The Direct Theory of International Investment in the Theory of International Capital Flows

The 1970s was the era of rapid development of transnational corporations (TNCs). According to the information released by the United Nations Center for Transnational Corporations, in 1973 there were 9,481 transnational corporations in the world*** with more than 30,000 subsidiaries. The development of transnational corporations, so that it is increasingly becoming the main body of international investment, has aroused widespread concern. Take the United States alone as an example, the United States transnational corporations in the entire 70's direct investment in developed countries from 51 billion U.S. dollars to l 57 l billion U.S. dollars, an increase of 2.08 times. Overseas investment activities of transnational corporations, to international investment has brought a series of new problems, and to the traditional theory of international capital flows put forward a challenge. Because the reasons for TNCs' overseas investment cannot be answered from the traditional profit differentials, especially in the case of an efficient capital market that can transfer money from low-interest countries to high-interest countries, pure profit cannot explain overseas direct investment. Thus, the "industrial organization theory" was born.

1, monopoly advantage theory

The theory was first put forward by the American scholars Kindleberger (C. P. Kindleberger) and Hymer (S. A. Hymer) and others. The so-called monopoly advantage, refers to the multinational corporations have the "exclusive production factor advantage", including high degree of capital concentration, advanced technology, strong ability to develop new products, perfect sales system and scientific management style.

They believe that the answer to the question of why a country invests abroad should be found in the form of industrial organization and in the monopoly advantages possessed by multinational corporations. They pointed out that the reason why a company invests abroad is that these companies have monopoly advantages in technology, patents, capital and management, and these advantages can be transferred abroad through industrial organization without being grasped by local competitors. Therefore, although in the competition with local enterprises, these companies in transportation, communication costs and understanding of the local legal and economic environment is at a disadvantage, but the monopoly advantage can completely offset these disadvantages, so that transnational corporations overseas investment to obtain higher than the domestic returns. Kindleberger also argues that most of those with these advantages are large oligopolies that can exploit their economies of scale in production and marketing both domestically and globally.

Their theory was later developed and improved by many scholars in different perspectives. For example, Hirsch (S. Hirseh) emphasized the cost reduction effect of direct investment from the model economic benefits of production and scientific research and development; Shapiro (D.M. Shapiro) concluded after studying foreign investment in Canada that large high-tech enterprises, more than the general ability to enter or exit a particular industry, capital mobility is more flexible, and therefore they have the ability to enter or exit a particular industry, and therefore they have the ability to enter or exit a particular industry, and therefore they have the ability to invest in the right place, without being subject to the national investment. Krugman (P. R. Krugman) and Caves (R. E. Caves) observed that direct investment is usually divided into two categories, one is parallel investment and the other is "vertical investment". They argued through the product model that vertical investment is the result of the integration of the entire production process, to avoid price distortions and supply fluctuations of upstream products or raw materials, and the establishment of overseas branches to ensure supply, reduce costs and increase monopoly power.

2, market internalization theory

In the industrial organization theory based on another investment theory, namely, Buckley (P. J. Buekley) and Carson (M. C. Casson) of the market internalization theory or market imperfection theory. The so-called market internalization, mainly refers to the establishment of the market in the company's internal, to the company's internal market instead of the company's external market. The starting point of this theory is to explore the imperfections of the external market and to explain the determinants of OFDI in terms of the relationship between such imperfections and the allocation by TNCs of their internal resources.

The theory holds that, due to the incompleteness of the external market, if the "intermediate products" such as semi-finished products, process technology, marketing know-how, management experience and personnel training owned by the enterprise are traded through the external market, the enterprise cannot be assured of maximizing its profits. Enterprises can only solve the contradiction between the internal resource allocation efficiency of enterprises and the external market by utilizing OFDI, establishing production and operation entities in a larger scope, forming their own integration space and internal exchange system, and transforming the open external market transactions into internal market transactions. This is because internalized transactions will minimize transaction costs, and in the internal market, buyers and sellers have an accurate understanding of product quality and pricing, and information, knowledge and technology can be fully utilized, thus reducing trade risks and maximizing profits.

