The Multinational Firm and the Theory of Industrial Organization

The theory of foreign direct investment (henceforth referred to as FDI) is of relatively recent origin. It was first put forward in 1960 by Stephen Hymer in his PhD thesis at Massachusetts Institute of Technology (MIT) (Hymer, 1976). Before that time, the various international capital movements were not distinguished from one another, since they were all explained in terms of differentials in interest rates between the various countries. However, this theory was at odds with certain facts and trends, already clearly identifiable at the end of the 1950s, which were to characterize the next two decades. In particular, there were : the local financing of the foreign subsidiaries of American enterprises, and the simultaneous onset of portfolio investment from European countries in the United States and of FDI from the USA in Europe. These factors made it extremely difficult to accept a single, unified explanation of all these different capital flows. The predominance of FDI in some industries, and at the same time the existence of crossed FDI in a particular industry, were further factors which underlined the need for a specific hypothesis to explain the phenomenon of FDI and induced researchers to seek the hypothesis in the field of industrial organization and outside balance of payments theory.