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The author would like to thank Donald J. Mathieson for useful comments.
Reported foreign direct investment inflows, IMF Balance of Payments Statistics. Recent studies describing the evolution of foreign direct investment include Thomsen (1988), De Anne and Thomsen (1988 and 1989), and Lipsey (1989).
Foreign direct instrument inflows in net debtor developing countries increased gradually from $2 billion in 1970 to $15 billion in 1981. These inflows declined afterwards, remaining around $10 billion for a few years, before increasing again to reach $17 billion in 1988.
It is not obvious what constitutes control of a firm. In general, countries classify as a direct investment enterprise those in which the percentage of foreign ownership is above certain limit, usually between 10 and 25 percent. Although there is no uniform criteria among countries, moderate differences in the percentage used for the classification do not alter significantly the measurement of foreign direct investment, since the share of foreign ownership in firms considered to be foreign affiliates is usually much larger. For the discussion of some of these issues, and other methodological and data problems, see Thomsen (1988).
The structure of this presentation is based on that employed in the comprehensive survey by Agarwal (1980). There are also other alternative ways of organizing the discussion. For example Boddewyn (1985) groups the theories according to whether they refer to conditions, motivations, or precipitating circumstances for foreign direct investment. Kojima and Ozawa (1984) distinguishes between macro- and micromodels of foreign direct investment.
The discussion of this point is continued in the section on diversification with barriers to international capital flows.
Although Hymer’s dissertation was completed in 1960, it was not published until 1976. See also Kindleberger (1969).
The concept of “industrial organization theory of foreign direct investment” is not used uniformly in the literature. Sometimes it is meant to encompass all the theories derived from Hymer’s work, i.e., all the theories included in this section. In this paper, the concept is used in its more restrictive sense, to refer to the literature focusing on structural imperfections.
This approach also implies that the motivation behind multinational production, and therefore foreign direct investment, may well be the search for efficiency, rather than the attempt to profit from monopoly power. This change in focus has important welfare implications. See Dunning and Rugman (1985), and Teece (1985).
A variant of this “follow the leader” hypothesis, is the “exchange of threat” hypothesis, in which intraindustry foreign direct investment results from firms invading each others’ home markets due to oligopolistic rivalry (see Graham (1978, 1989)).
In Errunza and Senbet (1984), the authors further developed the theoretical basis for their view that indirect portfolio diversification by multinational firms helps complete international capital markets, and they expanded their empirical investigation. Some limitations of this paper are indicated in Bicksler (1984).
Kojima’s hypothesis is mainly concerned with international economic relationships between industrial and developing countries. This is clear from several passages of his papers, and is explicitly stated in Kojima (1975), where he speculates that two-way direct foreign investment between advanced industrial countries may be explained by other theories.