The theory that the incompleteness of the external market is reflected in many aspects, mainly: (1) the existence of monopoly buyers, making it difficult to bargaining transactions; (2) the lack of forward hedging market to avoid the risk of enterprise development; (3) the absence of intermediate products market according to the different regions, different consumers and the implementation of differentiated pricing; (4) the information is not effective; (5) the government's intervention and so on. In order to minimize the impact of these market imperfections and to make the desired return on the advantages and intermediate products produced by the enterprises, the enterprises usually invest overseas.

The theory further states that whether the market can eventually be internalized depends on the following four factors: industry-specific factors (nature of the product, external market structure and economies of scale, etc.), region-specific factors (geographic distance, cultural differences, and social characteristics, etc.), country-specific factors (the country's political system, fiscal system, etc.), and firm-specific factors (the ability of internal market management of different business organizations, etc. ). The most critical of these is industry-specific factors.

This theory, is a powerful measure against market incompleteness. It explains the advantages of internalization - lower transaction costs and reduced risk - that can be achieved by multinational firms created through direct investment. It also explains to a 'degree or extent the formation and development of various forms of outward foreign direct investment in the post-war period, including transnationally operated service industries, such as transnational banks. However, this theory is only a micro-analysis, does not analyze the international production and division of labor of multinational corporations from the height of the integration of the world economy, and also ignores issues such as industrial organization and investment sites.

3, product cycle theory

Another international investment theory related to the theory of industrial organization is Vernon (R. Vernon) "product cycle theory". Vernon believes that the development of the product cycle of the enterprise's law, determines the need for enterprises to occupy overseas markets and to invest abroad. He pointed out that products have their own characteristics at each stage of their life cycle. At the stage of product innovation, the innovating country has the advantage, generally the domestic market demand is greater, then the most favorable is to arrange for domestic production, foreign demand through exports can be satisfied. After the product enters the mature stage, the product performance is stable, the foreign market is expanding, the price elasticity of consumption increases into, then there is an urgent need to reduce costs. If the marginal cost of domestic production plus transportation costs over the average cost of production in foreign factories, if there is also a difference in the price of foreign labor, then the production in foreign countries is more favorable. Moreover, at this stage, foreign competitors will also appear, because as the product is exported, the technology will gradually leak out, and there is then a danger of losing the technological advantage of the innovative product. In order to maintain the market and prevent overseas competition, it is necessary to establish branches abroad. Investments on this stage are often made in countries with similar needs and little difference in technological level with the home country. When the product finally enters the standardization stage and production has been standardized, price competition becomes the main aspect and the comparative advantage is no longer technology but labor. In order to achieve competitive advantage, enterprises accelerated the pace of foreign direct investment to low-cost countries or regions to establish subsidiaries or other branches.

4, technology cycle theory

Another scholar Masee (S. P. Masee) from the perspective of technology, information rent-seeking and Vernon's theory similar to the "technology cycle theory". He believes that enterprises spend huge sums of money to create technology and "information", is an attempt through these technologies and information to produce and sell related products in order to obtain monopoly rents. However, patent protection is imperfect, so that their rent-seeking objectives are difficult to satisfy domestically, and firms have a rent-seeking incentive to transfer capital to countries that they believe offer additional patent protection. Markey points out that TNCs specialize in the production of technological information suitable for intra-firm transfer and will specialize in the production of complex technologies in order to ensure that they appropriate them and receive their fair share of rents. He also argued that the mass production of new products leads to technologies becoming less and less important. For this reason, he developed the concept of the "industrial technology cycle".

He argued that at the development stage, TNCs tended to keep tight control of these technologies in their own countries and would not transfer them. At the utility stage, driven by the objective of maximizing rents, TNCs would export their capital overseas to set up branches through which they would transfer their technologies. As TNCs increase their investment abroad and expand their scale of production, their technology cycle reaches the maturity stage, at which point the scale of TNCs' investment abroad will again be gradually reduced as their technologies become obsolete.

