Financial theories of foreign direct investment: a review of literature

S. Veeramani (), Abha Shukla () and Mariam Jamaleh ()
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S. Veeramani: Jamia Millia Islamia
Abha Shukla: University of Delhi
Mariam Jamaleh: Jamia Millia Islamia

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2020, vol. 47, issue 2, No 1, 185-217

Abstract: Abstract Although the major part of literature on foreign direct investment FDI is largely based on the assumption of imperfections in goods and factor markets, a small but growing literature has been looking for a potential impact of imperfections in capital markets which resulted in the development of a group of financial theories on FDI over the years. We examine 119 articles including 104 articles published in 59 leading journals, and 9 classic books. We use the qualitative methodology to analyze their content. The analysis enabled us to identify four main strands of financial theories on FDI. The first explains FDI as a response to different exchange rate variables. The second one applies the portfolio theory to international diversification by multinationals. Third strand sees FDI through the lens of behavioral finance. Finally, the last strand investigates the distinct internationalization path that is followed by financially disadvantaged multinationals domiciled in emerging countries. The analysis revealed theoretical inconsistencies within each group and among different groups of financial theories that is also translated into inconclusive empirical results on many occasions. The analysis also uncovered a geographical bias where in multinationals and FDI from emerging countries are substantially under researched. While the idea of forming one financial theory on FDI is attractive, our suggestion is that future research should opt for a context-specific inclusion of financial factors until the debate about the efficiency of financial markets is settled.

Keywords: Foreign direct investment; Diversification; Exchange-rate; Behavioral finance; Emerging multinationals (search for similar items in EconPapers)
JEL-codes: F21 F23 G15 G34 G4 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s40812-019-00144-8

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