Caves (1996)

Management > Global Firm > Lectures > Independent Research > Caves > Failure of P assets > OLI and transaction costs > Hypothesis > Factors and Barriers > FDI > Hymer on FDI > Further comments on FDI

Further comments on FDI

Owing to perfect competition, it may not necessarily benefit a firm to invest abroad if another country’s profits are increasing, as the profits will eventually decrease with the flooding of the market with new indigenous entrants. Purely competitive firms, by definition, do not have enough assets to offset the costs of being foreign. An MNE cannot exist in a perfectly competitive market, there needs to be something else, which means that the “capital-arbitrage” hypothesis is insufficient.

“Capital intensity…is never a significant predictor of which industries are prone to heavy involvement with foreign direct investment”

When companies invest abroad it correlates with falling profit rates. This is due to the “shakedown” losses of starting up new businesses in foreign countries. When there is a large number of firms investing from and to in the same country, then the large number of young enterprises which are in this shakedown period account for the appearance of falling accounting profits. Pg26

The capital-arbitrage hypothesis is useful, but only in conjunction with many other theories, as it is very incomplete.