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Foreign Direct Investment FDI refers to capital expenditures by companies with their head office in another country to either acquire assets of an existing firm in a foreign country with the intention of playing a role in managing those assets or to establish a new firm Put more simply a firm in one country invests in another country in order to control and manage an actual productive capacity that will generate output There are a number of causes of FDI some of which can be applied to almost all foreign investment and others that are specific to the country in which the investment is being undertaken The more general causes of FDI are h Neo-classical theory This refers to the comparative advantages or natural resource advantages held by a particular country compared to another If a country has a comparative advantage over another ie higher factor endowments compared to the other country then it makes sense for the country with the lower factor endowments to invest in the other country and benefit from the higher productivity there For example lower labour costs or higher labour productivity in one country would encourage firms in another country without these benefits to invest and produce in this country in order to gain from this comparative advantage h Ownership Location and Internalisation Paradigm A firm may wish to produce in another country the OLI paradigm explains why it does this through FDI as opposed to other methods of production such as licensing a domestic firm to produce you good The ownership factor indicates that a firm may wish to purchase an existing firm and use takeovers as a means of expansion rather than starting a new firm from scratch The location argument implies that a firm may benefit from having production facilities outside the domestic country By being able to produce in different areas of the world the firm can reduce transportation costs and
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