This project has been funded with support from the European Commission (226388-cp-1-2005-1-de-comenius-c21). This publication reflects the views only of the authors

Billion $	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004
2005
World	Export	5,163.5	5,401.3	5,589.2	5,498.9	5,709.5	6,452.5	6,185.6	6,485.7	7,578.3	9,203.1	10,431.2
	Import	5,283.9	5,545.1	5,738.1	5,681.4	5,919.6	6,724.0	6,481.1	6,739.8	7,856.6	9,555.6	10,783.4
Germany	Export	523.5	524.6	512.9	543.8	543.5	551.8	571.6	615.8	751.6	909.9	969.9
	Import	463.9	459.1	445.7	471.5	474.0	497.2	486.1	490.3	604.6	715.7	773.8
Czech Republic	Export	21.3	22.2	22.4	25.9	26.6	29.1	33.3	38.5	48.7	69.0	78.2
	Import	25.1	27.8	27.1	28.3	28.5	32.0	36.3	40.7	51.7	70.0	76.7
Lithuania	Export	2.7	3.4	3.9	3.7	3.0	3.8	4.6	5.5	7.2	9.3	11.8
	Import	3.7	4.6	5.6	5.8	4.8	5.5	6.4	7.7	9.8	12.4	15.5
Turkey	Export	21.6	23.2	26.3	27.0	26.6	27.8	31.3	36.1	47.3	63.2	73.4
	Import	35.7	43.6	48.6	45.9	40.7	54.5	41.4	51.6	69.3	97.5	116.6
USA	Export	584.7	625.1	689.2	682.1	695.8	781.9	729.1	693.1	724.8	818.8	904.4
	Import	770.9	822.0	899.0	944.4	1,059.4	1,259.3	1,179.2	1,200.2	1,303.1	1,525.5	1,732.3

Source: World Trade Organization, 2006, p. 199 – 202.
While this increase in the world trade makes the consumption of goods and services of the home country possible in other countries, it also creates the diffusion of the consumption patterns, culture, social life and life expectancies of the home country into the whole world. The striking point in this process is that although all the countries make certain amounts of export, their effects on the world differ as their shares in total exports vary. Should the world export figures are examined, the hegemony of the USA prevails, except for 2004 and 2005. Therefore it is not a coincidence that the process of globalization in which trade increases is denoted at the same time as Americanization.
If the ratios of world trade volume to the world income in 1999 (46.63%) and in 2005 (53.84%) are compared, it is seen that even in this short time span the world trade increases faster than the world income and therefore the international trade and globalization are important. The increased ratio of trade increases the effects on the world and creates positive and negative ideas on the subject.

1.1.4. Multinational Companies as a Transporter: Theories of MNCs and FDI

MNCs are the companies that make FDI and produce value added in more than one country and own this process. These companies may prefer to produce where the product will be marketed instead of producing in the home country and export it. If this preference is analyzed at country or the source of investment points of view instead of firm viewpoint, one encounters with the subject of FDI.
The Organization for Economic Co-Operation and Development (OECD) and the International Monetary Fund (IMF) have reached a common definition of FDI with their collective studies. Accordingly FDI means the international investment in s foreign country done by a resident company in one economy with the intention of the creation of long-lasting business relation.

1.1.4.1. Theories of MNCs

MNC has become a concept of that concerns the business world with the establishment of the so called first MNC, Dutch-East India Company in the 17^th century. The company was the first that allocates the risk as international trade has considerable risks and allows collective ownership through share issuing that is the impulse of globalization.
The modern MNCs were formed mainly in Europe, particularly in Belgium (Cockeril), Germany (Bayer), Switzerland (Nestle), France (Michelin) and UK (Lever) in the 19^th century and applied FDI strategies in order to overcome the difficulties in exports resulted from tariffs. The aim of MNC is to get capital where it is cheapest and produce where they get the highest rate of return.
Today the number of MNCs and their efficiencies in the world increase parallel with the globalization process. The number of such companies is more than 37,000 as of 2000 in the world. The number of branches or agencies of MNCs’ in different countries has reached to 450,000. Therefore theories of MNCs have been developed. The most significant ones of these theories are the location and internationalization theories.

1.1.4.1.1. Location Theory

According to the location theory the location of the production is determined by the resources. The determining factors of the location choice are the cost of transportation and trade barriers. If the transportation costs are high then the production is located in the country or region where the product will be marketed. Another reason of such relocation is the high tariff rates that the host country applies.

1.1.4.1.2. Internationalization Theory

According to the internationalization theory the reason why production is done by only one company instead of many in various locations is that it is more profitable to produce with one company.
In the explanation of the advantage of internationalization the first approach of the internationalization of MNCs emphasizes the importance of technology transfer. Technology transfer may come across with some difficulties. It is difficult for a potential buyer to appraise the actual value of knowledge. Besides knowledge can not be packed and sold. The intellectual property rights are also difficult to secure. Therefore for a MNC the establishment of a new enterprise in a foreign country is more profitable than the sale of technology to another company.
The second approach intensifies on vertical integration. For example under the assumption that both companies are monopolies, the price of input used by first company and produced by second company is tried to be lowered and increased by the first and second companies respectively. Therefore a dispute between these two companies will exist. Moreover some coordination problems may occur because of the demand and supply imbalances between two companies. Volatile prices constitute high risks for both companies. In case of a vertical integration of these two companies the problems will disappear or be relieved.

