Capital Theories Of Capital Theory

2374 Words Sep 14th, 2014 10 Pages
2. Literature Review (2,370)
Capital theory
FDI has only been treated as separate to traditional theories of capital movements in the internationally sphere since the 1950s (ref: lit review copied text). It became a system and theory in its own right in response to undertakings to understand the inadequacies in projected investment return from different countries, and began to differentiate between them as individual systems. A study by Mundell (1960) showed that some American firms were actually able to gain a higher rate of return on European investments that those in their local economy. Using observed behaviours and characteristics however, Hymer (1960) and Caves (1982, p.25) argued that the expected differential rate of return on international investment were not adequate to motivate FDI and that investment in both directions was a lot more common than expected. It was also contested that under perfect markets the increasing of short-term profits in one country’s investing firms would not have the effect of making them then turn to international investment because such an increase in the short term would also create opportunities for competitors and in due course absorb any further profits (Kindleberger 1969; Hufbauer 1975). A seemingly better alternative to the differential rate of return model is the portfolio approach develop in the 1960s which uses a Tobin/Markowitz stock adjustment model. This portfolio approach gave reasons for its assumption that part of…

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