Foreign Direct Investment

   Above we have explained six different types of foreign direct investment that companies can undertake for different purposes. The first type to invest in FDI is to gain access to specific factors of production such as know-how, technical knowledge, patents or brand names. In the second type companies shall invest to gain access to cheaper factors of production such as low-cost labour. The third type of FDI involves international competitors undertaking mutual investment in one another in order to gain access to each other's product ranges, for example joint venture. According to the fourth type companies undertake FDI in order to gain access to customers in the host country market. In the fifth type companies jump barriers by establishing a local presence in order to gain access to local markets.

   Hymer stated in his work from 1960 that markets were not perfect and information did not flow freely. Hymer also argued that local companies had better information about the economic environment in their country than foreign competitors did. Four different types of imperfections according to Kindleberger could explain the existence of FDI. The diversification theory explains why companies take the risk to invest abroad. According to this theory the MNCs may gain advantages through risk reduction through international diverification.