Theoretical Framework of Fdi

2025 Words Jan 28th, 2013 9 Pages
Foreign direct investment has increasingly been identified as a major growth-enhancing component in most developing countries. FDI promotes economic growth in the host country in a great number of ways. From a more compressed perspective, these effects of foreign investment could be direct through a certain investment source or indirect through certain spillover effects. In a more broad view however, FDI could be said to put pressure on the firms in their host countries to improve their competitiveness leading them to reduce their transaction costs to the foreign investors, also increasing the return of capital and eventually increasing economic growth. It is also argued that the inflow of FDI would influence investment in the domestic …show more content…
They would also have better marketing knowledge compared to the other firms, which means they would be able to develop their marketing skills as well as their management structure and more advanced processing methods. The importance of this theory is the fact that the advantages are more easily transferred from one unit to the other regardless of how far apart they are from each other. This means that due to the imperfect market characteristic, the rival firms do not benefit from the technological advantage. The multinational firms however realize huge profits. An empirical study by Graham and Krugman (1989) indicated that the technological advancement of European firms server as a key incentive for them to invest in the USA. Also these stated firm-specific advantages are gained more if the investing firm chooses to perform all its production processes in the host country rather than other methods such as importing of products and licensing agreements.

LOCATION-SPECIFIC THEORY
This theory was said to be successful due to the fact that it laid emphasis on locational factors. It has been argued that, as there is a variation of real wage costs among countries, the firms that have low technological costs move to low wage countries (Hood and Young, 1979). Also, in countries where trade barriers have been created by the government to reduce import levels, multinational companies tend
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