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.

  1. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  2. Paradigm Shift

    A major change in how some process is accomplished. A paradigm ...
  3. New Paradigm

    In the investing world, a new paradigm is a totally new way of ...
  4. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  5. Foreign Direct Investment - FDI

    Foreign Direct Investment (or FDI) is an investment made by a ...
  6. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
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