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Volume 11, No. 1, 2023
Open Access Journal
ECONOMICS
Innovative and Economics Research Journal
www.economicsrs.com
SEVENTY YEARS OF FDI LITERATURE: REVIEW, COMPARISON
AND CRITIQUE
Hasinul Hussan Siddique 1, Barjoyai Bin Bardai 2
Received 11. 01. 2023. Sent to review 23. 01. 2023. Accepted 23. 05. 2023.
Original Article
1 Al Madinah International University,
Kuala Lumpur, Malaysia
2 Al Madinah International University,
Kuala Lumpur, Malaysia
Corresponding Author:
Hasinul Hussan Siddique
Email: brains786@li ve.com
JEL Classication:
O47, F21
Doi: 10.2478/eoik-2023-0015
UDK: 339.727.22(4-672EU)(048.83)
ABSTRACT
International capital movement in the form of Foreign Direct Investment (FDI)
by multinational enterprises (MNEs) signies a widely researched phenomenon
in comprehensive review of the FDI literature. Its vastness makes it impossible
to fathom its depth, as such the paper highlights what the author considers to
be mainstream theories in the domain of empirical studies on FDI. is study
critically reviews (FDI) literature over a period of 70 years from 1950 to 2020 to
provide a theoretical lens for future research beyond the established models. e
discussion covers the mode of FDI inows, statistical methods applied, theoretical
models, contributions to paradigms and empirical papers investigating FDI.
Furthermore, the papers selected cover heterogenous geographical regions, while
in certain papers FDI has been studied as a dependent variable in others as an
independent one. e focus lies on the FDI and its resultant activities of MNEs
in the form of subsidiaries to carry out market seeking, strategic asset-seeking
and eciency seeking activities. ough, most researchers have narrowed
down to four determinants of FDI i.e., motives of MNEs for undertaking FDI,
size of MNEs, entry modes into host country and investments sector recently,
many works have applied formal theories to provide a framework for market
failure such as holdup problems, non-fulllment of contracts and related agency
costs. It is concluded that FDI has evolved into a signicant area of empirical
investigation. Overall, the gaps and opportunities in existing literature are
identied thereby directions for further research emerge.
Keywords: Foreign Direct Investment, Empirical studies, Literature review,
Statistical methods, Critique, internalisation.
1. INTRODUCTION
e emerging real-world economic scenario has led economic literature to investigate the
inuence and orientation of research undertaken over the past seven decades. Since the volume
of FDI literature is humongous it is not possible to conduct an exhaustive review, however despite
constraints the study is a major contributor to its eld. e focus lies on the FDI and its resultant
activities of MNEs in the form of subsidiaries to carry out market seeking, strategic asset-seeking
and eciency seeking activities (Dunning 1993, 1998).
e study contributes signicantly to the investigation of FDI. Firstly, it is the rst of its kind that
covers such a wide and signicant range of empirical studies over such a large time, since previous
studies have restricted time periods. (Almfraji & Almsafri, 2014). Earlier research exhibits the link
between dierent variables such as corporate governance, foreign market entry and establishment
modes, ownership, location, and internalisation choices. (Dikova, 2009; Dikova and Sahib, 2013;
Lien et al., 2005; Filatotchec et al., 2007; Ambos et al., 2006, 2011, Dikova and Van Witteloostuiin,
2007; Hertensstein et al., 2017). Secondly, the present paper focuses on heterogenous geographical
Pages 195- 221
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regions rather than past homogenous case studies e.g. (Kurtishi-Kastrati, 2013). irdly, the present
study is not limited to FDI determinants alone but the interaction of economic growth, economic
and structural reforms, increase in competitiveness and deregulation and impact of FDI in the host
country. e review also covers the dominant theories that have evolved over the last seven decades
including the OLI paradigm and Internalisation theory.
Aer introduction the literature review focusses on FDI literature, methodology section describes
the research approach and thereaer critique of theories and variables. Finally, limitations and gaps
are highlighted, and suggestions are given for selecting theories and content.
2. LITERATURE REVIEW
A brief construct of the mainstream FDI theoretical paradigm is divided into perfectly competitive
and imperfectly competitive theories. FDI theories emerged during mercantilism when capital
and wealth accumulation was reected in gold reserves (Carbaugh, 2004). ereaer, the quest for
natural resources, establishing colonies and spreading religion led to the ow of FDI to colonies.
(Sage, 2010).
e content exploration of prior reviews of FDI literature reveal that the origins of FDI are quite old
with many schools of thought with new theories embedded. ere appears to be a lack of consensus
amongst them e.g. based on modes of foreign market entry i.e. export mode, intermediate mode,
and hierarchical mode of entry. (Cullen, 2002; Hollensen, 2001; Kim et al, 2002; Marshall, 2003).
e review also identied some widely used variables in FDI studies such as Inward FDI, Outward
FDI, locational determinants, FDI spillover, entry modes etc.
Foreign rms chose either investment mode or ownership mode to enter foreign markets.
e investment mode involved a trade-o between a Greeneld investment or Merger &
acquisition while ownership mode comprised opportunity cost between owning a subsidiary
and joint venture (JV).
Figure 1. Foreign entry market mode.
Source: adapted from ‘A Summary of studied Entry modes’, Cullen (2002).
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While making their choice of entry mode, MNEs, trade-o between risks and returns or resource
availability and need for control (Cespedes, 1988). Agarwal & Ramaswami (1992) opined that the
choice of an entry mode is oen a compromise among these attributes. A high investment requires
the ability of an MNE to secure nancial resources and is associated with high risk/return.
