Re-orienting the paradigm: path
dependence in FDI theory and the
emerging multinationals
Jan Knoerich
King’s College London, London, UK
Abstract
Purpose – The purpose of this paper is to analyze how path dependence in the evolution of major theories of
foreign direct investment (FDI) locked in a theoretical perspective of the multinational enterprise that focused
on asset-exploitation. This perspective is challenged by recent contradicting observations of multinationals
from China and other emerging economies. A decisive re-orientation of FDI theory is proposed as a way
forward to resolve this tension.
Design/methodology/approach – Placing FDI theories into the context of FDI patterns prevailing at the
time they were developed, Thomas Kuhn’s framework on the evolution of scientific knowledge is employed to
track how the mainstream FDI theory emerged, went through a period of normal science and then approached
a crisis of science in this field.
Findings – The evolution of FDI theory is strongly path-dependent, which made it difficult for theory to
effectively incorporate new conceptual discoveries and empirical findings about the nature of FDI activity.
Originality/value – FDI theory would benefit from a full re-orientation to a demand-oriented perspective
which places the pursuit of advantages, assets, resources, etc., at the core of the theory. Such a change is implicit
in many recent theoretical advances and would assure theory is generalizable to all types of FDI.
Keywords Emerging market multinationals, Chinese multinational firms, Foreign direct investment (FDI),
Path dependency, Theory of the multinational enterprise, OLI
Paper type Research paper
Introduction
The arrival of companies from emerging economies such as China, India and Brazil on the
world stage since the beginning of the twenty-first century ushered in a new era in the study
of foreign direct investment (FDI) and the multinational enterprise (MNE). These emerging
multinational enterprises (EMNEs) exhibited features that were markedly at odds with
observations of traditional multinationals known to have expanded globally during the
second half of the twentieth century, which prompted many scholars to question and revisit
established FDI theories (Alon et al., 2011; Child and Rodrigues, 2005; Buckley et al., 2007;
Gammeltoft et al., 2010; Yiu et al., 2007; Ramamurti, 2009; Mathews, 2006; Athreye and
Kapur, 2009; Moon and Roehl, 2001; Hennart, 2012). Criticisms of extant theory focused on
its baseline idea that companies required strong firm-specific advantages (FSAs), such as
know-how or branding capabilities, to successfully internationalize (Buckley et al., 2017,
p. 1047; Dunning, 2001a; Hymer, 1976; Vernon, 1966). This requirement contradicted many
observations of EMNEs, which were found to be internationally less experienced, less
competitive and smaller than their advanced economy peers (Cuervo-Cazurra and Genc,
2008; Luo and Tung, 2007; Gammeltoft et al., 2010; Contractor, 2013). Other distinct features
of EMNEs that raised theoretical questions were their strong network orientation, greater
risk-taking behavior, institutional constraints and intense state-government relations in
emerging home economies (Mathews, 2006; Buckley et al., 2007; Peng, 2012, 2014; Hoskisson
et al., 2013; Yiu et al., 2007; Morck et al., 2008; Luo and Tung, 2007; Quer et al., 2015;
Yang and Stoltenberg, 2014). International Journal of Emerging Markets
Vol. 14 No. 1, 2019
pp. 51-69
© Emerald Publishing Limited
1746-8809
DOI 10.1108/IJoEM-04-2017-0123
Received 10 April 2017
Revised 1 October 2017
25 February 2018
16 May 2018
Accepted 31 May 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1746-8809.htm
The author would like to thank Agatha Kratz and three anonymous reviewers for their valuable
comments on earlier drafts of this paper.
51
Re-orienting
the paradigm
The paradox of EMNEs internationalizing despite weak FSAs was further aggravated by
their rapid expansion into economies more advanced than their home country (Ramamurti,
2012; Madhok and Keyhani, 2012; Holtbrügge and Kreppel, 2012; Guillén and García-Canal,
2009), as shown in Figure 1. Chinese firms expanded into North American and European
markets (Anderson and Sutherland, 2015; Knoerich, 2012; Blomkvist and Drogendijk, 2016), and
Indian multinationals increasingly focused their FDI on the USA, UK, Germany and other
advanced economies (Pradhan and Sauvant, 2010; Parthasarathy et al., 2017). Companies from
other emerging economies such as Brazil, Mexico and Taiwan, and even from less prominent
emerging markets such as Jordan, Chile and Costa Rica (Bianchi, 2014; Padilla-Perez and Gomes
Nogueira, 2016), have internationalized in the face of highly competitive global incumbents that
dominate international markets. Some Chinese firms acquired world leading companies in
advanced economies despite their technological and managerial weaknesses, internationally
unknown brands and limited international experience (Knoerich, 2010). Such discoveries
amplified the tension between extant theory and actual observations of Chinese and other
EMNEs. It is increasingly questionable whether traditional FDI theory – and especially the
necessity of FSAs that forms the core of it – still accounts for the whole spectrum of global FDI.
This study exposes path dependence in the evolution of FDI theory as the origin of this
theoretical dilemma. When FDI was first analyzed after the Second World War, all to be
seen were multinationals from leading Western economies investing abroad by exploiting
their international leadership and competitive advantages, often in less advanced
economies. Continuous theorization on FDI over time locked in these observations – most
notably in the form of Dunning’s (2001a) “OLI paradigm,” which emphasized a company’s
firm-specific or “ownership advantages” as a foundation of FDI. But over time, mainstream
theory was increasingly challenged by the need to incorporate newly emerging conceptual
discoveries and empirical observations that did not fit well with its emphasis on ownership
advantages. This study is believed to be the first to examine the consequences of path
dependence for the evolution of FDI theory and the resulting lack of fit with more recent
trends. The conclusion drawn from this analysis is that as FDI theory evolved, it should
have placed lesser emphasis on FSAs as a foundation of FDI to avoid questions about the
universal applicability and generalizability of the theory.
