Global Patterns of Foreign Direct Investment - Essay Example

?Theories of Internationalisation and Relevance in Explaining Global Patterns of Foreign Direct Investment Introduction Economic activities crossing the boundaries of countries have been taking place long before the current trend of globalisation. Nevertheless, these economic exchanges have steadily grown in terms of products, services, and geographical range in the past fine years and have now reached their peak in the past decade. Trends also indicate that these exchanges shall continue to grow and expand in the future. These activities are part of internationalisation, a phenomenon which is very much synonymous with globalisation. Various theories of internationalisation help explain the current trends in the economy, including global patterns of foreign direct investments. This paper shall now discuss the theories of internationalisation and its relevance in explaining the global patterns of foreign direct investment (FDI). A general discussion on relevant theories of internationalisation shall first be discussed in this paper, followed by related theories of foreign direct investments. The relationship between these theories and patterns of foreign direct investments will then be discussed in detail. This paper is being carried out in order to sufficiently establish the relationship between internationalisation and the current trends in FDIs. Understanding this relationship would also help secure a general conceptualisation of the impact of expanding trade relations on the global economy. Body Problems arising from international trade generally indicate various questions for economists. One of these questions is based on explanations for the trade relations between various states. Another issue is based on the nature of gains or related losses to a state or economy. Finally, another question is related to the impact of trade policies on the economy. The different theories of international trade are founded on the first issue and the current discussion on the theories arising from such issue, including the classical trade theory, the factor proportion theory and the product life cycle theory. The classical trade theory declares that a country’s export and import is based on its trade relations with other countries (Morgan and Katsikeas, 1997). In effect, countries can gain profits if they direct their activities to the generation of products and services which are most profitable. This theory relates the situation where a country creates products and services for its people, and for export in terms of surplus. As a result, it is favourable for countries to import the products and services where they also have an economic disadvantage (Morgan and Katsikeas, 1997). The economic advantage and disadvantage may be based on differences in available resources, labour, and technology. The classical theory argues that the foundation of international trade would come from the differences in the qualities of production and available resources which are also based on differences in natural and acquired advantages (Morgan and Katsikeas, 1997). Another theory of internationalisation contrasts with the classical trade theory. The factor proportion theory discusses that countries usually produce the export products and services which support significant production advantages that they have, and they will import the products and services which would need large scores of production factors that may be limited (Hecksher and Ohlin, 1933). This theory supports the idea of economic advantage by evaluating the endowment and costs related to factors of production (Morgan and Katsikeas, 1997). The above theories do not completely explain the current trends in international trade. For one, the rise of technological development and of multinational corporations during the 1960s called for new theories on international trade. At such time, the product life cycle theory relating to international trade was considered a significant basis in explaining trade patterns and MNC expansions (Morgan and Katsikeas, 1997). Such theory pointed out that the trade cycle arises when products are created by parent firms, by their subsidiaries, and later, by other countries at minimal costs (Vernon, 1966). This theory also explains how products and goods may come about as a country’s exportable product, later evolving into an import. The major consideration of the international product life cycle is based on the fact that the technological innovation as well as market expansion is a major issue which would help explain international trade (Dunning, 2001). In effect, technology is a primary factor which helps create and develop innovative products whereas market size structures help establish the impact and type of international relations. These theories help provide a basis for internationalisation in trade. Other newer theories also help explain the current globalised economy. These theories, however, do not take into account the impact of the government and other international organisations in trade relations. The classical trade theory helps explain how foreign direct investments capitalise on what the country can export and what it imports (Morgan and Katsikeas, 1997). The choice in investments is therefore based on what can best provide the greatest profit or returns in investments for the investing country. During the late 1980s to the early 1990s, conditions for foreign direct investments became favourable for various investors (Narula and Dunning, 2010). The inwards global FDI stocks expanded almost at an annual rate until 2007 when it reached the billion dollar mark. Decrease in stocks and investments declined in 2008 because of the global economic crisis but improved again from 2009 onwards. The fall in global stocks did not necessarily imply cancelled investments in FDIs (Nissen, 2011). The falls in these FDIs were based on market value, and the favourable conditions for FDIs increased over the last twenty-one years (Nissen, 2011). The willingness of countries to participate in FDIs has risen in the last twenty years, and this is mostly based on the fact