Economic activities crossing the boundaries of countries have been taking place long before the current trend of globalisation. This paper shall now discuss the theories of internationalisation and its relevance in explaining the global patterns of foreign direct investment (FDI). …
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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...
This essay stresses that 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. 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.
This paper makes a conclusion that 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.
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FDI can also be defined as an investment of a company in a foreign country by building a factory within the host country. It is through a company’s direct investment in machinery, building and equipment in another country that foreign direct investment is made possible.
The paper studies a number of broad ranging conceptual frameworks have been advanced that function as a means of articulating inflows of FDI. Democratic political structures have been demonstrated to be a major component of attracting foreign direct investment as such structures are more apt to stability and transparency.
Inward FDI increased from 9.6% of GDP in 1990 to 26.7% in 2006. (Woodward, 2011). There has also been a recent flow of FDI towards developing economies and this has had a plethora of effects, both for home and host countries. (Raj and Sager, 2005). Foreign Direct Investment has over the last three decades aroused conflicting responses from the first and third world.
The closer linkage between and among global powers has precipitated more interdependence and better business opportunities among countries, but when economic crises strike more seriously than expected countries suffer economic losses, which sometimes cannot be solved by the International Financial Institutions (IFIs).
Research studies indicate that there is direct relationship between FDI and financial markets. According to the research studies, structural changes in financial markets have been used in attracting FDI. The general view is that stock markets have been established with the main reason of intermediating funds towards investment projects (Hui and Margarida 210).
Some of these countries became full European Union (EU) members in May 2004. They also experienced a significant increase in foreign direct investment (FDI). As a consequence, the ratio of inward FDI stock to the 12 CEE countries studied here in total world inward FDI stock increased more than three-fold, from 0.81% in 1994 to 2.89% in 2004.
(Wikipedia, 2006). After the 1960's, foreign direct investments (FDI) have increased at a steady rate, with FDI stocks making up twenty percent of the world's Gross Domestic Product (GDP). Currently, China leads the world in foreign direct investments.
The author states that a multinational firm in a developed country may face higher labor costs and higher production costs when locating its subsidiaries in its own home country, while a shift overseas may involve a larger initial investment but is economically beneficial in the long run because the margin of profits are higher.
rategies that enable entities to diversify its assets and risk across diverse countries by engaging in contractual agreements with multiple potential partners. Companies may find it advantageous by producing in foreign countries compared to exporting to those countries based on
In recent time, outward Foreign Direct investment has been significantly increased from China and India. Discuss the factors responsible for such a growth. Do you think International business theories (OLI and IDP) adequately explain the reasons for outward Foreign Direct investment?
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