Incorporating Dynamic Capabilities into Dunning’s Eclectic Paradigm: A Study of Small and Medium-sized Enterprises

Small and medium-sized enterprises (SMEs) are now playing an increasingly important role in international business. Entry mode choice is considered one of the most critical strategic decisions because once established, is difficult to change or reverse, results in having long-term performance implications. Dunning’s eclectic paradigm (OLI) has been long recognized as one of the leading frameworks in inquiring entry mode selection. Yet, this analytical tool is comparatively static in nature, offering little guidance to accommodate the market dynamism with the increased globalization in recent decades. This paper thereby suggests incorporating dynamic capabilities (adaptive capability, absorptive capacity, and innovative capability) into the sub-paradigm of ownership advantages, serving as a firm-level capability-related safeguard mechanism which makes costly hierarchical mode of entry less necessary. Hence, this can uphold the position of OLI paradigm as the dominant analytical framework of value-creating cross-border activities. From practical perspective, recognizing the significant values of different types of dynamic capabilities, SMEs can chart their own paths to develop, and simultaneously utilize their own capabilities to overcome their inherent smallness. This can allow them to manage their new entries and market operations in this fast-paced global marketplace more efficiently and cost-effectively.