Fdi Internalisation Theory

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Introduction

FDI (Foreign Direct Investment) is a venture made by an organization or element situated in one nation, into an organization or substance situated in another nation. Remote direct investments differ considerably from aberrant speculations, for example, portfolio streams, wherein abroad organizations contribute in equities listed on a country's stock trade. Substances making direct ventures regularly have a noteworthy level of impact and control over the organization into which the speculation is made. Outside direct speculation alludes to direct venture value streams in the reporting economy. It is the aggregate of value capital, reinvestment of income, and other capital. Direct venture is a class of cross-outskirt speculation
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There are a number of theoretical studies that have examined FDI. According to economists, FDI is an essential component for the economic development of any country, specifically developing countries.

The theories of FDI are as follows:

1. Production Cycle Theory of Vernon
According to the theory of Venom, there are four stages of production cycle: innovation, growth, maturity and decline. According to Raymond Vernon, different companies come up with a new innovative product or service for local consumption and export the surplus in order to serve also the foreign markets.

2. The Internalization Theory
The internalization theory was developed in 1976 by Casson and Buckley and then in 1982 by Hennart and finally in 1983 by Casson. The theory explains how transnational companies are motivated to achieve FDI as well as their growth.

In conclusion the advantages of internalization are as follows:
1. To avert negotiating and searching for costs
2. To avert costs of disturbing actions from suppliers, buyers or buyers
3. To avert costs of breached contracts
4. To acquire economies of interdependent
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The Eclectic Paradigm of Dunning
The eclectic theory is a combination of 3 different theories known as O-L-I (Direct foreign investment) developed by professor Dunning
1) “O” - Ownership
Ownership is the intangible assets of a company that can be reassigned amoung transnational companies at a low rate which leads to higher incomes and reduced costs.
Advantages:
- Access to markets through trademarks because of monopoly advantages
- Different kinds of innovations from the technology that will be introduced.
- Economies of scale and better access to financial
2) “L” - Location:
Location advantages are the main factors that determine who the host country will be for transnational companies activities.
Advantages:
-Economic Benefits of quantitative and qualitative factors of production, transportation cost, telecommunications and etc
-Political benefits include similar government policies that affect FDI flows

- Social benefits includes cultural diversity and distance between the host and home countries, cultural diversity
3) “I” - Internalisation
When the first two conditions (Ownership and Condition) are met, the company will be profitable to use the advantages. (Dunning, 1973, 1980, 1988).

4. Monopolistic Advantage
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