Why Do Companies Engage in Fdi

Topics: Foreign direct investment, Market, Market failure Pages: 10 (3333 words) Published: February 28, 2013
Name:Emmanouil Agrafiotis
Student ID:541930
Degree Title:MA Globalization and Corporate Development
Course Title:MNEs in a Globalizing World: Economic and Legal Perspectives
Course Code:15PFFC019
Course convenor:Dr. Stephanie Blankenburg
Course tutor:Mr. Jago Penrose
Title: Why do companies engage in Foreign Direct Investment?
Word Count:2,748

This Essay will analyze three streams of thought concerning the engagement of firms in Foreign Direct Investment, namely Hymer’s Approach, the Internalization Theory and Dunning’s Eclectic Paradigm. There is, naturally, a great deal more to be said about Internationalization of Production, but this essay will focus to these three paradigms mainly because of their modernity and also due to limitations of space. The selection of the first two specific schools of thought is because of their significance in their time of development, as well as the pillar-status they still hold in the evolution of International Business Theory. Dunning’s approach, though not contributing to the theory in terms of new developments, is interesting not only due to the vast amount of criticisms and controversy it has spurred, but also because of its utility as a descriptive tool. Furthermore, attempts to find linkages between the theories will be made.

1. Hymer’s Approach (Market Power)
Hymer’s contribution in the theory of FDI is paramount, both in terms of time and of introduction of key concepts. While presenting similarities with the Marxist approach, in terms of conflict, especially in his latter works (Hymer, 1971), his approach was novel in different respects: Firstly, it is considered the first theory to actually address FDI,as ‘a mechanism by which the MNE maintains control over productive activities outside its national boundaries’ (Dunning and Rugman, 1985, p.228) , rather than just as the capital flows driven by interest or profit rates that neoclassical economists have been proposing (Cantwell,2000) . Secondly, Hymer was the first to challenge the dominant then perception of the markets by that markets are structurally imperfect a priori. Thirdly, he is the first scholar to provide explanations of why firms decide to move to international production, instituting determinants such as ownership advantages and diversification, which are driving factors in contemporary literature (i.e. ownership advantages in Dunning and diversification in Theory of International New Ventures and Born-Globals).

Hymer’s analysis lays down his perception of what hinders FDI or, as he calls it ‘international operations’. Yamin’s account on Hymer classifies two types of costs: ‘fixed and non-recurring’ and ‘recurring costs’ (Yamin, 1991, p.66). The first ones refer to language, unfamiliarity with market conditions, etc while the second ones to possible discriminatory treatment by governments, consumers and risks in exchange rate. However, Hymer goes on to determine under which conditions, despite these costs it is still efficient for the MNE to engage in international production.

The two main determinants for a firm to engage in FDI, according to Hymer, are the Possession of Advantages and the Removal of Conflict. A third one is traced by Pitelis (2002,p.13) in ‘diversification’, though Hymer (according to him) considers it a ‘minor’ one, ‘because control is not involved’(p.13). It is however, useful to make a note of this, since it reflects another one of Hymer’s contributions- that he touched on an aspect that is now a pivotal factor in evolutionary views of the firm (i.e. in Niche Markets and Born-Globals). The first determinant is derived from the market failure perspective Hymer takes; it is obvious that since firms are unequal and differentiated, they will carry diverse advantages and disadvantages. The ability of the firm to recognize and capitalize its advantages might lead it to a decision to engage in international operations....

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Cantwell, J. (2000), ‘A survey of theories of international production’, in C.N. Pitelis and R. Sugden, The Nature of the Transnational Firm, London: Routledge
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Dunning, J. H. (1979), ‘Explaining changing patterns of international production: in defence of the eclectic theory’, Oxford Bulletin of Economics & Statistics, Vol. 41, 4, p269-295
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