Introduction focusing more to reap the benefits and maximizing

 

Introduction

After years of restricting foreign direct investment (FDI),
governments in developing countries are now focusing to attract external
investors, spending large sums of money to attract foreign companies to their
country. In Brazil, for example, competition to attract FDI is estimated to
have cost around US$300,000 per job created. 1

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These changes are valid because multinational corporations
(MNCs) are thought to bring not just employment and capital, but also new
skills and technological skill for domestic firms. Such advantage to the
company as well as the country is to leak out from MNC subsidiaries to domestic
firms as ‘spillovers’. But the evidence to support the positive spill over
effects expected by both policy makers and theorists is inconclusive. 2 This
sums up that we need to reconsider the situations in which FDI can and does
provide spill over, and the policy continues the practices that encourage such
effects.

For example, information technology MNCs in India, such as
Texas Instruments and Oracle, send their human resources to the United States
for training and enhancement of skills in research and development. Domestic
firms then use these skills when those workers change their work place. 3

The OLI MODEL APPROACH:

The key propositions
of the Electric Paradigm:

1. Ownership specific advantages (O):
2. Location advantages (L)
3. Internalisation advantages (I)

Internationalisation theory focuses on imperfection in
intermediate product markets. Two main kinds of product market are knowledge
flow linking Research and Development (R&D)
to production and flows of component and raw materials. Internationalisation
occurs only when the company is focusing more to reap the benefits and maximizing
the profits by lowering the cost. In Today’s growing economy every company aims
at this and these leads to Foreign Direct Investment.

Foreign Direct Investment can be in two forms namely Resource seeking investment and Market seeking investment.

1. Ownership:

There are many forms of ownership advantages (O) that the
multinational can transfer within the multinational enterprise located at
various parts of the company at relatable low cost. There are few assets owned
by the corporation which can add as an added benefit over other competitors. The
firms base on its competitive factors the internationalization process.
Some of them are monopolist advantages that the company in its home
country has in form of privileged, like scarce natural resources, patent
rights, brand, innovation activities, technology, and knowledge. These benefits
must have some variant and particular and give to the international firm
the choice to compete internationally profitably, moreover to be transferable
between countries and within the firm.

2. Location:

The firm must utilise some foreign factors (L) in connection
with its rooted national core competences, or as Dunning defined ownership
advantages. The location advantages of various countries are keys in
determining which will become host countries for the multinational firms.
Definitively the attractiveness of various location factors can change
over period of time so that a host country can to some extent alter its
competitive advantage as a location for foreign direct investment. We
can differentiate the factors including all of them in several groups, there
are namely in three types of location factors based on:

Economic
advantages: Consist of the factors of production, transport and
telecommunications costs, scope and size of the market, etc…
Political
advantages: Include the domestic and international specific government
policies that influence inwards Foreign Direct Investment flows,
intra-firm trade and international production.
Social,
cultural advantages: include psychic logical gap between the home
and host country, language and cultural diversities, general attitude
towards foreigner ant the overall position towards free enterprise.

3. Internationalisation:

The internalisation advantages (I) opens up as answer to
market failure, as for example which regards that buyers and sellers have
asymmetric information, what creates uncertainty around the quality of the
transactions and the proper price. Dunning explains that “There should be
an internalisation advantage in the firm believes that its ownership
advantages are maximum exploited internally rather than directly
through spot markets or offered to other firms through some contractual
arrangement such as licensing, the establishment of a joint venture or
management contracting.”