Parth Das Uob no: 13028287

Question 1: Which theory do you think offers a better explanation of manufacturing FDI

from developing countries: Dunning’s OLI paradigm or Product Life Cycle theory?

Explain your answer fully.

Introduction: -

FDI is a central part of an open and effective international economic society and a main catalyst

to expansion. Though the benefit of FDI do not accumulate automatically and evenly across

countries, sectors and the local communities. Implementing national policies and international

investment architecture for pulling in more FDI to the developing countries and reaping its

benefits both the host and FDIs seemed to have benefited, while the countries where the FDIs

came from suffered which to loss of jobs to the developing countries. Liberalization of trade and

reduction of trade barriers has opened new grounds to trade while manufactures could assemble

their plants elsewhere. The following report will explain the PLC and OLI theories and will

comprise a comparative analysis of both the theories which offers a better explanation of

manufacturing FDI from developing countries (Kokko, 2006).

Foreign direct investment (FDI): -

Foreign Direct Investment (FDI) is an important part of an open and viable part of an efficient

economic system and a major facilitator to advancement. National strategies with the help of

important international investment design is important for drawing in FDI to a large number of

developing nations and for receiving the full rewards of FDI for improvement in a particular

country.

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The fundamental difficulty is for the investing nation, which need to set up a broad, transparent

effective investing policy, which could make it easy for the investors to invest and make it easy

for the establishing company to build an effective institute and recruit manpower in order to

implement them efficiently. The over-all advantages of FDI for developing nations economies

are well recognized. Given the investing nation strategies and an essential level of advancement,

studies demonstrates the FDI generates innovation overflow, helps human capital planning,

augments to international trade settlement, makes a more fixated business condition and

enhances the improvement of the enterprise. The above helps in the development towards greater

economic development, which is the strongest device in order to improve poverty related issues

in developing nations. Furthermore, the scope of the FDI moves beyond the economic benefit,

FDI may help to enhance natural and social conditions in the country which is planning to invest

, for example, exchanging "cleaner" technologies and leading to more socially responsible

corporate policies.

Developing nations, rising economies and nations going to economic changes have come

progressively to consider FDI to be a source of financial advancement and innovation,

development in incomes and business. Most of the developing countries have changed their FDI

rules and regulations inclined towards increasing the investment opportunities. They have

intended to look into the issue in order to relax domestic polices in order to increase the

advantages of Foreign Investments in domestic economy. The FDI tries for Improve the problem

related in the domestic economy, by concentrating on the broad impact of FDI on full scale

financial development and other welfare-upgrading forms, and on the channels through which

these advantages produce results.

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OLI approach of John Dunning’s: -

The “OLI” or also known as “eclectic” an approach to the study of FDI (Foreign Direct

Investment) developed by John Dunning. “OLI” stands for ownership, location and

internalization, three potential sources of advantages which will determine a firm if or not to

become multinational. The theory is based on assumptions that the organization will avoid doing

transactions in open market. Since most businesses aim to find or opt the most cost-effective

option while maintaining the quality, the eclectic paradigm may then be assessed for different

scenarios.

As mentioned earlier the three factors which determine a firm’s decision making; ownership,

location and internalization. Ownership advantages states why some companies relocate to

developing countries and how beneficial it is for such multinational companies to gain advantage

over proprietary information and ownership rights. This includes copy rights, trademarks and

patents like Glaxosmith and Apple possess the reputation which enables them to charge the

premium price. The location advantages are focusing on where the multinational enterprises

decide to locate. This could be based on the availability of skills and natural resources. For

example, Saudi oil is cheaper to extract than Alaskan oil. The last stage which is internalization

also determines if it is beneficial for a company to produce or contact it to a third party. On the

other hand, for instance pharmaceutical companies would be reluctant to license third party to

produce their goods where intellectual property rights are not strong. The OLI theory basically

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explains the scenarios and situations that every company faces while deciding to invest in foreign

market. (Users, 2016)

Product life-Cycle approach of Raymond Vernon’s: -

The product life cycle stage or international product life cycle; is developed by the economist

Raymond Vernon in 1966. According to Raymond each product has a certain life cycle which

begins with a development phase and ends with a decline phase. Vernon’s product life cycle can

define both trade and FDI by adding a time factor. Primarily when a firm innovates a product, it

produces it with the national boundaries while enjoying its advantage in the export market. Later

on, when the product enters the growth phase the firm might intend to invest in foreign market

and export from there. (Suttle, R 2016).

