FDI(Foreign Direct Investment) is the investment of one business entity or an individual from one country to another country. FDI is the formal and effective way to invest in another country. FDI is an effective method of driving the economy across the world. Through the FDI one country can execute its economic activities across national boundaries. Management thinkers explained how the business organizations implemented The FDI in their theories.
FDI (Foreign Direct Investment) is effectively described by the following theories
Market imperfection theory
This theory of FDI explains how the factors of an imperfect market are responsible for FDI in another country. This is due to the factors of production may be cheaper in one country whereas the same factors may be costlier in another country.
The business organization strives to relocate its business to another country through FDI to take benefits of cheaper resources or cheaper factors of production. The market imperfection theory describes how these imperfections in the market are responsible for moving the business beyond the wrong boundaries of the nation through FDI.
Following all the key factors of market imperfections, the next range
Monopoly power
This factor indicates the capability of an organization to acquire almost all of the market and create a monopoly in the market. the organization may be the government or private. Government organizations may have the right to avoid any new business organization entering the market.
For example
Railway services are provided in India by Indian Railways only. No other private organization has the right to enter this service. But in the future, it may be possible.
Government involvement
Sometimes government policies such as tax policy, monetary policy, fiscal policies Regulations, and subsidies can influence the business strategies when a business organization prepares to implement for a specific purpose.
For example
The pricing policy of any business organization during implementation cannot be effective when governments suddenly change fiscal policies or tax policies. If the taxes on the product or the material used by the business organization increase then the business organization cannot implement the pricing policies effectively.
Shortage of resources
Resources may not be sufficient or costlier than international markets. cheaper resources may attract any business organization to establish their business in other countries. FDI is an effective way to start running business activities in the global market. resources may consist of the availability of raw materials, Human resources, Finance, machinery, etc.
Example
India is the only country where every manufacturing business organization desires to establish their setup. Due to cheaper labor and other resources global businesses are attracted to this country. Toyota the Japanese company manufactures their maximum vehicles in India.
Product Life Cycle Theory
Raymond Vernon proposed this theory. He presented the various stages of the business organization while expanding the business across the globe through FDI. Following are the key stages that describe how businesses invest abroad based on the product life cycle.
Introduction
At this stage of the FDI product life cycle, the company focuses on establishing production or manufacturing either at home or abroad. It focuses on innovation and product differentiation. Innovation and product differentiation help organizations for competitive advantage.
Growth stage
This stage describes the export and establishment of business activities abroad through FDI. It allows a business organization to establish its position in the foreign market by selling its products. This stage of FDI product life cycle theory focuses on expanding the business activities such as manufacturing, acquiring or accessing resources, developing technology, adopting innovation, etc. to strengthen the roots in foreign markets.
Maturity Stage
The maturity stage of the FDI product life cycle theory describes the stage of the business when the business organization tries to reevaluate the strategy to know the necessity of change. It also focuses on how the efficiency of the business organizations can be increased and reduce the cost incurred on various activities.
Decline Stage
The decline stage of the FDI product lifecycle theory indicates the necessity of the business organization to divest and change its strategy in the foreign market. It has been done through detailed reevaluation and analysis of available opportunities.
Network Theory
This theory of FTI describes the importance of relationships and Social networks of business organizations in the world. The network and relationships of business organizations Provide several opportunities to expand their business activities across the globe. It enables the business organization to access the resources make advancements in technology and take a competitive advantage. Social networks and relationships provide the necessary information required to expand the business and for competitive advantage.
Eclectic Paradigm or OLI Framework
This theory describes the various factors next FDI more favorable for business organizations. it describes the ownership advantage of the firm which is investing through FDI, the location advantage of the host country, and internationalization which makes FDI more effective and favorable than any other way of investing abroad.
The ownership advantage of the company enables it to decide what strategy they have to implement in foreign markets. Various functional areas of the business organizations such as human resource management, marketing management, and financial management implemented successfully with power or authority in foreign markets using ownership advantage.
Location advantage enables organizations to establish manufacturing facilities near the market and near the place from where all resources are easily available.