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MEANING
Means investment for establishment of a new enterprise in foreign country either as a branch or as a subsidiary and acquisition of an overseas business enterprise.
THEORIES OF FDI
MAC DOUGALL-KEMP HYPOTHESIS INDUSTRIAL ORGANISATION THEORY LOCATION SPECIFIC THEORY PRODUCT CYCLE THEORY INTERNALISATION APPROACH ECLECTIC PARADIGM CURRENCY BASED APPROACHES POLITICO ECONOMIC THEORIES MODIFIED THEORIES FOR THIRD WORLD FIRMS
This theory gives answer to the question why we do FDI.The answer is its advantages.The advantages are:Product differentiation Marketing skills Proprietory technology Managerial skills Beter access to capital Economies of scale Govt imposed market distortion
MATURING PRODUCT STAGE appears when the proct turns price elastic along with similar product in the market.Rivals increase and firm decide to set up a subsidiary
STANDARDISED PRODUCT STAGE with greater price competitiveness motivates firm to start production in a low cost location where cheap labour is available DEMATURING STAGE breaks down product standardisation with sophisticated models of the product being manufactured in high income countries.
INTERNALISATION APPROACH
Buckley and Casson n 1976 too assume market imperfection but imperfection in their view is related to the transaction cost that is involved in the intra firm transfer of intermediate products such as knowledge or expertise. In an international firm,technology developed at one unit is passed on to other units normally free of charge This means that transaction cost in respect of intra firm transfer of technology is almost zero whereas such costs in respect of technology transfer to other firms is usually exorbitantly high.
ELECTIC PARADIGM
It was given by Dunning in 1980 and revised in 1993 It is a combination of industrial organisation theory,internalisation theory and location specific theory It postulates that at any given time,the stock of foreign assets owned by a MNC is determined by a combination of firm specific or ownership advantage(O),the extent of location bound endowments(L),and extent to which these advantages are marketed within various units of the firm(I)
POLITICO-ECONOMIC THEORIES
According to Fatehi-Sedah & Safizedah(1989) political stability in the host countries leads to foreign investment therein. A firm moves from a politically unstable country to a politically stable country.
Developing country firms too possess firm specific advantages on account of modification of technology
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BENEFITS TO THE HOST COUNRY Availabiliy of scarce factors of production Improvement in balance of payments Building of economic and social infrastructure Fostering of economic linkages Strenghtening of the government budget
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Strained balance of payment following reverse flow Dependence on the import technology Employment of expatriates Inappropriate technology Unhealthy competition Cultural and political interference
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Availability of raw material Improvement in balance of payment Employment generation Revenue to the government Improved political relations
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Undesired outflow of factors of production Possibility of conflict with the host country government