Foreign Direct Investment and Development:
In neo-classical economic theory, FDI involves the movement of capital from capital abundant to capital scarce host countries. Mundell(1957) propounded that FDI promotes greater production and welfare in the same manner as trade in goods under trade liberalisation. Akamatsu (1961, 1962) provided 'flying geese theory'. According to this theory, FDI through MNCs disperses production technology and know-how fi&n a high wage source country to one or more lower wage host countries.
i) ownership specific advantages: The firm-has comparative advantage in the knowledge it 'owns'. We may refer it technology, patents, etc,
ii) locational advantages of host countries: such as huge market in the host country, or lower cost of local resources or elimination of tariffs that induce the firms to locate in host country etc., and
iii) internalisation advantages: It means the endeavour of the firm to produce goods itself, rather than licensing its technology.
The first one reflects firm-specific determinants, whereas the locational advantage is specific to particular country, which explains why FDI flows to some countries and not others. Thus OLI (taken from the first letters of the above mentioned advantages) paradigm addresses the following questions such as:
a) which firms do undertake FDI,
b) where do the firms go for their direct investment and
c) why do they internalise their advantages through direct investment instead of selling it off.
Thus a combination of factors determines the forms of production and the way market is being catered and serviced.