Theoretical Framework of Fdi

Foreign direct investment has increasingly been identified as a major growth-enhancing component in most developing countries. FDI promotes economic growth in the host country in a great number of ways. From a more compressed perspective, these effects of foreign investment could be direct through a certain investment source or indirect through certain spillover effects. In a more broad view however, FDI could be said to put pressure on the firms in their host countries to improve their competitiveness leading them to reduce their transaction costs to the foreign investors, also increasing the return of capital and eventually increasing economic growth. It is also argued that the inflow of FDI would influence investment in the domestic firma of the host country

Theoretical framework of FDI
Various theories of FDI

There are a number of theories, which explain FDI. These theories are all set to be based on an economic environment in which the costs of labor and other resources used in production are too high thereby forcing the consumers to use substitute inputs in production (I.E imperfect market condition). The economic theories are listed as follows:

* MacDougall-Kemp Hypothesis; * Industrial organization theory; * Location specific theory; * Product cycle theory; * Internalization approach; * Eclectric paradigm; * Currency Based Approaches; * Portfolio-economic theories.
Of all these theories the MacDougall-Kemp Hypothesis is the only theory, which is based on a perfect market condition.

MacDOUGALL-KEMP HYPOTHESIS
This is one of the earliest theories, which was engineered by G.D.A MacDougall in 1958 of which M.C Kemp later in 1964 made a detailed explanation of the theory.
This theory uses a two-country model, I.E Country A and Country B in which Country A is the investing country while Country B is the host country. It is assumed in this theory that the price of capital is equal to the marginal productivity which means there is a free