Direct investment among the richest countries has been one of the eminent features of the world economy since the mid-1980s. Within this broad trend, Europe features prominently as both a home and host to multinational enterprises (MNEs). Not only did many Japanese and American firms invest massively, but even the most somnolent European firms appeared to awake to the need to look beyond their own national borders. (Thomsen and Woolcock, 1993)
In narrow terms, FDI is simply all capital transferred between a firm and its new or established foreign affiliates. In its broadest sense, FDI represents competition: among workers, governments, firms, markets and even economic systems. (ibid)
The main objective of this report is to illustrate the motives in relation to firm`s desire to locate some production or other activities in a foreign country. In order to do so, several theories that seek to explain why FDI takes place will be discussed, such as Dunning`s Eclectic Paradigm, Vernon`s Life Cycle model, the Knickerbocker Model and others. Moreover, to evaluate the rationale for FDI, references will be made to the case study of Nissan`s automotive investment in North-East England.
The most commonly seen forms of FDI can be determined as:
• Merges and Acqusitions;
• Privatisation-related investment;
• New forms of investment (joint ventures, strategic alliances, licensing and other partnership agreements);
• Greenfield investment (a new operation);
• Brownfield investment (expansions or re-investment in existing foreign affiliates). (Hill, 2007)
One of the first theories explaining multinational firms was created by Hymer (1959). He develops a specific - advantages theory which states that firms need to have internal – specific advantages over domestic rivals, in particular economies of scale and superior product technology, in order to invest in that country.
Thereafter, Knickerbocker (1973) emphasise oligopolistic rivalry as an explanation for FDI, with firms investing in each other`s home markets to gain first mover advantages, leading to a follow-the-leader pattern of international investment to reduce risks in an uncertain oligopolistic environment.
Furthermore, Vernon`s (1966; 1979) product life-cycle theory explains the shift from export to direct investment in developed and developing countries. Rivalistic firm behaviour drives firms in developed countries to locate lower value added or mature activities in low cost developing countries so that the firm can move up the product cycle and focuse on developing new products therefore sustaining the competibility.
Thereafter, the internalisation theory was developed in order to understand why firms invest abroad instead of exporting or licensing to domestic firms. It argues that high transaction cost, such as enforcing contracts, maintaining quality, and keeping proprietary rights over technical and marketing knowledge, may justify direct ovnership (internalisation) of overseas activities. This theory has been expanded to include the transaction costs of political intervention and trade barriers. (Loewendahl, 2001)
However, several theoretical studies have started to incorporate the insight from different perspectives into their own disciplines and are acknowledging the important contributions that different approaches can make to each other. (ibid)
Dunning has brought together the main principles of there theories and developed Eclectic, also knows as Ownership-Location-Internalisation, paradigm, that clearly identifies these three areas of possible advantage for FDI to take place. (Dunning and Lundan, 2008)
Although academically it is still under discussion, most countries seem convinced that inward FDI is benefical for their local economies. (Oxelheim and Ghauri, 2004) The study of Nissan`s automotive investment...