Transactional Cost Advantages And Disadvantages

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

Systemic market risk versus risk that is organic to the multinational corporation can be further differentiated based upon operations, shipping, vendor negotiations; all factors can be affected by the currency exchange rate incurred or profiting the organization. Corporate tax rates can be minimized through hedging of foreign direct investments, and the corresponding the currency exchange rates. Beyond investing in countries

There are many costs involved in internalization. These costs can be communication costs due to cultural differences, costs due to legal systems of the country which favors the local companies.

This lack of integration was especially taxing in the face of competition from local and foreign companies

Regional differences of FDI in China are the result of various economic and non-economic factors. Dunning divided the locational factors whicn affect FDI into four groups: market factors, trade barriers, cost factors and the investment environment. According to FDI location mentioned in the first part, the location selection factors influencing FDI can be classified into four groups below: cost factors, policy factors, market factors and centralization economic factors. The essay will focus on the influence of market factors and centralization economic factors.

The research this material accounts for mainly focuses on the pros and cons of FDI regarding corporations more than host countries, like what are the factors that attract multinational’s investment, what are the risk of expropriation, the extent of the development of stock markets, and what is the linkage between democracy and foreign investment (Bekaert, Harvey, & Lundblad, 2011; Busse & Hefeker, 2007; Eichengreen et al., 2011; Li, 2009). Indeed, this specific research tells little about the host countries in this international flux of investment rather than distinguishing between developed and less-developed countries (LDCs).

We have looked at FDI as the first major in our paper because FDI inflows point to a lot of factors that are right (or wrong) with the economy. In our opinion China remains an attractive FDI destination based purely on the fact that the extent of development possible is still large and the development thus far has been highly skewed, both in terms of demography and geography. Thus China’s capacity to absorb funds remains as high as ever, despite questions being raised about the undervalued currency.

The competitive advantages of service firms have been extended in terms of ownership, location and internalization advantages by Dunning (1989). As international competition in services grow, competitive advantage become increasingly important determinant of FDI in services. However, competitive advantages in services are difficult to measure and also transfer, especially if they are culturally and institutionally embedded. It is found that FDI is positively affected by the international competitiveness of the home country’s service industry.

The effects can be negative or positive. According to the theory of Hill (2003), FDI can affect host countries on resources-transfer effects, employment, competition and product and process innovation. There are a small number of research available that explain the behaviour of local companies when FDI take place. Nevertheless, there are many research that explain the benefits for the local economy. Foreign direct investment can increased indirect productivity for host country companies through the realization of external economies. Generally these benefits indicates the importance of the way in which the influence is transmitted that referred as “spillovers” (BlomstrOrn,

Companies entering foreign markets may face problems or increased costs because of the business environment and the way in which the companies operate. Marketing services might be expensive and certain payment mechanisms may be unavailable. Some of such difficulties include

China’s economic reform has attracted worldwide attention. From the early stage of mainly export-oriented industries with cheaper labour costs to more recent foreign investments aiming to tap the huge domestic market, China, especially eastern region has gradually opened up to the rest of the world. While this research study is not only of vital importance to China, but also meaningful to the FDI development efforts to the individual regions in other countries.

Furthermore, Prime, Subrahmanyam and Lin selected the data to compare levels of FDI and FDI performance, and introduced the Porter's diamond theory to analyze the data. Firstly, Prime, Subrahmanyam and Lin (2011) found that demand conditions, factor conditions, and firm strategy, structure and rivalry can’t certainly verify the larger FDI flows to China as compared with India (pp. 312-320). As Prime, Subrahmanyam and Lin mentioned, both countries have the similar potential market capacity. In the factor conditions (infrastructure, technology and labor force), both countries have made major progress with infrastructure, but weakness remains in both places (Bai and Qian, 2010; Patel and Bhattacharya, 2010; Sweeney 2010). Compared with

For many years FDI has allowed lots of externalities such as displacement of general knowledge, level elevation in industrilization, important technology change in production and distribution, workforce development. Host country's competitiveness increase by FDI's services. Cause when a country get FDI inflow that means the country attract new capital so its productivity increase. If FDI would be productive then the capital that coming the country will be stable and long lasting. With the competition brought by FDI, in the host country's companies effected very efficially from this. They tend to become more productive and they would be more powerful againts abroad competitor. In a country when the companies has strong productivity, then the growth ratio in that country is higher than others. ( Baracaldo (2005)). With the FDI inflow of country, the employment generation will increase in that country. When the country's productivity increase, employment ratio will increase and its competitiveness increase, too. FDI contribute to the spillover of technology and improve knowledge. FDI make them efficient and with this way productivity increase(Ramírez (2006)). Also, FDI allow bring new goods and services in host country.

Such ownership-specific inputs may take the form of a legally protected rightpatents, brand names, trade marks-or of a commercial monopoly-the acquisition of a particular raw material essential to the production of the product-or of exclusive control over particular market outlets; or they may arise from the size or technical characteristics of firms-economies of large-scale production and surplus entrepreneurial capacity. It should be observed that these ownership advantages are not exclusive either to international or multinational firms. Some are applicable to all firms producing in the same location; others are those which a branch plant of an existing enterprise may enjoy over a de n o w enterprise of the same n a t i ~ n a l i t y But, because they operate in different location.~ specific environments, multinational firms may also derive additional ownership advantages-such as, their ability to engage in international transfer pricing, to shift liquid assets between currency areas to take advantage of (or protect against) exchange fluctuations, to reduce risks by diversifying their investment portfolios [Rugman 19791, to reduce the impact of strikes or industrial unrest in one country by operating parallel production capacity in another and by engaging international product or process specialization [Dunning 19771. The essential feature about these second types of inputs is that, although their origin may be linked to location-specific

The present study is descriptive in nature based on secondary data collected through newspapers, magazines, research papers and various publications of government, to analyze the issues and prospects of FDI in one of the most significant sectors of Indian economy.