What does the OLI Paradigm propose to explain? Define each component and provide an example of each
What will be an ideal response?
Answer: The OLI Paradigm is an attempt to develop an overall framework to explain why MNEs choose FDI to serve foreign markets rather than alternatives such as licensing or exporting. The letters of the paradigm are O for owner-specific advantages, L for location-specific advantages, and I for internalization.
Owner-specific advantages require that the firm have a comparative advantage in its home market that it feels it can exploit internationally. To be most effective, the advantages should be difficult to copy. Location specific advantages may be due to market imperfections or genuine comparative advantages such as a source of a particularly high quality natural resource. With internalization the firm has in its possession some proprietary information or product such as software or personnel that may provide an advantage in the international marketplace.
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