This study contributes to the further advancement of FDI theory by laying out why a
decisive re-orientation of FDI theory is necessary and how it should be undertaken. It explains
why FDI theory should do away with its current focus on the exploitation of FSAs as a raison
0
50
100
150
200
250
300
350
400
0
500
1,000
1,500
2,000
2,500
3,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FDI stock from developing and transition economies into G7 countries (US$ billion, left axis)
FDI stock from G7 countries into developing and transition economies (US$ billion, left axis)
FDI from developing and transition economies into G7 countries (index with base year 2001=100)
FDI from G7 countries into developing and transition economies (index with base year 2001=100)
Source: UNCTADStat
Figure 1.
FDI between G7
countries and
developing and
transition economies
52
IJOEM
14,1
d’être for FDI activity, and instead adopt a “demand-oriented” perspective. From this
perspective, the multinational is not viewed primarily as a supplier of FSAs to other countries,
but rather as an entity that uses FDI as a means to satisfy its own demand for specific
advantages, assets, resources, etc., by pursuing them abroad. Although recent theoretical
advances, which take account of the emerging multinationals, are already implicitly falling in
line with such a re-orientation, they avoid broader questions about the general paradigm and
analytical thrust underpinning FDI theory. The “demand-oriented” perspective developed in
this study addresses this shortcoming by providing an appropriate new fundament and basis
for the future advancement of theorizing on FDI.
Path dependence in FDI theory
Path dependence, a familiar concept in the field of economics, refers to a process whose
outcome is conditioned by that process’s own history (Martin and Sunley, 2006). According
to Peacock (2009) and Sterman and Wittenberg (1999), the concept of path dependence can
be applied to examinations of how scientific knowledge is produced. It is implicit in Thomas
Kuhn’s famous work on the evolution of scientific knowledge (Peacock, 2009). Avoiding the
term “theory” in favor of “paradigm,” Kuhn’s (1970) thinking centered on the idea of a
scientific paradigm going through a life cycle from initial emergence of the paradigm, to
normal science, followed by crisis and ending in revolution, when science shifts to a new
dominant paradigm (Sterman and Wittenberg, 1999). As this research will show, FDI theory
has so far gone through the first three stages of this cycle.
For this study, a history of path-dependency in FDI theory was constructed through an
in-depth survey of the theoretical literature on FDI from the 1950s to today. It included
70 original articles or books that developed the theories and 40 in-depth discussions of these
theories and their evolution by third authors. Several articles included published accounts in
which FDI theorists who were active during the relevant periods recalled their experience
of the way in which FDI theory evolved. This material was cross-checked with ten
comprehensive reviews of FDI theories to ascertain that all the major, enduring and most
widely referenced theories of FDI had been incorporated in the analysis. The resulting
illustration of the path dependence in FDI theory is depicted in Figure 2.
This study does not differentiate the “FDI theory” and “theory of the multinational
enterprise,” as both represent a confined body of theory, aimed at explaining why FDI
occurs and multinationals come into existence. This is in line with language used in
previous studies (Dunning, 2003; Hennart, 2009).
The emergence of FDI theories
The emergence stage in the evolution of scientific knowledge is characterized by a lack of
common beliefs and agreed scientific standards, resulting in competition among different
potential paradigms. Then, at some point, one specific paradigm begins to attract most
scientists in the relevant field of study (Sterman and Wittenberg, 1999). Dating roughly back
to the late 1950s and up until the mid-1970s, several theories – or paradigms – competed to
explain FDI and the activities of MNEs. Precisely at that time, when theories of the MNE
underwent a rapid process of conceptual development, FDI was largely an activity reserved
to internationally leading companies from high-income countries (Buckley, 2016, p. 75).
According to Figure 3, in the 1970s, advanced economies accounted for close to 100 percent
of all FDI outflows. Unsurprisingly, FDI theory was formulated and conceptualized in
accordance with these observations.
Early theories transferred elements of economic and international trade theory to the
cross-border movement of capital (Mundell, 1957), employing relatively simplistic two-country,
two-commodities and two-factor approaches and assuming perfect market conditions. It was
Hymer (1960, 1976), together with Kindleberger (1969), who contested this purely economic
53
Re-orienting
the paradigm
treatment of FDI and the assumption of perfect markets, suggesting that instead, companies
invested abroad to overcome imperfections in international markets. This strand of thinking
advanced the concept of market power – companies investing abroad by employing oligopolistic
or monopolistic advantages which enabled them to overcome disadvantages naturally incurred
by the estrangement experienced in a foreign environment. This idea of market power persists
in FDI theory up to the present day, awarding Hymer a reputation of father figure in the
development of this field of scientific inquiry. Unfortunately, he was not able to further advance
his theoretical thinking due to an unexpected early death in 1974.