All the above kinds of international investment theories related to industrial organization theory have a ****same feature, which is to analyze the impact of monopoly advantage on multinational corporations' overseas investment from the perspective of industrial organization behavior on the basis of industrial organization. The monopoly advantage theory focuses on the constraining influence of the total monopoly advantage of TNCs and emphasizes that this advantage is an advantage from the perspective of industrial organization rather than a country-specific advantage, which correctly points out the main role of TNCs in international direct investment. The market internalization theory or market imperfection theory focuses on the motivation of TNCs to seek to minimize production costs, which is also correct, since minimizing costs means maximizing profits. The product cycle theory focuses on analyzing how TNCs strive for the most favorable production conditions at different stages of the development of their products to maintain their monopoly advantage and its impact on international investment. This is also true in general.

Technological Cycle Theory emphasizes the impact of the rent-seeking incentive of TNCs to create new technologies on overseas investment, and its arguments are similar to those of Product Cycle Theory. To the extent that most MNCs are large firms with a technological development advantage, this theory also has a unique role to play. However, all of the above theories have the flaw of confusing the intrinsic motivation for OFDI by TNCs with the extrinsic objective conditions, and confusing the nature of TNCs' pursuit of monopoly profits on a global scale and the distinction between them and the global production and distribution capabilities and other objective conditions they possess. These theories can not explain the motives of some enterprises that do not have monopoly advantages such as technology and other overseas investment, as well as the investment behavior of some countries in the direct development of new products abroad and other issues. 1, eclecticism theory

From the mid-1970s, international investment appeared some new phenomena and new features: in the developed countries continue to export capital in large quantities at the same time, some developing countries have also begun to outward foreign direct investment, and there is a growing parity. Especially after the first oil crisis, the oil-exporting countries' overseas investment has increased a lot. For these new phenomena, the international investment doctrine of industrial organization theory, which takes developed countries' transnational corporations as the main object of analysis, is difficult to explain clearly, and then a new theory needs to be born. Dunning (J. H. Dunning) of the "eclecticism theory" is a representative of the theory appeared at this time.

Dunning tried to analyze international investment by combining the theories of international trade and industrial organization. According to him: "The reason for calling it 'eclectic theory of international investment' is that;

(1) it incorporates the major theories that have been used to explain international investment over the past 20 years;

(2) it applies to all types of foreign direct investment;

(3) it is a good way of analyzing international investment, and it can be applied to all types of foreign direct investment.

(3) perhaps most interestingly: it includes the three main forms in which firms go international, namely direct investment, commodity exports, and contractual resource transfers, and suggests which approach firms should take under which circumstances."

The main points of this theory of Downing's are:

(1) It begins with an analysis of the conditions that are sufficient and necessary for a firm to make outward direct investment.

The theory states that there are three forms of international economic activity in which a country's firms engage: direct investment, export trade, and technology transfer. Direct investment necessarily entails higher costs and increased risk. The reason why TNCs are willing and able to develop overseas direct investment is that they possess three comparative advantages, such as ownership-specific advantages, the ability to internalize ownership-specific advantages and location-specific advantages, which local competitors do not have. The first two are necessary conditions for OFDI, while the latter is a sufficient condition. These three advantages and their combination determine which form of activity a company chooses to engage in economic activity.

If a company has the specific advantage of ownership, it can only choose the program of technology transfer for international economic activities; if it has the specific advantage of ownership, and the advantage of internalization, it can be exported; if all three advantages, it can be foreign direct investment.

(2) further points out the main content of ownership-specific advantages. Including: ① technological advantage, which also includes technology, information, knowledge and tangible capital, etc.; ② enterprise scale advantage, which also includes monopoly advantage and economy of scale advantage; ③ organizational and management ability advantage; ④ financial advantage (including money).

(3) points out the location-specific advantages of content. Including: ① labor costs; ② market demand; ③ tariff and non-tariff barriers; ④ government policies, etc..

Downing's theory focuses on analyzing the conditions of direct investment, and it is correct in terms of the conditions of international investment constituted by these advantages, which can explain the phenomenon of international direct investment in different types of countries, and it is also very informative for enterprises to choose different internationalization development strategies. However, this theory, which attributes all international investment to the three factors of advantage, is inevitably absolutist. Certain types of firms, such as service firms, have no obvious regional advantage in investing overseas, and the reason for investing overseas is determined by the characteristic that the service it provides must be in the same location as the consumer.

