Determinants of Foreign Direct Investment and the Advantages Theory

Abstract

This study reviews three classic international business theories and some related empirical studies to identify the gaps in the literature and suggest future research directions. In international business studies, most analyses on the determinants of FDI are centered on three concepts of firm-specific, internalization, and location advantages according to the monopolistic advantage theory, internalization theory, and OLI paradigm. These three advantages determine whether a firm will internationalize, how it will enter foreign markets, where it will locate in the host country, and how it will perform in a foreign market. However, These theories are set up with the premise of firm-specific advantages and cannot be used to explain the phenomenon of emerging market multinational enterprises, which have emerged in large numbers in recent years. Simultaneously, these theories, which focus on manufacturing, need to be used to explain the internationalization of the service industry in-depth and with greater relevance.