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Related Theories Of Macdougall-Kemp Hypothesis

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2.4 FDI Related Theories
There are several theories explaining FDI. With exception MacDougall-Kemp hypothesis, other FDI theories are based on the imperfect market conditions and a few are based on imperfect market capital .
2.4.1 MacDougall-Kemp Hypothesis
This one of the earliest theories developed in 1958 by MacDougall and later improved in 1964 by M.C. Kemp in 1964. The theory assumes there are two nations, one is the investing country and the other is the host country. The theory assumes that the price of capital being invested equals the marginal productivity. In addition, the capital can freely move from the country of capital surplus to the county with capital deficit. Thus, the capital marginal productivity will create equilibrium between the two countries. When the capital is invested, it will cause improvement in the efficiency use of resources. Consequently, the capital invested will improve the welfare of the citizens. Although after investment the capital out in the supplying nation will decrease, the nation income in both countries will not decrease because the country benefits/returns from the invested capital which of course equals the capital marginal productivity times the total foreign investment. Thus, as long as the foreign investment capital exceeds the loss of output, the foreign country will continue investing because it gets larger national income.
On the other hand, the host country will continue encouraging foreign investment as it enjoys greater

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