2, diversified risk theory

Another theory developed in the mid-1970s about the conditions of investment is the "diversified risk theory". Its representative of the early Caves (R. E. Caves) and Stevens (G. V. Stevens). They start from Markowitz's portfolio theory, that OFDI diversification is the result of risk diversification, so the basis of portfolio theory is also the basis of the theory. According to Kevs, horizontal investment in direct investment reduces market uncertainty through product diversification and reduces the risk of a homogeneous product mix, while vertical investment is designed to avoid the risk of uncertainty in the supply of upstream products and raw materials. According to Stevens, the principle of risk diversification by manufacturers is the same as that of individuals, which always requires that the risk is sought to be minimized with a certain expected reward. However, the individual investment conditions are not the same as the enterprise, individuals invest mainly in financial assets, manufacturers invest in real estate, investment in different countries and regions of the plant and equipment.

The theory of the late representatives of Agmon (T. Agmon) and Li Shad (D. Lessard) also believes that multinational corporations foreign direct investment is on behalf of its shareholders as a diversification of risk investment, the irrelevance of the returns of direct investment in different countries and regions for the individual to diversify the risk of a very good way, and even securities investment can not be provided by way of the securities market, because of the securities market. The cost of moving capital is high and the system is imperfect. Another scholar Adler (M. Adler) that, since multinational corporations are directly on behalf of shareholders to make investment decisions, individual into the securities investment on the restrictions do not necessarily lead to foreign direct investment, only when the foreign securities market is imperfect, can not meet the needs of personal investment, multinational corporations direct press investment. In this case, multinational corporations play the role of financial intermediaries to diversify risk.

The diversified risk theory links portfolio investment with direct investment, and regards the imperfection of developing countries' securities market as a factor of direct investment, which should be said to have its correct side, and it supplements the insufficiency of the previous investment theories from another angle. since the 1980s, with the gradual improvement of developing countries' securities market, portfolio investment has gradually become the most important form of investment. This proves that direct investment and portfolio investment have complementary roles. China is now making great efforts to improve the environment for foreign investment and is striving to attract more foreign investment. However, we should not neglect the role of further developing and perfecting China's securities market, because according to the theory of risk diversification, securities investment is the first form of investment considered by foreign enterprises. With the continuous improvement of China's securities market, the amount of foreign investment absorbed through this channel will surely increase greatly. After crossing into the 1980s, the pattern of international investment has changed greatly. The United States from the status of the largest capital exporter gradually declined down, Japan, Germany and other developed countries overseas investment rose sharply. The United States became the object of their competing investments, and by 1985, the United States had become the largest capital-importing country. At the same time, some newly industrialized countries also began to invest overseas. With the international investment pattern changes corresponding changes is the role of the international financial market in the international capital flows more and more big, emerging international financial center one by one and with the help of the achievements of the scientific and technological revolution into one, the newly created means of financing and financing methods are also endless. International banking syndicates and financial oligarchs have replaced industrial transnational corporations as the masters of international investment. All these have posed new challenges to the previous theories of international investment. As a result, the theory of studying and analyzing international investment from the financial point of view has become the ****same feature of the new investment theory since the 1980s.

1, currency exchange rate theory

Aliber (R. Aliber) of the "currency exchange rate theory" is an early investment theory from the financial point of view. He argues that all previous theories have failed to answer why these firms have the advantage of access to foreign assets, nor have they provided any views on the pattern of investment, i.e., why some countries export capital and others import it, nor have they explained why the pattern of investment has changed.

He points out that there was an advantage in the U.S. capital markets in the 1960s that stemmed from the fact that investors in the U.S. and around the world had a preference for denominating their debt in dollars, which was reflected in the fact that interest rates denominated in dollars were lower than those in other currencies when adjusted for expected exchange rate fluctuations. This led to the same conclusion that investors would have to pay more for a dollar of dividend income, which in turn meant that U.S. firms were able to pay more for foreign equity than firms in other countries. He argues that the high level of U.S. investment abroad throughout the 1960s was the result of an overvalued dollar. With the introduction of floating exchange rates in the 1970s, the dollar fell dramatically, so U.S. stock market prices fell and foreign stock market prices rose. At this time, the headquarters in Europe, Japan's enterprises are willing to pay a higher price to buy U.S. companies. Alibert pointed out that the pattern of international investment can be measured from the headquartered in different countries in the enterprise market price rise and fall. Capital flows in when the market price of firms headquartered in different countries falls, and capital flows out when the market price rises. Changes in the market prices of firms headquartered in different locations were a reflection of changes in nominal exchange rates and inflation rates. Therefore, he believes that hard currency countries will make direct investments in soft currency countries.

