Question

Compare and contrast these explanations of FDI: internalization theory and Knickerbocker’s theory of FDI. Which theory do you think offers the best explanation of the historical pattern of FDI? Why?

Answer 1

Answer:

The main contrast between the two theories can be summarized as follows:

The internalization theory of multinational firms proposes that direct international investment occurs when a firm has information-related intangible assets with public good properties.

The Knickerbocker theory assumes that markets are monopolistic and firms are oligopolistic and firms try to match each other's moves to keep each other in check so as not to allow a rival gain a competitive advantage over others.

Explanation:

After 1945, global Federal Direct Investment (FDI) flows did recover from depression and war, but the geographical pattern of foreign investment was completely transformed. In the postwar economic boom of 1945-80, most of the investment flows took place within and between developed countries

These increases in the flows of foreign investment have themselves marked a new and distinct phenomenon in the era of globalization. Several factors have helped drive this growth such as technological strides in the world of business.

The Knickerbocker theory offers the best explanation and emphasizes interdependence of major players in the same industry.