Question

Identify and briefly discuss the theories of Foreign Direct Investment (FDI) and indicate which theory most influences FDI in the Caribbean Region.

Answer 1

It is not quite easy to have a full inventory of theories on FDI determinants update. However, let us have some of this.

(I) Theory of international trade is seemingly one thing distinct from the full dialogue on FDI – i.e. a theory in itself with its own paradigm and development. More merely, there is an important difference to be made between the (a) classic and (b) neoclassic contributions, i.e. the previous regards only the David Ricardo’s contribution and contains nothing about the FDI concept. The basic reason of such circumstance is simply that Ricardo here saw a ‘perfect competition international market’ – i.e. that was going to be contradicted by (b) neoclassics – i.e. Heckscher (H), Ohlin (O) and Samuelson(S) or the ‘HOS model’. In alternative words, all (a) and (b) agree that FDI – would be expected (only) when no market competition. Ricardo ne'er detected of FDI, but he even couldn’t admit them since no reason to move capital across the world market area. On the contrary, the three HOS (and not only) see different natural (plus capital) resource endowment among nations that makes each nation (country or national economy) have some resources as more abundant and cheaper in the home area. Then, the national interest needs additional lush resources to be higher place into worth throughout international trade with a minimum of any 2 consequences:

/ two price levels for the same good traded the way home and international market here split from one another and the international market always claims the higher price so the Ricardian read on its ‘former good competition’ vanishes;

/ a similar on top of can base the nation’s comparative advantage that was although a Ricardo’s finding.

While previously Ricardo had seen a ‘goods’ national specializing in the international trade, HOS were coming to adjust such idea by ‘production factors’ national specializing, i.e. it is factors (previously than merchandise and/or services) reaching twin indicator.

Finally, its equally HOS clearing the approach of FDI’s birth, as another hypostasis (and/or hypothesis) of different factor’s prices throughout the world in a non-market competition environment. This time (i.e. for the FDI case) it isn’t about good produced and traded when containing several factors – i.e. international trade theory --, but directly about capital (to be) invested for new productions to be done together with the other production factors – in other words, ‘ capital and labour are searching for each other all over’, be it in the home or international economic areas or markets.

Some political and business leaders throughout the Caribbean area unit already

concerned about their domestic industries. They are fearful that U.S. export markets will

be overwhelmed by cheap Chinese imports. As China continues to grow its presence

throughout the region there are many positive implications for the Caribbean, such as the

opportunity to develop domestic markets. However, the challenges discussed in relation

to trade imbalance, the idea of a new core—periphery model, U.S. geopolitical

influences, and concerns over the Caribbean’s domestic production illustrates the

significance is assessing Chinese FDI into the Caribbean.

Chinese FDI also has implications for theories of international relations. Although

many scholars suggest that Chinese FDI in the Caribbean reflects nerorealism (that is,

that the Chinese state directs FDI so as to maximise trade, natural resources, or to limit

diplomatic ties with Taiwan); a theory developed by Andre Gunder Frank and Immanuel

Wallerstein offers associate alternate perspective on China’s long-run agenda. As discussed in the theoretical section, this theory suggests that there is a world economic system, in

which some countries benefit while others are exploited. Developed and developing

world into three subcategories, of which are the core, the semi-periphery, and the

periphery. Core countries dominate and exploit the peripheral countries for labor and raw

materials, and they are generally not dependent on any one state or country. They serve

their own economic interest and area unit centered on the next talent and capital-intensive

production. In distinction, peripheral countries area unit enthusiastic about core countries for capital,

usually lack a strong central government, export raw materials, and have low-skill

associated with cheap labor. If this model proves true, China’s FDI may contribute to a

new core-periphery relationship between Caribbean states and the core, which will create

great challenges for Caribbean countries in attaining economic dependence.