Discuss Dunning's eclectic theory of international production as a theory to explain flows of international trade and foreign direct investment.
What will be an ideal response?
Answers may vary, but Dunning's eclectic theory of international production is currently the most widely cited and accepted theory for explaining FDI. The theory maintains that if a firm is going to invest in production facilities overseas, it must have three kinds of advantages: ownership specific, location specific, and internalization. The firm must have both location and ownership advantages to invest in a foreign plant. It will invest where it is most profitable to internalize its monopolistic advantage. These investments can be proactive, being strategically anticipated and controlled in advance by the firm's management team, or reactive, in response to the discovery of market imperfections.
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