The Organizationfor Economic Co-operation and Development (OECD), defines foreign directinvestment (FDI) as a set of economic activities or operations made by aresident (direct investor) in one economy which primary purpose is to establishlasting interest in an enterprise that is resident of an economy different tothe one of the investor (direct investment enterprise). According, to a balanceof payment notion a lasting interest is demonstrated when at least ten percentof the voting power of the direct investment enterprise is own by the directinvestor (International Monetary Fund (IMF), 2009).Establishing a strategic long-term relationship to ensure a significant degreeof influence in the enterprise or gaining access to new markets are among thedirect investors main purposes. The quantitativeindicators of FDI are measured through the flows and stocks of directinvestment in balance of payment accounts. Following the requirements of the Manualof Balance of Payment elaborated by the IMF, each country must report the FDIstatistics on an aggregate basis in terms of assets and liabilities, separatedon a directional basis of inward and outward investment and provide ageographical and industry breakdown.
Manyresearchers have attempted to explain the determinants for firms to undertakeFDI, from Iversen (1935) portfolio movement theory to Aliber (1970) microfinancial and exchange rate theory, they all have tried to develop a systematicframework that can justified it. Among, one of the most renowned approachesthat 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 FDIdeterminants. The approach is commonly known as “eclectic” or OLI, which standsfor ownership, location and internalization. According to Dunning (2001), theseare the three potential sources of advantages that are determinants to firms’ decisionto become a multinational; without them the firms may be more profitable ifthey are organize in different ways such as remaining domestic; produce in theirown economy and export; or licensing its production to a foreign company Additionally,Walsh & Yu (2010) mention other determinants that can have a connectionwith FDI flows in the host economy1,among them: market size and growth potential, openness, exchange ratevaluation, political stability, bilateral tax treaties and institutions. Dunning (2008),also made an analysis from the perspective of the investing firms andcategorized FDI in four main types based on the motive behind the investment.The first type natural resource seeking, refers to firms investing abroad toacquire physical resources, labour force or technological capability of higherquality and lower cost than in the home country2.
Thesecond type market seeking, whichconsists in serving the local and regional market is also called horizontal FDI,given that it involves the replication in the host country of productionfacilities. The third type of FDI called efficiency-seeking or vertical FDI,takes place when in the presence of economies of scale, the investing firms cangain from the common governance of geographical dispersed activities. Finally, strategicasset or capability seeking involves acquiring assets of foreigncorporations to promote global competitiveness. However,scholars like Agarwal (1980), Parry (1985), Itaki (1991), Chakrabarti (2001),Eden & Dai (2010), have questioned the capacity of the developed approachesto serve as some general self-contained theory, that could explain both inwardand outward FDI flows (Demirhan & Masca, 2008). Usually FDIis 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 rightpolicy framework is applied. Furthermore, they consider that under a rightpolicy environment, FDI could be a key element in globalisation; provide meansfor creating direct, long lasting and stable links between economies; be avehicle for local enterprise development; improve the competition position ofthe host and home economy; encourages the transfer of technology and know-howbetween economies and be an important source of capital.
(Organization For Economic Co-operation and Development , 2008). However, theliterature it is still inconclusive of the effect that FDI has on the economies.Studies pinpoint both, positive and negative effects that inward and outwardFDI has in the host and home countries. Vissak and Roolaht (2005) highlightthat even with the discrepancies there is a greater number of studies thatfocus 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 thatmost of countries have about the firms outside their countries borders. Moura& Forte (2010) highlight how United Nations Conference on Trade andDevelopment give several explanations to why different empirical studies have yielddifferent results, among them they mention the difference in variables used, thelack of analysis of the host country domestic conditions or potential errors inestimation methods.
Inthe last two decades, FDI has been consider by developing and emergingeconomies as a key source of modernisation, income growth, employment andeconomic development (OECD, 2002). Since then, therehas been a remarkable dynamism in FDI flows, internationally and in LatinaAmerica and the Caribbean (LAC).