The OLI Paradigm (Buckley and Casson, 1976: Dunning 1977) is an attempt to create an overall framework to explain why MNEs choose FDI rather than serve foreign markets through alternative modes such as licensing, joint ventures, strategic alliances, management contracts, and exporting.
The OLI Paradigm states that a firm must first have some competitive advantage in its home market— “O” or owner-specific— that can be transferred abroad if the firm is to be successful in foreign direct investment. Second, the firm must be attracted by specific characteristics of the foreign market— “L” or location-specific— that will allow it to exploit its competitive advantages in that market. Third, the firm will maintain its competitive position by attempting to control the entire value chain in its industry— “I” or internalization. This leads it to foreign direct investment rather than licensing or outsourcing.