The flow of Foreign Direct Investment


The Dutch East India Company, during the early 16th century set the trend by expanding their operations as a trading company from its home country Netherlands to the British colonial enterprises in Asia and Middle East in order to take advantage of the prime quality of product available at cheap prices. This similar pattern is observed till date by various other enterprises to enrich and supplement their operations by expanding their operations to foreign lands. These transnational enterprises are normally engaged in Foreign Direct Investment (FDI) and own or, in some way, control the value added activities in more than one country (Dunning J H, Lundan S M, 2008). The most important milestone witnessed in the second half of 20th century was the expeditious rise of multinational enterprise and the consequent globalization of the world economy. Some of the most successful multinational enterprises are Microsoft, Nokia, Coca-Cola, Citigroup, HSBC and so on.

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The global activities of multinational enterprises and the flow of Foreign Direct Investment (FDI) are significantly based upon a dominant framework known as The Eclectic Paradigm or OLI Paradigm (Dunning J H, 2000). This framework suggests that there are three main reasons which influence the flow of FDI across national and cultural boundaries, the first being the competitive advantages that the company possesses which in turn encourages the company to invest in markets around the world with an aim of either utilizing or increasing their existing FDI. These explicit advantages not only include tangible assets of the company such as, skilled manpower and Capital but also include the intangible assets of the company such as know-how, technology, marketing, entrepreneurship skills and management structure. Hence, by expanding their area of operations the company can utilize its advantages to their optimum level and thereby capture a wider market share and consumer base. For example, Coca-Cola dominated the U.S. market during the 19th Century, but in 1926 they began to expand their business globally in order to increase their customer base and profits.

The second reason that influences the flow of FDI attributes to the advantages the company wishes to acquire by expanding its operations to strategically selected locations. These can be broadly classified as location specific benefits gained by the company due to the economic, political, cultural, social, legal and financial environment of the host country. Profound understanding of the Macro factors of the host country is very vital for the company going multinational as it is the same for companies existing in the market. Hence, the most fundamental task for the multinational firm is to ensure optimum utilization of these factors in accordance with its ownership specific advantages to steer itself towards success. The Third reason that influences the firms to cross national and cultural boundaries is termed as Internalization; this helps the firms to evaluate alternative ways in which it can mould its competitive advantages with reference to the location specific benefits of host countries. According to Stephen Hymer's research, firms adopt internalization not with an intention to reduce their costs but to enable them to exploit their advantages in a more fruitful manner (Hymer S, 2008). The firms adopt internalization when, there is inexistence of market or when existing market is functioning poorly. This helps the firms to penetrate the market of the host countries with ease by either licensing its competitive advantage to another firm, exporting products developed using its competitive advantage or by establishment of subsidiaries in host countries. Furthermore, the multinational firms are categorized on the basis of types of Foreign Direct Investments made by them such as FDI to capture a particular foreign market for their products, FDI to gain access to resources that are either not available or are more expensive at home, FDI to take advantage of the economies of scale and scope from the host country and FDI through acquiring the assets of foreign corporations (Dunning J H, 1993).

After understanding the reasons which motivate the companies to expand their operations across the national boundaries and become Multinationals, it is very essential to understand as to how the companies plan such kind of expansion. In order to carry out this task the company needs to formulate certain basic operational strategies along with decision making methods to make certain accurate and efficient execution of activities.

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The most initial step for the company is to conduct an internal research to ensure that it possesses some kind of core competencies or competitive advantages which will provide an extra-edge in the domestic markets of the host countries. Further, the firm needs to take decision pertaining specific market segment through which it will penetrate and thereby, enter the market of host countries. This decision requires in-depth planning and analysis to contemplate the combination of product and the core competencies that the company possesses, accompanied by identification of any kind of location specific advantages that the company desires to utilize. After deciding the market segment, the company needs to crystallize the entry strategies that it will employ to pierce the markets of the host country effortlessly. Entry strategies are principally dependent on the type of operations the company plans to carry out in the host country, the competitive advantages of the company and the availability of resources. The various types of entry strategies such as Licensing, Subsidiaries, Exporting, Franchising, Turnkey Contracts, Contact manufacturing, Joint ventures, Mergers and Acquisitions are adopted with an aim of investing the FDI in the host country so that the company can amalgamate its own resources with the resources of the host countries and thereby increase its market share and consumer base. Appropriate choice of entry strategy is mandatory for a firm, as it plays an immense role in resourceful positioning of the company in the competitive markets of the host country.

Moreover, the company also has to reengineer its organizational structure to make it more viable for managing the cross border operations. The reason being that the type of management and regulation required differs from place to place and for this reason understanding and adopting location specific management style becomes imperative. In addition to this, embracing the cultural of the host country and working in accordance to it helps in avoiding any kind of cultural complexities that might arise due to the international cultural differences persistent around the globe. This along with the appropriate management structure aids the company in building healthy human relations in its home country as well as the host country which in turn defines the success of the company. Consequently, in order to make a firm a multinational enterprise, it is very crucial that all the required steps and decisions are made with optimum efficiency backed by current market positioning and research.

To conclude, Multinational Enterprises employ various entry strategies into foreign markets not only for their personal benefits but also to determine the growth and development of the host nations. There have been many instances in the past wherein a Multinational company has compounded for the growth of GDP of the host nations and have also been a blessing in disguise to generate employment. A classical example of this is Developing countries such as India and China. After the opened their doors for the FDIs to flow their GDP has increased considerably thereby strengthening their economy as a whole. The mere presence of MNEs in the market helps in maintaining demand and supply equilibrium to eliminate monopolies of the local suppliers. They are solely responsible for improved and efficient infrastructure in the host countries which eventually push the host nation's per capita income and National income. Therefore, even though Multinationals work to favor their home country, one cannot deny the advantages that they transport to the host countries in form of outsourcing and operations.


  • Dunning J H and Lundan S M, 2008, 'Multinational Enterprises and the Global Economy', 2nd edition, Edward Elgar Publishing limited.
  • Dunning J H, 2000, "The eclectic paradigm as an envelope for economic and business theories of MNE activity" International Business Review 9, Pg 163 - 190.
  • Dunning J H, 1993, 'Multinational enterprises in the Global Economy'.
  • Ethier W J, November, 1986, 'The Quarterly Journal of Economics', Volume 101, No. 4, Pg. 805-834, available at (Online):, accessed 19/03/2010.
  • Hymer S, Journal of International Business Studies, 2008, 39, Pg 167-176.
  • Markusen J R, Spring, 1995, 'The Journal of Economic Perspectives', Vol. 9, No. 2, Pg: 169-189, available at (Online):, accessed 20/03/2010. 
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