The content of this document are notes derived from academic writings, namely, journal articles and textbooks. Covers key thinkers on the topic of the variable I (internalisation) from the OLI paradigm in relation to FDI and the global business environment. More specifically it covers the following...
Hymers Seminal work:
Concerned mainly with establishing what foreign direct investment was, saw that investments
differed in terms of motivation.
His demarcation criterion between FDI and portfolio investment is control.
At the time of his writing the neoclassical theory which was based on interest rates differentials was
prevalent however, he felt that this theory could not possibly explain foreign direct investment and
its motivations.
A powerful criticism put forward by Hymer of the neoclassical approach considers that the theory
tends to direct focus on particular industries across various countries rather than on a particular
country across various industries.
There are two strands to the growth of firms through direct investment, the search for markets
which implies FDI is demand led and the second strand emphasises the role of internal finance
meaning profits generated from foreign subsidiaries are retained and reinvested back into the host
country (potentially neoclassical reasoning for FDI – also rejected by Hymer).
Hymers gives two determinants as motivations for firms to directly invest abroad:
1. The existence of specific advantages that can be exploited in the host country/abroad
2. Removal of conflicts in foreign markets
(He also notes there is a minor third reason for FDI mainly applicable to large firms, diversification
which helps spread risk for the firm)
When expansion takes place directly across national frontiers we have the multinational company
(Letto-Gillies, 2012:55)
Hymer concentrates on the advantages of vertical integration when considering why a company
would be interested in expanding into other countries through direct production and coordination
(ID)
Letto-Gilles (2012) Chapter 8: (89-99)
Internalisation is referred by Rugman as ‘The modern theory of the multinational enter-prise’
(Rugman, 1982: 9).
There are in general two forms of market imperfections:
1. Structural - market shares and power that each firm command
2. Transactional - Imperfection in knowledge such as asymmetry access to information.
Transactional referring to imperfections of knowledge, so asymmetry of information
between buyer and seller. These imperfections lead to specific costs as well as other costs
e.g. legal to carry out contracts
Coase on why firms grow - the fact that the firm and the production process within it are
organized via planning and direction rather than via the price mechanism (D:90)
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