30 Kasım 2012 Cuma

The Theories Related to FDI (Foreign Direct Investment)

A number of theories have been developed to explain the models of FDI and activities of multinational enterprises during the last couple of decades. Theories discussed in this study are the internalization theory, Dunning’s eclectic theory which seeks an explanation of multinational enterprises activities and the product life cycle one which is originally known as a trade theory but also used to explain FDI and multinational enterprises’ activities.[1]

The theories with their explanations are as follows:[2]
  • Internationalization theory: The hypothesis of the internalization theory is that Multinational Companies (MNC) seek alternative ways to set up value-added activities outside the national market and those multinational enterprises take investment decision whenever they see that operating across national boundaries is beneficial and exceeds home market operation advantages. Internationalization theory expresses that firms can be international after experienced proccesses start with passive export than abroad marketing, abroad production. The Born Global companies that operate in international markets from the earliest day of establishment, conflict with the traditional internationalization theory.[3]
  • The Eclectic Theory: This theory groups a number of explanations which can be classified either as ownership-specific advantages (O), location-specific advantages (L) and internalization advantages (I). In deciding whether to undertake FDI or not, a firm must have developed its specific characteristics that enable it to be competitive in the market. Moreover, the capability and willingness of MNCs to operate in foreign markets depend on their possessing specific assets. Such assets are referred as ownership specific advantages (O), because they are unique to that particular firm. Those assets are not only tangible such as natural endowments, capital etc. but also intangible assets such as technology, information and managerial skills. By location specific advantages (L), Dunning indicates the advantages that rise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets. The ‘I’ internalization factor in the OLI paradigm explains why a firm would choose to serve a foreign market through FDI rather than pursue alternatives modes without ownership of foreign equity.
  • Product life cycle: This theory states that first, firms start by exporting their production to foreign markets then invest across national boundaries as product moves through its life cycle. This action contains three product stages; the new, maturing and the standardized.

[1] Murat Karaege, “Development and Determinants of Foreign Direct Investment in Turkey: A Comparative Analysis with the EU Countries”,  Master Thesis, Sabanci University Graduate School of Arts and Social Sciences, 2006, p.15.
[2] Karaege, p.15-18.
[3] Recep Çiçek and Ömür Demirer, “Geleneksel Uluslararasılaşma Teorisine Karşı Çıkan Yeni Bir Uluslararasılaşma Modeli: Global Doğan İşletmeler”,  Akademik Bakış, No:16, April, 2009, p.1.

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