How Dunning’s paradigm and Vernon’s product life theory covers Foreign Direct Investment

For the international economic system to grow and meaningful development to be achieved, Foreign Direct Investment must be the catalyst that drives this.  However, it is important to understand that FDI does not translate to automatic economic development.  For these benefits to be realized, the international investment architecture together with the national policies of the developing countries that want to attract Direct Foreign investment have to be right (Daniels &Radebaugh, 2009). Since most of the Foreign Direct Investments originate from the developed countries, they have to contribute to establishing an enabling environment. They can do that by helping their developing counterparts to access international markets, as well as the latest technology available, provide development assistance, and help develop an international framework that ensures multinationals operate in a business-friendly environment.  In this paper, I will be interrogating the theory between Dunning’s OLI paradigms or Vernon’s Product Life Cycle that offers the best explanation as to why foreign direct investment takes place from developed nations to the developing ones.

Foreign Direct Investment Trends            The late nineties to early two thousand saw the rise in direct foreign investment; however, most of these direct investments were not from developed countries to the developing ones. In sharp contrast to that expectation, only a small fraction of these FDI went to developing nations. Statistics show that in the year 2000, the total inflows of direct foreign Investment stood at $1. 3 trillion dollars. This number is said to have been four times what it was in the mid-nineties (Nocke, & Stephen 2008, 530). The interesting part, however, was that out of the total foreign direct investment, 80% went to developed countries, while 90% of the development came from the developed countries (Nocke, & Stephen 2008, 530).  Studies further reveal that the small amount of FDI that goes abroad is unevenly distributed with the bulk of it going to Asia and Latin America. Although the amount of Direct Foreign Investment that comes from developed countries can be regarded as small, it is a significant portion to the developing countries given the size and the level of development of their economies.

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