Theoretical Evolution of Foreign Direct Investment Theory

Abstract

Scholars have attempted to understand the ability of firms to cross borders and invest in an overseas state, as opposed to other forms of globalisation. The evolution of Foreign Direct Investment theory reflects global realities of our time, moving from the simplistic early trade-based rationale to the highly sophisticated international investment mechanisms that incorporate ownership, location, and internalisation advantages. This paper seeks to consider the historical integration and progression of FDI theorists, more precisely, Classical and Neoclassical Trade Theories, the Monopolistic Advantage Theory, the Internalisation Theory, Dunning’s OLI Paradigm, Mathew’s LLL Model, and, more recently, the Institution and Network- Based approaches. To anchor the theory, perspectives on how FDI has been treated in advanced and developing economies are added. Over time, theorists from economics, business, and international finance have developed multiple frameworks to explain why firms engage in FDI, where they go, how much they invest, how they prefer to enter the market, and which sectors they seek. The development of FDI theory reflects the ever-evolving nature of global conditions, empirical observations, and conceptual breakthroughs. This paper presents a chronologically organised thematic account of how FDI theory has progressed, its significant contributions, limitations, and recent directions.