This document discusses different theories of foreign direct investment (FDI). It begins by covering Stephen Hymer's theory of imperfect markets, which views multinational corporations as oligopolistic firms that seek to establish control and maximize profits by taking advantage of market imperfections in host countries. It then briefly mentions the product life cycle theory. The majority of the document is spent explaining the internalization approach theory and eclectic theory of FDI, which incorporate factors of ownership advantages, locational advantages, and internalization to explain why firms undertake FDI. It concludes by listing some common objectives of companies engaging in FDI, such as reducing costs, gaining economies of scale, and knowledge sharing.

1. Topic i:
P R E S E N T E D B Y :
M A M T A B H O L A
( A S S I S T A N T P R O F E S S O R P G D E P A R T M E N T O F C O M M E R C E A N D
M A N A G E M E N T A R Y A C O L L E G E , L U D H I A N A )

2. COMMERCIAL
BORROWINGS
OFFICIAL
FOREIGN AID
FOREIGN
PORTFOLIO
INVESTMENT
FOREIGN DIRECT
INVESTMENT
LOANSGRANTS

3. Meaning:
FDI occurs when an investor based in one
country acquires assets in another
country with the aim of managing the
asset.

5. 1. THEORY OF IMPERFECT MARKETS
• Propounded by Stephen Hymer in 1976
• Who believed that MNC’s were the typical oligopolistic firms.
• Their main objective is to establish control and maximize profits.
• He was of the opinion that MNC’s enjoy certain technological and organizational benefits
over its competitors in the host country.
• But along with the competitive advantages they also face certain barriers i.e. linguistic,
legal and cultural & demographic barriers etc.
• But they can make good use of market imperfections, many of which are created by the
host country such as higher customs duty, protected market etc.
• However this theory has been criticized on the grounds that it leaves many other motives
for FDI unexplained.

6. 2. PRODUCT LIFE CYCLE THEORY

7. 3. INTERNALIZATION APPROACH THEORY
• Technical know how (patents, trademarks and knowledge are
considered as intermediate goods.)
• Market failures / inefficiencies
• Benefits of owning productive processes, patents, technology and
management skills.
• Alan Rugman explains that there may be times where no market is
available to sell an intermediate product like information, so the
firm may create an internal market by setting up subsidiaries
abroad to cover the lack of external market.

8. 4. ECLECTIC THEORY OF
FDI
OWNERSHIP
ADVANTAGES
LOCATIONAL
ADVANTAGES
INTERNATIONAL
ADVANTAGES
• SPECIAL
KNOWLEDGE
• ECONOMIES OF
SCALE
• MONOPOLISTIC
ADVANTAGES
• NATURAL
RESOURCES
• UNDERSTANDING
OF
DEMOGRAPHICS
• OTHER POLITICAL
AND LEGAL
FACTORS
• TARIFF AND
NON TARIFF
BARRIERS

9. O + L = ARMS LENGTH DEALING
E.G. EXPORTS, LICENCING
O + L + I = FDI

10. OBJECTIVES OF FDI
• To reduce cost of production
• To have diversified sourcing facility
• To gain economies of scale
• To promote knowledge sharing
• To retain domestic customers

17. THANK
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