faty
Get Complete Project Material File(s) Now! »
Differential rates of return
The Differential rates of return theory argues that foreign direct investment flows are mainly attributable to the differing rates of return on capital that firms can earn in different countries. The argument here is that foreign capital and investment will move out of countries with low relative rates of return on capital to those with higher rates. The underlying rationale of the Mc-Dugall Kemp model (Chen 1983: 18-20) of this hypothesis is that rates of return on capital are inversely related to the availability of capital within a given country such that countries experiencing capital scarcity will pay higher rates for invested capital thereby attracting foreign capital from those countries that possess excess capital. Eventually, investment flows will cease (or at least diminish) as supply and demand forces act to equalize the rates of return to capital of the two countries.
The differential rates of return theory seemed to be supported by empirical evidence pertaining to United States foreign direct investment in the late 1950s. During this period, after-tax rates of return earned by United States subsidiaries in manufacturing in Europe were consistently above the rate of return earned by United States domestic manufacturing investments. However, this same empirical evidence seemed to contradict the differential rates theory during the period of the 1960s when United States foreign direct investment in Europe continued to rise whilst at the same time the rates of return for United States subsidiaries in Europe were consistently below the rates of return on United States domestic manufacturing (Lizondo 1991:69). Additionally, the differential rates of return theory contradicts the available evidence that shows that there is a substantial amount of two-way foreign direct investment taking place between countries. That is, there are numerous cases in which firms from country A invest in country B at the same time that firms from country B are investing in country A (Chen 1983:18-20; Cf. Lizondo 1991:69).
Market power approach
The market power approach focuses on the motivation of the firm to increase it’s market power, in the face of stern oligopolistic competition, through the exploitation of it’s ownership-specific advantages (Cantwell in Pitelis & Sugden (eds.) 1991:21). It is argued that in the early stages of growth, the oligopolist firm will experience steady growth in the domestic market share. However, domestic market concentration will expand to the limit in an oligopolistic market, and thereafter it is only possible for oligopolists to maintain or increase their market shares by expanding their competition to foreign markets.
The argument is further augmented by two rationalizations as to why the resultant competition into foreign markets, by oligopolists, takes the form of foreign direct investment as opposed to exports (Cowling and Sugden 1987). First, as a way of maximizing foreign profits, the multinational enterprise can better negotiate wages, than is possible by producing at home and exporting, by threatening to exercise it’ s capability to relatively easily shift production between alternative locations. Second, the multinational enterprise can weaken the bargaining power of trade unions, whose power is magnified by the size of the firm within which they are organized, or by contracting out work previously done within the firm to a network of dependent subcontractors, both locally and internationally.
Disinvestment, Trade Sanctions and the Economy
Apartheid, as previously defined (see 3.2.1.3(i) above), was simultaneously a social, political, legal and economic phenomenon that underscored every aspect of South African societal life. The economics of apartheid has traditionally been studied under either of two divergent and polemic approaches known as the liberal approach and the neo-Marxist approach. The ‘liberal’ approach saw apartheid as inherently anti-capitalist in that it interfered with the free movement of supply and demand forces in the economy by protecting white workers from labor-market competition with blacks. In contrast, the neo-Marxist approach viewed apartheid as a uniquely South African form of capitalism, in which apartheid laws served to enhance the productive capacity of the economy by ensuring an elastic supply of black workers at low wage rates (Fine and Rustomjee 1996:21-2; Lowenberg and Kaempfer 2001:1).
Although the distance between these two positions is enormous both in methodology and in conclusion, the international consensus on the efficacy of apartheid encompassed not only it’s economic viability, but also examined it’s social, political and ethical ramifications in calling for the dismantling of the system. International trade sanctions and disinvestment campaigns instituted against South Africa in the mid to late 80s were intended to serve as the means through which the apartheid system would be brought to an end. In this regard, apartheid was seen as a system that could not be changed other than through indirect means. Thus, international measures taken to negatively affect the South African economy were expected to lead to internal pressures (especially from the politically influential business sector) for a dismantling of the system.
Chapter 1 – Introduction
1.1 Introduction
1.2 Point of departure
1.3 Problem statement
1.4 Significance of the study
1.5 The hypothesis and research question
1.6 The objectives
1.7 Methodology
1.8 Scope
1.9 Sequence of the presentation
1.10 Key concepts and terms
Chapter 2 – A Survey of the Theory of Multinational Enterprises
2.1 Introduction
2.2 Perfect Market Assumption Theories
2.3 Imperfect Market Theories
2.4 The Eclectic Paradigm
2.5 The Economic Effects of Foreign Direct Investment on the Host Country
2.6 CONCLUSION
Chapter 3 – Historical Perspective of South Africa’ s Investment Climate
3.1 Introduction
3.2 Agricultural, Mining and Manufacturing Investment and development
3.3 Conclusion
Chapter 4 – Global Foundations for Establishing a Need for the Regulation of Multinational Enterprises
4.1 Introduction
4.2 International Perspective on the Justification for MNE regulation
4.3 Contemporary thinking on the regulation of Multinational Enterprises
4.4 Conclusion
Chapter 5- Critical Survey of Existing Policies on Foreign Direct Investment in South Africa
5.1 Introduction
5.2 Public policy defined
5.3 Public policy and change
5.4 Public Policy Determinants
5.5 Review of FDI/MNE policies – South Africa
5.6 Alternative policy options reviewed
5.7 Conclusion
Chapter 6- Rationalization of Foreign Direct Investment Policy Structures in the South African Government
6.1 Introduction
6.2 Defining rationalization, organization and organization theory
6.3 Evolvement of organization theory
6.4 Measurement of Organizational Performance and Structure
6.5 Regulation and Structure
6.6 Conclusion
Chapter 7- Summary, Conclusions and Recommendations
7.1 Introduction
7.2 Summary of conclusions of each chapter
7.3 Recommendations
7.4 Issues For Further Study
7.5 Conclusion