3. METHODOLOGY
We conducted a keyword search across online databases and journals like Business Source Premier,
JSTOR, ScienceDirect, ProQuest, Elsevier database, Scopus, SpringerLink and Google Scholar for
publications in the last seven decades. Keywords included inward FDI, outward FDI, MNE etc.
to retrieve relevant studies with a holistic approach and a minimum citation of 500 counts that
contained the terms FDI in the title, abstract or keywords list were also analyzed. e PRISMA
(Preferred Reporting Items for Systematic reviews and Meta-Analyses) method was used to validate
the research process.
By deploying a structured PRISMA, the titles and abstracts of the review literature were screened
independently for any discrepancies. Limited by publication dates, full text, citation counts etc.
records were obtained and entered in the owchart. is study has been divided into three parts
(1950-74), (1975-99) and (2000-20). e classication of the time-period identies the eect of
MNE-FDI research literature publications over a period of seven decades (1950-2020).
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Figure 2. PRISMA process ow chart.
Source: adapted from Trifu, A. et. Al (2022).
e PRISMA ow diagram was completed, and the systematic review revealed that, overall, 85
theories with high impact theoretical research as evidenced by a minimum of 500 citations, to
identify key contributions to theory were selected. Altogether, 20 theories were published between
1950-74, 30 theories between 1975-99 and 35 during 2000-20.
4. DISCUSSION COMPARISON AND CRITIQUE
e rst period of review, (1950-74), is a period of economic uncertainty marked by raging
cold war between USA and USSR, birth of European Economic Community and emerging oil
crisis. Empirical data revealed that during this period of 1950-74 ‘multiple regression’ analysis is
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Seventy years of fdi literature: Review, comparison and critique
applied as a common tool of statistical method. Since the global economies were more focused on
economic growth, most authors conducted research on FDI and its productivity in host nations as
a dependent or independent variable.
e second period of review, (1975-99), is a period of severe energy crisis (OPEC oil embargo)
and economic uncertainty marked by Balkan war in Europe and rst Gulf war in Middle East.
Empirical data revealed that during this period of 1975-99 ‘Ordinary Least Square and multiple
regression’ analysis is applied as a common tool of statistical method and FDI was studied as an
independent variable.
e third period of publications review, (2000-20), marked by the second Gulf War and expansion
of the European Union. Europe was hit by challenges arising from the enlargement of the EU market
and adoption of Euro in the Schengen area, persistent threats to internal security, illegal migration
through porous external borders, Balkan wars, and coronavirus pandemic. e period culminated
in global nancial crisis, rise in liquidity crunch, collapse of banks worldwide and covid lockdowns.
Empirical data revealed that during this period of 2000-20 ‘OLI paradigm’ and ‘Internalisation
theory’ are applied as a common tool of statistical method to study FDI determinants.
Mainstream FDI eory Publications (1950-2020)
Table 1. Empirical studies on FDI published (1950-74).
S no Authors Yea r Dependent variable Analysis unit (Tests)
1 Barlow & Wender 1955 FDI Regression analysis
2 MacDougall-Kemp 1958 Marginal rate of Productivity Regression analysis
3Hymer 1960 FDI Multiple regression
4Vern o n 1966 FDI Multiple regression
5 Krainer 1967 FDI Multiple regression
6Scaperlanda 1967 FDI from US Multiple regression
7 Grin 1968 GDP Cross-sectional analysis
8 Bandera & White 1968 FDI, size of market Multiple regression
9D’Arge 1969 FDI Multiple regression
10 Schmitiz 1970 FDI OLS
11 Erbe 1970 FDI Multiple regression
12 Aliber 1970 Financial ows Regression analysis
13 Caves 1971 FDI FDI gravity model
14 Weisk o 1972 Domestic savings / Gross
investment Pooled OLS
15 Pesmazoglu 1972 GDP Multiple regression
16 Kim 1972 Gross xed capital formation OLS
17 Christian &
Pagoulatoes 1973 GDP, Gross xed capital
formation Cross-sectional analysis
18 Healey 1973 GDP Multiple regression
19 Knickerbocker 1973 FDI Entry concentration index
20 Kouri & Porter 1974 Private FDI OLS
Source: Author’s compilation.
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Table 2. Empirical studies on FDI published (1975-99).
S no Authors Yea r Dependent variable Methodology
1Stoneman 1975 EG Multiple regression
2Kouri 1975 FDI OLS
3Johanson &
Wiedersheim-Paul 1975 FDI & psychic distance Time series data
4 Buckley & Casson 1976 FDI Regression analysis
5Hymer 1976 International production Time series data
6Hirsch 1976 Trade investment Regression analysis
7 Johanson & Vahlne 1977 FDI internalisation Time series data
8Magee 1977 FDI & Skills Analysis of capital ows
9 Kojima 1978 FDI comparison Regression analysis
10 Krugman Paul 1979 FDI & EOS Cost analysis
11 Dunning 1979 Eclectic paradigm OLI approach
12 Blomstrom & Pearson 1983 Value added per employee OLS
13 Well s 1983 FDI & technology Time series data
14 Helpman 1984 Trade equilibrium Variation analysis
15 Meyer 1984 FDI spillovers Curvilinear analysis
16 Blomstrom 1986 Market concentration OLS
17 Santiago 1987 FDI Stepwise regression
18 Culem 1988 FDI OLS, GLS
19 Kharas & Levinsohn 1988 Total consumption 2SLS
20 Rothgeb 1988 GDP Multiple regression
21 Smiths 1988 Exports OLS
22 Krugman Paul 1991 FDI location Multiple regression
23 Drake & Caves 1992 FDI OLS
24 Pastor & Hilt 1993 Private FDI OLS
25 Metwally & Tamaschke 1994 Debt service, debt stock, capital
inow, GDP OLS, 2SLS
26 Aitken et al 1996 Wage 2SLS
27 Kumar 1996 R&D expenditure OLS
28 Markusen et al 1996 Knowledge-capital Linear regression
29 Borensztein 1998 EG 2SLS, 3SLS
30 Wilhelms & Witter 1998 FDI tness OLS
Source: Author’s compilation.