Factor endowments
approach
adopted by
Market power
Market imperfections
approach
contested by
Product cycle
approach
Macroeconomic
approach Kojima (1973)
in line with
Internalization
approach
Uppsala model
Eclectic (OLI) paradigm
Transaction cost
economics Williamson (1981)
adopted by
Johanson and Vahlne (1977)
adopted
by
adopted
by

Extended product cycle approach
Localized technological change
Theory of technological
accumulation
Wells (1983)
Lall (1983)
Pavitt (1987)
Cantwell and
Tolentino (1990)
informed
Asset-seeking
accommodated by
extended by
Emergence stage
North–North and
North–South FDI

North–North, North–South
and South–South FDI
Crisis stage
North–North,
North–South,
South–South and
South–North FDI
adopted by
Transaction cost
economics
Coase (1937)
Vernon (1966)

revived by
Ohlin (1935)
Mundell (1957)
Buckley and Casson
Hymer (1960)
Kindleberger (1969)
Dunning
(various years)
New new
trade theory
(2002)
Strand 1
theories
Strand 2
theories
advanced by
Note: See figure 4 for a graphical representation of the two strands
Figure 2.
Path dependence
in FDI theory
54
IJOEM
14,1
Vernon’s thesis about the product cycle argued that firms, having developed innovative
products in a leading industrialized economy (the USA), expand production abroad once product
standardization necessitates a search for more labor-intensive and cost-effective production
locations (Vernon, 1966). In resonance with the concept of market power, the companies
undertaking investments are leading and dominant international actors from high-income
countries investing in less advanced economies to take advantage of lower-end economic
activities. Similarly, Kojima’s (1973, 1979) “macroeconomic” approach, informed by observations
of Japanese multinationals, identified comparative advantages enjoyed by investors in host
economies as a key explanatory factor for the existence of FDI.
The well-known internalization approach, developed during the 1970s, focused on the
existence of imperfect markets in the international transactions of firms. Forming part of
organization theory, this approach extended transaction cost economics to the context of the
MNE. It argues that information asymmetries and the uncertainties of bargaining in the
open market incentivize firms to internalize the markets for important economic activities
within the confines of the enterprise. If this happens at an international level, MNEs come
into being (Buckley and Casson, 1976).
The 1970s was also the time when a group of Scandinavian scholars developed the
Uppsala model, also called internationalization approach, which saw the expansion of firms
beyond the borders of their home country as a dynamic, sequential process. According to
this view, companies internationalize by gradually improving their knowledge about foreign
markets and reducing psychic distance with those markets, over time committing
increasing amounts of resources to their overseas operations in these locations ( Johanson
and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977, 1990). Unfortunately, the rather
deterministic nature of the framework and its focus on early stages of internationalization,
together with other criticisms ( Johanson and Vahlne, 1990), limited its overall potential as a
universal theory explaining FDI.
By the mid-1970s, none of these theories had convincingly managed to claim dominance,
yet scholars were quite familiar with each other’s efforts as they worked at the same
institutions or met at conferences. John Dunning’s main contribution was, thus, to effectively
bring together some of the previously developed ideas under one theoretical framework
(Buckley and Casson, 1991, p. x). In his view, the international activities of companies were
determined by their ownership (O) advantages, reminiscent of the concepts of market
power and competitive advantage, by internalization (I) advantages obtained from
bringing economic activities within the hierarchy of the firm, and by location-specific (L)
advantages, referring to country-specific attributes that attract investments (Dunning, 2000).
5 0
10
15
20
25
30
35
40
45
50
0
500
1,000
1,500
2,000
2,500
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Source: UNCTADStat
Figure 3.
Annual outward FDI
flows (US$ billion)
and percentage of
world total
55
Re-orienting
the paradigm
This tripod of advantages came to be known as the “OLI paradigm,” or “eclectic paradigm” as
it effectively drew on and combined several theories into one analytical framework (Dunning,
2001b, p. 43). A product of previous theories by its very nature, the OLI paradigm is a clear
illustration of path-dependence in FDI theorizing.
Dunning’s (2000) conceptualization of the OLI paradigm as an “envelope for economic
and business theories,” as unconventional as it might be, was an ingenious move. It gave
him an upper hand in the competition for dominance in FDI theory, eventually elevating him
to the leading figure in this field. The OLI paradigm has enjoyed popularity especially
among British, Commonwealth and European scholars. That Dunning’s dominant role in
FDI scholarship remains uncontested is confirmed by his record on Google Scholar – as of
2017, his citation count was above 62k. This is more than double the citation counts of the
next highly ranked FDI scholars on this measure. Taking the list of leading international
business scholars provided by Lahiri and Kumar’s (2012, pp. 324/331) ranking exercise
(and after cleaning their Google Scholar profiles for inaccuracies), S. Tamer Cavusgil came
next (32k), followed by Peter Buckley (31k), Mike Peng (29k) and Paul Beamish (29k).
This further confirms the OLI paradigm as the dominant FDI theory in the world.
Normal science in FDI theory
The emergence of the OLI paradigm in the 1970s launched a period of normal science in FDI
theory, with the eclectic paradigm forming the standard theoretical reference point to which
a great number of scholars and academics committed themselves. The eclectic paradigm
was therefore not easily shaken by changes in global FDI patterns or by new theoretical
advancements. This kind of complacence is typical for a period of normal science, in which
differences between the theory and actual observations or new discoveries tend to be
resolved through a preference for the theory (Sterman and Wittenberg, 1999, p. 324). Normal
science does not aim at discovering novelties, but instead is a cumulative activity aimed at
“the steady extension of the scope and precision of scientific knowledge” (Kuhn, 1970, p. 52).
