Interlocking Global Business Systems: The Restructuring of Industries, Economies and Capital Markets

By Edward B. Flowers; Thomas P. Chen et al. | Go to book overview

LITERATURE REVIEW AND THEORETICAL FRAMEWORK
There is a substantial amount of literature analyzing overseas investment behavior, but the literature on the financial channels used for overseas investment is limited. In this section, we briefly look at the existing theories of the financial behavior of overseas investments. An introduction to the financial aspects of Taiwanese overseas investments is provided and this discussion will be used as a reference when we present the derivation of our hypotheses. Several hypotheses about the determinative factors of sources of funds will also be presented in this section.A number of theories have been developed to explain overseas investment, these include: international trade theory, industrial organization theory, the market imperfections hypothesis, the risk-diversification hypothesis, the eclectic theory. 1 Although scholars have laboriously analyzed the activities of foreign investment, studies of financial behavior related to overseas investment have not been so popular. The relevant studies can be summarized as being either an extension of the eclectic theory of international production or as a capital structure theory of the multinational enterprise.
Extension of the Eclectic Theory of International Production
According to Dunning ( 1981), the eclectic theory suggests that all forms of international production by all countries can be explained by reference to various conditions which can be attributed to:
1. Ownership-Specific (Firm-Specific) Advantages. These factors are the characteristics of firms, such as size, performance, monopoly power, resource capacity and usage, proprietary technology, trademarks, production management, ability to obtain inputs on favored terms and so on.
2. Locational (Environmental) Advantages. These factors are the characteristics of countries which might be chosen for investment, including production costs (wages, material costs, energy costs, tax rates), transfer costs (transport costs, tariffs, non-tariff barriers), political risks and some general determinants such as the productivity, profitability and growth rate of the country.

According to the eclectic theory, various factors can influence the activities of multinational enterprises. The financial aspects of these activities, which relate to firms' access to resources, do not seem to be important to Dunning and have not been emphasized by the eclectic theory.


Capital Structure Theory of Multinational Enterprises

The capital structure of multinationals has been studied from several aspects, including international environmental factors and agency cost. Stonehill and Moffett ( 1993) have collected and edited a set of papers on these topics. The

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