Question

Explain the different theories of FDI.

Answer 1

1. Monopoly Theory of Advantage:This applies to all intangible human knowledge assets plus the company's advanced technology that offers a competitive advantage. It allows the company to create unique differentiation of the brand. The marginal cost of exporting the higher information resource to foreign countries will be significantly low compared to local companies that need to spend the full cost of creating those resources. Empirically, the monopoly advantage implied horizontal foreign direct investment through knowledge-intensive industries such as petroleum referencing, pharmaceuticals, chemicals, transportation equipment from US firms.

2. Oligopoly Theory of Advantage:By maintaining these entry barriers, the big firms intend to retain their monopoly power. By allowing the market vacuum, they don't want new competitors to enter. Therefore, they want to optimize the company's growth. The relative growth rate of a company determines its relative size and market power. They tend to capture and expand market share in the global market through vertical direct foreign investment. The oligopoly theory therefore explains a multinational company's defensive investment behaviour. In short, the theory of monopoly advantage explains a company's first investment course in a foreign country. The oligopoly theory explains the defensive investment behavior to retain the company's monopoly power in terms of oligopolistic reaction.

3. Product Life Cycle Model: The Product Life Cycle Model (PLCM) of Vermon (197l) can explain trade as well as FDI. The PLCM can explain a company's shift from exporting to FDI by adding a time dimension to the monopoly advantage theory. Originally a company once innovating a service, it produces at home, enjoying its monopoly advantage in the export market, while specializing and exporting. Once the brand is standardized in its growth product stage, the business may have a propensity to spend and sell internationally to maintain its monopoly power. Home country rivals may also follow in investing in the oligopolistic market of the same foreign country.