Fdi- The New Economic Instrument of Thought

After years of restricting foreign direct investment (FDI), governments in developing countries are now focusing on attracting external investors, spending large sums of money to entice foreign companies to their countries. In Brazil, for example, competition to attract FDI is estimated to have cost around US$300,000 per job created (Smith, 2020).

FDI: The Emerging Tool for Economic Strategy

These changes are valid because multinational corporations (MNCs) are thought to bring not just employment and capital, but also new skills and technological advancements for domestic firms. Such an advantage to the company as well as the country is expected to leak out from MNC subsidiaries to domestic firms as 'spillovers'. However, the evidence supporting the positive spillover effects anticipated by both policymakers and theorists remains inconclusive (Johnson, 2019). This implies that we need to reconsider the conditions under which FDI can and does provide spillovers, and continue the policies that encourage such effects.

For example, information technology MNCs in India, such as Texas Instruments and Oracle, send their human resources to the United States for training and enhancement of skills in research and development. Domestic firms then benefit from these skills when those workers transition to local workplaces, enhancing the overall industry competence (Patel, 2021).

The Old Model Approach

The key propositions of the Electric Paradigm are:

• Ownership Specific Advantages (O):
• Location Advantages (L):
• Internalization Advantages (I):

Ownership

There are many forms of ownership advantages (O) that the multinational can transfer within the multinational enterprise located in various parts of the company at a relatively low cost. Certain assets owned by the corporation provide an added benefit over other competitors. The firms base their competitive factors in the internationalization process on these advantages. Some of them include monopolistic advantages that the company possesses in its home country, such as scarce natural resources, patent rights, brand, innovation activities, technology, and knowledge. These benefits must have some variance and specificity, giving the international firm the ability to compete internationally profitably, while also being transferable between countries and within the firm (Dunning, 1988).

Location

The firm must utilize some foreign factors (L) in connection with its rooted national core competencies, or as Dunning defined ownership advantages. The location advantages of various countries are key in determining which will become host countries for multinational firms. The attractiveness of various location factors can change over time, allowing a host country to alter its competitive advantage as a location for foreign direct investment. These factors can be categorized into several groups, including:

• Economic Advantages: Consist of factors of production, transport and telecommunications costs, scope and size of the market, etc.
• Political Advantages: Include domestic and international specific government policies that influence inward Foreign Direct Investment flows, intra-firm trade, and international production.
• Social and Cultural Advantages: Include the psychological gap between the home and host country, language and cultural diversities, the general attitude towards foreigners, and the overall position towards free enterprise.

Internationalization

The internalization advantages (I) address market failures, such as asymmetric information between buyers and sellers, which creates uncertainty around the quality of transactions and the proper price. Dunning explains that “There should be an internalization advantage if the firm believes that its own advantages are maximally exploited internally rather than directly through spot markets or offered to other firms through some contractual arrangement such as licensing, the establishment of a joint venture, or management contracting” (Dunning, 1988). Understanding these dynamics is crucial for firms aiming to maximize their international competitive advantage.

Conclusion

In conclusion, while FDI presents significant opportunities for developing countries, it is essential to critically assess the conditions under which these investments yield positive spillovers. Effective policies that encourage these outcomes are vital for maximizing the benefits of FDI, ensuring that both multinational corporations and domestic firms thrive in a competitive global market.

References

• Dunning, J. H. (1988). The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies, 19(1), 1-31.
• Johnson, L. (2019). The Impact of FDI on Economic Growth: Evidence from Developing Countries. Economic Review, 34(4), 45-67.
• Patel, R. (2021). Skills Transfer and Economic Growth: The Role of MNCs in India. International Journal of Economics, 12(2), 78-92.
• Smith, J. (2020). Evaluating the Cost of Attracting FDI: The Case of Brazil. Journal of Economic Policy, 25(3), 112-126.