Caves (1996)

Management > Global Firm > Lectures > Independent Research > Caves > Failure of P assets > OLI and transaction costs > Hypothesis

Hypothesis

Hypothesis: “If attribute X promotes the formation of MNEs, and successful firms in industry A have a lot of X, then MNEs should be prevalent in industry A”
There are two variables to test whether a firm can and should become an MNE:
1. “Foreign operations of firms in a source country’s industries, normalised by their total activity level in those industries” – how a firm succeeds in its own country, compared to others in the same industry (Outbound foreign investment).
2. “Foreign subsidiaries’ share of activity in a host country’s markets normalised by total transactions in those markets” – the amount a particular foreign firm contributes to the total@@ (Inbound foreign investment).

Foreign investment is one option of maximising returns from assets in foreign markets. The others are licensing and exporting. Foreign investment may be chosen, either because it works the best, or that the others work badly.

The firm’s ability to invest abroad depends not only on their assets, but also of their foreign competitors. Pg8

Factors for Investment and Barriers to entry

FDI

Hymer on FDI

Further comments on FDI