这是本人写的一篇有关FDI的文章，希望大家多多指正。谢谢了。

Introduction:

 

The second half of the twentieth century saw processes of globalization impacting on people’s lives across the world: from cosmopolitan urban centers to rural outposts; from advanced industrial complexes to craft workshops. Increasing interconnectedness and interdependence between people, organizations and governments have been facilitated by improvements in technology. Globalization represents deeper integration. At the heart of this deeper integration is foreign direct investment (FDI). The result of FDI is a multinational enterprise (MNE) that is company that owns or controls significant activities in at least two countries. (Winters. L. A. 1991) Why firms may choose the MNE option rather than exporting and/or leasing production rights to foreign firms and what type of circumstances could influence changes in the popularity of MNE host countries like Brazil, China and India, are two important questions.

In this essay, firstly Dunning’s eclectic theory of FDI will be used to answer the first question that is why firms may choose the MNE potion rather than exporting and/or leasing production rights to foreign firms. Then, the second question that is what type of circumstances could influence changes in the popularity of MNE host countries will be answered. Finally, a conclusion will be given. 

                                                                                              

 

Main body:

Definition of FDI

The foreign direct investment is the purchase and control of an entity in one country by residents of another. (Winters. L. A. 1991) It is used to describe transnational capital transactions made by companies from one country to another country. The transactions entail the purchase of production resources or companies or stakes in them. (Jepma C. J. & Rhoen A. P. 1996)

Dunning’s eclectic theory

The basic answer for the first question is that the profits from FDI exceed other forms of expansion. However, why does this happen? To answer this, we will use the Dunning’s eclectic theory. In the eclectic theory, there are three groups of ‘advantages’ that can determine the propensity of a firm to prefer FDI. These three advantages are ownership advantages, internalization advantages and locational advantages. (Gray P. H. 1999)

FDI Route

:

If these three advantages are met, a firm will choose to expand by FDI and an MNE is born. (Winters. L. A. 1991)

The Foreign Involvement Decision

                                               Locational advantage

Abroad                         Home  

Internalisation

Advantage

Yes                          MNE                         export

No                        license, abroad               license, home

(Winters. L. A. 1991)                                                  

Initially suppose there is a demand for automobiles in China and a specified firm possess ownership advantage in the production of automobiles. If there is no internalization gain, the firm may license its ownership advantage to another firm. Moreover, if locational factors indicate expansion is best achieved in China, it will license a firm in China; if there is a locational advantage at home, it will license a firm at home. If, on the other hand, there are internalization gains, the firm will undertake the expansion itself; if locational factors favor home expansion it expands at home and exports to China, whereas if it favors China economic environment, FDI and MNE will take place in China.   

 

Evaluation of Three advantages:

FDI occurs if three advantages are met. Therefore, it is vital for them to evaluate whether they possess these three advantages.

Ownership advantages:

Ownership advantages are advantages specific to the expanding firm relative to its competitors overseas, which stem from various market imperfections. (Winters. L. A. 1991) They could derive from the size of firm and its reputation relative to some existing firm in the foreign market. (Gray P. H. 1999) Dunning argues that a multinational firm must possess some competitive advantages (CA) in the production to compensate for additional costs when undertaking direct investment.          

For example, if the firms have a technological advantage, they may have ownership advantages since they could lower production costs relative to rivals or even allow the introduction of new products. This means they have high skilled labour, human capital and research and development (R&D), which confirm that the firms can achieve economics of scale in production.

 

Moreover, the large and diversified firms may have CA in innovation and certainly have more resources. Also these companies are able to raise money more cheaply than others, they may spend lots of money in R&D, thus achieve economic of scale in the production.

 

Furthermore, some companies may have CA because of their government’s strategic trade policies. They may derive advantages in other markets through their government’s political influence and subsidies.

