IntroductionAfter years of restricting foreign direct investment (FDI),governments in developing countries are now focusing to attract externalinvestors, spending large sums of money to attract foreign companies to theircountry.
In Brazil, for example, competition to attract FDI is estimated tohave cost around US$300,000 per job created. 1These changes are valid because multinational corporations(MNCs) are thought to bring not just employment and capital, but also newskills and technological skill for domestic firms. Such advantage to thecompany as well as the country is to leak out from MNC subsidiaries to domesticfirms as ‘spillovers’. But the evidence to support the positive spill overeffects expected by both policy makers and theorists is inconclusive. 2 Thissums up that we need to reconsider the situations in which FDI can and doesprovide spill over, and the policy continues the practices that encourage sucheffects.For example, information technology MNCs in India, such asTexas Instruments and Oracle, send their human resources to the United Statesfor training and enhancement of skills in research and development.
Domesticfirms then use these skills when those workers change their work place. 3The OLI MODEL APPROACH:The key propositionsof the Electric Paradigm:1. Ownership specific advantages (O):2. Location advantages (L)3. Internalisation advantages (I)Internationalisation theory focuses on imperfection inintermediate product markets. Two main kinds of product market are knowledgeflow linking Research and Development (R&D)to production and flows of component and raw materials. Internationalisationoccurs only when the company is focusing more to reap the benefits and maximizingthe profits by lowering the cost. In Today’s growing economy every company aimsat 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 themultinational can transfer within the multinational enterprise located atvarious parts of the company at relatable low cost. There are few assets ownedby the corporation which can add as an added benefit over other competitors. Thefirms base on its competitive factors the internationalization process.Some of them are monopolist advantages that the company in its homecountry has in form of privileged, like scarce natural resources, patentrights, brand, innovation activities, technology, and knowledge. These benefitsmust have some variant and particular and give to the international firmthe choice to compete internationally profitably, moreover to be transferablebetween countries and within the firm.
2. Location:The firm must utilise some foreign factors (L) in connectionwith its rooted national core competences, or as Dunning defined ownershipadvantages. The location advantages of various countries are keys indetermining which will become host countries for the multinational firms.Definitively the attractiveness of various location factors can changeover period of time so that a host country can to some extent alter itscompetitive advantage as a location for foreign direct investment.
Wecan differentiate the factors including all of them in several groups, thereare 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 tomarket failure, as for example which regards that buyers and sellers haveasymmetric information, what creates uncertainty around the quality of thetransactions and the proper price. Dunning explains that “There should bean internalisation advantage in the firm believes that its ownershipadvantages are maximum exploited internally rather than directlythrough spot markets or offered to other firms through some contractualarrangement such as licensing, the establishment of a joint venture ormanagement contracting.”