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Table 3. Empirical studies on FDI published (2000-20).
S no Authors Year Dependent variable Analysis (Test)
1Noorbakhsk 2001 FDI WLS
2Ghemawat 2001 FDI Not used
3Choi 2003 FDI OLS, WLS
4 Fung et al 2003 FDI GLS
5 Bevan and Estrin 2004 FDI RE
6 Bevan et al 2004 FDI Cross-section analysis
7Durham 2004 EG OLS
8 Nocke & Yeaple 2004 Heterogeneous FDI Equilibrium analysis
9 Li & Liu 2005 FDI, GDP 3SLS
10 Schneider 2005 GDP, innovation rate OLS, FE
11 Alsan et al 2006 FDI OLS, RESET
12 Ramman & Zurbuegg 2006 FDI FE, RE, cross section analysis
13 Hansen & Rand 2006 FDI FE, VAR
14 Asiedu 2006 GDP Panel data analysis
15 Kasugalluo 2007 FDI, gross xed capital formation OLS, FE, RE
16 Mina 2007 FDI GLS
17 Te Velde & Xenogiani 2007 Literacy ratio OLS, RE, FE
18 Rugman A. 2007 FDI internalisation FSA-CSA matrix
19 Luo & ung 2007 Internationalisation of EM MNEs eory construct
20 Azemar & Desbordes 2009 FDI OLS, FE
21 Suliman & Mollick 2009 FDI FE
22 Vijayakumar et al 2010 FDI Panel analysis
23 Azman, Saini et al 2010 EG PTR
24 Ali et al 2011 IPR OLS, GMM, Panel analysis
25 Tiwari & Murascu 2011 GDP Pooled OLS
26 Jadhav 2012 FDI Panel analysis
27 Morrissey & Udomkerdmongkol 2012 Pvt investment GMM
28 Tintin 2013 FDI OLS, FE
29 Masron & Nor 2013 FDI Panel analysis
30 Kashcheeva 2013 EG OLS, GMM, FE
31 Kaur et al 2013 FDI Panel analysis, FE, RE
32 Lessmann 2013 Regional inequalities OLS, LIML
33 Fereidouni 2013 CO2 emissions GMM, FE
34 Goswami & Haider 2014 FDI Panel and factor analysis
35 Paul & Sanchez-Morcillo 2019 FDI Multiple regression
Source: Author’s compilation.
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4.1. PERFECT MARKETS
It is a theoretical concept that assumes a perfectly competitive market and absence of informational
asymmetries.
4.1.1 FDI CAPITAL/RATE OF RETURNS
(MacDougal, 1958) assumed perfectly competitive market conditions, in a two-country model,
to explain his FDI construct. e underlying assumption was that capital out-ows from a low-
rate to a high-rate return country. (Gamal, 2008). It was argued that the driver for undertaking
FDI is to invest in countries where the marginal rate of productivity is equal to or higher than
the marginal costs, thereby giving birth to import substitution eorts. Kemp (1964) assumed that
marginal productivity of capital and its prices, in any two countries were equal. However, similarity
of argument that free mobility of capital leads to equalization of the marginal productivity of capital
between any two countries, defeated its revised objectives.
Similar theories were put forward by (Simpson 1962, Frankel, 1965), (Pearce & Brown, 1966)
and (Caves, 1971). (1969) argued that if the economies were perfectly competitive, FDI was
not necessitated. e need for FDI exists due to market distortions. Hymer rejected the perfect
competition concept and built his theory based on imperfect market setup (Hymer, 1976). Empirical
research undertaken by (Agarwal, 1980) and (Bandera & White, 1968) disapproved the FDI Capital
theory on three fronts. Firstly, human capital plays a major role in ironing out the dierences in
return on capital. Secondly, rate of return is an imperfect precondition for explaining prospective
FDI ows. irdly, capital ows may not necessarily occur from low-income countries to high
income countries.
4.1.2. FDI MARKET
(Bandera & White, 1968) tried to establish a link between eciency seeking FDI and size of market
as measured by a rm’s sales or GDP. Assuming prices as constant, an increase in market size will
generate more prots, thereby pushing the GDP per capita and economic welfare up. (Asiedu,
2006) and (Mughal & Akram, 2011) further improvised this theory. But it suers from universal
appeal and does hold true for FDI ows from some countries but not all countries. If FDI were to
exist based on perfectly competitive markets, then barriers to access to knowledge and trade etc.
would not exist. (Calvet 1981 & Kindleberger 1969). If political conditions are included, then FDI
theories can be defended better by theories of Imperfect markets.
4.2. IMPERFECT MARKETS
Imperfect competition is a market situation that assumes market ineciency and market failure
arising from informational asymmetries, government interference and entry and exit barriers. It
leads to collusion amongst rms and unethical business practices leading to above normal prots
and concentration of wealth. (Vasyechko, 2012).
(Kindleberger, 1969) argued that imperfections in a market were the outcome of violations of
features of Perfect competition. erefore, it involves strategic decision making on the part of rms
to undertake FDI knowing the risk factors. (Mankiw, 2009).
4.2.1. INTERNAL FINANCING
(Barlow & Wender, 1955) based their theory on the ‘Gambler’s Earnings theory.’ Initially,
multinational enterprises undertake minor investments overseas. As the subsidiary rm grows,
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reinvestment of its prots from operations in the host country becomes the source of nancing.
