundeszentrale für politische Bildung (1) belong MNE companies to the countries where their headquarter is based in. Further Bundeszentrale für politische Bildung (1) estimates that approximately 9.000 MNE´s belong to Germany and approximately 2.500 international firms belong to the United States. As it can be observed, the trend in businesses is to become a multinational company. To become a company which engages in international activities is a long time process consisting of various steps. Therefore firms having international intentions began to question under which circumstances they should internationalise its activities and which market entry form they should choose.

Methodology

Various theories exist which cover that topic for example: the product life cycle of Vernon, Porters diamond model, the Eclectic Paradigm of international production and the Uppsala-School Internationalisation approach; only to name a few. This paper focuses on two approaches which explain firms intention to establish activities outside their national borders: the Eclectic Paradigm of international production and the Uppsala-model of internationalisation and thus their comparison examining similarities and differences. The basis of that paper is information from books, professional journals and the Internet. Some information appear rather old but in fact the important basic information of the theories comes from the seventies and eighties. As a matter of course the most used literature is actual one. In first place, some definitions are made to provide a common understanding of fundamental terms used within this paper. Second the Eclectic Paradigm of international production is described as a general framework to explain multinational enterprise activities. Further the Uppsala-model of internationalisation is examined which is one of the most popular approaches in international management. Afterwards a critical comparison of the Eclectic Paradigm of international production and the Uppsala School Internationalisation-model is made. That critical juxtaposition is made in the end; after the basics of the Eclectic Paradigm and the Uppsala School internationalisation approach had been explained. Finally that paper will end by the conclusion which focuses on the most important points. The end of that seminar paper is the outlook which puts forward ideas of improvement as well as possible changes of the theories.

2 Definitions

In this chapter significant definitions are made to establish a common understanding for basic terms used within this paper. The following terms are playing a significant role in every chapter of the paper. The start definition is the explaination of the term multinational enterprise, further a definition of export is given, afterwards foreign direct investment is explained and finally a definition of International contracts is provided.

2.1 Multinational enterprise

In the following section the term multinational enterprise is exclusively explained. A broad definition of a MNE is the circumscription as a corporation which acts in more than two countries by establishing its own subsidiaries in production and sales. One widely spread criteria of a MNE is its quantitative internationalisation degree that means that MNE´s activities in a home country are compared to the activities abroad. Some measurement categories could be the annual turnover, employees, incoming orders and fullfilled orders. Dunning (1993, p. 3) defines more closely “A multinational or transnational enterprise is an enterprise that engages in foreign direct investment (FDI) and owns or controls value-adding activities in more than one country.” This definition of a MNE is the one which is mostly accepted by scientists. Dunning (1993) speaks from six equal important criteria to measure a companies multinationality: 1. the size and number of subsidiaries abroad,

2. the quantity of countries in which the enterprise operates on value-adding activities,

3. the allotment of foreign branches to ratios of the total enterprise. Foreign to total operations ratio (employees, revenues, income); f.ex. FTO employees: describes the proportion of employees abroad in comparison to the totality of employees,

4. the extent of internationalisation of management and share property; f.ex. local employees know better about local markets, 5. the degree of internationalisation of higher value activities as R&D

6. the extent of advantages of the company through operating in various countries.

An important point is where the headquarters of the parent company is domiciled when allocate to countries. Bpd

(http://www.bpb.de/wissen/K61B0G, 2006) says that a parent company is a corporation with a majority of rights to vote of a subsidiary or with the right to displace the majority of a subsidiary employees. Further Bpd (http://www.bpb.de/wissen/K61B0G, 2006) differentiate a multinational company as a corporation with indepent acting subsidiaries or branches These subsiadiaries operate independent concerning supply, production, distribution but conform to the parent company policies. The most important questions of decisions are decentralized, which means the subsidiaries have decision autonomy to reach optimal solutions. Dunning (1993) states also that the MNE´s activities influence trade on the home market as well as on the host market. Especially MNE´s pursue the strategy of global sourcing by using the tool of foreign direct investment.

2.2 Export

Export and import too are basic forms of foreign trade, especially when some products and services aren´t available in a certain country but are demanded. Today export is one of the most important market entry strategies. Kutschker, Schmid (2006) define export as the activity of a company to distribute goods and services in a foreign country. Wheelen, Hunger (2004) say that export business is less risky than other forms of market entry. Export is

differentiated in direct or indirect export. Welge, Holtbrügge (2003) state that direct export business happens without including trade agents. Further Welge, Holtbrügge (2003) state that it exists a direct relation between domestic and foreign business partners. Another export form is the indirect export. Trade agents or middlemen are part of the indirect export process. Wheelen, Hunger (2004) say that an exporting company can transfer functions also to a professional export management company. Welge, Holtbrügge (2003) conclude that export business is possible almost without any international experience and input coming from the exporting company.

2.3 Foreign direct investment

There are different strategies how a company can enter a country and overcome market entry barriers. Foreign direct investment is one option among others as strategic alliance, export, subcontracting, licensing or joint venture. There exist no general definition of foreign direct investment. But there exist various definitions witch share common opinions what a FDI specifies. FDI is an important driver of globalisation and the number of FDI is increasing constantly.

Dunning (1993) states that foreign direct investment (FDI) is a long-term investment process of a company in a foreign county. The investment is made to the outside, but from inside the investing enterprise. Dunning (1993, p. 5) says that FDI “…consists of a ´package´ of assets and intermediate products, such as capital, technology, management skills, access to markets and entrepreneurship.” The investing firms remains owner of the transferred resources and therefore controls them. FDI is the financial investment in a company abroad to exert a long-term influence on its business policy. Corresponding to international standards, the long-term influence can be guaranteed at 10% of the direct investment, means capital or voting rights. In this context influence and control are important terms by which FDI are differentiated from Portfolio investments. Portfolio investments are normally short-term oriented and smaller amounts which mark the ownership. FDI are important indicators for globalization and build connections between countries and companies.

2.4 International Contracts

The last point within the chapter of definitions is the point international contracts which means the transfer of resources, for example licensing or franchising. Licensing means that one enterprises grants rights to another enterprise. Then the licensee can produce or sell or even change slightly the product in a foreign country. Welge, Holtbrügge (2003) state that even knowledge can be transferred to another company. An example are patents