Dunning- Theory of International Production
TOWARD AN ECLECTIC THEORY OF INTERNATIONAL PRODUCTION: SOME EMPIRICAL TESTS
JOHN H. DUNNING ' University of Reading
I
Abstract. This paper first sets out the main features of the eclectic theory of international production and then seeks to evaluate its significance of ownership- and location-specific variables in explaining the industrial pattern and geographical distribution of the sales of U S . affiliates in fourteen manufacturing industries in seven countries in 1970.
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H There is now a consensus of opinion that the propensity of an enterprise to iNTRoDucTtoN engage in international production-that financed by foreign direct investmentThe Underlying rests on three main determinants: first, the extent to which it possesses (or can Theory acquire, on more favorable terms) assets ' which its competitors (or potential competitors) do not possess; second, whether it is in its interest to sell or lease itself; and third, these assets to other firms, or make use of-internalize-them how far it is profitable to exploit these assets in conjunction with the indigenous resources of foreign countries rather than those of the home country. The more the ownership-specific advantages possessed by an enterprise, the greater the inducement to internalize them; and the wider the attractions of a foreign rather than a home country production base, the greater the likelihood that an enterprise, given the incentive to do so, will engage in international production. This eclectic approach to the theory of international production may be summarized as follows.* A national firm supplying its own market has various avenues for growth: it can diversify horizontally or laterally into new product lines, or vertically into new activities, including the production of knowledge; it can acquire existing enterprises; or it can exploit foreign markets. When it makes good economic sense to choose the last route (which may also embrace one or more of the
JOHN H. DUNNING ' University of Reading
I
Abstract. This paper first sets out the main features of the eclectic theory of international production and then seeks to evaluate its significance of ownership- and location-specific variables in explaining the industrial pattern and geographical distribution of the sales of U S . affiliates in fourteen manufacturing industries in seven countries in 1970.
e lr !. V
t
; 3 ;
H There is now a consensus of opinion that the propensity of an enterprise to iNTRoDucTtoN engage in international production-that financed by foreign direct investmentThe Underlying rests on three main determinants: first, the extent to which it possesses (or can Theory acquire, on more favorable terms) assets ' which its competitors (or potential competitors) do not possess; second, whether it is in its interest to sell or lease itself; and third, these assets to other firms, or make use of-internalize-them how far it is profitable to exploit these assets in conjunction with the indigenous resources of foreign countries rather than those of the home country. The more the ownership-specific advantages possessed by an enterprise, the greater the inducement to internalize them; and the wider the attractions of a foreign rather than a home country production base, the greater the likelihood that an enterprise, given the incentive to do so, will engage in international production. This eclectic approach to the theory of international production may be summarized as follows.* A national firm supplying its own market has various avenues for growth: it can diversify horizontally or laterally into new product lines, or vertically into new activities, including the production of knowledge; it can acquire existing enterprises; or it can exploit foreign markets. When it makes good economic sense to choose the last route (which may also embrace one or more of the