(Anderson, 1983) showed that growing cash ows act positively with investment outlays due to
lower costs of nancing. (Froot & Stein, 1991) also showed that multinationals prefer internal
nancing in future because external nancing is costly due to information asymmetries in capital
markets. Restrictions on prot repatriation by multinationals mandate reinvestment of their
earnings in the subsidiary.
4.2.2. INTERNALISATION/TRANSACTION COST
Hymer, Kindleberger and Caves gave valuable inputs to internalization concept, however, they only
re-worked their construct based upon the theory of rm (Coase, 1937). (Buckley & Casson, 1976)
in their book ‘e Future of Multinational Enterprises’ looked at rms as an alternate institution to
markets, hence market imperfections were the basis for internalisation. Internalisation of markets
refers to replacement of arm’s length contract relationship (open market transactions) by managerial
coordination within the rm. (Aliber, 1993) & (Kindleberger, 1984); both through (Rugman, 1986)
argued that Hymer was aware of the existence of the transaction cost angle though, at no point, he
mentioned it. Other researchers opined that it was born out of the (Coase, 1937) Transaction Cost
theor y.
Firms that spend on R&D develop new input processes. e higher cost of conducting market
transactions acts as barriers to sell inputs or transfer technology to unrelated rms. In such
scenarios rms internalize their transaction costs through backward or forward integration. A
major limitation of this theory was the risk of the host government intervention. However, Buckley
and Casson, both, were indierent to risks across industries. For example, utility services like
telecommunications, electricity, and water supply face greater risk of government intervention due
to fear of social considerations being sacriced.
e “Transaction Cost analysis” turned out to be a big success since it explained the tradeo between
the wholly owned enterprises (WOE) and equity joint ventures (EJVs) (Anderson & Gatignon,
1986; Hennart & Larimo, 1998; Chen & Hu, 2002).
4.2.3. UPPSALA SCHOOL/NORDIC INTERNATIONALIZATION MODEL
Researchers at the University of Uppsala, Sweden (Johanson & Wiedersheim Paul, 1975) &
(Johanson & Vahlne, 1977) propounded a FDI model known as “e Uppsala School Approach” or
the “Nordic Internationalization Model” or the “Scandinavian Stages Model.”
Internationalization in Swedish rms was dened as, “a journey of a rm’s movement of its operations
beyond the boundaries of home country”. (Dima, 2010). e process of internationalization
involved steady acquisition, integration, and use of business knowledge in foreign markets and
operations. (Johanson & Vahlne, 1977).
e Uppsala model focused on four core concepts i.e. knowledge of market conditions, market
commitment, current activities and uncertainty decisions. e two variables i.e. state factors
(comprising market knowledge and market commitment) and change factors (comprising
commitment and current activities) are the drivers for the model. (Masum & Fernandez, 2008)
diered that market knowledge is the driver for a rm’s ability to identify opportunities and challenges.
Market knowledge and market commitment combine to represent resource commitment.
Later, a new phenomenon “Psychic distance” was identied as the sum of factors (variances in
language, work culture, education, cultural and industrial development) preventing the ow of
information from and to the market”. (Johanson & Vahlne, 1977). Psychic distance gives priority to
countries with similar market conditions and cultural environments.
e model “focused on the gradual acquisition, integration and use of knowledge about foreign
markets and operations, and on the incrementally increasing commitments to foreign markets”
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(Johanson & Vahlne, 1977). It justied that business rms tend to intensify their commitment
towards foreign markets with a increase in experience (Hollensen, 2001). However, two major
weaknesses of the model are that absence of market knowledge prevents rms from investing
abroad and secondly resource commitments and uncertainty are inversely related. (Alserud &
Tykesson, 2011).
4.2.4. APPROPRIABILITY THEORY
Appropriability refers to excludability of technology or an asset from other rms as a means of
rewarding the innovator through protectionist measures (Magee, 1977). e theory is based on the
ability of multinational rms to utilize FDI to earn more revenues from their advanced technology
and competencies in ve stages i.e., discovering new product, product development, product
creation, market creation and appropriability.
e model focused on four variables i.e. knowledge of market, decision making in market, and
current activities. Innovations give rise to product acceptability in the market and standardized
production shis to developing countries. us, capital ows take place from developed to
developing countries. Despite the weaknesses the model laid the foundation for Internalization
theor y.
4.2.5. MONOPOLISTIC POWER ADVANTAGE
In 1960, Hymer’s Ph.D. dissertation titled “e International Operations of National Firms: A
Study of Direct Foreign Investment”, posed a fresh challenge on the international operations of
multinationals. He argued that the traditional international trade theories of the times i.e. “Global
Trade eory” or “Neoclassical Financial eory of Portfolio Flows”, presented by (Heckscher,
1919) & (Ohlin’s, 1933) “Factor Endowment eory”, to explain ows of capital between countries
were inadequate to explain the motives of multinational engagement in FDI.
Hymer assumed imperfect markets and information asymmetry as the theoretical basis and used
‘Industrial Organization approach’ to study FDI activities undertaken by multinationals (Parry,
1977). He propounded that capital ows arose from the variances in rates of return on investment
(interest rate) between dierent countries. e rate of return on investment in “capital-abundant”
countries or developed nations was less than that in developing nations without abundant capital
resources, leading to developed countries undertaking investment in developing countries.
(Kindleberger, 1969), expanded the work of Hymer to augment FDI in monopolistically
competitive markets. Pareto optimality cannot be achieved until constraints in the working of
perfect competition were removed. Market imperfections that encourage overseas investment
comprise asymmetric information about markets, cost leadership, superior technology, managerial
expertise, patents, barriers to entry of rms etc.
