Since 1960 many economists (from Grazia Ietto-Gillies [3] prior Stephen Hymer’s [4]) have created theories regarding direct investment, which explained the causes of FDI and reasons for TNC by neoclassical economics based on macro economic principles. These theories were based on the classical theory of trade. In this theory the motive for trade was a result of the difference in the costs of production of goods between two countries. The main motive for a company’s foreign activity in these theories is low cost of production. Joe S. Bain explained the internationalization challenge with help three main principles: absolute cost advantages, product differentiation advantages and economies of scale. Moreover, the neoclassical theories were created
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This theory proposed approaches international investment from a different and more company-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between simple capital investment and direct investment. The difference between the two, which will become the base of his whole theoretical structure, is the issue of control. It meaning that with direct investment companies is able to obtain a greater level of control than with portfolio investment. Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements can't explain international production. Furthermore, he clarifies that FDI isn't obligation a movement of funds from a home country to a host country. It's concentrated on particular industries within many countries. In contrast, if interest rates were the key motive for international investment, FDI would was concentrated many industries within fewer countries. Other interesting observation made by Hymer went against what was maintained by the neoclassical theories: FDI isn't limited to investment of excess profits abroad. In fact, FDI may be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods. Hymer to propose the three key determinants …show more content…
Further studies attempted to explain how companies could monetize these advantages in the form of licenses.
Removal of conflicts: conflict arises if a company is already operating in foreign market or looking to increase its operations within the same market. He proposes that the resolution for this barrier arose in the form of collusion, sharing the market with rivals or attempting to acquire a direct control of production. However, it must be taken into account that a reduction in conflict through obtaining of control of operations will increase the market imperfections.
Propensity to formulate an internationalization strategy to mitigate risk: companies are characterized with 3 levels of decision-making: the day to day supervision, management decision coordination and long term strategy planning and decision making. The extent to which a company may reduce risk depends on how well a company can formulate an internationalization strategy taking these levels of decision into
This theory proposed approaches international investment from a different and more company-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between simple capital investment and direct investment. The difference between the two, which will become the base of his whole theoretical structure, is the issue of control. It meaning that with direct investment companies is able to obtain a greater level of control than with portfolio investment. Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements can't explain international production. Furthermore, he clarifies that FDI isn't obligation a movement of funds from a home country to a host country. It's concentrated on particular industries within many countries. In contrast, if interest rates were the key motive for international investment, FDI would was concentrated many industries within fewer countries. Other interesting observation made by Hymer went against what was maintained by the neoclassical theories: FDI isn't limited to investment of excess profits abroad. In fact, FDI may be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods. Hymer to propose the three key determinants …show more content…
Further studies attempted to explain how companies could monetize these advantages in the form of licenses.
Removal of conflicts: conflict arises if a company is already operating in foreign market or looking to increase its operations within the same market. He proposes that the resolution for this barrier arose in the form of collusion, sharing the market with rivals or attempting to acquire a direct control of production. However, it must be taken into account that a reduction in conflict through obtaining of control of operations will increase the market imperfections.
Propensity to formulate an internationalization strategy to mitigate risk: companies are characterized with 3 levels of decision-making: the day to day supervision, management decision coordination and long term strategy planning and decision making. The extent to which a company may reduce risk depends on how well a company can formulate an internationalization strategy taking these levels of decision into