Overview of Main FDI Theories

1
Overview of Main FDI Theories
1.1 FDI theories from a historical perspective
In the nineteenth century, classical economic theories (e.g. those of Adam

Smith, David Ricardo) regarded international trade as a motor of economic
internationalization and integration. Internationalization through trade
was considered an essential catalyst for generating domestic wealth, espe-
cially when a country sought specialization in those economic activities
where it had comparative advantages. Private companies had become the
principal economic agents of the capitalist system in place, and leading
scholars in countries with open economies like England favoured deregula-
tion and liberalization in all possible spheres of economic life so that trade
relations could be expanded with other countries. Unlike the ‘intervention-
ists’ in France, the liberal ‘free traders’ in England and the United States
emphasized the importance of a ‘natural order of things’ pushing for a lean
State that would interfere as little as possible in the ‘invisible’ hand of the
market, which would always find its own equilibrium.1
International trade was initially promoted by mainly Dutch, English and
French companies in overseas colonies, where they controlled sales outlets,
and warehousing and assembly facilities. These companies had also estab-
lished some manufacturing capabilities in distant markets, but it took
almost a century – towards the mid-1950s – before transnational corpora-
tions (TNCs) in the modern sense started appearing in the United States,
with full-fledged production networks spanning the globe. The position of
uncontested leadership acquired by some of these corporations enabled
them to commit part of their human and financial resources to productive
investments in the growing markets of Latin America and Europe, where
they benefited from postwar reconstruction efforts. These extensive
internationalization activities of US corporations like Coca-Cola, Dupont,
General Electric, General Motors, IBM and Xerox provided academicians
and analysts in the United States and Europe with the empirical basis for
identifying explanatory variables of FDI decisions and behaviour patterns.
19
P. Fischer, Foreign Direct Investment in Russia
© Paul Fischer 2000
20 FDI Theories and Policy Implications
It was at that time that western scholars began to devise comprehensive

theories for explaining the origin and causes of FDI, as well as its impact on
the economies of host and home countries.
Theories and concepts of foreign investment have been adjusted and
constantly refined since the 1960s, but they have not yet been able to
provide foolproof analytical tools to governments seeking to anticipate FDI
company behaviour ex-ante and to effectively influence international
movements of capital, technology and know-how. Certain paradigms,
however, contain interesting findings, which can be of assistance in formu-
lating and implementing strategic FDI policies for economic growth and
industrial development. Broad empirical research also offers valuable
insights into shifts of global FDI patterns and motivations of foreign
investors in response to economic policies and incentives in host countries.
For several decades, scholars and policy-makers in transition countries
were practically excluded from the public debate on global business inte-
gration and the role of FDI in national economies. Systemic and ideological
differences did not permit free research and policy suggestions on this
issue. The theories described in this chapter aim to help readers from Russia
and other transition economies understand the historical stages of business
transnationalization through FDI in western and developing countries, and
its impact on national economies and world trade. They serve as a basis for
further analysis of inbound and outbound FDI and to understand why
certain nations and sectors remain more competitive than others.
Future research and observation will need to be focused on companies
from western countries, which are major capital generators for global
investment.2 In the coming years, decision-makers in transition countries
will need to draw on international findings to build their political and legal
frameworks for attracting FDI, which is becoming a scarce but indispens-
able factor for economic development and technology transfer. Strategic
FDI policies should one day enable local manufacturers to gain ownership-
specific advantages3 and become themselves foreign investors, thus
pushing transition countries further up the investment development path.4
Transition countries like Poland, Hungary and the Czech Republic are
already reaping the fruit of carefully designed FDI policies, which are also
the result of in-depth analysis of prevailing theories and experiences made
in other FDI recipient countries (e.g. China, Spain, United Kingdom).
A number of disciplines have attempted to provide a theoretical frame-
work for explaining the transnationalization of business and foreign invest-
ment behaviour of corporations: economics, international business
strategy, marketing, and even political science and sociology. Each of these
subject areas offers an understanding of the nature and conditions of over-
seas investment and capital commitment, from their specific disciplinary
angle. For example, ‘product policy’ within the functional business area of
marketing provides the basis for the international product cycle paradigm.5

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Overview of Main FDI Theories

1.1 FDI theories from a historical perspective

In the nineteenth century, classical economic theories (e.g. those of Adam

It was at that time that western scholars began to devise comprehensive

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