Academic journal article International Research Journal of Arts and Humanities

An Empirical Analysis of the Impact of Three Important Aspects of Eclectic Paradigm on Foreign Direct Investment (FDI)

Academic journal article International Research Journal of Arts and Humanities

An Empirical Analysis of the Impact of Three Important Aspects of Eclectic Paradigm on Foreign Direct Investment (FDI)

Article excerpt

1.1Introduction

In the field of international business, John H. Dunning's eclectic paradigm is the most widely recognized and used theory, which serves as an important mechanism for the analysis of foreign direct investments (FDI). The eclectic paradigm is an all-embracing analytical framework that encompasses diverse theories and contributes towards the understanding of patterns, trends, and determinants of FDI. The main idea of eclectic paradigm is that in order to invest abroad, a firm ought to have important advantages in terms of ownership, location and internalization (Dunning 1977, 1980, 1993, 2000a, 2001). Ownership-specific advantages could be competitive in nature and firms could enjoy monopoly power, "possession of a bundle of scarce, unique and sustainable resources and capabilities, which essentially reflect the superior technical efficiency of a particular firm relative to those of its competitors" (Dunning 2000a: 168). Locationspecific advantages are the "immobile, natural or created endowments" (Dunning 2000a:164) which become an incentive to invest in a particular country. Last but not the least, the internalization advantage gives international investors incentives to engage in foreign investment activities rather than franchising or licensing (Dunning 2000a).

A substantial body of empirical literature documents the positive spill overs of FDI to host nations and their economies. Such externalities can come in the form of an increase in national income, savings, financial resources (significant means of funding), higher employment rate, new technology and managerial know-how, improvements in human resources, increases in competition and economic development (Chowdhury and Mavrotas 2006; Moghaddam and Redzuan 2012; Alfaro et al. 2004). Another important advantage of FDI is that it is considered to be less risky in the long run than other forms of investments due to the fixed and long-term nature of incentives (Nunnenkamp 2001). Increase in FDI inflows signals towards liberalization of government policies and improved investment climate.

The main objective of the chapter is to empirically examine the impact of three important aspects of Eclectic Paradigm that is ownership, location and internalization on FDI inflows by using different variables for each sub-paradigm. This study examines the relevant variables over the last couple of decades for 196 countries. The reason for analysing FDIs in our sample is that during this era notable changes in global, economic and political arena took place. Recent decades witnessed a rapid globalization, market liberalization, technological developments in production processes, means of communications and distribution systems and growth in international investments worldwide (Dunning 1996).

This chapter is divided into five sections. The next section explains the relevant FDI determinants in connection with OLI sub-paradigms and the main hypotheses for empirical analysis. The following section describes the data and methodology used for the study. Section 5.4 discusses the estimation results. Conclusions of the study are drawn in the final section.

1.2Literature Review and Hypothesis Development for the Determinants of OLI Paradigm

This section describes the hypothesized relationship between dependent and independent variables and their expected directions on the basis of the existing literature.

1.2.1Ownership

Ownership advantages are classified into asset ownership advantages, transactional ownership advantages (Dunning 1981; Dunning and Rugman 1985), and institutional assets advantages (Dunning and Lundan 2008). First, asset ownership advantages comprise of the imperfect competition and monopolistic benefits firms enjoy, such as economies of scale, advanced technology, product differentiation, distribution networks, and privileged access to financial capital. The product-specific tangible assets include property and equipment. …

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