1.1.4.2. Theories of FDI

FDI started to be analyzed as it partly substitutes and represents trade and because of its effects on the home and host countries. These analyses have resulted with theories; these theories have diversified and evolved according to the flows, theories of economics and the effects they generate.
Main stream of the FDI theories with imperfect competition encompasses Product Life Cycle Theory, Internationalization Theory and Eclectic Paradigm. Besides these main stream theories there are also instrumental theories.
Although any of these theories is sufficient by itself in explaining all the FDI flows, each of them has considerable contribution in the explanation of FDI flows.

1.1.4.2.1. Product Life Cycle Theory

Theory explains international production that the traditional Neo-Classical trade theory does not. Theory becomes important in the literature with Vernon’s paper “International investment and international trade in the product cycle” in 1966.
Figure 1: Product Life Cycle Theory

Source: [Available at http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/img/productlifecycle.gif], (Accessed 04.02.2008).
According to the theory, an innovation occurs in the unsatisfied markets where per capita income and purchasing power are high because the sale of high priced product that contains the innovation and therefore the research and development (R&D) costs is easier in such markets. Furthermore in such markets the communication between producers and consumers is advanced. Therefore the markets with the ease of taking feedbacks which is important for the process of product standardization are proper as the location of production initially.
After the product started to be produced in such a market, the demand for the product increases and the product get standardized. The increased standardization does not stop the product differentiation process, in the contrary the increased competition boosts specialization (i.e. the shift to the production of table radios, automobile radios and mobile radios from the radio production).
Increased production affects the choice of production location. As the product standardizes the production also standardize and the need for elasticity decreases while the cost of production becomes important. Increased importance of cost connotes the question of whether to move the production into low-cost locations or not. This choice is done through the comparison of the costs in the host country and home country together with the transportation cost to the host country.
Consequently production shifts from the high-cost home country to the relatively low-cost developing country.
In the beginning the home country produces and markets the product only domestically and therefore she starts to export and finally relocates its production into foreign countries. At the final step most of her production relocates and she may even become a net importer.
Although the product cycle theory has crucial contributions for the explanation of FDI flows, it can not be used for the resource-seeking FDI. Besides the theory is also criticized as it becomes weaker in the short-life-cycle cases, it loses importance in contemporary economic structure as most of the innovations are done by MNCs, and it overrates the ambiguity and costs of overseas production.

1.1.4.2.2. Internalization Theory

Internalization theory tries to explain whether MNCs use leasing or licensing methods for the sale of their products abroad or they produce abroad through FDI by themselves. In other words it answers the question why a company prefers FDI instead of producing in the home country and then exporting it.
The theory is based on the study of Buckley and Casson in 1976. According to the theory firms maximize their profits in an imperfect competition environment. In this process if

• 
  Transportation costs are high, there are trade barriers,
  
• 
  There is the problem of inadequate foreign market information,
  
• 
  There is information asymmetries between sellers and buyers,
  
• 
  There are transaction cost-increasing conditions, the firm chooses internalization and make FDI.
  

Thus firms may avoid delays, bargaining and customer ambiguities, and take the opportunities of the minimization of governmental regulations’ adverse effects through transfer pricing and price differentiation between different markets.

1.1.4.2.3. OLI Paradigm (Eclectic Paradigm)

The theory has the most extensive scope among FDI theories. Dunning has created the theory by combining many former studies (eclectic).
According to Dunning production of a firm in a foreign country depends on these three conditions:

1. 
   Firm should have tangible and intangible assets and skills so that can compete with the domestic firms of the host country who have national knowledge and experience.
   
2. 
   For a firm through an advantage taken from the host country it should be more profitable to produce in the host country than to produce in the home country and export it.
   
3. 
   Making FDI should be more profitable than selling, leasing or licensing the skills.
   

These conditions which are called OLI by Dunning are the ownership (O), location (L) and internalization (I) advantages respectively.
The ownership advantage can be achieved through privileged ownership of some income bearing properties (patent, trade secrets or trademarks) and governance of separate but related activities from one head firm (economies of scale and synergy, diffusion of geographical risk and cross-country arbitrage).
The location advantages are those caused by the superiority of production method in the host country, high transportation costs, cheap labor, and proximity to the consumers, local image and the foreign governments’ trade applications.
Internalization advantage means the advantage that is caused by the imperfect competition.
Although the theory is much broader than the others, it is also criticized. First criticism is the decreased significance of the variables as they are immense. The variables are correlated with others. Another criticism is that the theory is static and can not explain the paths and processes of firms in the internalization process. Some blames the theory as entirely micro economic and even claims that it has no difference with the theory of internalization.

1.1.4.2.4. Other Theories

Although these theories are not as popular as the main stream theories, they have significant contributions in the development of main stream theories.