Discussion Paper

No. 2015-67 | December 08, 2015
Does the Explanatory Power of the OLI Approach Differ among Sectors and Business Functions: Evidence from Firm-level Data


The relevance of services FDI strongly increased over the last two decades. As services and goods differ with respect to important characteristics, one may expect that the determinants of internationalisation are not identical in services and manufacturing. Surprisingly, there is practically no firm-level research contrasting the two sectors in this respect. In order to fill this gap, the authors aim at identifying for manufacturing and services, firstly, the determinants of a firm’s propensity to engage in foreign activities (exports and/or FDI) and, secondly, the factors determining a firm’s direct foreign presence in terms of (combinations of) business functions. The authors find that an OLI-based model is well suited for explaining not only the propensity to go international but also the differences between two specific forms of FDI in terms of business functions both for manufacturing and services. In all models, the explanatory power of the OLI approach is stronger for manufacturing than service activities. The results are consistent with the stages view of internationalisation in particular in manufacturing, but to a lesser extent also in services where the process of internationalization is less continuous.

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Spyros Arvanitis, Heinz Hollenstein, and Tobias Stucki (2015). Does the Explanatory Power of the OLI Approach Differ among Sectors and Business Functions: Evidence from Firm-level Data. Economics Discussion Papers, No 2015-67, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2015-67

Comments and Questions

Anonymous - Invited Reader Comment
December 10, 2015 - 10:12

There have been numerous attempts in the last 20 years or so to operationalise Dunnings ideas, and to interpret them in a way that generates an equation that can be estimated.
In order to examine this approach, I think one first has to consider what the purpose of doing this ...[more]

... is. IB scholars will start out by saying that the purpose of OLI was to generate a conceptual framework that brought together the monopolistic advantages of Hymer, and the internalisation theory that was expressed in Buckley and Cassons 1976 book. As such, it was an attempt to explain the limits of the firm. The problem however that scholars have found in seeking to derive an econometric equation is that OLI also captures conceptually all motives for firms undertaking FDI, which are typically condensed into market seeking, efficiency seeking, resource seeking and technology seeking, or, ignoring resource seeking for the moment, condensed into technology exploiting or technology sourcing. However, with the exception of the occasional survey, data sets do not provide this information, and so whether one is seeking to apply Melitz, Dunning or the Uppsala model, the same issues present themselves. The theories are essentially developed to describe the ordering of internationalisation, being domestic  exporting  FDI, though either an evolutionary process, or through a selection process where the highest performing firms move all the way to FDI. This can in turn be linked to Dunnings idea of ownership advantages.
However, consider technology sourcing for a moment. It is well established that technological laggards can engage in technology sourcing, thus effectively flouting the stepwise or pecking order approach, though in Dunnings terms their ownership advantages may be the resources required to acquire knowledge, either assimilating through absorptive capacity (human capital) or the financial resources to simply pay for it.
Alternatively, consider efficiency seeking. Suppose a firm outsources all of its low value added activities to a low cost location, that fits in perfectly with OLI, and indeed will through the batting average effect, increase average productivity at either the firm or sectoral level. There is no reason however why this should be related to the available measures of ownership advantages such as R&D, and equally no reason why they should engage in the intermittent step of exporting.
Taking this together, it is therefore perhaps not surprising that different sectors, with different value chains, or which above patterns to a greater or lesser extent, will generate different results.
The other essential problem with seeking to model OLI is the “I”. Conceptually this concerns the incentive of firms to retain certain activities with the firm – ie doing FDI rather than trade. While size etc. can be a proxy for this, this is not what is meant in IB terms by the boundaries of the firm. Rather, one may want to consider either the growth opportunities, or the extent to which internalisation offers lower risk. This might include proxies such as the number of other foreign subsidiaries, as a proxy for experience, as well as growth and or the institutional quality of the host country.
In short therefore, this is a valid attempt, with some interesting data to model the FDI process, though it raises as many questions as it answers. Finally, I should also point out that I claim little originality for these remarks, many similar comments have been made about my own work modelling firm level FDI decisions over the years.

Heinz Hollenstein - DC 2015-67
December 14, 2015 - 15:44

Enclosed, as a PDF-File, our reply to the Invited Reader

Anonymous - Referee Report 1
January 18, 2016 - 12:04

see attached file

Anonymous - Referee Report 2
January 25, 2016 - 08:05

see attached file

Anonymous - Referee Report 3
February 15, 2016 - 08:29

see attached file

Arvanitis/Hollenstein/Stucki - Reply to Referee Reports
May 12, 2016 - 08:18

see attached file

Arvanitis/Hollenstein/Stucki - Revised Version
May 12, 2016 - 08:20

see attached file