Since the early 1960s a large number of theories on foreign direct investment(FDI) have emerged. This proliferation was to a large extent, due to Hymer (1976),and the subsequent recognition that FDI is a manifestation of market imperfection and firm specific advantages. This is the implicit and explicit assumption in most modern theories. The multiplicity of factors involved in production,combined with barriers to the free movement of goods and services, together with the differences in production environment, are all reasons for also been an increasing number of studies regarding other modes of foreign investment. These new forms of FI activities – such as join venture , licensing, franchising, etc seem to have taken on an increasingly important role in recent years everywhere, including developing countries (Oman,1984).
Foreign direct investment (FDI ) is the vehicle by which firms achieve their strategic objectives. Accompany must posses some asset such as product and process technology or management and marketing skills that can be used beneficially in the foreign affiliate in order to invest in production in foreign markets. According to Kindleberger(1969) , “For direct investment to thrive there must be some imperfection in markets for goods or factors, including among the latter technology. Or some interference in competition by government or by firms, which separates markets”. The industrialized nations have remained the major contributor as well as the major recipient of FDI though FDI flows to the developing world have more than doubled between 1990 and 1999 . According to Chakrabarti (2002) in 1999 , nearly 58percent of 30 global FDI flows went to the industrial countries ,37 per cent to developing countries , and just 5 per cent to the transition economies of eastern Europe. FDI embodies two typical assets : first ,capital and second ,technology or a number of intangible advantages. So, FDI is more likely to be important in industries with significant firm-specific ,intangible ,knowledge-based assets. Foreign direct investment contributes most to the development process whn affiliate is wholly owned and fully integrated into the global operations of the parent company. Once the parent investors commit themselves to incorporate the output from host country into a larger strategy to meet global or regional competition-there is evidence of a dynamic “integration effect”, which provides newer technology , more rapid technological upgrading ,and closer positioning along the frontier of best management practises and highest industry standards , than any other methods for the host economy to acquire such benefits. There is evidence of more intensive coaching for supplier in quality control, managerial efficiency , and marketing than any other means for firms in the local economy to gain these skills (Nunuez,1990). FDI will improve competitiveness and, thus, create employment and increase the welfare of the host nation (Dunning, 1994). This is a result of inward investment increasing the number of entrants in the indigenous industry which forces all competitor firms in the industry to become more competitive by reducing costs and improving efficiency and quality. Much FDI activity is achieved by way of a joint venture between a foreign company and an indigenous company and this may bring advantages such as risk diversification, capital requirement reductions and lower start-up costs (Perlmutter and Heenan, 1986). Indirect impact will manifest itself in the
creation of spillovers and linkages – typically in suppliers and customers – whereas the dynamic impact will affect the competitive environment. Inward investment is likely to stimulate the production of global competitors in the recipient country (UN,1995). Market size and growth, barriers to trade, wages, production, transportation and other costs, political
stability, psychic distance and host government’s trade and taxation regulations, performance requirements, cultural distance, GDP per capita and infrastructure are
factors affecting FDI location (Dunning, 1993).
While economic growth, and technology transfer to the host country are important
consequences of FDI, development of technological infrastructure and human capital
are critical prerequisites, and so antecedents for FDI (Noorbakhsh and Paloni, 2001).
Moreover, while psychic distance has been pertinent so far in FDI decisions (UNCTAD,
1997; UN, 1998), its importance might gradually reduce with increasing globalization
and development of new/digital economy. According to Sethi et al. (2002 p. 701),
“institutional and strategic factors into theory . . . need to be considered in tandem to
explain the change in trend of FDI flows”. The inflow of FDI includes a raise in the
production base, the introduction of new skills and technologies and the creation of
employment. Foreign investors increase productivity in host countries and FDI is often
a catalyst for domestic investment and technological progress. Increased competition
associated with the entry of an MNE upgrades the competence and product quality in
national companies, and opens up possibilities for export (Ahn and Hemmings, 2000).