Later, (Pitelis, 1991) and (Cowling & Sugden, 1987) gave the ‘Monopolistic Advantage theory’ that
dealt with the lack of aggregate demand in monopolistic markets and its impact on the growth of
GDP. Once a rm established its superior knowledge, it used it overseas at no extra costs. It was
simply an extension of the work of Kindleberger and Hymer.
4.2.6. OLIGOPOLISTIC REACTION
(Knickerbocker, 1973) came up with his FDI theory based on Oligopolistic reactions arising from
market imperfections. Knickerbocker argued that there are three reasons that motivate rms to
undertake FDI i.e. location advantages, ownership advantages and imitative behaviour to match a
rival rm’s move (Head et al., 2008).
Since interdependence amongst oligopoly rms creates uncertainty in the production costs in the
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country to which they are currently exporting, they are vulnerable to the risk of being undercut by
rival rms switching from exporting to setting up a manufacturing base in the host country. us,
by replicating rival’s FDI, the rm can avoid being underpriced (Altomonte & Pennings, 2003).
If there are cost uncertainties in the host country then oligopolistic interdependence is held up,
but if certainty in costs prevails, then the incentive to produce overseas decreases with rival rms’
investment.
4.2.7. PRODUCT LIFE CYCLE
While (Joel Dean, 1950) originally introduced the ‘PLC theory’ the concept was never fully claried.
(Polli & Cook, 1969) Later, in 1851, Herbert Spencer introduced the thought of “survival of the
ttest” aer analyzing business rms in a free market. In 1966, Vernon propounded the theory
of “Product Life Cycle”. based on the US manufacturing rms. e theory suggested that rms
undertake FDI at a stage in the life cycle of products they have pioneered.
e argument was that FDI occurs as a response to the fear of losing markets as products matured
and the desire for cheaper factor endowments arising from competition (Latorre, 2008). (Vern on
1966, 1979) argued rising competitive conditions in home markets makes the demand elastic.
erefore, it is more remunerative to shi a rm’s production line to a less developed country. As
these countries expand enough for large-scale production, products can be exported to the original
domestic market. However, Vernon’s theory did not give any insight on whether FDI was more
ecient than exporting or licensing for expanding abroad.
Later, (Vernon, 1979) admittedthat the theoretical conditions had changed rapidly, andthat the
theory’s predictive capacity had diminished signicantlyas a result(Latorre, 2008). Nonetheless,
the “Product-cycle eory” continues to provide a framework withinwhich scholars like (Hirsch,
1976) and (Helpman et al., 1984 and 2004) investigated whether to follow the FDI or export route.
(Hakansson 1982; Hakansson & Snehota 1995; Blankenburg Holm, Eriksson & Johanson, 1999;
Blomstermo & Sharma, 2003) claimed that market knowledge can be established through networks
of interconnected commercial contacts.
(Knickerbocker, 1973) improved the PLC model by evaluating the divergence between a rm’s
actual choice of FDIs and the proposals derived under the PLC-model. Risk and uncertainty
variables for enterprises were identied as the key sources of variations.
4.2.8. INDUSTRIAL ORGANISATION APPROACH
(Hymer, 1976) work focused on international production in imperfectly competitive markets.
(Lemfalussy, 1961), (Kindleberger, 1969), (Knickerbocker, 1973), (Caves, 1974), (Dunning, 1974),
(Graham & Krugman, 1989) and (Cohen, 1975) supported this construct.
(Sodersten, 1970) also claimed that rms undertook FDI to maximize prot margins by exploiting
technology or organizational dominance. Simultaneously, (Robock & Simmond, 1983) contended
that having rm-specic advantages did not necessitate foreign investment because rms could
utilize their advantages through exporting or licensing as evident in the post war period from
1940s to 1960s.
e sources of market dominance i.e. technology patents, brand value, marketing and management
expertise, economies of scale, and low-cost nancing were dubbed rm-specic advantages by
Hymer and monopolistic advantages by Kindleberger. e fear of technology being hacked by
competitors is a big source of concern for businesses (Sodersten & Reed, 1994).
e theory proposes that advantages are eciently conveyed from one unit of a commercial entity
to another unit of that rm, regardless of whether they are shared in a country or in more than
one country (Caves, 1971). However, Hymer failed to present a complete explanation for FDI in
his thesis. Consequently, when, and why FDI takes place was attempted by Vernon’s (1966) PLC
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theory, the eclectic approach by (Dunning, 1977, 1979 and 1988) and the Internalization theory by
(Buckley and Casson, 1976).
4.2.9. FINANCIAL FLOWS
(Aliber, 1970) explained FDI in terms of purchasing power of a currency. e strength of the various
currencies in the host and source countries was the basis for the investment hypothesis. Weaker
currencies had a greater potential to attract FDI due to variations in market capitalization rates as
compared to stronger investing country currencies.
Countries with high entry barriers attract FDI because MNEs bypass trade obstacles this way.
Despite Aliber’s contention that it was an alternate hypothesis and hence a valid basis for direct
venture in developed countries, it does not appear to be particularly applicable to less developed
countries where markets are imperfect, run-on baby capital, and tightly controlled foreign currency
(Lall, 1978). (Caves, 1988), (Froot & Stein, 1991), and (De Mello, 1997) are among the other notable
works in the same class.
Even though Aliber’s idea was widely accepted, neither it explained why two developed countries
with equal parity currencies would invest nor why MNCs from emerging countries (with weaker
currencies) speculate in rich countries (stronger currency).
4.2.10. FDI INTERNATIONAL TRADE
(Adam Smith, 1776) and David Ricardo (1817) developed a theory that claried international trade
ows. But in modern times, foreign direct investment has overtaken international trade as the most
important factor (Graham, 1996; and Helpman & others, 2003).
