Internalization Theory Of Foreign Direct Investment

CHAPTER 2 THEORY OF FDI 2.1 Concept of FDI In this globalization era, many firms worldwide try to expand their business abroad in order to gain the advantages that FDI has offer. Foreign Direct Investment (FDI) itself can be defined as a category of investment made with the objective of establishing an enterprise by a company or entity in one country into a company or entity in another country OECD (2009). FDI can be divided into two types based on the direction of the investment. The first type is Inward Direct Investment which can be explained as the investment made in the reporting country by non-resident investor. The value of inward direct investment is called FDI net inflow.

Developing countries can benefit a lot from multinational corporations. On the other hand with many benefits there are lot disadvantages related to ethical conducts that exploit hidden agenda of the developing nation. FDI (foreign direct investment) have been observed to be imperative in the financial advancement of the host nations, and pivotal in building mechanical capacities of local organisations in developing nations viewpoints (Keller, 2010). For the global dispersal it is a channel of innovation, which can possibly exchange mechanical, authoritative and administration to developing nations that can, at last, prompt unrivalled technological capacities, and advancement works on, bringing about the monetary development of these nations.

The final fallacy is based off the traditional concept that in order to export, firms are obligated to sell to foreign countries. In contrast to what is traditionally considered, modern economies dominate global value chains. Each organization adds value to different components of the chain even though a firm is not frankly engaged in the selling process to a foreign buyer as it may be part of the chain that exports. According to the authors the global value chain contains three sets of firms. Tier 1 consists of specialized suppliers for specific parts that rely on tier 2 for components.

There are two broad types of investment risk: Market Risks. These risks come with owning an asset of any kind, including cash. The market potentially can become less valuable for assets due to preferences made by an investor, a change in interest rates, or other factors, like weather. Asset-specific risks. Asset-specific risks originate from companies or the investments themselves.

Foreign direct investment (FDI) is when a corporation in a country establishes a business operation in another country, through setting up a new wholly owned company , or acquiring local company, or making a joint venture in the host country .an important element of globalization and the whole world economy, is a driver of employment, technological progress, productivity improvements, and economic growth. It plays the critical roles of filling the development, foreign exchange, investment, and tax revenue gaps in developing countries (Smith, 1997; Quail, 2007). In particular, it can play an key role in any country development efforts, including: supplementing domestic savings. employment generation and growth. integration into

A common way to make strategic asset-seeking investments is through acquiring assets of foreign company in order to replenish or increase the company’s current assets. Strategic assets are often sought through merging or acquiring assets of foreign companies to gain competitive advantage in a new market and to promote long-term strategic objectives. The MNEs that are prompted by this type of OFDI are commonly established MNEs that aim for an integrated international or regional strategy, and new foreign direct investors that look for acquiring a competitive strength in a foreign market. The main motive for strategic asset seeking OFDI is to leverage of minimizing a particular cost or marketing advantages over the competing MNEs international portfolio of physical assets and skilled labour competences. Thus, strategic-asset seeking OFDI enable companies to increase their ownership-specific advantages or decline other companies’ competitiveness.

In a case of agricultural production or mining, protectionist economies may enjoy a comparative advantage by establishing policies that prevent third parties from producing the same product. In a case of increased productivity in the infant and exclusively producing companies, other benefits may trickle to other industries in the form of raw material purchases, acquisition of new technology, and the creation of competent labor force for the economy (Ferrini, 2012). Evidently, the success of a protectionist economy highly depends on the interaction of the local industries, the government, and consumers in a move to promote the consumption of local commodities and promote the growth of infant industries. First, the government must introduce policies to protect and limit the number of international firms that have jurisdiction to produce or import certain commodities. Secondly, the local firm must embrace the market challenges and use government support to deliver quality goods at affordable prices.

Relational the record between financial reporting quality and investment efficiency has an impact between macroeconomic and corporate levels (given that investment is a major determinant of the return on capital obtained by investors). Our results by considering a comprehensive measure of investment elongate and generalize the results of before (and its sub-components), in order to financial reporting quality using multiple agents，and by specifically filing the relation between financial reporting quality and two origins of economic inefficiency, over-investment and under-investment. By the previous studies are difficult to find the relation between financial reporting quality and over-investment and

During this process while the free flow of capital has risen, trade has transformed into a more liberalized version and consumer habits have gotten to be like each other. Connections have been created among industries and businesses, cooperation between transnational enterprises has developed and foreign speculations have been started. All through this procedure, even the shut economies have opened up for direct foreign investment (Nunnenkamp, 2002). Investments have extraordinary importance as far as expanding of countries ' GDP particularly foreign investments. Foreign investment, investable assets can be characterized as moving to another country by individuals and firms.

Once a company engages in foreign investment it becomes known as a multinational enterprise (MNE). Foreign investment can be made either directly or indirectly. Foreign direct investment (FDI) involves company’s investing in tangible assets such as land, buildings & factories, machines or other equipment in a foreign host country. There are two types of FDI, Greenfield and Brownfield investment. Greenfield investment involves a