It is difficult to exaggerate the importance of foreign direct investment (FDI). Globalization is the result of FDI, in which the world slowly becomes one large market and one large factory as trade and investment merge into each other. The factors and problems that drive this creation of a "one-world" factory are subject to debate at all levels of society.
Foreign Trade
Foreign trade is not FDI since it is just the cross-border trading of goods rather than opening plants in other countries. The well-known "neo-liberal" concept of foreign trade is that certain countries have inherent advantages in the creation of a product. Such things as native talent, natural resources or low-paid labor can give one economy or firm an edge over others. It makes sense to buy goods from that source since others would be more expensive. Trade is then justified both on the grounds of consumer choice and low price.
Foreign Investment
FDI derives directly from trade. An important theory of FDI holds that it is something forced upon countries, given the inherent advantages one society has over the domestic economy. A firm can become more "competitive" if its raises efficiency standards. This might require FDI since the firm can directly avoid any tariff barriers, take advantage of cheap labor and have immediate access to raw materials and new markets. In other words, FDI is a way to take advantage of local advantages to undercut both foreign and domestic competition.
Internal Market Theory
An important approach to FDI comes from the "intellectual property" tradition. Economist Francis Cherunilam holds that the "internalization" theory occurs when a firm has valuable and exclusive technological inventions that it wants to keep away from competitors. A firm will then "go global" in order to create an international network of plants and distribution centers so the firm can keep a close eye on the dissemination of the technology at issue. To "license" foreign firms to use the technology is just too risky under this theory.
Product-Centered Approaches
Although it is common to think about FDI relative to location-specific advantages such as labor, approaches like internalization or life-cycle theories are more specific to certain types of firms, especially those in high-technology sectors. Life-cycle theory holds that the product is the reason for foreign investment. The firm, having created a new product that utilizes new technologies, will eventually lose its domestic advantages as patents run out and other firms catch up. Therefore, the firm will relocate to less advanced societies to take advantage of its domestic lack of competition in these industries. In other words, as a new product becomes no longer novel at home, a firm will then seek to compensate for this by relocating to a society without the technical sophistication of the domestic economy and can extend the life-cycle of the product.