Therefore, Raymond Vernon believes that there are four stages of production life cycle;

introduction, growth, maturity and decline. The life span and how fast the product moves

through the life span depends on the market demand and what marketing tools are used. The

introduction stage is when the product is successfully established in national and international

market. At this stage investment are made to promote and create consumer awareness to generate

more sales. (Productlifecyclestages,2016). Moving on to growth stage, where the company will

generate more profits while other competitors enter the market with similar products. The

company might shift its production facility to a different country based on its cost of production.

Third stage is maturity, where the competition is fierce and the company would do anything to

remain its market position. The product is comparatively sold at lower price and the company

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would look at its other opportunities such as adaptations or innovation and by products. The

company may consider to license third party to produce the product basis on the cost of

production. Vernon’s theory suggests that in a period of time depending the life cycle of the

product the main exporter may change from exporter to importer (low cost producers becoming

exporters). The last stage is decline; this is where the market is saturated and the product is no

more competitive due to entry of new innovative products or a shift in market trend resulting to

low market sales(toolshero,2017).

Product life-Cycle approach is better than OLI approach that description of

Manufacturing FDI: -

Foreign Direct Investment (FDI) is an important part of an open and feasible part of an efficient

economic system and a major facilitator to advancement. Implementing national strategies with

the help of important international investment design is important for drawing in FDI to a large

number of developing nations and for receiving the full rewards of FDI for improvement in a

particular country.

The fundamental difficulty is for the investing nation, which need to set up a broad, transparent

effective investing policy, which could make it easy for the investors to invest and make it easy

for the establishing company to build an effective institute and recruit manpower in order to

implement them efficiently. The over-all advantages of FDI for developing nations economies

are well recognized. Given the investing nation strategies and an essential level of advancement,

studies demonstrates the FDI generates innovation overflow, helps human capital planning,

augments to international trade settlement, makes a more fixated business condition and

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Parth Das Uob no: 13028287

enhances the improvement of the enterprise. The above helps in the development towards greater

economic development, which is the strongest device in order to improve poverty related issues

in developing nations. Furthermore, the scope of the FDI moves beyond the economic benefit,

FDI may help to enhance natural and social conditions in the country which is planning to invest,

for example, exchanging "cleaner" technologies and leading to more socially responsible

corporate policies.

Developing nations, rising economies and nations going to economic changes have come

progressively to consider FDI to be a source of financial advancement and innovation,

development in incomes and business. Most of the developing countries have changed their FDI

rules and regulations inclined towards increasing the investment opportunities. They have

intended to look into the issue in order to relax domestic polices in order to increase the

advantages of Foreign Investments in domestic economy. The FDI tries for Improve the problem

related in the domestic economy, by concentrating on the broad impact of FDI on full scale

financial development and other welfare-upgrading forms, and on the channels through which

these advantages produce results.

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Conclusion:-

To conclude, the FDI has an important role in developing countries and different ways it can

help the host and well as the country that the money is been invested in. moreover the two main

theories Product Life Cycle and the OLI approach of the FDI theory. However, after both the

theories have been discussed we can conclude that Product Life Cycle theory is better that the

OLI theory as the major reason as to most of the host countries invest in Foreign Direct

Investment is majorly because of the rate at which the product maturates in the market and how

saturated the market is, as it helps the investor earns and continues to earn more profit in the long

run.

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References:-

1. Kokko, A (2006). THE HOME COUNTRY EFFECTS OF FDI IN DEVELOPED

ECONOMIES. [Online].Available at:

http://spot.colorado.edu/~utar/HomeEffects_Kokko.pdf [Accessed on 11th of November

2016].

2. Mulder, P. (2012). Product Life Cycle Stages theory by Raymond Vernon | ToolsHero.

[online] ToolsHero. Available at:

https://www.toolshero.com/marketing/product-life-cycle-stages/ [Accessed

13 Dec. 2017].

3. Productlifecyclestages (2016).Product Life Cycle Examples. [Online].Available at:

http://productlifecyclestages.com/product-life-cycle-examples/[ Accessed on 10th of

November 2016].

4. Suttle,R(2016). Examples of Product Life Cycle Phases. [Online].Available at:

http://smallbusiness.chron.com/examples-product-life-cycle-phases-

13722.html[Accessed on Nov 14th 2016].

5. Users (2016).World Economy FDI: The OLI Framework. [Online].Available at: http:

//users.ox.ac.uk/~econ0211/papers/pdf/fdiprinceton.pdf. [Accessed on 15th of November

2016].

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