INVESTMENT THEORIES

1. Theory of Capital Movement

• Capital is one of the factors of production others are land, labor and
entrepreneur.
• International capital movement is any transfer of capital between countries
(with goal of obtaining extra profit)
• It can be in the form of physical capital and financial capital. The profit can
be interest rate, dividend, share, on profit of corporation abroad or rent.
• they help to finance development of underdeveloped countries.
• The term international capital movement refers to borrowing and lending
between countries.

2. Market imperfect theory

The first theory of imperfect market which led to the flow of funds is the industrial
organization theory. In the case of foreign investments, the major tasks faced by
the investors for venturing in other countries was the competition from the local
entities. This is due to the fact that the locals have a better understanding of the
market in terms of ease of working, language, rules and regulations, and attitude.
This competition can only be dealt favorably if the investment origin countries
bring in superior technology in the process. When the large Multinational
companies entered the Indian economy they not only brought funds but also other
important modern technology. This includes superior management skills, brand
names, marketing and management skills, and economies of scale. As a result, it
helped them to overcome disadvantages from the changing environment.

Market imperfections theory is a trade theory that arises from international markets
where perfect competition doesn't exist.

. Given by Kindleberger

Among some of the most common market imperfections are monopolies, oligopolies,
large countries in trade.

Example Automobile Sector, Telecom Sector etc.

3. Internationalization Theory

The Internationalization theory of the MNC is concerned with entry mode choices in
single markets based on transaction cost analysis.

• Internationalization theory suggests that risk exposure is attenuated and firms do

escalate their resource commitments from low to high investment intensive foreign
entry modes.

If there is lacking knowledge about foreign markets, firms limit their risk exposure
through limiting resource commitment

Three most popular internationalization theories are

o Uppsala model (introduced by Jan-Johansson and Jan-Erik Ahlen) (Gradual and

Incremental expansion into foreign market)

o Network approach, (Johanson and Mattsson (1988) introduced) (highlights

importance of relationships with suppliers, customers and market that can
stimulate or hep a form to go abroad )
o International New Ventures or also known as Born Global. seek for resources
selling products for gaming competitive advantages from multinational since
the beginning.

4. Location Specific Advantage Theory

The ability of an individual, company, or economy to conduct an activity better than

another for reasons related to location

• Location-specific advantages or LSAs are those location-specific market features

and/or factors of production that enable a firm to achieve an improved financial
outcome from the provision of the same product or service relative to alternative
locations. They may include access to skilled labour, incentives, market premiums,
access to growing markets, superior infrastructure, and cost savings.

5. Eclectic Theory

The eclectic paradigm assumes that companies are not likely to follow through with a
foreign direct investment if they can get the service or product provided internally
and at lower costs.
The goal is to determine if a particular approach provides greater overall value than
other available national or international choices for the production of goods or
services.

Given by Dunning's

For Example a Company should go for FDI or not