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Should Countries Promote or Restrict Foreign Direct Investments

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Globalization has dissolved national borders and turned the world into a global village. A relevant effect of globalization is the presence of an organization in a number of countries in addition to its birthplace. This has changed the scenario of global business significantly. Multinational enterprises have come into existence which has their operations and existence located in more than one country. These are organizations that have control over assets, factories, mines, sales offices in two or more countries. A flow of capital from one nation to another may occur in two different ways: the direct route or the Foreign Direct Investment and the indirect route or the Foreign Portfolio Investment. A definition by the Bureau of Economic Analysis states foreign direct investment as an investment in which a resident of one country obtains a lasting interest in, and a degree of influence over the management of, a business enterprise in another country. (Assessing Trends and Policies of Foreign Direct Investment in the United States. The reasons behind FDI are many and depend upon a range of factors that guide the business model of the investing company. The widely accepted theory to analyze the investment motives have been provided by John H Dunning. Popularly named as the Eclectic theory, it is a combination of three sets of advantages that must be present for a company to invest abroad. First is an ownership-specific advantage (O), which states the advantages the company would gain over similar firm or countries in the market. Second is a location-specific advantage (L) that determines the region where the firm invests. Finally, the internalization advantages (I) explains the need and benefits of investing against the option of obtaining the same through trade relations. Considered together, these factors define the OLI framework on which an eclectic model is based.