Match the List-I with List-II:

Match the column

List-I: Theories of International Investment	List-II: Outline of Theory
A. Eclectic Theory	I. FDI occurs largely in oligopolistic industries rather than in industries operating under near-perfect competition
B. Appropriability Theory	II. Capital as an investment will move from countries where it is abundant to countries where it is scarce because the returns on investment opportunities are higher where capital is limited
C. Market Imperfection Theory	III. The firm should be able to keep the benefits resulting from its innovation and research for its exclusive use
D. Theory of Capital Movements	IV. The framework follows three tiers—ownership, location, and internalization, assuming that companies are not likely to follow through the FDI if they can get the service or product internally and at lower costs

Choose the correct answer from the options given below:

Correct option is D

The correct matching for the theories of International Investment is A-IV, B-III, C-I, D-II.

The Eclectic Theory, also known as the OLI Paradigm (Ownership, Location, Internalization), was developed by John Dunning. It posits that for a firm to engage in FDI, it must possess specific ownership advantages, find a suitable location, and find it more beneficial to internalize operations rather than licensing.

The Appropriability Theory suggests that firms engage in FDI to retain exclusive control over their technological innovations and proprietary knowledge.

The Market Imperfection Theory, popularized by Stephen Hymer, argues that FDI is a result of market failures (like oligopolies) where firms seek to exploit their specific advantages.

Finally, the Theory of Capital Movements is a classical approach suggesting that capital flows from low-interest (capital-abundant) nations to high-interest (capital-scarce) nations to maximize returns.

Information Booster

• OLI Framework: The Eclectic theory is the most comprehensive framework in international business, combining elements of trade theory, location theory, and firm-specific advantage.

• Market Power: Under the Market Imperfection theory, FDI is viewed as a tool to reduce competition and increase the firm's market power globally.

• Transaction Costs: Internalization (a key part of the OLI model) is primarily driven by the need to reduce transaction costs associated with external contracts.

• Differential Returns: The Theory of Capital Movements treats FDI simply as a financial flow, often criticized for failing to explain why a firm would want to control an entity abroad rather than just lending money.

• Knowledge Protection: The Appropriability theory is closely linked to R&D-intensive industries where "leakage" of trade secrets to competitors is a high risk.