ECONOMIC & LEGAL ASPECTS
OF FOREIGN DIRECT INVESTMENT
FDI THEORIES
1. Vu Chi Loc, International Investment,
2012, Hanoi National University Publishing
house
2. Imad A. Moosa, "Foreign Direct
Investment: Theory, Evidence and Practice“,
2002, Palgrave.
3. World Investment Report 1998, Trends and
Determinants
4. Charles W.L.Hill, International business:
Competing in the Global Marketplace, 2007,
McGraw - Hill Irwin
THEORIES OF FOREIGN
DIRECT INVESTMENT
1. Theories assuming perfect markets
2. Theories assuming imperfect
markets
3. Other theories of foreign direct
investment
Theories assuming perfect markets:
The differential rates of return hypothesis (1)
The portfolio diversification hypothesis (2)
The market size hypothesis (3)
Theories assuming imperfect markets:
The industrial organization hypothesis
The internalization hypothesis
The location hypothesis
The eclectic theory (Eclectic/OLI paradigm)
The product life cycle hypothesis
The oligopolistic reactions hypothesis
1. The Product Life Cycle Theory
(Raymon Vernon, 1966)
* Situation:
* Cycle:
-> Initiation (Introduction)
 Exponential growth (Spread)
 Slowdown (Maturation)
 Decline (Senescence)
The Product Life Cycle Hypothesis
3 stages:
(1) Initial production (price)  Improvement
(defined demand)
(2) Maturity and Export  FDI
(3) Standardization  Import
• Initial production (price)  Improvement
Stage 1 (defined demand)
Stage 2
Stage 3
• Maturity and Export  FDI
• Standardization  Import
1. The first stage
- The initial production takes place at
home, close to the customers
- The demand for the new product is
price inelastic
- As time passed, the product is
improved, based on feedback from
customers
2. The second stage
- Maturity & export of the product to
countries having the next-highest level of
income as demand emerges in these
developed countries
- As demand continues to grow &
competition emerges, the innovation firm
resort to FDI in these countries.
- The home countries is a net exporter of
the product, while foreign countries are net
importers
3. The third stage
- A complete standardization of the
product and its production process
- Price competition from other producers
forces the innovating firms to invest in
developing countries, seeking cost
advantages
- The home country starts to import the
product from both domestic and foreign
firms based in foreign countries.
2. The Eclectic theory - J. Dunning
(1977, 1978, 1988)
* Develop:
- Industrial organization hypothesis
- Internalization hypothesis
- Location hypothesis
* Questions:
- Demand for a particular commodity in a
particular country
- export/expanding into a new line of business
within the home country/ indulging in portfolio
investment/ licensing its technology to foreign
firms
Three conditions:
+ Ownership advantages
+ Internalization advantages
+ Location advantages
Ownership advantages
Imad A. Moosa (2002): Ownership of some intangible
assets (particular technology, monopoly power and size,
access to raw materials, and access to cheap finance)
Dunning (2001): Ownership of, or access to a set of
income-generating assets, or from their ability to
coordinate these assets with other assets across national
boundaries in a way that benefits them relative to their
competitors, or potential competitors
Internalization advantages
- It must be more beneficial for the
firm to use these advantages rather
than to sell or lease them
- Expansion within the firm or selling
the rights to the means of expansion to
other firms
Location
advantages
- It must be more
profitable to use
these advantage
in combination
with at least some
factor inputs
located abroad
3. The Kojima Hypothesis
(1973, 1975, 1985)
- Complementarity of FDI (capital,
technology, managerial skills) and trade
- FDI: + trade – orientated (excess
demand for import & an excess supply for
export) & promote trade & a beneficial
industrial restructuring in both countries
+ anti-trade- orientated : opposite
effects to those of the first kind &
promotes unfavourable restructuring
The effects of FDI on the home
countries and the host countries