On the Determinants of Foreign Capital Flows - DAAD partnership ...

included in the model, the movement of capital flows internationally is no longer responsive
to interest rates (Hymer 1960-1969).
Following Hymer, much literature has contributed to theories to FDI. For instance, the
internalization approach (1976) underlines the fact that the influence of imperfections in
the capital market provides a strong impetus for firms to internalize operations. Buckley
and Casson (1991) claimed that if firms keep operations internal through wholly-owned
subsidiaries rather than using foreign investment instruments in terms of licensing, patenting
or trademarks, they are more apt to minimize transaction costs, hence increasing productive
efficiency.
All such writers added more and more determinants to FDI as a whole. But the need to
integrate location specific factors to internalization variables to explain capital flows seemed
to be important. In this line of thought, Dunning’s (2004) OLI paradigm explains that
multinational firms mainly responsible for bringing FDI in host countries enjoy three
distinct types of advantages, namely, ownership, locational and internalization benefits.
Ownership advantages may be in terms of primarily, monopolistic gains through the
possession of scarce natural resources or patent rights, technology–knowledge gains or even,
economies of large size. Locational benefits will include economic, political, social and
cultural advantages amongst others whilst internalization advantages will bring about the
right choice of mode of entry in order to operate efficiently in the host economy.
However over the years, economic, social and political factors, cultural aspects as well as
government policies have all turned out to be equally significant in establishing a proper
environment to attract FDI. The Dynamic macroeconomic FDI theory suggests that FDI is
a long term function of multinationals’ strategies. Time plays an important role and timing
of investment depends on the macroeconomic environment at that particular period in the
host country as well as its degree of openness and rate of economic growth. Risk
perceptions also lie as a determinant (Sanjaya Lall 1997).
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