Liberalisation and trends in fdi, Macroeconomics

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. 

Posted Date: 11/9/2012 5:17:04 AM | Location : United States

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