The Flow of Foreign Direct Investment to Developing Countries - Essay Example

This theory draws heavily on the more general work of Williamson that explores the conditions under which firms choose a hierarchical approach to engaging in business activities rather than a market-based approach. Williamson argues that where two sets of conditions exist, firms will tend to prefer internal or hierarchical approaches. These conditions include oligopolistic (few sellers) or oligopsonistic (few buyers) market settings and situations of great uncertainty. Oligopolistic or oligopsonistic situations lead to the choice of a hierarchical approach because, in these situations, opportunistic economic agents will make it very difficult for a firm to negotiate an equitable transaction.

In situations of uncertainty, the fact that individuals and organizations are limited in their analytical capacity will lead to internal organization because of the difficulty of writing and enforcing long-term contracts that incorporate all the necessary contingencies that arise as a result of an uncertain environment (Michael, 1982). Building upon this work, international business theorists suggest that firms that venture overseas either have a particular competitive advantage or seek a competitive advantage.

A firm's existing competitive advantage might be its superior technology, its unparalleled management expertise, or its unique brand name. Indeed, these competitive advantages are often intangible assets. Though critical to the firm, they are not identified as fixed assets in the firm's balance sheet. The firm has various options it could use to benefit from these competitive advantages. These options span the choice of a market or a hierarchical approach. In particular, the firm could sell or rent these advantages on the.

This essay stresses that the worldwide pool of labor expanded beyond the borders of the countries with enfranchised working classes and high levels of reproduction. Employers seeking to minimize their direct employment costs and their indirect political burdens sought out communities of workers who were politically less potent than those in the older industrial states and whose costs of reproduction were lower. This paper makes a conclusion that the findings highlight the interaction between global financial institutions and local political-economic variables.

When these variables measure both international and intranational processes simultaneously, they reflect or point to highly interdependent processes that influence the location of foreign investment. In other words, national and international dynamics are so interpenetrating in the modern world system that any analysis that disregards the effect of either set of factors is seriously deficient. As such, the work extends the political sociology of foreign direct investment by showing the importance of international financial institutions in directing and attracting foreign direct investment.

Specifically, International Monetary Fund conditionality is both a signal of approval and a generator of policies that create access to foreign investors. When these two factors interact with policies of repressive regimes, foreign investors have realized their goal: economic access and political protection.