(Adam Smith, 1776) formulated his thesis based on total cost disparities, or ‘Absolute advantage.’
It was like mercantilist notions that ignored the role of FDI in production. Ricardo developed his
theory on ‘comparative advantage,’ which broadened Smith’s idea. Since it assumed only labour as
one factor of production i.e. labour, dierences in production technology explained the costs that
motivated trade.
However, the classical theories failed to explain the global movement of capital since they assumed
immobility of labour across the borders. (Morgan & Katsikeas, 1997).
4.2.11. INTERNATIONAL TRADE & INVESTMENT
Hirsch (1976) analyzed FDI using industrial organization and location theory models. He focused
on two characteristics: (a) a prot-maximizing rm choosing to serve an overseas market, and (b)
the conditions under which a rm enters an overseas market, either through exports or as a local
manufacturer due to direct investment.
Assuming the transport and marketing costs to be zero, multinational FDI can only take place in
an environment that accepts rm-specic productive output determinants on one hand, and rising
information, communications, and transaction costs as economic distance increases on the other.
4.2.12. MARGINAL INDUSTRIAL EXPANSION
In his work ‘Foreign Direct Investment’, ( Kojima, 1978) propounded the marginal industrial
expansion theory. He analyzed “Japanese-type Direct Investment” and “American-type Direct
Investment”. ( Kojima, 1973, 1975 and 1985) equated the trade theories with direct investment
theories. He argued that FDI was necessary for factor markets to become more competitive and
ecient globally.
e theory suered from a major limitation i.e., it was relevant to Japan’s FDI situation during the
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1970s. (Geroski, 1979) criticized it to be an immature model for explaining the FDI activities of
multinational rms. None of the works cited above consider the modes of FDI i.e., either vertical
or horizontal. (Helpman, 1984) and (Helpman et.al., 2003 and 2004), linked international trade to
vertical and horizontal FDI.
4.2.13. INTERNATIONAL TRADE EQUILIBRIUM
Helpman (1984), developed an international trade equilibrium model which combined the elements
of ownership and locations with reference to vertically integrated rms dealing with production
of a single product. e theory tested rms that enjoyed a single production facility, located far
away from headquarters. It assumed that zero taris and transport costs negated the incentive for a
vertically integrated rm to open multiple production facilities.
(Helpman et al., 2004) studied the choice faced by a rm either to export or form a horizontal FDI.
(Helpman, Melitz & Yeaple, 2003) developed a model of international trade in which rms chose
either to cater to the domestic market or exported or engaged themselves in FDI to serve markets
overseas. ey argued that every industry had heterogeneous features; therefore, the rms diered
in their output. e results supported the hypothesis that overseas markets are better catered to by
exports relative to FDI sales when trade asymmetries are less, or economies of scale are more.
4.2.14. FDI MODE
(Nocke & Yeaple, 2004) studied the underlying dierences amongst countries, thereby giving rise to
vertical form of FDI. Greeneld investment is establishing new plants in a foreign market, whereas
Browneld investment entails entering a foreign market through mergers and acquisitions.
It was asserted that if the two FDI modes were indeed perfect substitutes then all the rms would
be indierent between the two modes leading to no variation in the mode of choices across rms
within the same industry. However, government policies too view them as separate in many host
countries.
Mergers and acquisitions permit heterogeneous organizations to take complementary factor
endowments in their rm-specic assets (Maksimovic & Phillips, 2001). Greeneld investments,
on the other hand, entail the development of a production capacity plant in a foreign country to
allow a company to deploy its assets there. Assuming, ceteris paribus, that there were no trade
barriers and zero trading costs between any two countries. (Nocke & Yeaple, 2004) projected that
dierences in factor costs among countries lead to Greeneld FDI (from a high-cost to a low-cost
country) and cross-border acquisitions (from one country to the other). Cross-country diversion
would lead to Greeneld FDI (from one country to the other), while cross-country dierences
in entrepreneurial competencies give rise to mergers and acquisitions (from each country to the
other). is model showcased two-way FDI ows.
Dierences in production costs were the cause for undertaking greeneld FDI and cross-border
acquisitions by multinational enterprises. Hence, rms undertaking greeneld investments were
more ecient than those going in for acquisition and mergers. In the long run as production cost
dierentials level out all FDI takes the form of cross-border acquisitions.
However, the hypothesis failed to explain the enormous expansion of FDI from less developed host
countries to developed countries.
4.2.15. SMALL SCALE TECHNOLOGY
(Wells, 1983) propounded the theory based on three characteristics of outward FDI –
(i) Multinational rms in developing countries form joint ventures than those from
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industrialized countries.
(ii) Developing-country investments are concentrated in another developing-country or its
vicinity.
(iii) A host country’s economic development is typically lower than that of the home country.
However, rather than interpreting the expanding FDI ows from developing countries to developed
countries, this study could only explain the likely characteristics of outbound FDI from developing
countries in the early stages (Lindsey, 1984).
4.2.16. INSTITUTIONAL FITNESS
(Wilhems & Witter, 1988) argued that a country’s ability to attract, absorb, and retain foreign direct
investment should match the expectations of the prospective investors.
e government’s legal and regulatory framework over-ruled determinants like market size, low
labour costs etc. (Popovici & Calin, 2012, 2013). A government’s active role is envisaged through
the four pillars i.e., government, markets, education system and socio-cultural environment.
(Wilhems & Witter, 1998). While (Assuncao, 2011) suggested that governments decide the rule of
FDI ows, (Benassy-Quere et al., 2007) highlighted the dominant role of institutions in attracting
FDI. (Popovici & Calin, 2014) added that government tness included economic freedom, minimal
trade and exchange rate interventions, low level of corruption, and greater transparency level.
