Foundations of foreign direct investment

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Southern New Hampshire University
To adequately understand foreign direct investment, one must trace the origins of international trade beginning with comparative advantage theory, which views trade from the standpoint of perfect competition, to the new classical theories that focus on imperfect markets. The debates that are raised in these theories touch on many issues, however, central to the underlying theme in all of these theories are the issues of efficiency and equity as they impact both the home and host countries. Understanding the theories in and of themselves is not enough to explain the concept of foreign direct investment. We need an instrument to tie the two together and that instrument or more preferably, institution, is the multinational corporation (MNC). The literature is inconclusive in providing a precise definition of the MNC. A generally accepted theorem is that MNC’s are composed of a corporate structure where operations are in two or more countries on such a scale that growth and success depend on more than one nation, and where decisions are made on the basis of global alternatives (Parry 1973). For the basis of this paper, we shall also accept this premise. This paper will examine how international trade theory impacts foreign direct investment decisions. We will investigate the idea of a MNC moving from the notion of perfect competition to the concept of dealing with market imperfections as well as follow the evolution to the "new paradigm" of international trade.
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