that there is a need for firms and various countries to be more competitive and more effective in earning higher revenues (Cantwell and Narula, 2003). The patterns of FDI have now been directed towards investments in emerging economies like India, Singapore, India, and other emerging economies in Asia. The classical trade theory emphasises that investments are made on goods and services which can best serve the interests of the investing country (UNCTAD, 2011). In this case, investing in these emerging economies is serving the best interests of the investing countries, gaining significant profits from the major improvements which these countries are accomplishing. The Global FDI outflows increased by 17% in 2011, and this increase was mostly based on the growth of outward FDIs from developed countries (UNCTAD, 2011). The outward FDIs from developing countries fell slightly, but the FDI from emerging economies increased by 19%. Following favourable growth in the transition economies, the FDI for these economies grew significantly in 2011. In South-East Europe, the competitive production costs also helped support the FDIs (UNCTAD, 2011). The large resource-based economies were also able to benefit from the persistent natural resource-seeking FDIs as well as the strong performance of the local consumer economies. Improvements in information technology also helped in the expansion process. This was an accepted pattern in the FDI (Gionea, 2005). The internationalisation theories mentioned above already acknowledge the importance of acquiring new technologies for the sake of establishing a foothold on the global economic trends. The trends in global expansion have also included faster Internet, email systems, social networking, and strong telecommunications availability (Nissen, 2011). International political integration has made it easier to sustain knowledge and to reduce capital barriers between countries. As such, the trends for FDIs have sought to support the gains of political integration, supporting the economic processes which can ease the flow of goods and services within integrated economies (Gionea, 2005). Various theorists have also sought to establish the limitations of trade theories in relation to FDIs. Some of these theories include the market imperfections theory and the internalisation theory (Morgan and Katsikeas, 1997). According to the market imperfections theory, corporations which are persistent in establishing market opportunities and their decision to invest their funds abroad are considered as a strategy to focus on specific capabilities which are not similar to competitors in other countries (Hymer, 1970). The capacities and advantages of corporations are based on market imperfections on products and other elements of production. This means that the theory of ideal competition indicates that corporations have to create homogeneous goods and secure similar access to the elements of production (Morgan and Katsikeas, 1997). However, the actual scenario of imperfect competition, which is founded on the industrial organization theory, establishes that firms secure various kinds of competitive gains. The market imperfections theory does not establish why foreign production is the most favourable tool in developing a firm’s advantage. Under these considerations, a comprehensive understanding of FDIs would only be partially explained. According to Dunning (1980), the internationalisation production theory seems to be the more favourable explanation for these imperfections. This theory indicates that the tendency of a firm to support foreign production is based on the specific qualities of the home country in terms of resource implications in securing businesses (Morgan and Katsikeas, 1997). The theory emphasises that resource differentials and advantages of firms have a role to play in establishing overseas activities; moreover, foreign direct government actions also impact the attractiveness and entry conditions for various corporations (Morgan and Katsikeas, 1997). Another aspect of foreign investment theory which is related to this discussion is the idea of internalisation, which has been significantly assessed by various theorists (Buckley and Casson, 1976). This theory emphasises the idea that corporations seek to establish their specific internal markets when opportunities for lower costs in businesses can be achieved. In effect, internalisation includes vertical integration, securing new activities which used to be under the jurisdiction of intermediate markets (Buckley and Casson, 1976). Based on such considerations, FDIs would admittedly include a complex and integrated process which is founded on flexible adjustments in the market. The evolutionary consideration of FDI evaluates international investments as an ongoing process which is based on the international experience of multinational enterprises, their capabilities, and environmental interactions (Hill, 2003). Based on the Uppsala theorists (University of Sweden), international expansion is a process which includes various gradual decisions that firms make in relation to international activities. The basic foundations of the model indicates that insufficient knowledge is a major barrier in internationalisation and that essential knowledge can only be gained through time-based experience (Hill, 2003). Internationalisation theories also declare that the collective knowledge of country-specific practices and environments can help corporations increase their local activities, reduce the unpredictability of the market as well as increase economic competence (Hill, 2003). The process of internationalisation arises from the interactions between the establishment of knowledge on foreign markets and operations, on one side, and the growing commitment of finances to the foreign markets on the other (Morgan and Katsikeas, 1997). Under these conditions, there is a dynamic process which unfolds among the different economic parties, especially as these parties exist based on growing commitments in the international market scene. For large multinational corporations, the FDIs are complex tools which require the coordination