Chapter Five:
Foreign Direct
Investment
1: Introduction
Multiple theoretical Analysis of FDI
FDI activities cannot
approaches are determinants
be fully explained by
needed to requires a collection
a single theory
demonstrate FDI of theories
FDI requires at least 10%
2: ownership or voting power
Definition
Control in management is
and Types crucial
of FDI
• According to IMF (1993), "first of all,
foreign direct investment requires at
least 10 percent or more regular or
FDI voting power or companies stock.
Definition • Moreover, foreign direct investment
considers as a strong connection
among the investors in one nation,
• and their Investments organizations at
other nation. Subsequently
FDI
• Briefly, we can say the control in
Definition management or making a firm decision is
more important than the ten own
percentage in many countries.
• Natural resource seeking
• Market seeking
Types: • Efficiency seeking
• Strategic asset seeking
• The multinational company operates in a
nominated land out doors to gain resources
Natural not available in the country of origin or to
secure resources at bringing down costs.
resource • There are three kinds of resource in an
seeking outlandish location may the firms deserve to
secure. First kind including, raw materials
such as metals, agricultural products, etc.
that sort of operation includes large capital
expenditure and site-specific expenditures.
• Foreign direct investment is looking for the
news market to start operating in an overseas
location
• provide goods and services to the foreign
markets and other markets in neighboring
Market nations.
seeking • Moreover, in this case of FDI, the foreign firms
must have a competitiveness advantages to
compete with homeland company and to
take a position in the national markets.
• Multinational enterprises, it may be invested
in other nations with large market size for
exploitation the economies of scale in a host
nation.
• The first aim of seeking efficiency FDI is to
take various advantages of diverse
dimensions endowments in host nations,
such as intelligent labor, natural
Efficiency resources, and high level of technology.
• in developing countries the investment
seeking motivate may be labour-intensive
manufacturing sector industries and
primary
• in developed nations, while investing in
information-intensive activities and
technology-intensives.
• a multinational company may invest
abroad in the purpose of motivated to
require, strategic foreign assets to improve
Strategic their competitive situation at the other
asset countries.
• The strategic assets such as regulatory
seeking FDI systems, technologies, management and
marketing skills innovatory capacity and
so on.
Significant work in international
business theory existed before
1960
3: Pre-Hymer
Lacked recognition and
(before 1960) systematic organization
Notable contributions from
Phelps (1936), Lewis (1938,
1948), and others
Pioneered the theory of
international business
4: Stephen
Distinguished between portfolio
Hymer (1934- and foreign direct investment
1974)
Emphasized the role of
organizational advantage and
imperfect competition
Explains why companies choose
FDI over licensing or exporting
5: Based on the idea of replacing
Internalization market transactions with internal
Theory transactions
Applies to areas like vertical
integration, transfer pricing, and
quality control
• The FDI theory of internalization tries to
give some explanations of why companies
investment abroad in preference to
licensing or exporting.
• According to the approach internalization,
the multinational firms tend to the
Internalization development and utilization of the
Theory organizational hierarchy whenever the
domestic transactions between
Enterprises are less expensive than
(external/contractual) market
transactions, or where overseas markets
do not exist of all.
Explains the geographical location
choices for FDI activities
6: Location Considers factors like economic
Theory variables, political variables, and
economic blocks
Discusses agglomeration and
dispersion forces in location
decisions
• The direct foreign investment location
theory refers to the geographical location
of the FDI activity
Location • How multinational company can be
selected their nations, of their foreign
theory investment operations destinations.
• The policy of foreign direct investment
carried out By a region, has a significant
impact on the attraction of FDI flows.
• the policy maker could have use varies policies
like banking facilities, loans or new lower tax rate
to encourage the foreign investors to investment
decisions.
• Furthermore, The theory of FDI Location uses
varies variables such as, political variables,
Location economic variables and economic block to the
explanation which locations are suitable for
theory attractive less or more FDI activities.
• for example, requiring innovation exchange,
import and fare necessities, restricts on the
repatriation of benefits and cash 96 trade
exchange controls, with different variables being
equivalent, these conditions will prevent FDI
inflow into that nation.
7: The Eclectic Paradigm
(OLI) Theory
• Integrates ownership, location, and
internalization advantages
• Explains different types of FDI based on these
three advantages
• Considers factors like market size, economies
of scale, and technology transfer
• according to (OLI framework) theory, The
fundamental premise of the eclectic
paradigm tries to make across relationship
between, the ownership advantage theory
and internalization theory, while adding
The Eclectic location theory at the same time.
Paradigm(O.L.I) • The Location advantages theory indicate to
theory which factors motives that push the
multinational company selection to
investment in a specific location, such as a
market potential, Favorable taxation
treatment, and lower cost of production, low
risk, competition structural favorable.
• (O.L.I ownership ). By using three distinct
advantages to comments different types
of selection the destination of FDI by
O.L.I foreign enterprises, (location advantage,
ownership advantage, and internalization
advantage)
Mode of Entry of Foreign Investment Based on
Dunning's OLI Framework.
Explores the locational
correlation between host regions
and surrounding countries
8: Spatial Discusses different types of FDI:
Interdependence horizontal, vertical, export-
Effects platform, and complex vertical
Considers the impact of trade
barriers and regional economic
integration
• According to proximity-concentration
hypothesis’, the decision of preferring a
new horizontal FDI will dominate by
cooperation between the trade cost such
as Tariff barriers, other trade barriers, and
transportation cost, with fixed cost of a
Spatial new building to establish a new branch in
Interdependence host market.
Effects • The MNEs will make investment decision
when the trade expenses are altogether
high in the host nation, luckily the export
from the nation of home origin is not an
alluring alternative.
• FDI in the home nation will have no spatial
impact on neighboring countries, ever
after the MNEs settle on free choices to
serve host country by sending goods out.
• The MNEs will make investment decision
Spatial when the trade expenses are altogether
high in the host nation, luckily the export
Interdepend from the nation of home origin is not an
ence Effects alluring alternative.
• After evaluating all potential markets, the
investment decision will take according to
the minimum cost to raise the return to
scale