3.2 Determinants of FDI in the OLI Framework
The OLI-paradigm is a basic framework by Dunning (1976, 1981) for analyzing the determinants or FDI. OLI refers to three different types of determinants that explain FDI: Ownership advantages (O), Location advantages (L) and Internalization advantages (I).
Ownership advantages derive from knowledge-based assets so they are internal factors for the firm (Neuhaus, 2006). These structural market imperfections allow firms to have a competitive advantage and thus to have market power via firm-specific assets. Among those assets are patents, differentiated product, superior labour skills, experience, and reputation. Such structural imperfections are necessary because operating abroad puts the foreign …show more content…
Shamsuddin (1994) shows that the main determinants of FDI are market factors such the size and growth of the market, cost factors such as the availability of labour or low labour costs and the investment climate as measured by for instance foreign debt. Shamsuddin (1994) indicates that the most relevant determinant of FDI is the market factors and more particularly the market size. Market size is typically measured as the host country’s GDP (Bevan & Estrin, 2000). In addition, Neuhaus (2006) suggests that a large market size benefits the investing firms since a large market size increases the number of potential buyers which in turn will raise the expected profits. Bevan and Estrin (2000) demonstrated that FDI inflows into transition countries are positively and significantly affected by the market size. On the contrary, Kinoshita and Campos (2003) find that market size is insignificant for FDI whereas the findings of Garibaldi et al. (2002) suggest a negative effect of market size on FDI inflows into transition …show more content…
This distance is generally described by the so called gravity models. The main result from the gravity models is that trade flows between two nations depend negatively on distance mostly because of high transportation costs and it is because of these costs that setting up a production plant are more attractive than the export of goods and services. (Neuhaus, 2006). Therefore, According to Slaveski and Nedanovski (2002), the lack of proximity to and the lack of adjacency to developed European markets is a significant factor that contributes to low levels of FDI inflows in Albania. The distance between developed markets and the host country appears to be the most determining factor that contributes to low FDI in the case of Albania. This is why the most FDI inflows to Albania come mainly from Greece and Italy. The limited proximity of Albania to developed market economies does not allow for technological benefits to take
The OLI-paradigm is a basic framework by Dunning (1976, 1981) for analyzing the determinants or FDI. OLI refers to three different types of determinants that explain FDI: Ownership advantages (O), Location advantages (L) and Internalization advantages (I).
Ownership advantages derive from knowledge-based assets so they are internal factors for the firm (Neuhaus, 2006). These structural market imperfections allow firms to have a competitive advantage and thus to have market power via firm-specific assets. Among those assets are patents, differentiated product, superior labour skills, experience, and reputation. Such structural imperfections are necessary because operating abroad puts the foreign …show more content…
Shamsuddin (1994) shows that the main determinants of FDI are market factors such the size and growth of the market, cost factors such as the availability of labour or low labour costs and the investment climate as measured by for instance foreign debt. Shamsuddin (1994) indicates that the most relevant determinant of FDI is the market factors and more particularly the market size. Market size is typically measured as the host country’s GDP (Bevan & Estrin, 2000). In addition, Neuhaus (2006) suggests that a large market size benefits the investing firms since a large market size increases the number of potential buyers which in turn will raise the expected profits. Bevan and Estrin (2000) demonstrated that FDI inflows into transition countries are positively and significantly affected by the market size. On the contrary, Kinoshita and Campos (2003) find that market size is insignificant for FDI whereas the findings of Garibaldi et al. (2002) suggest a negative effect of market size on FDI inflows into transition …show more content…
This distance is generally described by the so called gravity models. The main result from the gravity models is that trade flows between two nations depend negatively on distance mostly because of high transportation costs and it is because of these costs that setting up a production plant are more attractive than the export of goods and services. (Neuhaus, 2006). Therefore, According to Slaveski and Nedanovski (2002), the lack of proximity to and the lack of adjacency to developed European markets is a significant factor that contributes to low levels of FDI inflows in Albania. The distance between developed markets and the host country appears to be the most determining factor that contributes to low FDI in the case of Albania. This is why the most FDI inflows to Albania come mainly from Greece and Italy. The limited proximity of Albania to developed market economies does not allow for technological benefits to take