Dunning actively supported this process. Since the inception of the eclectic paradigm in the
1970s and up until his death in 2009, he spent more than 30 years continuously defending and
enhancing the OLI paradigm in an enormous number of publications. There were criticisms of
component parts of the theory, for example, questioning the necessity of ownership
advantages or internalization (Kogut and Zander, 1993; Fosfuri and Motta, 1999), and pointing
to a lack of distinction between national and cross-border dimensions of internalization
(Barney and Hesterly, 1996). The OLI paradigm also had to survive other scholars’ efforts to
promote their own or favored theories (Buckley, 1988; Rugman, 1985). As will be shown
further below, Dunning went to great lengths at explaining new discoveries and observations
in global FDI patterns from within the confines of his eclectic paradigm, making continuous
efforts to further “articulate the paradigm theory” (Kuhn, 1970, p. 27). This solidified the
process of normal science, enabling scholars to commit to the paradigm and making it difficult
to advance any criticisms based on contradictory findings (Peacock, 2009, p. 108).
The first notable change in global FDI patterns occurred with the first observations of
multinationals from developing countries during the 1980s, although their FDI was still of
insignificant magnitude when compared with the international total (see Figure 3) and mostly
involved investments in other developing countries (Wells, 1983). Examinations of these “third
world multinationals” aimed primarily at understanding what kinds of ownership advantages
enabled them to undertake overseas investments despite their inherent technological
weaknesses, lack of innovation and poor managerial and branding capabilities. One strand of
theory built on Vernon’s work and considered developing country firms to be recipients of
standardized technologies in the mature stage of the product cycle (Beausang, 2003).
Ownership advantages were derived from small-scale, low-cost, flexible and labor-intensive
activities which had been abandoned by advanced economy firms but not yet mastered by
56
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other firms in the developing economies (Wells, 1983). The theory of localized technological
change provided a more optimistic view, in which developing country firms derived their
advantages from the localization of technologies to better fit the conditions in developing
countries (Lall, 1983). Proponents of the theory of technological accumulation had even greater
confidence in the third world multinationals, suggesting that they are able to innovate along
idiosyncratic technological paths as their learning trajectory depends both on localized
innovation and the adoption of foreign technologies (Pavitt, 1987; Cantwell and Tolentino, 1990;
Tolentino, 1993). All these approaches found developing country multinationals to have at least
some sort of ownership advantages, even if these were based on economic activities considered
inferior to those of the advanced economy multinationals. Thus, none of these approaches
challenged the OLI paradigm. As long as developing country firms continued to invest in
countries with a level of development equal to or lower than in their home economy, which was
largely the case in the 1980s, the concept of ownership advantages could still function well.
From the 1980s, FDI was also “re-injected” into the international trade theory with the
increased recognition that scale economies of firms and product differentiation were
important in determining trade patterns (Krugman, 1980). The incorporation of FDI into this
“New Trade Theory” was informed by both internalization theory and the OLI paradigm
(Markusen, 1995), resulting in a wide range of empirical work on trade and FDI (Faeth, 2009;
Helpman, 1984; Ethier, 1986). But this approach neither yielded a widely recognized
FDI-specific theory, nor did it launch a meaningful challenge to existing theories.
A more significant challenge to the dominant OLI paradigm emerged during the 1990s
with the empirical discovery of asset-seeking as an important activity associated with FDI
(Almeida, 1996; Dunning, 1996). The asset-seeking perspective focused on the use of FDI as
a vehicle for gaining access to valuable assets in host countries, assets which could even be
used to overcome firm-specific disadvantages (Wesson, 1993, 1999). From here emerged a
duality of asset-exploitation vs asset-seeking in FDI research, where in addition to
exploiting ownership advantages, firms could invest in foreign countries to develop FSAs
through asset-seeking (Makino et al., 2002). Some scholars emphasized the opportunity to
source knowledge overseas through outward FDI activity (Park and Choi, 2014;
Inkpen, 1998). This corroborated with the development of a categorization in FDI
research distinguishing between market-, efficiency-, resources- and strategic asset-seeking
FDI (Dunning, 2000). Conceptually, asset-seeking appeared to be the opposite of assetexploitation, and had the safety mechanisms of normal science not been there to defend the
latter, the discovery of asset-seeking might have mounted a meaningful challenge to the
primary notion of multinationals as exploiters of ownership advantages.
However, scholars did not question the validity of the OLI paradigm. Wesson (1999), who
made a meaningful contribution to the development of the asset-seeking concept, argued
that it was in conformity with internalization theory (p. 3). Dunning (2001a) himself
acknowledged asset-seeking as “a new dimension to our thinking about the rationale for
FDI” (p. 183), and a perspective considered by many researchers to be “a raison d’etre [sic]
for MNE activity” (Dunning, 2001b, p. 45). He approached this challenge by advocating a
reconfiguration of the OLI components to account for asset-seeking activities, whilst
articulating the paradigm theory by producing explanations for why the basic tenets of the
eclectic paradigm still held firm (Dunning, 2001a, p. 183). Dunning (2001a) found a viable
solution to this dilemma in the concept of “asset-augmentation,” advancing the idea that
firms still need some ownership advantages which confer them with the necessary
capabilities to seek assets abroad (p. 183). Despite the resolution of this theoretical challenge
within the confines of normal science, the discovery of asset-seeking effectively introduced a
new perspective from which to examine the activities of MNEs, one that would bring FDI
theory closer to crisis mode once the emerging multinationals had begun to invest
significant amounts in advanced economies.
