: Focuses on reducing transaction costs. Firms internalize activities across borders when the costs of using external markets (e.g., enforcing contracts or protecting IP) are too high.
The relationship between FDI and economic growth remains a subject of intense debate, often referred to as "empirical ambiguity". Foreign Direct Investment: Theory, Evidence and...
: Evidence for "horizontal spillovers" (benefits to local competitors) is often weak, as multinationals actively guard their technology. However, "backward linkages"—where foreign firms upgrade the capabilities of their local suppliers—show more robust positive effects. : Focuses on reducing transaction costs
In practice, the landscape for FDI is rapidly shifting due to geopolitical and technological changes. : Evidence for "horizontal spillovers" (benefits to local
: Raymond Vernon argued that products go through stages—innovation, maturation, and standardization. As a product matures and production becomes standardized, firms move facilities to lower-cost countries to stay competitive. 2. Empirical Evidence on Economic Impact
: John Dunning’s framework suggests FDI occurs when three conditions align: O wnership (proprietary assets), L ocation (host country benefits like low costs or market size), and Internalization (the benefit of keeping operations "in-house" rather than contracting out).
: Some research indicates that FDI can "crowd out" domestic investment or lead to a "hollowing out" of local industries if domestic firms cannot compete with efficient multinationals. 3. Practice, Trends, and Challenges