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He began his work by analyzing two different types of business activities. One is related with the domestic productions that have a purpose for the foreign markets and the other is related with foreign direct investment. Dunning indicated that the two activities have the same nature and he attempted to explain them both.
The questions Dunning trying to answer are that why the enterprises decide to invest and produce in foreign countries then how to achieve this aim and where to be chosen as the locations. The advantages include ownership, location and internalization advantages.
Internalization advantages may answer the question how to operate FDI and international production. By transferring the asset and the ownership advantages to the subsidiaries in the foreign countries, enterprise can enjoy and utilize the resources belong to the headquarters.
This way can bring more benefit to the enterprise than through licensing them to other enterprise. Location advantages are those advantages that are related to the factor endowments and the policies adopted by the local government.
When the ownership and internalization advantages are combined with the location advantages, the enterprise can gain more benefit than through domestic production and exports. So those advantages need to be carefully analyzed by the enterprise so as to determine the place where to settle the subsidiaries or locate the production.
It not only links the micro and macro elements together but also involves the explanation of international trade and international production within the same theory. Many enterprises regard this theory as a guide for engaging into FDI. By developing the conception of OLI, Dunning concluded that companies that enjoy ownership advantages, such as managerial, marketing and organizational advantages, have the capabilities to engage in occupying the world market through FDI and international production.
And if a country possesses factor endowment like abundant raw material and low labor costs, it will create a great attraction for the country to obtain inward investment.
MNCs involved in FDI are mainly from developed country and countries with location advantages are mainly the developing countries. There are several countries that are involved in both outward and inward investment, however, Dunning fail to explain this fact.
The theory is certainly popular as a method of classification, but a doubt about this theory is that if it really can contribute more as an explanation to the activities of FDI.
It seems to just describe the process of the issues and has little evidence to support its conclusions. And in terms of its OLI advantages every different factor can be classified into the three classes, thus make it seems too simple as an explanation to international trade and international production, and then cause it hardly catch the nature of the business activities.
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