CHAPTER OUTLINES: Introduction. Definitions. The Growth of Foreign Direct Investment since the Second World War. The Rise of the Multinational Corporation—the regional distribution of MNC activity, the sectoral distribution of MNC activity. The Determinants of Foreign Direct Investment—Horizontal FDI, vertical FDI, conglomerate FDI. The Importance of MNCs in world trade: intra-firm trade—industry variations. Transfer Pricing—motives for transfer pricing, constraints on transfer price manipulation, empirical evidence on transfer pricing, the control of transfer pricing. Integrating Multinationals into Theories of Trade—international production in the neo-classical framework, the Dunning eclectic approach, recent attempts to integrate trade and FDI, Porter’s approach. Conclusion.
Accompanying the increase in world trade over the period since the Second World War, there has been an equally rapid growth of private foreign investment. Much of this has taken the form of companies setting up or acquiring a controlling interest in overseas subsidiaries/ affiliates. Today, most large companies and many medium-sized firms operate in more than one country. Such companies have come to be variously referred to as multinational companies (MNCs), multinational enterprises (MNEs) or transnational corporations (TNCs). The largest among them have overseas operations that match or exceed the size of their domestic operations. (Ranked by foreign assets, Royal Dutch Shell, part Dutch and part British, is ranked as the world’s largest company with assets of $102 billion, closely followed by Ford, Exxon, General Motors and IBM, all of the USA.) Such companies invariably operate on a global basis, planning their activities on a regional or international scale. One consequence is that the production of many goods has become transnational.
Overseas investment by companies to set up a new overseas subsidiary or acquire a controlling interest in another company is referred to as direct investment abroad or foreign direct investment (FDI). This is different from investment by individuals and financial institutions in the purchase of interest-bearing securities, which is called portfolio investment. Direct investment