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DETERMINANTS OF FOREIGN DIRECT INVESTMENT – A TALE OF NINE THEORETICAL MODELS
Author(s) -
Faeth Isabel
Publication year - 2009
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/j.1467-6419.2008.00560.x
Subject(s) - foreign direct investment , economics , multinational corporation , diversification (marketing strategy) , market size , variety (cybernetics) , international trade , international economics , macroeconomics , business , finance , marketing , artificial intelligence , computer science
Abstract This paper presents a review of nine theoretical models of foreign direct investment (FDI). Discussed are early studies of determinants of FDI (1) as well as determinants of FDI based on the neoclassical trade theory (2), ownership advantages (3), aggregate variables (4), the ownership, location and internalization advantage framework (5), horizontal and vertical FDI models (6), the knowledge‐capital model (7), diversified FDI and risk diversification models (8) and policy variables (9). From each of the nine theories, the relevant determinants of FDI are derived. Empirical studies indicate the importance of these determinants in the real world. The paper shows that there is not one single theory of FDI, but a variety of theoretical models attempting to explain FDI and the location decision of multinational firms. Therefore, any analysis of determinants of FDI should not be based on a single theoretical model. Instead, FDI should be explained more broadly by a combination of factors from a variety of theoretical models such as ownership advantages or agglomeration economics, market size and characteristics, cost factors, transport costs, protection, risk factors and policy variables.