Foreign Direct Investment (FDI) theories: An overview of the main FDI theories

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document in English

finance

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published 30/09/2008

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level : Advanced

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Summary

Foreign Direct Investment (FDI) acquired an important role in the international economy after the Second World War. The increase of the volume of foreign direct investment was so sharp that economists considered FDI as a new stage of Capitalism after the classic Marxist theories of Imperialism. The country with the highest volume of FDI outflows after the Second World War until the 1980s were the United States, which undermined the role of Great Britain, the “traditional” country of FDI during the pre-war period. With the exception of these two countries and Japan, which had established legal restrictions in relation to FDI inflows, other important countries of FDI outflows were Germany, Holland, France and Canada until the mid-1970s.

Keywords: FDI, multinational enterprise (MNE), economic integration

Abstract.
Defining Foreign Direct Investment.
FDI theories on a macroeconomic level.
1. Product Life-Cycle Theory (Vernon, 1966).
2. Oligopolistic Reaction Theory (Knickerbocker, 1973).
FDI Theories on a microeconomic level.
1. Business Behavior Theory (Baumol, 1959).
Eclectic Paradigm – The OLI Approach (Dunning, 1993).
1. Ownership advantages.
2. Location-specific advantages.
3. Internalization advantages.
4. Economic Integration and FDI.
Conclusion.