57
Re-orienting
the paradigm
FDI theory in crisis
A paradigm enters a crisis at the point when the number of anomalies and inconsistencies
accumulate to such a degree that scholars eventually begin to question the dominant theory.
They respond by engaging in activities aimed at addressing these anomalies and attempt to
propose appropriate solutions (Sterman and Wittenberg, 1999).
By the early 2000s, at least parts of the dominant paradigm in FDI theory had come
under attack, as observations appearing to be inconsistent with the OLI paradigm
multiplied. Not only did the share of EMNEs in global FDI flows rise continuously, but
these firms increasingly undertook greenfield investments and acquisitions in the
advanced economies (see Figures 1 and 3). The concept of ownership advantage did not fit
well with this trend, given the many technological, managerial, branding and other
weaknesses these companies still exhibited. It was not any more possible to rule out the
existence of multinationals internationalizing without advantages (Fosfuri and Motta,
1999; Hashai and Buckley, 2014). On the other hand, asset-seeking appeared to be an
increasingly suitable concept.
The debate about the implications of FDI from emerging economies for theory focused
initially on Chinese outward FDI, which grew rapidly during the first decade of this century
and by 2010 had exceeded the magnitude of outward FDI from the other BRICS economies,
Taiwan, South Korea and other emerging economies (according to UNCTADStat). Moreover,
China’s domestic political economy, with its high number of state-owned enterprises,
presented itself as a striking anomaly. It was the established scholars in FDI research who
were first to discuss the anomalies of Chinese outward FDI and their implications for theory.
Without doubt having an interest in protecting a lifetime of FDI theorization, they exhibited a
strong preference for an extension, rather than replacement, of the extant FDI theory (Child
and Rodrigues, 2005; Buckley et al., 2007, p. 501). This conforms to Kuhn’s (1970) notion of
normal science as a cumulative activity of making scientific knowledge more precise ( p. 52).
In recent years, there has been a remarkable intensification of FDI theorization aimed at
explaining the behavior of emerging multinationals. It is possible to divide this literature
into two strands – exploitation-focused vs demand-oriented theories – as presented
graphically in Figure 4 along an indicative timeline. Exploitation-focused theories refer to
the multinational exploiting technologies, brands and other ownership advantages to
engage in FDI. Demand-oriented theories focus on the multinational having a demand for
advantages, assets, resources, etc., which it seeks to satisfy overseas through FDI. Figure 4
shows how some new theoretical advancements can be fit cleanly into one strand, whereas
the locale of the others on this spectrum is somewhere in between.
The first strand perpetuates the focus on the exploitation of advantages as the core of FDI
activity, in line with the spirit of theoretical extension. Scholars adhering to this view went on a
search for new or different ownership advantages enabling emerging multinationals to engage
in successful FDI (Jormanainen and Koveshnikov, 2012). Emerging multinationals were seen to
benefit from “special ownership advantages” (Buckley et al., 2007), such as privileged access to
funds, resilience, frugality, etc. (Ramamurti, 2012; Contractor, 2013). There have been some
excesses in this regard, such as the proposal that access to cheap capital might be an ownership
advantage of Chinese companies (Buckley et al., 2007; Ramamurti, 2012), which is not much
more than reiterating that the possession of funds – from whichever source – is a prerequisite
for investment. Rugman (2010), based on his earlier work (2006, originally published in 1981),
emphasized country-specific advantages (CSAs), rather than traditional FSAs, as a frequent
source of competitive strength for emerging multinationals (Rugman, 2010; Rugman, 2006;
Narula, 2012; Chen et al., 2015). Yet, if some multinationals do invest abroad without exploiting
any advantages (Fosfuri and Motta, 1999; Hashai and Buckley, 2014), or even when
asset-seeking is found to be the only motive for FDI (Meyer, 2015), a theory focused on the
exploitation of advantages may not be universally applicable.
58
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Theories in the demand-oriented strand place multinationals’ seeking-behavior at the core of
the theory. According to the linkage-leverage-learning (LLL) approach, companies utilize
FDI to develop competitive advantages via linkage, leverage and learning (Mathews, 2006).
Similarly, the springboard perspective views international expansion as an activity EMNEs
undertake to acquire overseas assets that enable them to rapidly overcome their inherent
competitive weaknesses (Luo and Tung, 2007, 2018).
Some theories have become embedded in a middle ground, whilst giving the demand-oriented
strand greater prominence than it received previously. Moon and Roehl (2001) question the
market imperfections approach to FDI and the focus on ownership advantages, and recommend
replacing the concept of “advantages” with that of “imbalance.” They conceptualize FDI as an
activity to rectify an imbalance between ownership advantages possessed and advantages
sought through overseas investments. Similarly, the dynamic capabilities perspective describes
the ability of EMNEs to engage in both asset-exploitation and asset-seeking FDI as an
“ambidextrous internationalization” (Deng et al., 2018). Furthermore, the resource-based view,
which, in its original form, focuses on firm resources as the source of competitive advantage, has
been increasingly used to explain how emerging multinationals use FDI to acquire the resources
that they lack from abroad (Deng, 2007, 2013). Building on this, the increasingly popular
institution-based view demonstrates how, depending on the circumstances, institutions in the
home economy can be a source of competitive weakness as well as competitive strength for
emerging multinationals, where weaknesses could be overcome by acquiring resources overseas
(Hobdari et al., 2017; Peng et al., 2008).