Unfavourable economic policies discourage investors from investing in such countries for fear of
losing returns on investments (Wilhelms & Witter, 1998).
A country’s competitive advantage in the international FDI markets is determined by its institutions,
policies, and implementations rather than by general inexible characteristics. (Wilhelms & Witter,
1998).
4.2.17. FSACSA MATRIX
(Rugman, 2007) developed the FSA-CSA matrix as model paradigm based on a manager-oriented
approach. His ‘internalization hypothesis,’ centered on a single rm’s rm-specic advantages (FSA)
and location in the form of country specic benets, as consideration for FDI (Narula & Verbeke,
2015). e concept was based on the behaviour of a rm that decides to go in for an external market
to take advantage of its specic competencies. (Rugman, 2007).
FSA comprise unique factor endowment like competencies in innovation or marketing and
managerial abilities. Transactional advantages refer to the capabilities of business rms to
economize on business transaction costs because of multinational coordination and control of
assets. (Rugman & Verbeke, 1992; Buckley & Casson, 1976; Dunning & Rugman, 1985; Rugman
& Rugman, 1985). e CSA are country-specic benets such as factor endowments, demand for
local products, and favorable politico-economic rules. (Rugman & Collinson, 2008; Rugman &
Verbeke, 1990; Verbeke, 2013) (Dunning & Lundan, 2008; Hennart, 2009). (Rugman & Collinson,
2008; Rugman & Verbeke, 1990; Verbeke, 2013). (Rugman, 1981, 1988) and (Rugman, Lecraw &
Booth, 1985), provided the conceptual framework for the FSA/CSA matrix.
e matrix analyzed the situation between strong and weak options against its competitors. e
entire CSA/FSA paradigm considers demand side resource endowments and supply side potential
development of the rm. (Rugman and Verbeke, 2008; Rugman, 2010). However, the CSA/FSA
theory was overshadowed by Dunning’s OLI paradigm which appeared at the same time.
4.2.18. NEW TRADE CONCEPT
(Krugman, 1979) built an industrial-organization model of non-comparative trade. A critical
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factor as envisaged in the new trade theory of FDI was the existence of economies of scale and
networking eects that occur across industries. e existence of these economies of scale and
network competencies outweighed the theory of Comparative advantage of Ricardo.
Large scale economies in production, operations and marketing create barriers for new rms to
enter markets, since they cannot compete with existing rms due to competitive advantages in
technology, large scale production and supplier networks enjoyed by incumbent rms. (Markusen,
1984) and (Helpman, 1984) extended the ‘New Trade theory’ model to include FDI and multinational
rms.
e theoretical construct says that foreign trade may not necessarily arise out of international
dierences in factor resources or technology but as a means of exploiting economies of scale and
expanding the markets.
4.2.19. KNOWLEDGE CAPITAL MODEL
Markusen incorporated a third factor into his two previous models to postulate the FDI theory.
(Markusen, 1996, 1997). While the rst two earlier assumptions created a framework for vertical
fragmentation of the production function the third assumption created economies of scale at
individual rm level. Firms are motivated to integrate horizontally and undertake production of
similar goods and services at multiple locations. e model framework included knowledge, as an
asset that is available to geographically separate production units, requiring a skilled manpower
and is highly mobile (Markusen & Maskus, 2002).
ough, an improvement over other FDI theories like ‘transaction-cost approach’ to multinational
enterprises, it assumed a model both horizontally and vertically, hence dicult to work on. Another
assumption that the national market for goods is segmented and transport costs use unskilled
labour is also a weakness. (Geishecker, 2004), criticized the non-existence of institutional and risk
determinants in the model, that aect the distribution of FDI. Subsequent theoretical research
focused on horizontal models because they are more prevalent globally.
4.2.20. NEW ECONOMIC GEOGRAPHY
Krugman (1991) new theory was an improvisation over (Heckscher-Ohlin, Helpman & Krugman,
1985). Since certain geographical areas benet from rst mover advantages over others due to natural
resource endowments, the concept of distance, space, transport costs etc. gained momentum.
(Dixit & Stiglitz, 1977) assumed monopolistically competitive markets where generality is
sacriced for tractability. e new model helped in better understanding of ‘International Trade
theory’, thereby surpassing its most intelligent ancestor (Ohlin, 1933). Other scholars argue that the
relationship between intermediary producers and consumers (upstream and downstream) is the
focus of ‘New Economic Geography’ theory (Hildebrandt & Worz, 2004). e theory emphasized
the importance of economic clusters as a region capable of attracting new enterprises and skilled
labour by leveraging economies of scale (Antonescu, 2011).
(Kottaridi & omakos, 2007), examined the validity of the theory but couldn’t discover any
indication of the “core-periphery” pattern in FDI stocks per capita, thereby negating its universality.
4.2.21. ECLECTIC PARADIGM
In the year 1979, Dunning came up with the idea of ownership structures, location advantages and
internalisation advantages. e views were borne out of dissatisfaction arising from the existing
production theories of Hymer-Kindleberger approach, Product Life cycle theory and all the
internalisation theories given by (Heckscher’s, 1919) and (Ohlin’s, 1933) Factor endowment theory,
(Hymer’s, 1960) Monopolistic advantage theory, (C o as e’s , 1937) Transaction cost theory, (Buckley
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and Casson’s, 1976) Internalization theory.
e theory revealed host country economic policies, economic fundamentals, business strategy
to undertake investment in foreign lands. In 1993 he added a fourth condition to the earlier three
given in eclectic paradigm given in 1979 i.e. the belief by a business rm that its overseas production
plan is consistent with long term management strategy.
