Caves Economies: According to Caves, if a firm wants to invest horizontally (the production of the same product in another location) its property should prevail the advantage of domestic firms in the host country resulting from being resident and the firm should decide that FDI is more profitable than either export or licensing.
Caves believes that the following factors are important in the decision stage of FDI:
Product differentiation (is formed with subjective alterations by little physical modifications, branding, advertisement, marketing strategies and differences in the complementary products; and maintained by property rights and high cost barriers against physical imitation).
The FDI decision in vertical foreign investment (the production in which each part of a product may be produced in different locations and finally assembled) is made after the determination of optimal vertical integration level.
Oligopolistic Reaction Theory: According to the Oligopolistic Reaction Theory of Knickerbocker, one firm invests in one country in order to increase its market share. Immediately thereafter the other rival oligopolistic firms invest in that country in order not to lose their market shares. This kind of investment is also known as “Follow-the-leader”. Besides as firms avoid ambiguities and risks, they wait for an investment of a leader firm before themselves and its consequences and then they invest. This constitutes the reasoning of follow-the-leader theory.
Hymer and Kindleberger’s Theory: The most important contribution of Hymer’s doctoral dissertation -completed in 1960- to the theory of FDI is that it explains why MNCs transfer intermediate goods such as knowledge and technology among countries.
Hymer separates two types of the division of labor. He states that the division of labor among firms is controlled by markets and therefore is the subject of international trade theory and the intra-firm division of labor is controlled by the entrepreneurs.
Hymer and his instructor Kindleberger rather focus on firm-specific factors. Foreign firms have superiority such as the ability to find cheap capital, marketing experience, privileged entry permits for some markets, patented or non-tradable technology, managerial efficiencies and economies of scale. Hymer and Kindleberger can not explain precisely why a firm having these advantages tends to make FDI instead of export or leasing. Therefore the theory remains only as a guideline to other theories. On the other hand all the studies following Hymer’s dissertation are constructed upon Hymer’s ideas.