None of these approaches fully contest the OLI paradigm outright. Yet, the literature
from strand two and those theories found in the middle ground confirm that asset-seeking
has meanwhile become accepted as an important mainstream concept (Meyer, 2015; Cui
et al., 2014). Given the way academia is organized, involving significant pressures to publish
in leading journals edited and peer-reviewed by established scholars, it would be imprudent
for a scholar to advance a new theory whilst rejecting established theories. Engaging in a
Moon and Roehl (2001)
Mathews (2006)
Strand 1:
exploitation-focused theories
Strand 2:
demand-oriented theories
Buckley et al. (2007) and others
Imbalance theory
EMNE-specific advantages LLL approach
Rugman (2010) and others
Country-specific advantages
Luo and Tung (2007, 2018)
Springboard perspective
Deng (2007) and many others
Extension of resource-based view
Peng et al. (2008) and others
Institution-based view
Dynamic capabilities perspective
Deng et al. (2018)
Note: Categorization according to author’s interpretation
Figure 4.
Two strands of FDI
theorization in the
crisis era
59
Re-orienting
the paradigm
balancing act of advancing new theory whilst endorsing previous theories is, thus, the norm,
confirmed by the large number of theories found in a middle ground between the two
strands. Possibly because of these circumstances, all the recent advances have received
some degree of recognition, but have yet to gain widespread acceptance. None of these
approaches show serious potential to replace the OLI paradigm as the dominant theory.
A re-orientation of FDI theory
Sterman and Wittenberg’s examination of path dependence in scientific inquiry finds that
competition among paradigms and their order of succession is dependent on the scientific
environment within which theory is advanced, on the history of prior paradigms and on
self-reinforcing processes supporting some paradigms but not others. Once a specific
paradigm begins to dominate, switching to another theory becomes extremely costly,
allowing the dominant paradigm to maintain its prominence for long periods of time
(Sterman and Wittenberg, 1999).
The previous section’s analysis confirmed such patterns of path dependence having
greatly influenced the evolution of FDI theory over the past 60 years. New advancements in
FDI theory, aimed at addressing the changes observed in global FDI patterns, were built on
top of prior theoretical thinking. Strong tendencies of inclusiveness, with earlier theories
being incorporated into later theories, have exacerbated the path-dependent nature of FDI
theorization. The eclectic paradigm has been so successful because it managed to
incorporate other theories into the paradigm rather than having to refute competing theories
to gain legitimacy. It is omnipresent and has locked itself in as the dominant paradigm in
this field of academic inquiry (Hennart, 2012, p. 182).
The sub-optimal development of FDI theory
Although path dependence might be important in supporting the advancement of scientific
knowledge, it can lead to pareto-suboptimal outcomes in the development of appropriate
theories. With path-dependent processes selecting and giving preference to some theories over
others, there is no guarantee that the dominant theory emerging from this process is the most
superior among all viable alternatives. To the contrary, historical accidents, the nature of the
scientific environment or other factors can, if supported by path-dependent processes, make
an inferior paradigm dominate while potentially better alternatives are rejected (Peacock,
2009). It is important to consider this possibility in the case of FDI theory, for four reasons.
First, traditional theories of FDI emerged under a lack of knowledge of future developments
in global FDI patterns. At the time of their conceptualization it was certainly impossible to
anticipate the new discoveries that followed. The empirical observations available in the initial
years of theory development were of advanced economy multinationals, primarily from
Western economies, and of investments from stronger into weaker economies, so theory
developed accordingly (Ramamurti, 2009, 2012, p. 43). Similarly, issues such as networks,
institutions and state-government relations typical for emerging economies were not
considered in great depth. When the emergence of EMNEs combined with the discovery of
asset-seeking FDI to pose a significant challenge to established theories, the latter’s survival
was assured by processes of path dependence. But because most of FDI theory, as we know it
today, was developed at a time when nobody would have been able to anticipate the
particularities of current FDI patterns, it is unclear whether the extant FDI theory is the most
superior theory among all potential alternatives.
Second, one may question whether current FDI theory is in fact falsifiable. According to
Karl Popper (2005), the renowned philosopher of science, falsification is the criterion
demarcating science from non- or pseudo-science. In his view, a theory which is irrefutable,
because it can be modified to accommodate all possible observations, is by nature
unscientific (Thornton, 2016). Scientific extension, accounting for the recent developments in
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global FDI trends, could effectively constitute such an attempt at modification. Moreover,
the OLI paradigm itself could be questioned for the modifications it has undergone over the
years to accommodate new discoveries, such as the incorporation of asset-seeking behavior
into the paradigm by re-branding it as “asset-augmentation” (Dunning, 2001a). Continuous
scientific extension and modification may well make existing theories non-falsifiable and
thus, in Popper’s view, unscientific. It is for this reason that potential alternative theories
should be given greater consideration.
Third, FDI theory is potentially facing a lack of generalizability, in view of the Chinese
and other emerging multinationals operating in ways not predicted by such theory. As has
been shown, not all EMNEs possess the ownership, oligopolistic and competitive
advantages based on which they could make investments in line with the predictions of the
traditional theory. Moreover, while some may view the identification of new types of
ownership advantages as a viable solution to this dilemma, others will view such attempts
as no more than a desperate fix. The question is to what extent criteria of generalizability
and universal applicability must be fulfilled for a theory to count as legitimate, and how
many exceptions may still be tolerable.