Critics pointed out that the theory suered from too many variables and its operationality was
confusing. However, as of today, all over the world, Dunning’s (OLI) Eclectic Paradigm is regarded
as the basis of all classic theories to explain a multinational rm’s internationalization activities.
4.2.22. RECENT MODELS/FRAMEWORKS
Newly developed models and frameworks that are being or could be used in future research on FDI
inows and outows are:
4.2.22.1. LINKAGE, LEVERAGE, LEARNING LLL MODEL
e LLL framework,(Meier, 1984, Meyer, 2003)extended the Dunning’s Ownership, Location, and
Internalisation (OLI) framework to link it with strategic asset-seeking FDI. e LLL framework
explained how emerging multinational enterprises develop globalization, leapfrogging internalizing
patterns strategy in pursuit of new capabilities than FDI meant to exploit existing capabilities.
(Narula, 2006)argued that the doctrines of the LLL model are more convincing when compared to
Dunning’s OLI paradigm.
4.2.22.2. SPRINGBOARD THEORY
(Luo & Tung, 2007) explained the reasons for acquiring critical resources and reducing vulnerability
to institutions and markets at home, motivations, and processes behind outward FDI. e global
expansion factors are assumed to act as ‘Springboard’ since they are critical to acquisition of
resources for competition in their home markets with foreign MNEs from developed markets.
‘Springboards’ are a tool based on amalgamation, versatility, and adjustment advantages that
distinguish springboard emerging enterprises from more established multinational ones from
developed countries (Luo & Tung, 2010).
4.2.22.3. CAGE DISTANCE FRAMEWORK
Internalisation amongst emerging multinational enterprises is widely recognized in CAGE
framework developed by (Ghemawat, 2001, 2003). CAGE represents (Cultural, Administrative,
Geographic, Economic distance) framework for calculating FDI distance. Recently many
authors have used the CAGE framework in their empirical research to analyse distance factors as
determinants of FDI by multinational enterprises.
4.2.22.4. CPP MODEL
(Paul & Sanchez-Morcillo, 2019) presented the Conservative, Predictable and Pacemaker (CPP)
model, for analyzing the internationalization of rms. e pattern and location of FDI in a single
country context or cross-country context can be categorized as Conservative, Predictable and
Pacemakers. An advantage of this model is that it can measure global competitiveness.
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5. FINDINGS
Globalization has been a key driver for the emergence of the worldwide knowledge economy as
an alternative to manufacturing that has steered this transition. (Teagarden & Schotter, 2013). e
process of internationalization and globalization are the key to value addition to international rms.
Foreign direct investment data shows that there has been a quantum leap in conceptual renewal and
research publications in the last 20 years. is can be judged from the fact that out of a population
of 85 in our sample, 20 empirical papers were published between 1950-1974, 30 were published
between 1975- 1999, and 35 from 2000 to 2020.
Despite new frameworks and constructs (Dunning’s, 1980) OLI paradigm continues to be a dominant
theory. Ownership of assets such as technology, innovation, management skills etc. are intangible
specics to a rm. Similarly, the optimal decision for internalization of market transactions gives
rise to transaction costs that may be inherently unobservable. us, empirical research irrefutably
cannot conrm the internalization hypothesis.
Advances in empirical research techniques, new theoretical underpinnings, improved availability
of accurate data and evolution in internalisation features; all have contributed to FDI study. e
race to attract FDI is an existential struggle between developed and developing countries. A host
country’ policy framework, economic environment and ‘ease of doing business’ inuence the
outcome and ow of capital.
6. LIMITATIONS
is study suers from the possible exclusion of some research on FDI as it is highly diverse. New
theory development should incorporate changes and consider potential processes, patterns and
problems associated with the MNEs and FDI. Emerging changes are driven by developments at
the national level, international level and at MNE level. Over a period, (Dunning’s, 1980) OLI
paradigm has been recycled thereby restricting the emergence of new theories.
ere exist gaps between country level outcomes and rm-level outcomes. Research on the
outcomes of technology transfer for FDI intensity is missing to the extent to which the existing
literature is arbitrary and fragmented. Researchers should switch over from current cross-sectional
studies to longitudinal FDI patterns. Another area that needs attention is the existence of sub-
contractual relationships linking business groups and modes of FDI entry.
Only a limited number of studies have investigated how entry modes inuence the evolution of
post FDI strategy. (Anderson, Forsgren & Holm, 2002). Another gap in the existing literature is lack
of comparative analysis between developed countries and developing countries with similar and
dissimilar characteristics. Most study models rest on the idea that FDI is guided towards markets
having homogenous features. Today, the heterogenous emerging markets with similar or dissimilar
features oer lots of opportunities.
ere is also a need to develop a propensity score to measure outward FDI. (Hayakawa Matsura,
Motohashi & Obashi, 2013). Multiple regression techniques with control should be replaced by
structural equation modelling techniques. Continued pursuit of FDI research can provide better
insights for decision makers.
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7. CONCLUSION
It can be said that researchers have used a plethora of statistical methods, samples, and models in
their empirical studies. Institutional factors versus socio-political factors both appear signicant.
Since the global economic environment is dynamic the range of independent variables that aect
FDI has changed in the last ve decades. Recent literature shows that emerging economies with
better economic prospects, oer a greater potential to attract FDI, although, determinants are only
rm-level considerations, but critical is host nation’s inuence.
Future scholarly work should cover corporate determinants of FDI like labour disputes, role
of diaspora, labour mobility among expatriates in emerging economies. In conclusion, future
evolution of economic theories such as capitalism and their correlation to FDI should also form
part of future scholarly work.
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