Theories of FDI Essay Example | Topics and Well Written Essays - 1250 words

Theories of FDI - Essay ExampleAccording to US, FDI is the ownership or manoeuver of 10 percent or more of an enterprises voting securities, or the equivalent interest in an unincorporated business (Pustay & Griffin, 2006) Foreign groom Investment can either be inwards or outwards. In the inwards flow, is where the contradictoryers take control of the host countrys assets (Razin & Sadka, 2001). Governments of third world countries usually encourage such investment since it is beneficial for the country as higher currencies come in the host country. They usually give tax holidays, subsidies, low interest loans, grants, lifting of accepted restrictions etc. to strange investors to encourage them further. In the outwards flows, the residents of the host country take control of the foreign assets. This can happen through either purchasing available resources in the foreign country or by making investments in new buildings, lands and equipment in a foreign country or by leading a joi nt venture with a local partner in a foreign country (Razin, 2002).3. Why to opt for going abroad - An investment abroad can be to pull ahead profits found due to lower be, capitalize on the market opportunity or put down the knowledge of host countries operations to reduce costs and increase efficiency.John Dunning, professor at the University of Reading (UK) and Rutgers University (US) provided the eclectic theory of FDI which is also known as OLI paradigm. This paradigm is a combination of three concepts which helps to answer or so of the questions asked in the preceding section.1. Ownership AdvantagesThe ownership advantage addresses the WHY question of reason for going abroad. A firm trying to go abroad either sees a market opportunity where it can make headway profits or it sees a chance for it establish itself and survive in the long run. It gives firm particular advantages in either a costs cuts or higher revenues. China has emerged as a really lucrative place for in vestment due to lower manufacturing costs. Many of the industry giants including Sony, Honda, Apple etc. endure started to manufacture their products in China after staring in Japan.Although the foreign firm (or individual) would be alien with limited knowledge about the internal systems of the host country, the benefits resulting from the FDI will be far greater than the costs incurred to gain local market knowledge and to communicate and operate at a long distance. (Enderwick, 2005) (Dunning, 1993) (Dunning, Kogut & Blomstrom, 1990