Name Roll No.

Class Sub Seminar title Date of submission

K. Murugasen 09MBA29 II MBA; V Trimester International Business Management Theories of International Investment 30December 2010

THEORIES OF INTERNATIONAL INVESTMENT

in the classical tradition. which is an extension of the market imperfections theory.  Internalization Theory: According to the internationalization theory.  Market Imperfections Theory: One of the important market imperfections approach to the explanation of the foreign investment in the Monopolistic Advantage Theory propounded by Stephen in 1960. it may invest abroad in production facilities..e. foreign direct investment occurred largely in oligopolistic industries rather than in industries operating under near perfect competition. keeping the knowledge within the firm to maintain the competitive edge)? For example. marketing and finance. the firm (the licensor) does not make any foreign investment in this respect but on the other hand. The validity of this theory is clear from the observation of the noted economist Charles Kindleberger that under perfect competition. the existence of a perfectly competitive market. if a firm decides to externalize its know-how by licensing a foreign firm. if the firm decides to internalize. . production.Introduction: A number of attempts have been made to formulate a theory to explain the international investment. superior technology or skills in the fields of management. who assumed. A brief outline of the important attempts in this direction is given below:  Theory of Capital Movements: The earliest theoreticians. According to this theory. foreign investment results from the decision of a firm to internalize a superior knowledge (i. Methods of internalization include formal ways like patents and copy rights and informal ways like secrecy and family networks. Hymer suggested that the decision of a firm to invest in foreign markets was based on certain advantages the firm possessed over the local firms (in the foreign country) sucli as economies of scale. considered foreign investments as a form of factor movement to take advantage of the differential profit. foreign direct investment would not occur and that would be unlikely to occur in a world wherein the conditions were even approximately competitive.

If this condition is not satisfies. They are: 1. According to this theory. MNCs tend to specialize in developing new technologies which are transmitted efficiently through their internal channels. It is then exported to other developed markets. manufacturing facilities are established there to cater to these markets and also to export to the developing countries. Government policy  International Product Life Cycle Theory: According to the Product Life Cycle Theory developed by Raymond Vernon and Lewis T. market growth. the production of a product shifts to different categories of countries through the different stages of the product life cycle. Trade barriers 4.  Location Specific Advantage Theory: The location specific advantage theory suggests that foreign investment is pulled by certain location specific advantages. stages of development and local competition) 3. entrepreneurship and ease of organizing production). As the product becomes standardized and competition further intensifies. manufacturing facilities are established in developing countries to lower production costs and due to other reasons. a new product is first manufactured and marketed in a developed country like the US (because of favorable factors like large domestic market. Appropriability Theory: A firm should be able to appropriate (to keep for its exclusive use) the benefits resulting from a technology it has generated. According to Hood and Young. As competition increases in these markets. Marketing factors (like market size. The developed country markets may also be serviced by exports from the production units in the developing countries. Wells. Labour costs 2. . therefore. would have no incentive for research and development. the firm would not be able to bear the cost of technology generation and. there are four factors which are pertinent to the Location Specific Theory.

e. especially the leader in an oligopolistic industry.. According to Dunning. other firms in the industry followed as a defensive strategy. viz. 1. . Location specific advantages Firm specific advantages result from the tangible and intangible resources held exclusively. at least temporarily.  Other Theories: According to Knickerbocker’s theory of Oligopholistic Reaction and Multinational Enterprise. Eclectic Theory: John Dunning has attempted to formulate a general theory of international production by combining the postulates of some of the other theories. to defend their market share from being taken away by the initial investor with the advantage of local production. entered a market.. Internalization advantages 3. Firm specific advantages 2. by the firm and which provide the firm a comparative advantage over other firms. foreign investment by MNCs results from three competitive advantages which they enjoy. when one firm. i.

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