LITERATURE REVIEW

2.0 Introduction

Many theories have been advanced on Foreign Direct Investments (FDIs) and their impact on host country economies. This paper will seek to outline the three most popular of these theories drawing analogies to the Jamaican experience where possible. Ideologists have attempted to explain the reasons firms embark on foreign investments, the benefits they derive and the resultant costs and benefits to host countries. Some have also gone as far as saying there are no benefits to be derived by host countries because multinationals who indulge in foreign investments do so purely from an imperialistic position based on what they stand to gain from these investments. Worldwide, the trend has been for mergers and acquisitions to account for the major share of foreign investments; however, in the case of the Jamaican tourism industry, in recent years foreign investments have primarily taken the form of Greenfield investments. In excess of 80% of the FDIs in Jamaicas tourism industry are Greenfield horizontal investments. 2.1 Major Theories on Foreign Direct Investments The Product Life Cycle The global popularity that the Jamaican destination enjoys creates a reasonably high level of demand for tourists to visit the island. The Jamaican government has created the attraction of tax incentives in various forms to encourage investors to the industry. Spanish investors responding to the decline in demand for new hotel rooms in Spain and the resultant need to explore new cost-effective markets have, as a result of the attraction offered by the government, decided to look at Jamaica as an investment option.

This market saturation in their own country coupled with the location advantages presented by Jamaica provides excellent incentive for these investors. 2 2 2 2 2 The OLI Framework The most popular of the FDI theories is the Ownership, Location and Integration (OLI) framework developed by John Dunning (1981, 1993) in which he stated that foreign investments occur because firms have certain ownership advantages which they exploit through a process of internalization in countries that offer the requisite location advantages. Most of the current investments in the tourism sector in Jamaica are being undertaken by established Spanish chains of hotels supporting the OLI theory framework. These hotel chains already have proprietary ownership of technology and management skills/know-how, easily transferable to a developing country such as Jamaica which is already an established vacation location with great sunshiny weather almost all year round. Their senior executives and managers are all from their home countries providing them with the ability to utilize their own management styles and culture into the FDI hence the aspect of internalization. Governmental role in FDI

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Governments policies, statements and actions can and do influence the level of FDIs in a country. Successive governments in Jamaica have both positively and negatively impacted the level of FDIs in the country; however over the last ten years the policies have increasingly supported the level of FDIs. The following are some of the ways in which governments may influence the level of FDIs in their countries: 2.2.1 Radical Political view:

Like the Marxists, the Political Radical believes Multi-National Enterprises (MNEs) are imperialists who are used as tools to exploit host countries to the exclusive benefit of their home country giving nothing of value to the host country in exchange. There is currently no restriction on the repatriation of profits from Jamaica, thus influencing the balance of payments (BOP) negatively. This view is of the opinion that MNEs should not be allowed to operate in developing countries and where they exist these organizations ought to be nationalised. Jamaica tried this approach in the 1970s and all foreign hotels operating in the country at the time pulled out of the country. This hard-line stance resulted in the collapse of this view toward the end of the 1980s. According to Charles Hill in his book International Business, three possible reasons were advanced for this collapse: 1. The collapse of communism in Eastern Europe 2. The generally abysmal economic performance of countries embracing this radical view and the growing belief in some of these countries that FDIs can be an important source of technology, jobs and the ability to stimulate economic growth. 3. The strong economic performance of those developing countries embracing capitalism rather than the radical ideology. 2.2.2 Pragmatic Nationalism

The pragmatic nationalist believes FDIs have both benefits and costs. The benefits to the host country include capital, skills, technology and jobs while the costs include the repatriation of the companys profits. Another potential cost occurs in cases where these foreign firms decide to import their operational tools, equipment and raw materials rather than utilising local suppliers. Countries pursuing this ideology show a preference to firms either utilising technology which is believed to be beneficial to their country or engaging in activities considered to be in the countrys best interest. These MNEs are aggressively courted by host countries through the use, for example, of tax breaks and grants as incentives.

Jamaica has both received benefits and suffered the costs of FDIs in the country. The benefits include: Huge capital investments, particularly in the form of new buildings. Operational skills and know-how that have been acquired through formal training as well as on the job training from working with managers brought into Jamaica from the investors countries to transfer the companies worldwide techniques. Large numbers of Jamaican nationals have been employed by these companies both in the construction and operational phases. The costs include:
Repatriation of the companies profits since Jamaica has no restrictions on

this.
Jamaicas balance of payments is also being negatively affected by the

importation of equipment, furniture and other raw materials to include food items. 2.2.3 The Free Market View

Both Adam Smith and David Ricardo have been huge proponents of the free market system of trade and its benefits to world economy. Adam Smith (1776) argued that countries have an absolute advantage if they are able to produce goods or offer services more efficiently than another. He suggested that a country should therefore produce those goods it is efficient at producing and purchase from other countries those goods it produces less efficiently. David Ricardo (1817) has a modification of Adam Smith's view. He argued that it was possible for a country to have an absolute advantage in the production of more than one good. In such case the country should produce those goods for which it is most efficient and purchase from other countries those goods where it is less efficient; He believes these countries have a comparative rather than an absolute advantage.

Both theories although having differences in their beliefs support a free market system. In keeping with the teachings of both theorists the free market view believes international production should be distributed among countries according to their comparative advantage. That is, countries should specialize in the production of those goods they can produce most efficiently. This view argues that MNEs are the best distributors for the production of goods and services to the most efficient locations around the globe. Thus they feel FDIs are beneficial to both the host and source country. Conclusion There are several views put forward by scholars and economists over the years, to explain Foreign Direct Investments and the reaction to their impact on the host countries. The two major theories for FDIs are the Product Life Cycle and Ownership, Location and Integration approaches. Governments' involvements are considered to range from the Radical Political view to the Free Market view, with the Pragmatic Nationalist in between. These views changed with with the passage of time and Jamaica has practised the gamut of these views with varying degrees of success. Successive governments over the last ten years have embarked on policies that create an environment for the Free Market view.