of subsidiary processes beyond local territories (Gionea, 2005). Businessmen often discuss the process of thinking globally but acting locally. This balance can be achieved based on a framework as established by Pralahad and Doz (1987). This is known as the global integration and local responsiveness framework, which indicates that businessmen in global businesses establish competitive frameworks across two dimensions. These dimensions include two dictates which consider competing businesses internationally (Pralahad and Doz, 1987). The first dimension relates to global integration, which considers the linking of activities across states in order to secure better operations and secure the advantage of similar activities across various locations (Pralahad and Doz, 1987). The second element is local responsiveness, which highlights the responsiveness to the particular needs of the host country (Pralahad and Doz, 1987). Considering responsiveness is also based on the host country’s needs because the investments would ultimately bear fruit if they have a welcome market in the host country. Multinational corporations who are often involved in FDIs often choose one technique over another in order to ensure the competitiveness of their products (Rowley, 2006). More often than not, three basic strategies arise: integrated, multifocal, and locally responsive. Integrated strategies call for significant global coordination, and local strategies require national-level implementation (Rowley, 2006). The essential amount of internalisation is most significant for integrated strategy, which can be supported by multifocal tools, and by local resources (Rowley, 2006). Other paradigms on internationalisation and FDIs are made up of related and complementary elements – operational flexibility and strategic choices (Rowley, 2006). The primary consideration in operational flexibility is based on the fact that the balance in international integration and local responsiveness is founded more on securing flexibility. Flexibility allows business corporations to take advantage of shifts in competition, policies and the market (Rowley, 2006). Such flexibility is secured by reducing corporate dependence on assets which are already set. This indicates that businessmen will change their decisions when these changes are based on favourable market conditions. If these decisions can be changed later based on new data, then the economic impact of such change should be evaluated when assessing any corporate decision (Collis, 1991). In effect, if securing a joint venture with local businesses can cause the acquisition of a future stake in the business, the joint venture must consider the economic effect of such acquisition. Internationalisation also points out that there are various opportunities from which strategic flexibility can be gained by investors involved in FDIs (Collis, 1991). One of these opportunities involves production movement. This production movement allows corporations to respond to changes in the market, to fluctuating costs as well as exchange rates. Tax avoidance is also another opportunity for strategic flexibility. This involves production movement. Multinational enterprises can change their mark-ups on company sales of goods in order to secure profits in low-tax brackets (Collis, 1991). Financial arbitrage is also another opportunity for securing strategic flexibility for FDIs. MNCs can circumvent the restrictions imposed by the host government, mostly those which relate to finance, remittance, and foreign exchange in order to secure and support their new and innovative products. Another opportunity relates to the transfer of information (Rowley, 2006). Flexibility ensures that MNEs can benefit from the act of singling out available opportunities, assessing the world markets to match the involved buyers and sellers and avoiding the barriers to effective trade relations. Competitive power is also another opportunity in ensuring flexibility for FDIs (Rowley, 2006). This flexibility allows corporations to indicate prices based on the generally competitive rates. Various links in international value-added chain also secure leverage on equity claims for national markets (Rowley, 2006). Under these conditions, the internationalisation theories provide a basis for the shifts in patterns of FDIs, mostly in relation to competitive rates, as well as advantages in the market. Conclusion Based on the above discussion, the theories of internationalisation like the classical trade theory acknowledges the fact that trade relations and investments are dictated by the needs of investors and of the consumers. Where the need is great and the profit would best be gained, the FDIs would likely be made. The current global trends in investments indicate how the emerging economies have manifested the greatest need and the most profit for investments, for which reason investors have directed their economic activities to these areas. The internationalisation theory generally indicates how the current trends in the economy are gravitating towards more open forms of trade and economic relations. These FDIs are but another manifestation of internationalisation, and these investments would likely find bigger avenues for investment in the years to come. References Buckley, P.J. and Casson, M., 1976. The future of the multinational enterprise. London: Holmes and Meier. Cantwell, J. and Narula, R., 2003. International business and the eclectic paradigm, developing the OLI framework. London: Routledge. Collis, D., 1991. A resource-based analysis of global competition: The case of the bearings industry. Strategic Management Journal, 12, pp. 49–68. Dunning, J.H., 1980. Toward an eclectic theory of international production: some empirical tests. Journal of International Business Studies, 11(1), pp. 9-31. Dunning, J., 2001. The eclectic (OLI) paradigm of international production: past, present and future. International Journal of the Economics of Business, 8(2), pp. 173-190. Gionea, J., 2005. International trade and Investment: An Asia-pacific perspective. UK: McGraw-Hill. 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