This theory of Ariber is more correct to analyze the impact of exchange rate changes on international direct investment, he tried to use the exchange rate to explain the changes he observed in the pattern of international investment and the relative shrinkage of U.S. foreign investment. However, the exchange rate is a reflection of changes in the real price of currencies and of changes in international economic power, not the cause of such changes. Therefore, the impact of exchange rates on direct investment is only a phenomenon, really lead to changes in the pattern of international capital flows and constraints on international investment behavior is the relative advantage of monopoly capital in various countries and changes in the relative rate of development, which is the result of the law of imbalance in the development of capitalism plays a role.

2, the international financial center theory

Another analysis of the theory of international investment from the financial point of view is Reed (H. C. Reed) in the 80's put forward the "international financial center". Reed believes that all previous international investment theory has ignored the international financial center in the decision of international investment in the region, the scale and pattern of the role of the international financial center for international investment activities is very important, it is not only the international clearing center, the global securities and investment management center, communication and exchange centers, multinational banking centers, but also the center of international direct investment. Reid pointed out that what the internationalized company pursues is not the maximization of income or minimization of cost as the general viewpoint suggests, but the optimization of operational efficiency, i.e., the maximization of the price of the stock it issues and the interest of its bonds, which can make the enterprise more competitive in both the commodity market and the capital market. The operational efficiency of TNCs is assessed by the IFC, and the result of the assessment is reflected by the rise and fall of the prices of the stocks and bonds issued by TNCs. International financial centers play a role in international direct investment through the assessment of TNCs' capital ratios and operating policies. For example, when the international financial center thinks that a certain company's borrowing ratio is too high and its overseas assets are developing too fast, it will lower the market price of the company's securities, the company's operating efficiency will fall, and the company's shareholders and creditors will have lower returns, which in effect means that the company's entire capital distribution may be very inefficient. This will then force the company to adjust its investment strategy and business approach and to contract its overseas investments. If the company ignores the financial center's assessment, the financial center may further reduce the price of its securities, forcing the company to react. In this way, international financial centers and financial monopoly capital such as big banks, insurance companies, **** with funds, which dominate the financing activities of financial centers, control international direct investment activities.

Reid's international financial center statement correctly points out the control and influence of the international financial oligarchy, represented by the international financial center in the 1980s, on international capital flows. It is these international monopoly consortiums that are manipulating the international securities market prices and the flow and flow of international capital, chasing high monopoly profits on a global scale. However, although Reid correctly pointed out the influence of international financial centers, but did not grasp the essence of it, industrial capital and financial capital is not diametrically separable, they are dissolved together. And the errors in the analysis of this theory are obvious. It will enterprise securities price rise and fall and the relationship between business efficiency is reversed, as if the decline in economic efficiency of enterprises is caused by the decline in the price of enterprise securities, in fact, the decline in the price of securities is just a reflection of poor business operations. Although the monopoly capital of financial centers can manipulate and influence the prices of corporate securities, this relationship will not be reversed because monopoly capital will not and cannot maintain the securities of a poorly operated and unprofitable enterprise at a high price.

In addition, two other important theories emerged in the 1980s, Downing's stage theory of investment development and the two-way intra-industry investment theory.

3. Stages of Investment Development Theory

Downing made a dynamic development of the eclectic theory in 1982 and put forward the stages of investment development theory. The main points of this theory are:

(1) A country's investment flow has a close relationship with the country's level of economic development.

