The purpose of this study is to identify the main trends in fdi theory and highlight how these theories were developed, the motivations. National policies and the international investment architecture. Hymer 1976 posits that fdi was a way of transferring skills. Moreover, theories of fdi can be classified according to other criteria. It has been found that 31 to 40 percent of the private external borrowing guaranteed by developingcountry governments leaves as capital flight. Oligopolistic competition and foreign direct investment re integrating the strategic management perspective in the theory of multinational corporations anne kristin hoenen and michael w. Foreign direct investment in developing countries a.
Foreign direct funding is a vital problem that has attracted the eye of educational and skilled economists in addition to politicians and coverage makers. In the caribbean, foreign direct investment fdi, although small by world standards. Since the multinational corporation is definitionally equivalent to foreign direct investment, theories of foreign direct investment must account for why one country invests in another and why this investment is carried out within organizational boundaries of a firm see buckley and casson 1976, see foreign investment. Foreign direct investment and the nigerian economy. The effects of foreign direct investment 69 the effects of foreign direct investment 69 more likely to arise when there are significant economic, social, and cultural differences between the. For example, almost half of trade flows are intrafirm. Foreign direct investment and technology spillovers. Foreign direct investment is an important issue that has attracted the attention of academic and professional economists as well as politicians and policy makers.
Foreign direct investment theory, evidence and practice i. Fdi brings capital and technology to target rms, industries, and locations, a ecting demand for labor and therefore. A foreign direct investment happens when a corporation or individual invests and owns at least ten percent of a foreign company. Foreign direct investment is viewed as a channel of technological progress and thus introduced in a romers 1990 model framework, by making it easier to adopt the technology of producing. Internalisation as a general theory of foreign direct.
Foreign direct investment theory foreign direct investment fdi theory has not been fully established in the literature, however, the pioneering work of hymer 1976 laid down the concept of fdi of which this study has builton. Desmaraisx abstract we develop theory that accounts for complex dependence in foreign direct investment fdi relationships. There is a broad consensus in theory that only the most productive firms engage in fdi helpmanmelitzyeaple 2004melitz 2003. The paper investigates the relationship between foreign direct investment and economic growth. To understand foreign direct investment must first understand the basic motivations that cause a firm to invest abroad rather than export or outsource production to national firms. Theoretical studies on fdi have led to a better understanding of the economic mechanism and the behavior of economic agents, both at. The first attempt to explain fdi was ricardos theory of comparative. Foreign direct investment theories certain theorists have attempted to address. Among others, these include the neoclassical theory.
These foreign direct investment advantages and disadvantages provide a foundation for the decisionmaking. A greenfield also greenfield investment is a type of foreign direct investment fdi in which a parent company creates a subsidiary in a different country, building its operations from the. Theories of international trade, foreign direct investment. It acts as a panacea for breaking out of the vicious circle of low savingslow income and facilitates the import of. The balance of payments constraint can be expressed as follows. Even if there is a wellconstructed contract governing the terms and conditions of the investment, some foreign companies may decide to take the money and run. In theory, fdi can boost the host countrys economy via capital accumulation, the introduction of new goods and foreign technology according to the exogenousgrowth theory view, and also by enhancing the stock of knowledge in the. Foreign direct investment fdi is argued to play a pivotal role in accelerating economic growth eg of a host country especially in developing and organization. Moosa presents a survey of the vast body of literature and ideas relating to foreign direct. Foreign direct investment theory and strategy the theory of comparative advantage the theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless information, and no government interference. Firms conduct fdi by either engaging in greenfield investment or in crossborder acquisitions. Foreign direct investment fdi is an investment made by a company or entity based in one country into a company or entity based in another country. The oligopoly theory thus, explains defensive investment behaviour of a multinational firm.
A foreign direct investment fdi is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. During the past two decades, foreign direct investment fdi has become increasingly important in the developing world, with a growing number of developing countries succeeding in attracting substantial and rising amounts of inward fdi. Chapterii theoretical frameworks of foreign direct investment. Foreign direct investment fdi reasons why mncs are attracted to developing nations 1. Pdf on jan 1, 2019, hykmete bajrami and others published theories of foreign direct investment fdi and the significance. The origin of the investment does not impact the definition, as an fdi. Foreign direct investment fdi acquired an important role in the international economy after the second. Conventional theories of fdi focus on rm, industry, country. We distinguish between the level and rate effects of spillovers on the productivity of domestic firms.
Department of economics, state university of new york at buffalo, buffalo, ny 14260, usa received 19 october 2004. However, no single theory fits the different types of direct investment or the investment made by a particular multinational corporation or country in any region. Katsikeas theories of international trade, foreign direct investment and. Despite the incresing importance of foreign direct investment for developing countries, little attention has been given to its financial effects in general or its relation to capital flight in particular. Among others, these include the neoclassical theory of capital mobility, the industrial organisation. Discussed are early studies of determinants of fdi 1 as well as determinants of fdi based on the neoclassical trade theory 2, ownership. The theory of internalisation does provide an explanation of certain types of fdi activities by mnes. A model of endogenous growth first highlights the transfer of foreign technology as a key determinant of economic growth, and suggests that economic growth may conversely influence the inflows of foreign capital. Introduction in order to conduct empirical investigations on the issues pertaining to comparative conducts and performance of fcfs and dfs as well as for efficiency and export spillovers from fcfs to dfs, we require a theoretical framework for deriving.
