Eclectic Paradigm

Definition

The eclectic paradigm is a theory in economics and is also known as the OLI-Model or OLI-Framework. It is a further development of the internalization theory and published by John H. Dunning in 1979.

Eclectic Paradigm

What is an ‘Eclectic Paradigm’

An eclectic paradigm is a theory that provides a three-tiered framework for a company to follow when determining if it is beneficial to pursue direct foreign investment (DFI). The eclectic theory paradigm is based on the assumption that institutions will avoid transactions in the open market when internal transactions carry lower costs.

Explaining ‘Eclectic Paradigm’

For a direct investment in a foreign country to be beneficial, there must be a comparative advantage, an ownership advantage and an internalization advantage. The eclectic paradigm is considered a holistic approach, based on examining the entirety of the relationships and interactions of the various components. It provides a process to determine an organization’s strategy regarding the expansion of its operations through foreign direct investments.

Three Key Factors of the Eclectic Paradigm

Three main factors are considered as part of the eclectic paradigm analysis. The first goal is to determine if there is a comparative advantage to performing certain functions within a particular nation. Often, these considerations are fixed in nature; they apply to the availability and costs of resources when functioning in one location over another.

Eclectic Paradigm

Definition