Fdi- The New Economic Instrument of Thought

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

These changes are valid because multinational corporations (MNCs) are thought to bring not just employment and capital, but also new skills and technological skill for domestic firms. Such an advantage to the company as well as the country is to leak out from MNC subsidiaries to domestic firms as 'spillovers'. But the evidence to support the positive spillover effects expected by both policymakers and theorists is inconclusive. This sums up that we need to reconsider the situations in which FDI can and does provide spillover, and the policy continues the practices 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 use these skills when those workers change their workplace.

The old model approach:

The key propositions of the Electric Paradigm:

1. Ownership specific advantages (O):
2. Location advantages (L)
3. Internalisation advantages (I)

Internationalisation theory focuses on imperfection in intermediate product markets. Two main kinds of a product market are knowledge flow linking Research and Development (R&D) to production and flows of the component and raw materials. Internationalisation occurs only when the company is focusing more to reap the benefits and maximizing the profits by lowering the cost. Today’s growing economy every company aims at this and these lead to Foreign Direct Investment.

Foreign Direct Investment can be in two forms namely Resource seeking investment and Market seeking investment.

1. Ownership:

There are many forms of ownership advantages (O) that the multinational can transfer within the multinational enterprise located at various parts of the company at relatable low cost. There are few assets owned by the corporation which can add as an added benefit over other competitors. The firms based on its competitive factors in the internationalization process. Some of them are monopolist advantages that the company in its home country has in form of privileged, like scarce natural resources, patent rights, brand, innovation activities, technology, and knowledge. These benefits must have some variant and particular and give to the international firm the choice to compete internationally profitably, moreover to be transferable between countries and within the firm.

2. 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 keys in determining which will become host countries for the multinational firms. Definitively the attractiveness of various location factors can change over a period of time so that a host country can to some extent alter its competitive advantage as a location for foreign direct investment. We can differentiate the factors including all of them in several groups, there are names in three types of location factors based on:

Economic advantages: Consist of the factors of production, transport and telecommunications costs, scope and size of the market, etc… Political advantages: Include the domestic and international specific government policies that influence inwards Foreign Direct Investment flows, intra-firm trade and international production. Social, cultural advantages: include a psychic logical gap between the home and host country, language and cultural diversities, the general attitude towards foreigner ant the overall position towards free enterprise.

3. Internationalisation:

The internalization advantages (I) opens up an answer to market failure, as for example which regards that buyers and sellers have asymmetric information, what creates uncertainty around the quality of the transactions and the proper price. Dunning explains that “There should be an internalization advantage in the firm believes that its own advantages are maximum 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.”