 

Empirical evidence: Wolf (1977) compared three modes of expansion－diversification at home, exporting and FDI－and related them, across US industries, to average firm size and technological level( the proportion of scientists and engineers in total employment). (Winters. L. A. 1991) He found domestic diversification more closely related to size, (180 words) and foreign involvement more closely related to technology. Within the latter, however, industries with large firms showed more bias towards FDI than others. Hence, while technological leadership helps foreign involvement (ownership advantages), large firm sizes appear to relate to multi-plant expansion at home and abroad. This will be determined by the locational advantages.

 

Locational advantage:

 

The location factors complement the focus in traditional trade models on relative factor endowments. They derive from the mainstream of international economics, essential reflecting comparative advantage or distortions of it. (Winters. L. A. 1991) A number of studies reported that market size and growth played an important role in attracting FDI inflows into the country and it is particularly true when foreign investors with new technology and new management and marketing skills were primarily attracted by foreign country’s huge potential market and geared mainly towards long-term strategic considerations. Moreover, if the government frequently offers a low barrier to international commerce relatively to other countries, it will attract more FDI.

 

Moreover, cheap labour used to be cited as the key factor attracting manufacturing operations to have FDI in foreign countries. Empirical research also found relative low labour costs to be statistically significant, particularly for FDI in labour-intensive industries.

 

 

Apart from these two advantages, there are some other factors to be considered. For example, if the foreign countries have a good ‘country risk rating, they will attract more FDI since the companies wish to invest safely. Jun and Singh (1996) & Gastanaga (1998) examined the link between various political variables and foreign investment inflows. They found that that lower corruption and nationalisation risk levels and better contract enforcement are associated with higher FDI inflows. (European Journal of Political Economy 27, 2007)

 

Moreover, if the countries have a good policy stability and exchange rate stability which has been contributed to its recent economic growth, they will receive more FDI. According to Yuqing Xing (2006), he examined the hypothesis in the context of Japanese FDI for nine Chinese manufacturing sectors from 1981 to 2002; the empirical results show that the real exchange rate between the Yuan and Yen is one of the  significant variables determining Japanese direct investment in China. The devaluation of the Yuan substantially enhanced inflows of  direct investment from Japan, and the response of FDI to the change of the real exchange rate is elastic. (China Economic Review 17, 2006)

 

Tariff is another important reason for local foreign manufacture since a foreign affiliate would have the locational advantage of the tariff as well as the indigenous firm. The tariff would have the advantage of giving the MNE protection against other MNE which did not establish an affiliate in the foreign country. There could be gains to the first to establish production of a particular product-line in a country because, if there were no indigenous competitor, tariffs and quotas could be used to the exclusive advantage of the foreign corporation. (Gray P. H. 1999)

 

Internalisation advantage:

Internalisation gains arise if market imperfection prevents the effective sale of ownership advantages to other firms, thus expanding them by their own power. (Winters. L. A. 1991) The internalisation advantage derives from the advantage of operating within a hierarchy as opposed to the use of arm’s-length markets. It is a subset of “managerial efficiency advantage”. (Gray P. H. 1999) This advantage always links with technology-gap or product-cycle theory. The firms that have high technology may not want to license other firms or export their goods since their rivals may reduce imitation gap. Therefore, internalisation gains arise if these firms want to protect their ‘secrets’, thus expanding the imitation gap.  

 

For example, internalisation gains arise if a home firm does not want to risk defection by a licensee that might compromise its market power. Since poor production may damage all the users of that mark, thus lose its brand loyalty. Also providing technological advantage to your rivals may improve their sales and ultimately overtake you. Moreover, they arise if there are high costs involved in transmitting information or negotiating contracts, such as legal charges are very high, this makes difficult to transfer some things to other firms.

 

Furthermore, they arise in the presence of opportunism and uncertainty. For example, if you have a good idea, but it is difficult for others to believe whether it will work until afterwards. Therefore, this problem may blights technological innovations and the uncertainty is likely to reduce your offer price.

