Foreign Direct Investment, Globule business environment
Foreign Direct Investment (FDI) has been traditionally defined to mean a firm or a corporation from one nation investing physically into building a manufacturing factory in another country. The direct investment in physical structures such as buildings and equipments distinguishes FDI from portfolio investment that is a form of indirect investment. It may also include gaining a long-term management interest in a foreign firm. Other aspects of investment such as construction of a facility, purchasing a foreign firm, joint ventures or forming an alliance with a local company and investing in its technological needs may be regarded as FDI (Blaine 2008).
Phenomenal changes in technology, opening up of international trade through liberalization of investment policies, regulations, and tariffs, and changes in capital markets have influenced FDI (Moosa 2002). Moreover, management of FDI has been made possible by development of new information and communication systems as well as reduced international travel costs. The essay explores which theory between Dunning's OLI Paradigm or Vernon's Product Life Cycle theory portrays a better description of manufacturing FDI from developed states companies to developing states.
[...] Most firms adopt FDI so as to exploit readily available resources or location- specific assets. Manufacturing FDI is usually adopted by huge enterprises whose products are consumed both in the domestic and foreign markets. Hence, they are attracted to developing countries by the raw materials and cheap labour available in developing countries. They rely on both horizontal and vertical FDI to invest in facilities abroad in order to increase their production, cut cost and seek more market. Lastly, comparing the two theories, Dunning's OLI paradigm is more favourable in explaining the need for FDI by most firms. [...]
[...] Foreign Direct Investment (FDI) - Globule business environment Content I. Foreign Direct Investment (FDI) II. The "eclectic" approach Criticism III. Product Life Cycle theory Criticism IV. Conclusion Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) has been traditionally defined to mean a firm or a corporation from one nation investing physically into building a manufacturing factory in another country. The direct investment in physical structures such as buildings and equipments distinguishes FDI from portfolio investment that is a form of indirect investment. [...]
[...] It is imperative to internalize these advantages instead of using the market to move them to foreign corporations (Moosa 2002). Criticism The OLI model does not address satisfactorily one of the invaluable attributes of FDI, the difference between horizontal and vertical reasons for locating manufacturing facilities in foreign counties. It contains numerous variables that hinder its ability to operate. Dunning believes this weaken results in the process of attempting to integrate different motivations behind FDI in one framework. On the contrary, he posits that his theory is singly capable of providing an explanation for international production. [...]
[...] The importance of demand also comes into consideration for domestic demand can be the reason for innovation. Similarly, demand in the international market is an incentive for experts. MNEs are viewed as the most capable firms to facilitate the production and distribution of products demanded internationally and whose production location is constantly changing. They can overcome both technological and market barriers. For instance, USA due to its highly skilled labour, research, and development resources, prompted constant innovation among US companies so as to keep up with the highly sophisticated consumer demands. [...]
[...] The theory has revolutionized the way of thinking about multinational enterprises (MNEs) and promoted international business study. The initials "OLI mean Ownership, Location and Internalization, important sources of advantage that may motivate a company to invest in foreign countries (Blaine, 2008). Ownership advantages entail the competitive edge (firm-specific) that some firms have against others that make them invest in foreign states. Also, a successful MNE has some intrinsic advantages that help it to cut costs while operating abroad. There are two types of ownership advantages, asset and transactional. [...]
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