for Economic Co-operation and Development (OECD), defines foreign direct
investment (FDI) as a set of economic activities or operations made by a
resident (direct investor) in one economy which primary purpose is to establish
lasting interest in an enterprise that is resident of an economy different to
the one of the investor (direct investment enterprise). According, to a balance
of payment notion a lasting interest is demonstrated when at least ten percent
of the voting power of the direct investment enterprise is own by the direct
investor (International Monetary Fund
Establishing a strategic long-term relationship to ensure a significant degree
of influence in the enterprise or gaining access to new markets are among the
direct investors main purposes.
indicators of FDI are measured through the flows and stocks of direct
investment in balance of payment accounts. Following the requirements of the Manual
of Balance of Payment elaborated by the IMF, each country must report the FDI
statistics on an aggregate basis in terms of assets and liabilities, separated
on a directional basis of inward and outward investment and provide a
geographical and industry breakdown.
researchers have attempted to explain the determinants for firms to undertake
FDI, from Iversen (1935) portfolio movement theory to Aliber (1970) micro
financial and exchange rate theory, they all have tried to develop a systematic
framework that can justified it. Among, one of the most renowned approaches
that try to give a deeper inside in FDI is the one proposed by John Dunning in 1977.
Dunning developed a holistic yet context specific framework for analysing FDI
determinants. The approach is commonly known as “eclectic” or OLI, which stands
for ownership, location and internalization. According to Dunning (2001), these
are the three potential sources of advantages that are determinants to firms’ decision
to become a multinational; without them the firms may be more profitable if
they are organize in different ways such as remaining domestic; produce in their
own economy and export; or licensing its production to a foreign company Additionally,
Walsh & Yu (2010) mention other determinants that can have a connection
with FDI flows in the host economy1,
among them: market size and growth potential, openness, exchange rate
valuation, political stability, bilateral tax treaties and institutions.
also made an analysis from the perspective of the investing firms and
categorized FDI in four main types based on the motive behind the investment.
The first type natural resource seeking, refers to firms investing abroad to
acquire physical resources, labour force or technological capability of higher
quality and lower cost than in the home country2. The
second type market seeking, which
consists in serving the local and regional market is also called horizontal FDI,
given that it involves the replication in the host country of production
facilities. The third type of FDI called efficiency-seeking or vertical FDI,
takes place when in the presence of economies of scale, the investing firms can
gain from the common governance of geographical dispersed activities. Finally, strategic
asset or capability seeking involves acquiring assets of foreign
corporations to promote global competitiveness.
scholars like Agarwal (1980), Parry (1985), Itaki (1991), Chakrabarti (2001),
Eden & Dai (2010), have questioned the capacity of the developed approaches
to serve as some general self-contained theory, that could explain both inward
and outward FDI flows (Demirhan & Masca, 2008).
is consider a main component for sustainable economic growth. (Kurtishi-Kastrati, 2013). According to the OECD,
IMF and other international agencies, FDI could provide financial stability,
enhance wellbeing of societies and promote economic growth when the right
policy framework is applied. Furthermore, they consider that under a right
policy environment, FDI could be a key element in globalisation; provide means
for creating direct, long lasting and stable links between economies; be a
vehicle for local enterprise development; improve the competition position of
the host and home economy; encourages the transfer of technology and know-how
between economies and be an important source of capital. (Organization
For Economic Co-operation and Development , 2008).
literature it is still inconclusive of the effect that FDI has on the economies.
Studies pinpoint both, positive and negative effects that inward and outward
FDI has in the host and home countries. Vissak and Roolaht (2005) highlight
that even with the discrepancies there is a greater number of studies that
focus in positive rather than the negative effects of FDI in the host economy.
In regards, to the spill overs of inward FDI, Lipsey (2004), Vahter and Masso
(2005) justify the absence of empirical studies with the lack of inquire that
most of countries have about the firms outside their countries borders. Moura
& Forte (2010) highlight how United Nations Conference on Trade and
Development give several explanations to why different empirical studies have yield
different results, among them they mention the difference in variables used, the
lack of analysis of the host country domestic conditions or potential errors in
estimation methods. In
the last two decades, FDI has been consider by developing and emerging
economies as a key source of modernisation, income growth, employment and
economic development (OECD, 2002). Since then, there
has been a remarkable dynamism in FDI flows, internationally and in Latina
America and the Caribbean (LAC).