IV - Foreign Investments

Summary

It is widely acknowledged that foreign direct investments (FDI) play an important role in developing countries. FDI benefit the recipient country in a number of ways: they provide additional capital resources to finance investment activities in the country; and they are often accompanied by technology and, therefore, the country benefits from the new technologies introduced. Furthermore, FDI enable the country to have access to overseas markets since the foreign investors often have international market links before they come to the country.

There are strong links between international trade patterns and foreign investment patterns, especially since the majority of FDI are accounted for by MNCs (multinational companies). A number of theories have been developed to explain the relationships between the MNCs, FDI and international trade.

Tsuyoshi Koizumi (1987) has reviewed the literature on FDI in Asian LDCs. Among the general theories of FDIs and MNCs, the one developed by Dunning explains the ability and willingness of firms to serve markets, and the reasons why they choose to exploit this advantage through foreign production rather than through domestic production, exports or portfolio resource flows. According to Dunning's hypothesis, a firm will engage in FDI if three conditions are satisfied:

1. It must possess net ownership advantages over firms of other nationalities in serving particular markets. These ownership advantages largely take the form of the possession of intangible assets, which are, at least for a period of time, exclusive or specific to the firm possessing them;

2. When the net ownership condition is met, it must be more beneficial to the enterprise possessing these advantages to use them itself rather than to sell or lease them to foreign firms, that is, to internalize its advantages through an extension of its own activities rather than externalize them through licensing and contracting with independent firms;

3. When the first two conditions are met, it must be profitable for the enterprise to utilize these advantages in conjunction with at least some factor input (including natural resources) outside of its home country; otherwise foreign markets would be served entirely by exports and domestic markets by domestic production.