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This chapter explains how the classical postulations of international capital movement based on interest rate differentials failed to explain the post-WWII experience of capital movement among capital-rich developed countries, instead of capital-scarce developing countries; and how, as a result, beginning from the 1960s, scores of neoclassical theories emerged to predict international movement of capital, international trade, and the phenomenal expansion of multinationals around the world. This chapter also explores the perspectives of developing and transition economies in respect to international capital movement, and the operations of multinational enterprises.
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The US was not a major colonial power, but it had significant outward FDI to the Western Hemisphere, especially in Mexico, Canada, and the Caribbean countries. By 1914, these countries together accounted for more than 94 percent of American FDI in railroads. By 1929, American business interests owned bulk of the productive mineral resources in South American countries, such as nitrates and copper in Chile, rubber industries and ore deposits in Mexico, lead and zinc in Peru, tin in Bolivia, iron ore and manganese in Chile and Brazil, vanadium in Peru, tungsten in Bolivia, gold in Colombia and Ecuador, platinum in Colombia, and bauxite in Dutch Guiana and British Guiana. For further details see Tolentino ( 2000, 22–55) and Wilkins ( 1970, 1974).
The US, however, has a long history of foreign investment. Even in the 1870s, when the US was at the take-off stage and a net recipient of foreign capital, several US manufacturing companies made direct investments in Europe and elsewhere, and by the turn of the twentieth century, there were about 100 US-controlled manufacturing plants that operated outside the US (Buckley and Roberts 1982, 26).
Some, however, interpret Vernon’s theory more widely, attributing it to a newer batch of trade theories espoused by Leontief ( 1966), Johnson ( 1982), Linder ( 1961), and Posner ( 1961). Leontief emphasized how US exports embodied higher skills compared to Europe, Johnson highlighted how the US companies demonstrated higher rates of innovation, Posner explored how the technological gap explained different rates of innovation and learning among different firms and countries, and Linder emphasized similarity of income levels, factor endowments, and demand patterns as important determinants of the pattern of trade flows (Tolentino 2000, 5–6).
Kojima’s assumption that Suzuki went to India by being incompetent domestically, fails to explain the expansion of business activities in international markets by the domestically competent firms. For example, Toyota also set up its production base in India (Nayak and Chowdhury 2014). It is notable that major criticisms of Kojima’s theory are primarily based on “Chap. 2: Foreign Direct Investment and Multinational Corporation,” downloaded from http://www.fep.up.pt/docentes/fcastro/chapter percent202.pdf, on November 11, 2016. The name of the book or the author could not be discerned.
Originally coined by Michael Polanyi ( 1966), tacit knowledge refers to valuable and experience-based knowledge that leads to innovation, breakthroughs, and sustained competitiveness of organizations.
The notion of embedded knowledge or collective tacit knowledge was introduced by Mark Granovetter ( 1985), who emphasized linking of economic action to social structures. Also see Lam ( 2000) who differentiates four types of knowledge: embrained (individual-explicit), embodied (individual-tacit), encoded (collective-explicit), and embedded (collective tacit) in the context of business organizations.
Narula’s IDP model, however, underscores that each country’s IDP will be different based on its resource structure, market size, governmental role, and development strategies.
See Box 2.2 of Chap. 2 for further details on Chinese overseas investments.
The study, however, does not show any correlation between the size of diaspora and FDI outflow. During 1990–2007, annual Indian outward investment increased from $6mn to $17.23bn, of which $10.63bn went to the Netherlands, $5.84bn to the US, and $5.41bn to the UK. But during the same period, the UK had the largest Indian diaspora, followed by Canada and Greece. The Netherlands, the biggest recipient of Indian FDI, and the US, the third largest recipient of Indian FDI, had the 15th and the 7th largest Indian diaspora, respectively .
Round-tripping generally refers to a form of barter that involves a company selling an unused asset to another company, while at the same time agreeing to buy back the same or similar assets at about the same price. Round-tripping also refers to tax evasion and money laundering practices in order to distort market by establishing false revenue benchmarks.
The model stipulates that the rate of economic growth depends on the level of saving and the capital output ratio. For a desired growth rate, all that a developing country needs to do is to increase its savings rate or, alternatively, close the savings gap through foreign aid or foreign investment. Under this model, GDP growth rate = saving ratio/capital output ratio; thus if the savings rate is 6 percent and the capital output ratio is 2, an economy would grow at 3 percent per annum.
The Solow model, however, faced criticisms for its failure to explain why the US growth rate had been lower in the nineteenth century than in the twentieth century when it received far greater FDI.
In his later works, Solow has shown that continuous flow of FDI may prevent capital falling into diminishing returns zone due to continuous growth in technology. Subsequent studies also have shown that although the longevity of the transition period differs across countries, the capital widening effect of FDI lasts for many years (Aghion and Howitt 2008; Johnson 1982).
Prior to WWI, American MNEs had, however, substantial foreign investments in nonmanufacturing sectors. As discussed before, more than 90 percent of American FDI was directed at railroads in Mexico, Canada, and the Caribbean between 1897 and 1908, and even in 1914, such investments accounted for more than 94 percent of American FDI. Moreover, US businesses had significant investments in mining and agriculture in Latin America.
As explained before, in the early 1980s, when the US imposed voluntary export restraints (VERs) on Japanese exports, Japanese MNEs made huge tariff-jumping investments in the US auto industry. As a result, Japanese auto production in the US jumped from zero in 1982 to 2.8mn in 2004 (Spero and Hart 2010, 145).
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- Theoretical Foundations of Traditional FDI–MNE Nexus
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