(2) The concept of outward investment cycle is proposed. The theory divides the utilization of foreign capital and outward investment into stages, and the stages are: ① little utilization of foreign capital and no outward investment; ② more utilization of foreign capital and a small amount of outward investment; ③ the growth rate of both utilization of foreign capital and outward investment is very fast; and ④ outward investment is roughly equal to or more than the utilization of foreign capital. According to Tang Ning, developed countries have generally gone through these four stages, developing countries have entered the second stage from the first stage, Taiwan, Hong Kong, Singapore, South Korea and other emerging industrial clusters are rapidly moving from the second stage to the third stage or have entered the third stage.

(3) The use of dynamic international production synthesis theory or eclecticism theory to explain the stages of development of investment, and thus prove that a country's international investment flows are always closely related to the level of economic development.

This theory also argues that in the first stage of economic development, the country has few, if any, ownership-specific and internalization advantages, that it is extremely vulnerable, that it is not able to take advantage of foreign locational advantages, and that it is unattractive to foreign

investors. As a result, there was no capital export and only a small inflow of capital. In the second stage, the domestic market has been expanded, the purchasing power has also increased accordingly, the market transaction costs have also decreased, capital inflows began to increase, then capital inflows (i.e., the use of foreign capital) can be divided into two types, namely, import substitution and export-led type. In this stage of the introduction of foreign capital is a key move, to this end, the country has to create the advantages of location, such as improving the investment environment, a sound legal system, as well as dredging up professional channels. The third stage, the domestic economic level at this time there is a substantial increase in foreign investment is possible, because the previous stage of the introduction of technology on the development of domestic resources, so that the ownership of specific advantages continue to strengthen the advantages of foreign investors in the original relative disappearance of the advantages of foreign market location also has a greater attraction. The fourth stage, the economy has been quite developed or highly developed, generally have ownership-specific advantages, internalization advantages, and can take advantage of the location-specific advantages of other countries, when the country is actively engaged in direct investment abroad.

See, this theory and eclecticism theory is the same line, only the latter to be dynamic, with dynamic four stages of the correlation between direct investment and economic development, and the reason why a country can participate in foreign direct investment is because of ownership, internalization and location of the three aspects of comparative advantage and the results of the cooperation.

It should be noted that this theory has certain practical significance, which helps developing countries to fully utilize foreign investment to create the conditions of location, and also helps developing countries to use their comparative advantages to make appropriate foreign investment and advance to the international market.

4, intra-industry two-way investment theory

The theory of intra-industry two-way investment is based on the major changes in the flow of international capital in the past 20 years, especially the flow of capital between developed countries, and focused on the use of the same phenomenon of intra-industry put forward. Economists have studied this extensively and tried to explain this phenomenon.E.M. Graham pointed out that the reason for two-way investment lies in the "similarity of the industrial distribution of multinational corporations", and what is similar is easy to approach.

Downing pointed out that the two-way investment is mainly concentrated in technology-intensive sectors, and the traditional sector is not a high proportion of investment. This is because (1) the level of similarity between developed countries, but no one firm has exclusive ownership of specific advantages, but a number of companies to have almost similar ownership advantages. (2) Firms invest in both directions in order to obtain joint advantages, as well as to gain the benefits of economies of scale, and at the same time to get the benefits of lower costs in the host country. (3) Developed countries have similar income levels and basically similar demand structures, so that the expanding demand for heterogeneous products generates a tendency for intra-industry international trade among developed countries, and once intra-industry trade is impeded, the requirement for market internalization leads to the emergence of intra-industry two-way investment.

Heimer and Jindalberg also explain this phenomenon, put forward "oligopoly reaction behavior". They think that in order to get or keep the position in the international competition, the national oligopoly organization will be carried out by occupying the territory of the competitors, that is, the form of "oligopoly", and the intra-industry direct investment is an important means of this "oligopoly" competition.

In addition, in recent years, the emergence of safe harbor theory, can also explain the behavior of two-way investment. The theory's core point is: in developing countries, although investment returns are higher than in developed countries, but the security is weak, the degree of legal protection is small, that is, to bear great political and economic risks. Therefore, it is preferable to invest capital in developed countries to achieve more stable returns, while similar conditions within the industry, the investment effect is also faster, can also be more rapid profits. It can be seen that the application of the theory can easily lead to the growth of two-way investment.