The Evolution Of Foreign Direct Investment Theories: How Can Institutions Relate?

Theories of Foreign Direct Investment (FDI) have evolved over the past few decades. There are theories which try to explain the motivation behind investments, and there are others to explain why companies go abroad. To understand the motivations of firms in today’s economic environment, we have to trace the evolution of these theories. At first, researchers tried to explain capital movements with trade theories. However, because of the strict conditionality, they only explained a small part of FDI. To extend the validity of the models, researchers started to examine investments from the firms’ point of view. The models evolved from Vernon’s product life cycle model, through Hymer’s monopolistic advantage model, to Dunning’s eclectic theory. These firm-based theories highlighted the importance of entrepreneurs. Dunning’s theory includes the statements which featured in previous models. We can find monopolistic advantage, localization and internalization models in this argument. This study is an attempt to relate the issue of FDI to institutions. There is a rapidly growing literature on the subject of new institutional economics, which indicates that the effect of institutions can appear in any economic situation. These effects can be shown in Dunning’s theory, too. The consensus view seems to be that institutions play a significant role in ownership, in localization and in internalization advantages. Consequently, we can find them in the other models, too. The purpose of this paper is to ident