Foreign - Direct Investment: Theory, Evidence And...

: Focuses on reducing transaction costs. Firms internalize activities across borders when the costs of using external markets (e.g., enforcing contracts or protecting IP) are too high.

: Developed by Hymer, this posits that firms must possess unique "firm-specific advantages" (e.g., proprietary technology, brand power) to overcome the "liability of foreignness"—the inherent disadvantages of operating in a distant, unfamiliar environment. Foreign Direct Investment: Theory, Evidence and...

Theories explaining why firms choose to invest directly in foreign markets rather than exporting or licensing can be categorized into four main perspectives: : Focuses on reducing transaction costs

The relationship between FDI and economic growth remains a subject of intense debate, often referred to as "empirical ambiguity". Theories explaining why firms choose to invest directly

: Evidence for "horizontal spillovers" (benefits to local competitors) is often weak, as multinationals actively guard their technology. However, "backward linkages"—where foreign firms upgrade the capabilities of their local suppliers—show more robust positive effects.

: Some research indicates that FDI can "crowd out" domestic investment or lead to a "hollowing out" of local industries if domestic firms cannot compete with efficient multinationals. 3. Practice, Trends, and Challenges

: John Dunning’s framework suggests FDI occurs when three conditions align: O wnership (proprietary assets), L ocation (host country benefits like low costs or market size), and Internalization (the benefit of keeping operations "in-house" rather than contracting out).