 

In addition, they arise if the firms want to reduce the taxes or tariffs by manipulating the prices of intra-firm sales of services. This is known as transfer pricing. Although it is illegal in nearly all countries, it  is probably widespread because it is almost impossible for the authorities to know what the ‘correct’ price should be. This is especially so for transfers of technical or managerial services from headquarter to subsidiaries. (Gray P. H. 1999) 

 

Empirical evidence: The prototypical Japanese MNE grew by enjoying a strong advantage in internalization (managerial efficiency) and a supportive macro-organizational strategy (Dunning, 1992) to enable it to overcome a relative weakness in O-advantage and a small market that limited potential economies of scale, scope and specialization. (Gray P. H. 1999)

 

Determinants in the popularity of MNE host countries

In order to answer the second question that is what type of circumstances could influence changes in the popularity of MNE host countries, I will list some the factors that can determine in the popularity of MNE host countries. If the factors have a positive relationship with the FDI, the host countries will be more popular when they achieve these factors. Most of these factors have a link with the locational advantages.

According to Leonard K. Cheng & Yum K. Kwan (2000), they suggested that there are four factors can affect the FDI. (Journal of International Economics 51, 2000)                                  

  l       Size of a region’s market as approximated by regional income has a positive effect on the FDI. According to Head K. & Mayer T., a 10% increase in the market potential term raises the chance of a country being chosen by 3% to 11%. ( Review of Economics and Statistics, 2004)

l       Good infrastructure as measured by the density of all roads has a positive effect on the FDI

l       Wage cost has a negative effect on the FDI

l       Education has a positive effect but not statistically significant on the FDI.

 

On the European Journal of Political Economy (2007), Busse M. & Hefeker C. suggested other three effect on the FDI.

l       The institutional certainty has a positive effect on the FDI.

l       The intellectual property protection has a positive effect on the FDI

l       The corruption has a negative effect on the FDI.

 

Agglomeration effect is another important factor. Some literatures have demonstrated a statistical tendency of firms to make the same location decision as previous firms with similar attributes (such as industry and national origin). (Review of economics and Statistics, 2004)

 

Apart from these factors, we can also find that the extent of  countries’ openness and the tax policy can also affect the popularity of the MNE host countries. The countries’ openness is the primary factor. Since if the countries do not introduce economic liberalization policies, there will be no FDI in the countries. For example, before 1979, Chinese government did not allow economic liberalization and did not trade with most of countries. Therefore, the China’s FDI stock was zero percent of GDP. However, in the 1979, China’s Communist Party rulers introduced economic liberalization policies. Therefore, inward FDI stock has rapidly risen from virtually nil in 1980 to 35.6 percent of GDP in 2003. (Morrison J. 2006)

 

Conclusion

As explained above, the three advantages that are ownership advantage, locational advantage and internalization advantage are the main issues that influence the FDI route. Large and high technological companies will follow the FDI route if they want to keep their technology ‘secrets’ and favor foreign country’s economic environment. The FDI occurs when three advantages are met. If a country wants to keep its popularity in MNE, it should keep these factors, as explained above, in the right direction.   

 

References

Krugman, P. R. & Obstfeld M., ‘International Economics: Theory and Policy,’ Addison-Wesley, 2005.

Winters, L. A. , ‘International Economic 4^th edition’  Routledge, 1991, P217-P233

Jepma, C. J. & Rhoen A. P. ‘International Trade,’ Addison-Wesley, 1996, P42-P68

Gray, H. P., ‘Global Economic Involvement,’ Copenhagen Business School Press, 1999, P37-P65

Morrison, J. ‘The International Business Environment,’ Palgrave Macmillan, 2006, P135-P156

Busse, M. & Hefeker, C. (2007) ‘Political risk, institutions and foreign direct investment.’  European Journal of Political Economy

Xing, Y. (2006) ‘Why is China so attractive for FDI? The role of exchange rates.’ China Economic Review 

Head, K. & Mayer, T. (2004) ‘Market potential and the location of Japanese investment in the EU.’ Review of Economics and Statistics

Cheng, L.K. & Kwan, Y.K. (2000) ‘What are the determinants of the location of foreign direct investment? The Chinese experience.’ Jounal of International Economics