The Eclectic Paradigm, also known as the OLI Framework, is a theory developed by John Dunning. It explains why firms engage in foreign direct investment (FDI) and the factors that influence their decision-making process. The framework consists of three components:

- Ownership advantages: These are the unique advantages possessed by a company, such as intellectual property, brand reputation, or managerial expertise, which give it a competitive edge over local firms in foreign markets.

- Location advantages: These refer to the advantages offered by specific locations, such as access to resources, infrastructure, skilled labor, or favorable government policies. Companies seek locations that maximize their competitive advantage.

- Internalization advantages: These arise when it is more beneficial for a company to internalize its operations rather than relying on external market transactions. Internalization allows firms to protect their proprietary knowledge and maintain control over their value chain.


Developed by Michael Porter, the Diamond Model analyzes the competitive advantage of nations. It proposes that the competitiveness of firms in a particular industry is influenced by four interrelated factors:

- Factor conditions: The availability and quality of production factors, such as skilled labor, infrastructure, natural resources, and technological capabilities, determine a nation's competitive advantage.

- Demand conditions: The nature and sophistication of domestic demand play a significant role in shaping a firm's international competitiveness. Strong domestic demand fosters innovation and product improvement.

- Related and supporting industries: The presence of related industries and supporting infrastructure, such as suppliers, service providers, research institutions, and specialized knowledge, enhances the competitiveness of a firm and its industry.

- Firm strategy, structure, and rivalry: The competitive intensity and rivalry among firms within a nation influence their drive for innovation, efficiency, and continuous improvement.


The Uppsala Model, developed by Johanson and Vahlne, focuses on the internationalization process of firms. It suggests that companies gradually increase their commitment and involvement in foreign markets through four stages:

- No regular export activities: At this stage, the company has no experience or knowledge of foreign markets.

- Export via independent representatives: The company starts exporting by relying on independent agents or distributors who have better knowledge of foreign markets.

- Establishment of sales subsidiaries: The company establishes its own sales subsidiaries in foreign markets to have more control and gain market knowledge.

- Production abroad: Finally, the company establishes production facilities in foreign markets to better serve local demand and overcome trade barriers.


The Transaction Cost Theory, developed by Coase and Williamson, explains the choice between market transactions and internalization. It suggests that firms consider the transaction costs associated with using the market versus conducting activities within the firm. Factors influencing this decision include:

- Asset specificity: When assets are highly specific to a particular transaction, the firm may choose to internalize the activity to safeguard its investments.

- Uncertainty: High levels of uncertainty make market transactions riskier, and firms may prefer internalization to gain more control and reduce uncertainty.

- Frequency: Frequent, repetitive transactions are more efficiently conducted through the market, while infrequent transactions may be better internalized.

- Opportunism: The risk of opportunistic behavior by external parties may lead firms