The Euro-zone Crisis Essay

According to Moosa (2002), “Hymer (1976) organized the industrial organization hypothesis. Kindleberger (1969), Caves (1982) and Dunning (1988) further explained the hypothesis. This theory assumes that the firms when it establishes an enterprizes in another country it suffers from many disadvantages in comparison to local investors. The cultural aspects, languages, legal system and other factors play an important role in determining FDI. But there is increase in FDI. The theory explains about why firms invest in foreign countries. But the theory fails to explain the motivation for choosing the locations. This theory explains the expansion of FDI is due to capital, management, technology, marketing, and access to raw materials, economies of

In narrow terms, FDI is simply all capital transferred between a firm and its new or established foreign affiliates. In its broadest sense, FDI represents competition: among workers, governments, firms, markets and even economic systems. (ibid)

Foreign direct investment by multinational corporations is the action of obtaining controlling equity share of a firm in a foreign country. There has been many discussions about the role of FDI in affecting a country’s unemployment rate and economic growth. Of which many believed

Dunning’s OLI paradigm (1976) is used to support firms to locate its production in countries that are financially beneficial for them. According to Dunning, “the paradigm offers a holistic framework to take in consideration all of the important factors that influence the decision of a MNE.” (Stefanović, 2008, p.241) FDI is determined through the composition of the three powerful advantages; ownership, location and internationalisation as shown in figure 1. The thesis is to assess, ‘why go multinational?’, ‘how to choose the best location?’ and ‘what actions have to be taken to enter a foreign market?’

These models immediately established the idea that countries specialize and trade, not only because of underlying differences, but also because increasing returns are an independent force leading to geographical concentration of production of each good. Indeed, at a logical level, increasing returns are as fundamental a cause of international trade as comparative advantage. (Krugman P. R., 1987, p. 133).

The observation is that though there are gains in international trade, countries can suffer from further specialization as their gains from globalization decline. Palley’s view contrasts Smith’s original theory by showing the challenges of continued globalization and international free trade on individual nations. The original comparative advantage theory fails to capture the new realities created by globalization in international trade. The technology mobility from one nation to another negates the need for specialization and production of surplus because markets can satisfy their needs. Additionally, the transfer of technology is influenced by

The comparative advantage theory champions for the increased benefits with specialization. The countries which specialize in the production of certain goods they are perfect at producing will end up profiting in such venture. Consequently, the gains made by such firms or countries from the trade can be used to acquire goods they desire and do not produce. Comparative advantage will thus not only affect the types of goods produced but also the pricing of various goods

There are several reasons to why countries may trade. Differences in the technologies used in a country or differences in their ability to manufacture goods is one of the most popular reasons for explaining trade (Krugman, 2011). However, if a country has the better technology to produce all goods than another country, should it then become self-sufficient? It could, yet if it only concentrated on the production of the goods it can produce for the lowest cost and exchange the excess of those goods with the other country for the goods that it produces cheapest, then both can be better off (EconLib, n.d). This example introduces the important economic concept of comparative advantage (CA). A country has a CA in producing a good if it can produce it at a lower opportunity cost (OC), the cost of forgoing the production of another good, than anyone else (Krugman, 2014). This concept was first illustrated by the 19th century economist David Ricardo, who used it to determine the pattern of trade between countries. Ricardo developed a model in which he proved that countries will benefit if they specialize in the production of the goods in which they have a CA and export those goods to other countries in exchange for goods in which they have a CA. As a result of specialization and trade countries will be better off than they would have been in the absence of trade (Krugman, 2011).

This essay will first explore the OLI model and its components towards the establishment of the FDI . We will then continue with defining multinational corporate strategies, followed by comparing the OLI model with Head’s one.

Foreign direct investment (FDI) is investment that gains control of the foreign business or assets. It is a method of international expansion that gets a controlling interest in property, assets or companies located in other countries. FDI can also involve a business controlling resources such as mineral deposits, land and other assets in other countries. This form international expansion involves a higher level of commitment by the business because it usually involves a transfer of money, personnel and technology.

FDI is the international flow of firm-specific capital, such as “proprietary production technologies, managerial and organizational practices, and trademarked brands,” with the goal of capturing higher returns from their assets in international markets, while maintaining control over their firm-specific assets, (Pandya 477). FDI can now account for more than all other forms of capital flows combined. The regulatory framework for FDI in a country is mostly comprised of laws, regulations, and policy guidelines and varies widely between countries. Developing countries tend to be the heaviest users of FDI restrictions as “ownership restrictions [can be] integral to [their] economic development strategies,” (Pandya 478). The two most prominent strategies, import substitution industrialization and export-oriented industrialization, share the goal of building domestic industrial

Lastly, the objective of this essay is to show the theoretical development in internationalization for firms and the selection of their foreign country markets they choose to expand their business ventures.

This paper will look in depth at the effect of growth from FDI in India. It will first focus on the theoretical and empirical research regarding FDI and its effect on growth. It will discuss the literature that signifies that federal direct investment did help to grow India’s economy and explore why this is happening. It will mainly explore the federal direct investment outcome on growth and will use statistics on India’s economy to further understand this and prove that FDI is very important in order to help grow an economy. It will take a look at linear regression models that show a positive relationship between FDI and India’s GDP.

The unpredictability of autonomous FDI flows, in both scale and direction, has generated a substantial research effort to identify their major determinants. The remainder of this paper is mainly concerned with examining the factors influencing the destination of the investment: Host-country determinants, rather than industry specific factors. The major determinants of FDI are as follows---

In Indian context, the importance of FDI was realized way back in 1948 when emphasis was given on creating domestic base. However, since access to finance was quite limited, the attitude towards FDI was receptive (Kumar, 2004). Since then there was a debate over the necessity of FDI and Government of India in the 1980s cautiously went on deregulation of industries. However, after the adoption of liberal investment policy under economic reforms in 1991 resulted in attraction of more FDI inflow to the country. In recent times, FDI inflow to India increased by 17.1 percent in 2005, which is 5.8 percent of GDP of the country.