Foreign Direct Investment and the Multinational Enterprise: A Re-examination Using Signaling Theory

(Hardback)

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Although the industrial organization and internalization approaches are two major alternative explanations for the multinational enterprise and its foreign direct investment (FDI), internalization theory has prevailed in recent literature, despite its known empirical deficiencies. Furthering internalization theory, this book develops an FDI signalling framework, proposing that the firm's direct investment influences the perceptions of less-informed market participants. The signalling concept is derived from the internalization premise that a firm's intangible assets in know-how cannot be correctly priced in a market with asymmetric information, and this motivates the firm's decision to undertake FDI. If the premise is correct, the firm's decision is based on inside information, and the firm's action reveals that information to the market. The firm's FDI internalization is evidence of management's confidence in its intangible assets, and its action may further influence market perception. The hypotheses generated along this line of analysis are subjected to investigation, and the evidence is supportive of the FDI signalling proposition. Moreover, the study is an indirect test of internalization. As a result, internalization is transformed from a pure theory to an empirical format.

Reviews

"In this pathbreaking book, Professor Scott X. Liu makes one of the most important contributions to the literature on foreign investment since the 1960 dissertation of Stephen Hymer was published in 1976....This book is the first one to integrate signaling theory into the mainstream internalization paradigm of international business. It is full of useful insights and is a valuable contribution to the literature on the theory and operational management of the MNE. As such, it is an indispensable addition to the library of any serious researcher in the field of international business."-From the foreword, Alan Rugman
"Scott Liu's book is a cogent review of the theory of the multinational firm. It provides fresh perspectives on the internalization decision. Professor Liu's work provides an important additional consideration to the foreign investment decision, namely its signaling value, not just for further internalized investment, but also for further expansion by other methods such as exporting and alliances. This is a significant theoretical and practical insight for global strategy. Professor Liu provides a good counterpoint to theory, with several practical company cases and illustrations."-Farok J. Contractor Professor of International Business Rutgers University

Author Bio

SCOTT X. LIU is a consultant for the World Bank, actively involved in Chinese projects, and also a consultant for several major Asian multinationals.