According to Ekeledo & Sivakumar (2003:70) the two major theories’ on international entry mode is the internalizations theory and the eclectic theory. This is because they are the best-known theory and have empirical support. Here we discussing about these two theories.
According to Ekeledo & Sivakumar (2003:70) internalization theory is the same thing as transaction cost theory. The internationalization theory is an industrial organization-based theory. They assume perfect competition, mobility of resources among firms and homogeneous firms that is including perfect transferability of know-how between companies and their partners (Ekeledo & Sivakumar 2003:71). The internalization advantage is a contractual risk that makes controlling the foreign partner through FDI more valuable than licensing a local firm according to Ekeledo & Sivakumar (2003:72). This theory is questioned because it is not appropriate to compare FDI with exporting (Ekeledo & Sivakumar 2003:72).
The eclectic theory
(Ekeledo & Sivakumar 2003) explains the eclectic theory was developing due to the shortcomings in internationalization theory that focuses on location, ownership and internalization advantages. The ownership advantage refers to helping the foreign firm to overcome the disadvantages of competition against local firms. Location advantage refers to market potential and country risks that make conducting business in the foreign market profitable. And internalization advantage refers to contractual risks that make controlling the foreign affiliate through FDI more beneficial than licensing a local firm to offer the product in the foreign market (Agarwal and Ramaswami, 1992). But this theory does not explain why two firms with similar ownership, internalization, and location advantages may not choose the same entry mode. The resource-based theory views the firm and not the industry as the source of competitive advantages Ekeledo & Sivakumar (2003:72). The theory recognized the fact that the resources are both heterogeneous across firms and is affected by imperfectly mobile