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Managing Foreign Direct Investment in a Globalizing Economy - Essay Example

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The following essay "Managing Foreign Direct Investment in a Globalizing Economy" casts light on the management of FDI that has expanded rapidly throughout the world economy over the past two decades, helped by the removal of many national barriers to capital movements…
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Managing Foreign Direct Investment in a Globalizing Economy
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Download file to see previous pages In reality, many international investors are seemingly small and weak. For instance, multinational firms originating from developing countries have become a visible force in the world of FDI (Wells, 1983) Small and medium-sized firms also play significant roles in outward investment (Buckley et al, 1988), which have benefited many countries, thereby ending up in predicting future threats.
"FDI is a cross-border production activity that takes place for a number of reasons. Investment decisions are affected by market size and cost differentials, with firms investing in locations with relatively low production costs". (Barrell, 1997) After grappling with the question of why MNCs engages in International production, four theories have identified that attempts to explain four motivations for FDI, named Monopolistic Advantage Theory, Oligopolistic Reaction Theory, Internationalisation Theory, and the Eclectic Paradigm.
Hymer suggests that FDI occurs in imperfectly competitive markets and adopted an industrial organization approach to explaining the process of international production. Kindleberger details the nature of the monopolistic advantages that the foreign investor may possess over its domestic competitors. Thus, he indicates that these advantages may arise in the goods market to achieve vertical or horizontal integration. Kindleberger also states that monopolistic advantages may arise through the actions of the government in the host country. In restricting imports, the government may inadvertently stimulate FDI.
However, Caves argues that the vertically extended foreign investor does not rely on the possession of these unique assets. Its motivations for international production are to avoid oligopolistic uncertainty concerning the long-term supply and pricing of its inputs as well as to erect barriers to entry against new rivals.
Hood and Young (1979) postulate that the monopolistic advantage theory fully explains the FDI made by US multinational enterprises during the post-World War II period. However, they question whether the MNC needs to possess an advantage when investing in developing countries since it is confronted with little domestic competition. They cite the example of Japanese ventures in developing countries that are faced with few if any, effective local competitors. (Hood and Young, 1979)
Oligopolistic Reaction Theory
Knickerbocker argues that a rival firm's moves into a foreign market not only could threaten the corporate earnings of the other oligopolists but also could result in it acquiring competitive assets far in excess of those it already possesses. Thus, he posits, the defensive investment undertaken by the other oligopolists serves to maintain the balance of competition within the industry. (Barclay, 2000, p. 23) ...Download file to see next pagesRead More
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