Direct Investment Theory

III. Literature Review

Previous studies relating to concepts and theories of FDI and the effect of monetary and fiscal policies on FDI inflows are summarized in this chapter. This can provide a better understanding about foreign direct investment, and relationships between the dependent variable and independent variables (money supply, lending rate, treasury bills rate, inflation rate, government expenditure and taxes) are studied as well.

3.1. Concepts and theories of FDI

Foreign direct investment can be defined in two perspectives: microeconomic and macroeconomic. From microeconomic perspective, foreign direct investment can be defined as investment undertaken by a firm resident of one economy in a company resident in another economy,

The Eclectic Paradigm OLI

The eclectic paradigm theory developed by Dunning (1977, 1981) is a mix of Hymer's explanations and various other theories of direct foreign investments. According to this theory, there are three determinants of foreign direct investment:

1) Ownership advantages: this refer to intangible assets which are exclusive possessions of the company and may be transferred within transnational companies at low costs (e.g., technology, brand name, benefits of economies of scale). The advantage gives either higher incomes or reduced costs. But cost of operating at a distance have additional costs, therefore to successfully enter a foreign market, a company must have certain characteristics (as the property competences or the specific benefits of the company) that would triumph over operating costs on a foreign market (Dunning, 1973, 1980, 1988).

There are three types of specific advantages:

a) Monopoly advantages in the form of privileged access to markets through ownership of natural limited resources, patents,

Location advantages of different countries are the key factors to determining who will become host countries for the activities of the transnational corporations. The specific advantages of each country can be divided into three categories:

a) The economic benefits consist of quantitative and qualitative factors of production, costs of transport, telecommunications, market size, etc;

b) Political advantages include common and specific government policies that affect FDI flows;

c) Social advantages include distance between the home and home countries, cultural diversity, attitude towards strangers, etc.

3) Internalisation: when the first two conditions are met, it must be profitable to the company the use of these advantages, in collaboration with at least some factors outside the country of origin (Dunning, 1973, 1988).

This third characteristic of the eclectic paradigm OLI offers a framework for assessing different ways in which the company will exploit its powers from the sale of goods and services to various agreements that might be signed between the companies. As cross-border market Internalisation benefits is high, the more the firm will want to engage in foreign production rather than offering this right under