Foreign Direct Investment and Industrial Revolutions

Posted on Feb 6, 2025 in Economy

Foreign Direct Investment (FDI) and Economic Theories

Foreign Direct Investment (FDI) is the purchase or establishment of income-generating assets in a foreign country that entails control of the operation or organization. FDI occurs in different types of economies:

  • Developed economies (main investors of global FDI, e.g., Andorra)
  • Economies in transition
  • Developing economies (all others except Hong Kong)

International Business (IB) must be regulated to avoid tax havens, exploitation in developing and transition economies, and reduction of GDP in developed economies. Several theories explain FDI:

  1. Monopolistic Advantage Theory (late 1950s, S. Hymer): FDI is preferred by MNEs because advantages offer a degree of power and firm control over resources.
  2. Product Life-Cycle Theory (Raymond Vernon): The first stage involves searching for and creating a new product. The second stage involves searching for technology to produce and innovate, leading to the appearance of competitors.
  3. Uppsala Gradual Model (Johanson and Vahlne, 1977-2009): Internationalization involves the acquisition, integration, and use of knowledge of foreign markets.
  4. Internalization Theory (Buckley and Casson, 1976): MNEs organize firm-specific resources to overcome externalities (e.g., asymmetric knowledge and information).
  5. Eclectic Paradigm/OLI Paradigm (J. Dunning): Firms are motivated to internationalize their business to exploit their ownership or firm-specific advantages.
  6. LLL Theory (John Mathews): Small companies can speed up becoming global giants through linkage, leverage, and learning.

Organizational Structures:

  • Vertical organization: A way to organize the company.
  • Horizontal organization: To control a product or the production.

19th Century: Growth of Trade

The 19th century saw a revolution in the movement of capital, labor (including slavery), and goods, driven by improvements in technology.

Before the Industrial Revolution (15th Century)

Supply Factors: Land, climate, and technology resulted in low productivity. Guilds dominated. Luxury industries were profitable but represented a reduced market niche.

Demand Factors: Demography was characterized by high mortality rates, slow growth, and fragmented territories. Trade and communication were limited by fewer land routes. Payment methods included currencies, metals, and interest.

Institutional Framework: Slavery, feudalism, and religion were dominant. (e.g., Zheng He’s trips). Key trade items included perfumes, silk, spices, and aromatic plants. Knowledge of sea transport was crucial.

World Trade Before Columbus: China, Japan, Southeast Asia. Key goods: silk, powder, paper, food, salt, telescopes, maps. Diagrams and junks were important. Animals were a key source of energy.

Between the 15th and 18th Centuries

Feudalism persisted. Atlantic routes became important for gold and silver. Chartered companies like the East India Company and the Royal African Company emerged.

Industrial Revolution and Technological Evolution (18th-21st Centuries)

Entrepreneurs saw opportunities and combined scarce resources with innovations in the economy. Key periods include:

  • The Industrial Revolution
  • The Age of Steam and Railways
  • The Age of Steel, Electricity, and Heavy Engineering
  • The Age of Oil, the Automobile, and Mass Production
  • The Age of Information and Telecommunications

First Wave: Increased world population, improvements, mass migrations, stability in payments and exchange rates, revolution in transport and communications. Free-standing companies (UK) focused on cotton and exploitation in mines. MNEs (USA) like Nestle and Ford emerged.

  • 1st Sector: Mining
  • 2nd Sector: Transportation and Communications (railways and canals)
  • 3rd Sector: Plantations (cotton, bananas, coffee)

Second Wave (1939-1970): Time of wars (ADROMACRO and CSL):

  1. Erosion of MNEs and subsidies.
  2. Communism, Marshall Plan, cartelization.
  3. Alternatives to big MNEs: networks, family businesses, SMEs, districts, and clusters.

Large Family Businesses

Positive and negative perceptions (e.g., Ford Motor Co.).

Asia-Pacific Region

Singapore (e.g., Samsung), Chaebols, hybrid management cultures mixing.

Political Systems

  • UK and US: Champions of liberalism.
  • Communist: USSR, China, Cuba, and North Korea.
  • Fascist: Germany, Italy, Spain, and Portugal.