International Finance: Exploring Theories and FDI Impact Analysis

This essay provides an overview of international finance with a focus on foreign direct investment (FDI). It examines various theories and perspectives related to FDI, including the institutional fitness theory, internationalization theory, and macroeconomic theory. The essay discusses the role of FDI in international business, highlighting its impact on technological diffusion and peace enhancement through trading blocks. It also differentiates between horizontal, vertical, and conglomerate FDI, and explores the strategic goals of multinational companies, such as entering foreign markets, product specialization, cost minimization, and new market penetration. Furthermore, the essay identifies key drivers of FDI distribution and patterns, including market availability, raw material access, and foreign exchange considerations. It concludes by outlining the advantages and disadvantages of multinational enterprises, emphasizing the importance of information gathering and cultural awareness for successful international operations. Desklib provides this essay as a resource for students studying international finance, offering insights and analysis to aid in their understanding of FDI and its implications.

The International Finance.1
INTERNATIONAL FINANCE
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International finance
Foreign direct investment takes place when an investor in one country invests in
another country, where he has acquired assets to carry out business in the foreign country. The
following are theories and perspectives of FDI
The institutional foreign direct investment Fitness theory by Witter and Wilhems(1998)
explained on the strength by which a country is able to attract the Foreign Direct investment,
Absorbing and retaining them in that country (Blonigen, 2014).
The internationalization theory is another model that explains, When comparing the FDI against
non-FDI, the FDI is less risky since the information dissemination Monopoly is less. However,
some other philosophers argued that non-FDI expansion mode is preferable since the
Decentralization cost is high.
The macroeconomic theory is another model that gives the perception that Foreign Direct
Investment is just flow of capital across the borders. Lipsy (2004) explained the micro-level
factors that attract Foreign direct investment as the size of the market, Economic growth, Gross
domestic product, Natural resources, political stability, and infrastructure.
Role of FDI in International business
This is the purpose by which the Foreign Direct investment is achieving. The role of FDI
includes Technological diffusion where there is technology transfer between the countries with
low technology to those with high technology and hence help such countries to grow. It also
helps to enhance peace by forming trading blocks and by this, countries can move freely and
remove trade barriers.

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Various types of foreign direct investment
Horizontal foreign direct investment. This is where, the company does not change any of it
culture, operation or its structure even when it operates in the foreign country. The company
behaves the same way as in the home country. For example, there are Toyota assemblies for
motor cars in the United Kingdom and Japan, where they only do what Toyota itself is doing.
Verticle Foreign Direct Investment. Here, there is the difference in activities carried out
worldwide. It is subcategorized in two, forward and backward verticle foreign Direct investment.
Forward, is where companies move where there is a market for goods and services while
backward is where international integration goes near the raw materials. For example, tire
manufactures becoming the majority stake for Toyota.
Conglomerate. This type of FDI can conduct an unrelated business abroad. They always target
two limitations: New working environment and Entering into a foreign market, and nothing
more.
Strategic Goals of Multinational companies
Companies have different goals according to their specialization. The most common ones are:
Entering the foreign market, with the similar product as the parent company to reach many
consumers. Another role is product specialization where a foreign Direct investment may decide
to produce most of its products in one country and finishing production in another country. They
also aim at minimizing cost and maximizing profits. This is called Production Chain
Reprojection. Another one is New market penetration.
What drives FDI distribution and patterns

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Availability of market in foreign countries makes investors move there where their products are
demanded. The availability of raw material in foreign countries will make investors move near
them to reduce the cost of transportation (Molle, 2017). Foreign exchange is another factor
where an investor will move to where the currency is strong when they change into home
countries currency, there is a Forex Gain.
Advantages of MNE: One of the biggest advantages is, acquiring new skills from foreign
countries, Wide market, and Availablity raw material
Disadvantages of MNE areLack of information about the foreign company. The owners of the
company should familiarize themselves with the national culture, security, available market and
legal requirements. The MNE should equip itself with information, capital and security services

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Blonigen, B.A. and Piger, J., 2014. Determinants of foreign direct investment. Canadian Journal
of Economics/Revue canadienne d'économique, 47(3), pp.775-812.
Cohn, T.H., 2016. Global political economy: Theory and practice. Routledge.
Leamer, E.E. and Stern, R.M., 2017. Quantitative international economics. Routledge.
Molle, W., 2017. The economics of European integration: Theory, practice, policy. Routledge.