Going international for a company is connected with numerous difficulties and issues that have to be solved. Therefore, appropriate theories and researches can help the reader to understand theoretical background and principles that work in this area. This part of paper tends to evaluate such theories as eclectic theory and market imperfection theory in order to explore their background, critically evaluate them in terms of the main subject and explain why these theories are important for the following research and findings.
OLI: Ownership, Location, Internalization
Eclectic theory provides the researchers with the following OLI paradigm description: ownership advantage – company’s advantages are based on the specific nature of business, its human resources, patent portfolio, unique technologies, etc.; location advantage – different countries and regions of the world have resources, legal institutions and restrictions/ regulations specific for each, so they can influence operational costs, revenue, etc.; and internalization advantage – this advantage is based on the concept of ownership advantage transfer from domestic to international market within the boundaries of a company. It is a mix of three various factors of foreign direct investment, so one can present it as FDI = O + L + I. John H. Dunning developed the eclectic theory in 1980 and it is widely recognized in the economy science today.
It is used today in many scientific researches to describe the process of how a company should evaluate the situation when looking for an entry model to a foreign market. OLI model is universal and can be used for business researches in any area, including banking sector, for example (Uiboupin & Sõrg n.d.; McCrackan 2004).
According to Dunning (1980, 2001), Agarwal and Ramaswami (1990), and Pitelis (2006), the ownership advantages theory focuses on the strong sides of a company, its ability to present competitive products and be able to develop and present differentiated services and products for a foreign market. Dunning (1980, 2001), Jarblad (2003), and Pitelis (2006) also propose to evaluate the advantages of a company from the efficiency and monopolistic point of view, related to a company. These works provide rather comprehensive explanations of the importance of ownership advantages within the eclectic theory (Dunning 2001, Uiboupin & Sõrg n.d., Jarblad 2003).
Choice of the foreign market to enter plays a substantial part in the possible success for a company (Agarwal & Ramaswami 1990, Pitelis 2006, OLI Paradigm – The Eclectic Theory was evolved by John Dunning 2010). Therefore, as researchers state in their studies (Dunning 1980, 2001, Uiboupin & Sõrg n.d., Jarblad 2003, Agarwal & Ramaswami 1990 and Pitelis 2006), a company must determine and evaluate any possible contradictions between policies, economic and politic peculiarities, etc. on a foreign market and the ones that are common for a company at its origin location. Any unconsidered differences could become a serious obstacle later. So, it is important for a company to make a profound research in this area before entering the foreign market. The researches, conducted by Agarwal and Ramaswami (1990), Pitelis (2006), Uiboupin & Sõrg (n.d.) and Jarblad (2003) could be rather useful for the further research.
This theory emphasizes the idea that a company seeking for an entry to a foreign market could have advantages by making partnership arrangements, like licensing or joint venture, for example. Studies in this area conducted by Agarwal and Ramaswami (1990), Jarblad (2003), Pitelis (2006) and Twomey (2002), showed that such contracts should be prepared with extra caution because they can have unexpected consequences for a company that wants to enter the foreign market. These findings could provide a substantial background for further researches in the paper and could be valuable for theoretical support.
Market Imperfection Theory
The market failure is a situation when efficiency of product allocation or use of goods and services is low. Therefore, such market may be called imperfect. Market imperfection can be explained or described as anything that somehow interferes with trade. The appropriate theory was developed by Steven Hymer and colleagues in order to provide market imperfection principles with theoretic background (Pitelis & Sugden 2000, Twomey 2002). Pitelis and Sugden (2000) state, “according to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentiation, but in their absence markets are perfectly efficient”.
In other words, the theory is based on the assumption that perfect competition on a market is almost impossible at each given moment of time. The studies of Twomey (2002) and Chen (2005) provide the reader with comprehensive understanding of the market imperfection theory.
Deep understanding of this theory is necessary for the further research because peculiarities of each market could be determined and evaluated based on its particular imperfections. Pitelis & Sugden (2000) provide the researchers with necessary theories from Hymer, Dunning and other specialists in this area. Since the entry strategy of the company, going international would substantially depend on the peculiarities of the foreign market, determined, as it has already been mentioned, by its imperfection as well (What is Market Imperfections Theory? 2011; Pitelis & Sugden 2000).
Market imperfection theory is important background for the research that is going to be conducted. Therefore, the related studies should be explored. The theory gives practical understanding of the real situation on the international and domestic markets that are not perfect and cannot be considered as such. Therefore, it is necessary to have theoretical background to be able to evaluate the situation that a company could face enteri
The previous part of the study describes theoretical background for the answer to the main question, “How does foreign oil major company break into the China oil market?” In other words, it is the background for making the right choice of foreign market entry mode. OLI model provides the reader with understanding of the steps that have to be performed in order to determine the right entry mode (McLaney 2005, Miles 2003, Mullins 2010, Pearlson & Saunders 2009).
Ownership advantages include the following key factors that allow a company to seek for internationalization: the ability to develop differentiated products, the firm size and the firm’s multinational experience. First, a company should have the ability to create something new and constructive for the market it wants to enter. Second, a company needs to have the appropriate sales, the competitive assets’ size, equities and deposits, substantial number of employees, etc. Finally, a company should have international experience in some degree to be able to operate on international market. The degree is defined by percent of total earnings attributed to foreign operations, perceived degree of multi-nationality and perceived readiness to handle international business. These are the major features of a company that wants to go international (Raktabutr 2007, McLaney 2005, Miles 2003, Mullins 2010, Pearlson & Saunders 2009).
Location advantages, according to the above-described theory, influence the situation as well. These are the key factors that need to be considered: market potential and investment risk. Market potential of oil industry is still substantial. However, it is important to assess the market size, the growth potential, current situation with major consumers of the targeted products and services, etc. Investment risk is always present. It is important to understand and evaluate the risks connected with entry to China’s market and attitude of its government to possible investments from an international company to such strategic area as oil industry (D’Altorio 2010, Economides 2010, McLaney 2005, Miles 2003, Mullins 2010, Pearlson & Saunders 2009).
Internalization advantages of a company are determined by contractual risk. It is one of the key features to understand because a company needs to know what the risk of sharing assets and skills with host country firm is and how it is compared with integration with the firm. Such risks have to be evaluated and considered because it is important for a company to define the model of operations it is going to perform on the foreign market (Raktabutr 2007, Trippon 2010, McLaney 2005, Miles 2003, Mullins 2010, Pearlson & Saunders 2009).
Each of these factors is important for decision-making process. However, there are additional parameters that have to be measured as well. Evaluation of cultural and behavioural patterns of China’s market could be important to choose the entry mode because it would give the competitive advantage for a company that realized peculiarities of this market. Therefore, the combination of quantitative and qualitative methods was used in this paper to evaluate the factors given above (Trippon 2010, McLaney 2005, Miles 2003, Mullins 2010, Pearlson & Saunders 2009).
A company should have an opportunity to evaluate all the above said using surveys and interviews, both domestic and with representatives of foreign market, make statistical and ethical evaluation of the incoming data in order to determine own advantages and how to use them. Since there is no opportunity to conduct such specific surveys and interviews with participants of domestic and China’s oil market, it is necessary to evaluate available statistical information and correlate it with theoretical background provided before (Raktabutr 2007, Trippon 2010). Therefore, quantitative approach is more appropriate for our research because it operates with empirically acquired data from different sources.
The following can be concluded: the figure below presents connection between the choice of entry mode, location advantages and internalization advantages. On Figure 1 (Agarwal & Ramaswami 1990) it is clearly visible.