Mac Dougall -Kemp Hypothesis
FDI moves from capital abundant economy to capital scarce economy till the marginal production is equal in both countries. This leads to improvement in efficiency in utilization of resources in which leads to ultimate increase in welfare. According to this theory, foreign direct investment is a result of differences in capital abundance between economies. This theory was developed by MacDougal (1958) and was later elaborated by Kemp (1964)
Industrial Organization Theory Mac Dougall -Kemp Hypothesis
According to this theory, MNC with superior technology moves to different countries to supply innovated products making in turn ample gains. Krugman (1989) points out that it was the technological advantage possessed by European countries that led to massive investment in USA . According to this theory, technological superiority is the main driving force for foreign direct investment rather than capital abundance.
Currency Based Approaches
A firm moves from strong currency country to weak currency country. Aliber (1971) postulates that firms from strong currency countries move out to weak currency countries. Froot and Stain (1989) holds that, depreciation in real value of currency of a country lowers the wealth of a domestic residents visa avis the wealth of the foreign residents, thus being cheaper for foreign firms to acquire assets in such countries. Therefore, foreign direct investments will move from countries with strong currencies to those with weak or depreciating currencies.
Location-Specific Theory
Hood and Young (1979) stress on the location factor. According to them, FDI moves to a countries with abundant raw materials and cheap labor force. Since real wage cost varies among countries, firms with low-cost technology move to low wage countries. Abundance of raw materials and cheap labor force are the main factors for FDI. Countries with cheap labor and abundant raw material will tend to attract FDI.
Product Cycle Theory
FDI takes place only when the product in question achieves specific stage in its life cycle-introduction, growth, maturity and decline stage. At maturity stage, the demand for new product in developed countries grow substantially and rival firms begin to emerge producing similar products at lower price. So in order to compete with rivals, innovators decide to set up production in the host country so as to beat up the cost of transportation and tariffs.
Political-Economic Theories
They concentrate on the political risks. Political stability in the host country leads to FDI (Fatehi-Sedah and Safizeha 1989). Similarly, political instability in the home country encourages FDI in other countries(Tallman 1988).