Chapter 2 MNC theoriesFDI Outflows1982-19986-5Figure 6.1Growth of FDI, World Trade and World Output6-6Figure 6.2What should a MNC theory tell us?MotivationPatternOutlineCapital arbitrageMonopolistic AdvantageOligopolistic reactionInternalization TheoryEclectic theoryThe Product Life CycleDiscussion: new development and explanation FDI vs Portfolio Investment6-3Flow vs Stock of FDIFlow: Amount of FDI over a period of time (one year).Stock: Total accumulated value of foreign owned assets at a given point in time.6-4Two Forms of FDIHorizontal Direct Investmentin the same industryVertical Direct InvestmentBackward & forward6-172-1 Capital arbitrage BackgroundProfitability / Interest rate Capital-abundantcapital-scarce countries Large financial MNCsPortfolio investment and FDIsame directiondeficiency2-2 Monopolistic Advantage Stephen H.Hymer International Operations of National Firms: A Study of Direct Foreign InvestmentBackground2-2 Monopolistic Advantage Technological Advantagemanagerial skills Input Advantage Market Advantage2-2 Monopolistic Advantage FDI vs Portfolio investment Market imperfection2-2 Deficiency FDI launched by developing countriesFDI vs export or licensingMore competitive industrieslocation2-3 Oligopolistic reaction F.T.Knichkerbocker1970s 2-4 Internalization Theory1937 Coarse GovernanceOpportunismTransaction-specific InvestmentSite specificity, physical asset specificity, human asset specificityMarket G Intermediate G Hierarchical G transaction cost administration cost 2-4 Internalization TheoryPeter.J.Buckley Mark.C.Casson 1976 semi finished product-informationnon-rivalrous, non-excludable consumptionZero marginal costinformation paradoxunable to codify 2-4 Internalization TheoryOpportunism; information productAppraisaldiscussion 2-5 Eclectic theory John Harry Dunning: Location Specific AdvantageOSA+IA+LSA-？OSA+IA-？OSA-？AppraisalDiscussion2-6 The Product Life Cycle Raymond Vernon 1966 New Product Stage Mature P S Standardized P S appraisaldeficiency2-7 Other factorsExchange rateEconomic growthInvestment policyA Decision FrameworkHow high are How high are transportation costs and transportation costs and tariffs?tariffs?Is know-how amenable to Is know-how amenable to licensing?licensing?Is tight control over foreign Is tight control over foreign operation required?operation required?Can know-how be protected Can know-how be protected by licensing contractby licensing contract? ?Then licenseThen licenseExportExportFDIFDIFDIFDIFDIFDINoHighYesYesLowNoYesNoGeneral impressionnew development non-equity linkage Externalize not internalizediscussionChina got the biggest share in world FDI inflow in 2002, why?development trend of FDI p203 Honda in North Americateamwork