It is thus distinguished from a foreign portfolio investment by a notion of direct control. The management dimension is what distinguishes fdi from portfolio investment in foreign stocks, bonds and other financial instruments. The prevailing expectation is that international investment law largely does not do this. To understand foreign direct investment must first understand. Most economic rationale for granting special incentives for attracting foreign direct investment fdi is based. When an american tech company opens a data center in india, it makes an fdi. As such, one would expect countries with high corruption to receive less foreign direct investment. Chapter2 theories of foreign direct investment and. In distinguishing between portfolio and direct investment, hymer noted that firms.
Does foreign direct investment accelerate economic growth. Oligopolistic competition and foreign direct investment. Fdi theories were classified under macroeconomic and microeconomic perspectives. One goal of the law is to provide a means to return disputing parties to cooperation.
According to graham and spaulding website information direct foreign investment in its classical definition is defined as the company from one country making physical investment into building a factory to another country. Unprecedented growth in global foreign direct investment fdi in the last decades is causing dramatic changes in labor markets for both developed and developing countries. International investment law and foreign direct reinvestment. Within the endogenous growth framework, we offer an explanation on how foreign direct investment fdi generates externalities in the form of technology transfer. Chapterii theoretical frameworks of foreign direct investment to explain the nature, causes and possible socioeconomic consequences different thinkers have propounded different theories over a long period of time. Network theory and empirical analysis john schoenemany boliang zhuz bruce a. The oligopoly theory explain the defensive investment behaviour in terms of oligopolistic reaction to retain the monopoly power of the firm. Foreign direct investment theory and strategy comparative. Foreign direct investment fdi plays an extraordinary and growing role in global business. Pdf foreign direct investment theory, evidence and practice. Theories of foreign direct investment springerlink.
Executive summary investment expenditure is an important contributor to economic growth and employment. Yet, the benefits of fdi do not accrue automatically and evenly across countries, sectors and local communities. Theory and application to china jeanclaude berthelemy and sylvie demurger abstract the paper investigates the relationship between foreign direct. Foreign direct investment fdi acquired an important role in the international economy after the second world war. Pdf on jan 1, 2002, imad a moosa and others published foreign direct investment theory, evidence and practice find, read and cite all the. In short, monopolistic advantage theory explains first course of investment of a business firm in a foreign country. Implications for investment negotiations smitha francis for years, many researchers and economists analysing the impact of foreign direct investment fdi inflows into developing countries have been concerned that the influence and control of. We develop an assignment theory to analyze the volume and composition of foreign direct investment fdi. Theoretical studies on fdi have led to a better understanding of the economic mechanism and the behavior of economic agents, both at micro and macro level allowing the opening of new areas of study in economic theory. Foreign direct investment f di acquired an important role in the international economy after the second world war. The official stance of multinational corporations mncs is also nulltolerance of corruption. Results of study indicated that foreign direct investment is a real means to achieve a number of objectives, including.
Grossman princeton university elhanan helpman harvard university and cifar july 2014 abstract we study patterns of fdi in a multicountry world economy. Many developing countries need fdi to facilitate economic growth or repair. That can leave an investor with few, if any, options to recover their funds. Pdf foreign direct investment and capital flight semantic. Economic theory has identified a number of channels through which fdi inflows may be.
For statistical purposes an ownership threshold of ten percent has been established to distinguish equity holdings of foreign direct investors from those of. Imf fdi is an investment that is made to acquire a lasting interest in an enterprise operating in an economy other. Investment theory an overview sciencedirect topics. In development literature foreign direct investment fdi is traditionally considered to be instrumental for the economic growth of all countries, particularly the developing ones. This paper traces the evolution of the theories of foreign direct investment fdi during the past few decades. Foreign direct investment fdi is argued to play a pivotal role in accelerating economic growth eg of a host country especially in developing and organization for economic cooperation and development countries. Under stationary condi tions this means zero net investment.
These definitions have decreasing relevance in a globalizing marketplace in which firms are defined more by their terms of competition, or strategy, than by their mode of operation, or structure tallman, 1992. A linder hypothesis for foreign direct investment pablo fajgelbaum u. Regression model used in analyzing the effect of foreign. In particular, there are three areas where internalisation appears to provide an explanation of fdi as a specific form of international involvement by the mne. It is extremely important to be aware of this use of investment in the sense of replacement, e. We develop a model featuring nonhomothetic preferences for quality and monopolistic competition in which. Kampala international university, uganda school of economics and applied statistic. Theories of foreign direct investment foreign direct investment, or fdi, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. The balanceofpayments records four types of investment. Regression model used in analyzing the effect of foreign direct investment on economic growth zoica dinca nicola. Theories of international trade, foreign direct investment and. Foreign direct investment theory, evidence and practice. Foreign direct investment fdi, product life cycle theory plc, oli, investment. Corruption, foreign direct investment, corruption tolerable level of.
The economic rationale for offering special incentives to attract fdi frequently derives from the belief that foreign investment produces externalities in the form of technology transfers and spillovers. Thus, some of the theories try to explain outward fdi why mncs choose to invest abroad, whereas others try to explain inward fdi that is, a countrys propensity. Foreign direct investment fdi is an integral part of an open and effective international economic system and a major catalyst to development. In many ways, mnes are the control centers for a large portion of international transactions other than fdi. The foreign direct investment is a major source of foreign funds for all countries, irrespective of its. Crossborder acquisitions involve firms trading heterogeneous corporate assets to exploit.