Theories of FDI

Agarwal(1980):1.Theories assuming perfect markets

2.Theories assuming imperfect markets

3.Other theories

4.Theories based on other variables

Theories assuming perfect markets

1.The differential rates of return hypothesis

2.The portfolio diversification hypothesis

3.The market size hypothesis

Theories assuming imperfect markets

1.The industrial organization hypothesis

2.The internalization hypothesis

3.The location hypothesis

4.The eclectic theory

5.The product life cycle hypothesis

6.The oligopolistic reactions hypothesis

Other theories

1.The internal financing hypothesis

2.The currency areas hypothesis

(the effect of the exchange rate)

3.The hypothesis of diversification with barriers to international capital flows

4.The Kojima hypothesis

Theories based on other variables

1.Political risk

2.Country risk

3.Tax policies

4.Trade barriers

5.Government regulations

6.Stragegic and long-term factors

The differential rates of return hypothesis

1. 定義 :from low rate of return to high rate of return (mr=mc)

2. 條件： risk neutrality (substitute)

3. 實證： not support (measures); observation different

4.質疑 : other reasons ;capital or physical capital (ex. Human)

The portfolio diversification hypothesis

1:定義 : rate of return and risk (diversification)

2:實證 : weak support (measure problem-ante or post, re

port or actual) 3:優缺點 : (1)generalized (2)plasusible explanation (3) include ri

sk

(1)why FDI (2)FDI or portfolio investment

The market size hypothesis

1:定義： the volume of FDI in a host country depends on its market size (sales: economies of scale)

2: 理論 :neoclassical domestic investment theory

3:實證 : supported

4:疑問 : measures problem

The industrial Organization hypothesis

1:定義 :firm-specific advantages > disadvantages

Lall and Streeten (1977) (intangible assets difficult to sell)

(1)Capital (2)management (3)technology(4)Marketing (5)access to raw materials(6) Economies of scale(7) bargaining and political power

優點 :explain why firms invest in foreign country

缺點 :why choose A not B

The internalization hypothesis

1:定義 : from market transactions to internal transactions (mr = mc)

2:原因 :market failure or imperfection or inefficiency

3:優點 : time lags, bargaining, uncertainty and cost

4:缺點 : no empirical evident

hyp cannot test directly

The location Hypothesis

原因 : factors immobility (e.g. labor or material)

實證 :+ /- (incidence or severity/ union)

The eclectic theory

Dunning= O+L+I

Conditions: ownership, Internalization, location advantages

If ownership no Internalization==license

if ownership, Internalization no location= export

If ownership, Internalization, location = FDI

The production life cycle hypothesis

3 stages: initial production, maturity, standardization (products innovation, export, FDI)

問題 :USA no longer products innovator

The Oligopolistic reactions hypothesis

原因 : maintain market shares, status quo, equilibrium

問題 :why initial investment

The internal financing hypothesis

意義 :the utilizaiton of profit generated by a subsidiary to finance the expansion of FDI by an MNC in the country where the subsidiary operates. (internal financing < external)

理由 :1) capital market restriction, 2)inefficiency

實證 : support / not support

The currency areas hypothesis

意義 :strong currency country tend to invest abroad, sources of FDI

weak currency country recipients of FDI

The real exchange rate

升值 : 不利出口 , FDI 取代出口貶值 : 資產具吸引力 (e.g. USA)

The Hyp of diversification

1: barrier or cost

2: MNC opportunity

The Kojima Hyp

1:trade-orientated

2:anti-trade-orientated