Eclectic Paradigm

DEFINITION of 'Eclectic Paradigm'

A theory that provides a three-tiered framework for a company to follow when determining if it is beneficial to pursue direct foreign investment. The eclectic theory paradigm is based on the assumption that institutions will avoid transactions in the open market when internal transactions carry lower costs.

BREAKING DOWN 'Eclectic Paradigm'

In order for a direct investment in a foreign country to be beneficial, the following advantages must be present:

1. Product or company specific advantages, such as a comparative advantage.

2. Location specific advantages - where the company derives greater benefit through a foreign establishment.

3. Market internalization - meaning, it is better for the company to exploit a foreign opportunity itself, rather than through an agreement with a foreign firm.

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