Generalizability and universal application is of course not a requirement for a good theory,
and emerging multinationals may need a theory of their own. Theories such as the springboard
perspective, the LLL approach, the dynamic capabilities perspective or the addition of CSAs
are indeed quite EMNE-specific. But advancing a theory specific to the emerging multinational
raises conceptual challenges, such as questions about the appropriate cut-off point
distinguishing emerging from advanced MNEs, the precise definition of aspects that make
emerging multinationals unique, and the necessity to switch theoretical belonging when
emerging multinationals mature and transition to become advanced multinationals. Even more
problematic would be to stigmatize emerging multinationals as asset-seekers, while more
traditional investors from advanced economies have for several decades had the privilege of
being described as asset-exploiters. With asset-seeking featuring strongly in the literature on
Chinese outward FDI (Deng, 2007; Young et al., 1996; Child and Rodrigues, 2005; Amighini
et al., 2013; Gugler and Vanoli, 2015), this tendency is already prevalent. Thus, any theoretical
distinction between emerging and advanced economy multinationals would need to be
carefully crafted, and it is not surprising that the backing among scholars for such a separation
appears to be limited (Narula, 2012; Ramamurti, 2012).
FDI theory evolved primarily in the field of international business, spearheaded by
scholars at the University of Reading, some of whom in later years dispersed to other
locations in the UK and beyond. The thinking and theoretical arguments published by
business scholars are however bound by the need to present companies and businesspeople
in a favorable light. Academics working in international business are dependent on good
relations with companies, on whom they rely to obtain data and funding. The
asset-exploitation narrative focusing on the technological, managerial and branding
strength of multinationals promotes such a favorable view, as it creates a positive notion of
a strong company bringing capabilities and other assets which may spill over into host
countries. An asset-seeking perspective may, on the contrary, shine less of a bright light on
the activities of MNEs. This is because, even though target firms or host economies can
potentially benefit from asset-seeking FDI together with the investing firm (Knoerich, 2010),
it may also raise concerns over issues such as technology theft, reverse knowledge transfer
and economic dependency, attitudes increasingly visible toward Chinese multinationals
(Giuliani et al., 2014, p. 681). That activities akin to asset-seeking had been observed as early
as the 1950s (Cantwell et al., 2004, p. 18), yet no corresponding concepts entered theory, is an
indicator of such considerations possibly having been present, either consciously or
sub-consciously. For similar reasons, traditional theories may still be preferred among
business scholars today.
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A change in dominant perspective
It is useful, for a moment, to imagine a hypothetical world in which theorization on FDI started
only today, with no previous theories available and scholars having full knowledge of the
current characteristics of MNEs from both advanced and lower-income countries. This
scenario may well have seen FDI theory develop in a markedly different way to what
happened over the past 60 years because the phenomenon that firms go abroad to seek assets,
resources, advantages, etc. would have been familiar from the outset, rather than treated as a
new observation that needed to be woven into already existing theoretical frameworks.
It is likely that asset-seeking – or an associated similar demand-oriented perspective – would
have been given prominence in the development of FDI theory. This is not only because assetseeking is a characteristic of all time periods and done by multinationals from advanced and
developing economies – the former having engaged in asset-seeking activities since the 1950s
(Cantwell et al., 2004, p. 18; Sutherland et al., 2017; Almeida, 1996; Dunning, 1996). It is also
because recent theoretical advances, especially those referring to emerging multinationals, have
shown some preference for a demand-oriented narrative, while placing less emphasis on
asset-exploitation. Most new theoretical advances – apart from those simply advocating the
addition of ownership advantages – tend to lean toward the right-hand side of Figure 4.
Asset-seeking, or an associated concept, therefore deserves to be at the core of FDI theory,
rather than an add-on to existing theoretical frameworks.
Moreover, it cannot be proven – neither conceptually nor empirically – that the exploitation
of ownership advantages must occur in each case of a foreign investment. As discussed
above, examples exist where the clear identification of ownership advantages is a challenge.
If a company has the necessary funds, it can make an investment or acquire a firm, for which
it may not need any form of advantage. Of course, the same can be argued about asset-seeking
narrowly defined, as not all companies invest abroad to seek technologies, know-how and
brands. But theorists in the hypothetical scenario are unlikely to have started off with such a
narrow definition of asset-seeking. They would have begun developing theory by viewing FDI
from a broader demand-oriented perspective, in which the multinational uses FDI to seek, link
to or obtain from a foreign location whatever is in its interest. In other words, not only would
they have included the acquisition of assets in the theory, but also the pursuit of other
advantages, resources and further objects of interest in a foreign country.
Such a pursuit of advantages, assets, resources, etc., can be conceived as the essence of
any investment, a necessary and sufficient condition for FDI to occur. It is sufficient because
FSAs are not a requirement for such a pursuit to occur. It is necessary because without it,
the foreign investment would be without purpose and thus would not occur. No matter what
ownership advantages a company possesses, it would not invest abroad if it were not for the
existence of some market, technology, factory, linkage, network, workforce or other
advantage, asset or resource it considered worthwhile to obtain in the overseas location
through a merger, acquisition, greenfield or brownfield investment. A pursuit in a foreign
country is thus a universal requirement for an investment to go forward, a reason for
internationalization and the birth of the multinational, indeed the raison d’être of the MNE.
On the contrary, the possession of ownership advantages is neither a necessary (Hashai
and Buckley, 2014), nor a sufficient condition for FDI to occur. A multinational without
ownership advantages may nevertheless make an investment to obtain assets, advantages,
resources, etc., abroad, and a company may possess ownership advantages, but it may not
invest abroad as it finds nothing worth pursuing in another country. Ownership advantages
are rather a tool or means, to be employed in addition to investment capital, which
companies may or may not use to invest abroad successfully.
