ADVANTAGES OF DIRECT INVESTORS
ADVANTAGES OF DIRECT INVESTORS
Are companies big because they are multinational or are they multinational because they are big? Such a "chicken-and-egg" type question has hounded direct investment theorists: On one hand, there is evidence that very successful domestic firms are most likely to commit resources to direct investments; on the other hand, ownership of foreign direct investment appears to make firms more successful domestically.34
Monopoly Advantages Prior to Direct Investment
One explanation for direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go. The advantage is due to the ownership of some resource that is unavailable at the same price or terms to the local firm. The resource may be in the form of access to markets, patents, product differentiation, management skills, or the like. Because of the greater cost usually incurred by transferring resources abroad and the perceived greater risk of operating in a different environment.
the firm will not move unless it expects a higher return than at home and a higher return than the local firm abroad.35
Certain monopoly advantages may accrue to large groups of firms and explain their relative ability and willingness to move abroad. One such observation has been made in reference to the cost and access to capital. When the capital component is an integral part of a new investment, the company that can borrow in a country with a low interest rate has an advantage over the company that cannot. Prior to World War I, Great Britain was the largest source for direct investment because of the strength of sterling and the resulting lower interest rates on borrowing sterling funds. From World War II until the mid-1980s, the strength of the U.S. dollar gave an advantage to U.S. firms. More recently, this advantage has shifted to Japanese firms.36
Related to this is the relative power of different currencies in terms of the plant and equipment they will purchase. During the two and a half decades immediately following World War II, the U.S. dollar was very strong, and it was perhaps overvalued in later years. As a result, by converting dollars to other currencies, U.S. firms could purchase a greater output capacity in foreign countries than they could after the dollar began to slide downward in 1971. The reverse was true for firms from such countries as Japan and the former West Germany, which invested more heavily in the United States during the late 1970s and mid-1980s when the yen and mark increased their purchasing power.
Currency values do not, however, provide a strong explanation of direct investment patterns. There was a two-way investment flow between the United States and the former West Germany and the United States and Japan when the dollar was weak as well as when the dollar was strong. Then, in the first half of the 1980s, U.S. companies were not increasing investment abroad significantly, whereas foreign companies were investing heavily in the United States in spite of the strong dollar. The major reasons were high real interest rates in the United States and a relatively strong U.S. economy. In the late 1980s, when the dollar was weak again, there were record flows of direct investment both to and from the United States.37 The currency-strength situation therefore only partially explains direct investment flows and must be viewed along with other multiple motives for direct investment.
Are companies big because they are multinational or are they multinational because they are big? Such a "chicken-and-egg" type question has hounded direct investment theorists: On one hand, there is evidence that very successful domestic firms are most likely to commit resources to direct investments; on the other hand, ownership of foreign direct investment appears to make firms more successful domestically.34
Monopoly Advantages Prior to Direct Investment
One explanation for direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go. The advantage is due to the ownership of some resource that is unavailable at the same price or terms to the local firm. The resource may be in the form of access to markets, patents, product differentiation, management skills, or the like. Because of the greater cost usually incurred by transferring resources abroad and the perceived greater risk of operating in a different environment.
the firm will not move unless it expects a higher return than at home and a higher return than the local firm abroad.35
Certain monopoly advantages may accrue to large groups of firms and explain their relative ability and willingness to move abroad. One such observation has been made in reference to the cost and access to capital. When the capital component is an integral part of a new investment, the company that can borrow in a country with a low interest rate has an advantage over the company that cannot. Prior to World War I, Great Britain was the largest source for direct investment because of the strength of sterling and the resulting lower interest rates on borrowing sterling funds. From World War II until the mid-1980s, the strength of the U.S. dollar gave an advantage to U.S. firms. More recently, this advantage has shifted to Japanese firms.36
Related to this is the relative power of different currencies in terms of the plant and equipment they will purchase. During the two and a half decades immediately following World War II, the U.S. dollar was very strong, and it was perhaps overvalued in later years. As a result, by converting dollars to other currencies, U.S. firms could purchase a greater output capacity in foreign countries than they could after the dollar began to slide downward in 1971. The reverse was true for firms from such countries as Japan and the former West Germany, which invested more heavily in the United States during the late 1970s and mid-1980s when the yen and mark increased their purchasing power.
Currency values do not, however, provide a strong explanation of direct investment patterns. There was a two-way investment flow between the United States and the former West Germany and the United States and Japan when the dollar was weak as well as when the dollar was strong. Then, in the first half of the 1980s, U.S. companies were not increasing investment abroad significantly, whereas foreign companies were investing heavily in the United States in spite of the strong dollar. The major reasons were high real interest rates in the United States and a relatively strong U.S. economy. In the late 1980s, when the dollar was weak again, there were record flows of direct investment both to and from the United States.37 The currency-strength situation therefore only partially explains direct investment flows and must be viewed along with other multiple motives for direct investment.
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