Put differently, rather than focusing on ownership advantages as a means for FDI (that is
not essentially required), it is better to focus on a pursuit of advantages, assets, resources, etc.,
as the ends for FDI (required for it to occur). The strength of such a perspective is its universal
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applicability and generalizability to all advanced and emerging economy MNEs – both invest
abroad in pursuit of some sort of advantages, assets, resources or other objects of interest,
even if there may be differences in what they pursue specifically. A demand-oriented
perspective, therefore, promotes a holistic view that incorporates all kinds of FDI by all kinds
of firms. It further allows for Popper’s requirement of falsifiability – the discovery of any FDI
not driven by such a demand and not constituting a pursuit, as unlikely as it may be, would
result in falsification. Finally, it encourages parsimony, as the number of different concepts
needed to explain FDI is likely minimized.
Conclusions
Employing Thomas Kuhn’s framework on the evolution of scientific knowledge, this study
uncovered the constraints on the advancement of FDI theory imposed by deep processes of
path dependence in the evolution of the theory over the past 60 years. The eclectic paradigm
with its focus on FSAs and asset-exploitation was found to have locked itself in as the
dominant theory explaining FDI. Even when challenged by contradicting observations of
multinationals from China and the emerging economies, this perspective on FDI continues
to dominate, making a “scientific revolution” in FDI theory unlikely. A “paradigm shift” – to
use Kuhn’s terminology – would require a widely-accepted re-conceptualization in FDI
theory going beyond simple theoretical extension (Sterman and Wittenberg, 1999).
The main theoretical advancement of this study is its proposition of a full re-orientation
of FDI theory to overcome the shortcomings of the asset-exploitation perspective uncovered
by it. Instead of focusing on FSAs, a preferred perspective should be “demand-oriented,”
viewing the multinational primarily as an entity seeking to satisfy its demand for
advantages, assets, resources etc. abroad through foreign investment. This demandoriented perspective ventures beyond the focus on asset-seeking that dominates the existing
literature, as it conceptually incorporates all kinds of assets, resources, advantages, etc.,
sought through overseas investment. It, therefore, provides a much broader analytical
fundament, still to be filled with detail by future theoretical reasoning. Recent advances in
theory – including the LLL approach, the springboard perspective, parts of the imbalance
theory and dynamic capabilities perspective, and aspects of the resource- and institutionbased views – have already initiated this shift toward a demand-oriented conceptualization
of FDI theory but have fallen short of advocating a full re-orientation.
This is where this study goes decisively beyond previous theoretical advancements, as it
advocates for a fundamental re-orientation of the broad perspective applied to FDI and the
multinational. Rather than focusing on the strengths and advantages of the multinational to
explain its investments, the demand-oriented perspective re-orients the focus toward the
demands, needs and objectives of the multinational. Given that all FDI is motivated by a
pursuit of some advantages, assets, resources, etc., abroad, fully adopting this perspective
has the added benefit of promoting universally applicable, generalizable, parsimonious and
falsifiable FDI theories, and of overcoming the need for a particularistic theory specific to
the EMNE. The full and decisive re-orientation to the demand-oriented perspective is
preferable to previous practices endorsing a duality of asset-exploitation and asset-seeking,
which represents a compromise that comes at the cost of parsimony and theoretical focus.
The demand-oriented perspective provides an important new conceptual foundation, the
purpose of which is to entice greater confidence in the advancement of theories decisively
opposed to the asset-exploitation narrative.
Theories adopting the demand-oriented perspective potentially offer new and improved
ways of understanding and analyzing FDI, given this perspective’s greater power in the
examination of specific aspects of foreign investment. Such theories would likely provide
more profound insights on aspects that are influenced by the way in which multinationals
pursue advantages, assets, resources, etc., through FDI, such as the home country impact of
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FDI and effectiveness of reverse spillovers (Knoerich, 2017; Zámborsky and Jacobs, 2016).
They might better examine factors that lead to success or failure of investments, which
depends on the effective pursuit of the aspired advantages, assets, resources, etc. Theories
adopting a demand-oriented narrative will likely provide suitable theoretical backing to
examinations of various forms of environmental and social impact of FDI, an issue of
concern especially when MNEs pursue lower environmental and labor standards in host
countries. They would be effective for examining the attitude of governments toward FDI,
for example by explaining rationales for investment protectionism and the increased use of
investment screening mechanisms to vet Chinese acquisitions motivated by the pursuit of
assets and resources. Theories adopting a demand-oriented perspective may therefore offer
important insights for policy and practice and provide theoretical views that may be valued
beyond the realm of international business.
Switching to a demand-oriented conceptualization in FDI theory does not necessarily
constitute a full “scientific revolution” out of which an entirely new theory develops.
As theories adopting a demand-oriented perspective are further developed, many familiar
concepts might continue to be endorsed, resulting in a significant shift that nevertheless
perpetuates the path-dependent trajectory in the development of FDI theory. A general
theory fitting with a demand-oriented narrative could be superior to alternatives, yet still
incorporate some of the remarkable contributions made to the conceptualization of FDI over
the past decades. Alternatively, a decisive theoretical advancement that adopts a demandoriented perspective could yield an entirely new theory. It all depends on the trajectory
taken by theorists in the future.
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Corresponding author
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