country will move about within the country itself, but not across the national
borders. According to the H–O theorem, international trade will gradually
eliminate differences between production factor rewards in the various coun-
tries. In this way, exporting labour-intensive goods to a country with a rela-
tively small labour force may have the same effect as actually relocating labour
as a production factor to this country.
In reality, however, production factors do move across borders. Cash capital
and to a lesser extent labour are becoming increasingly mobile. A large proportion
of the international flow of cash is motivated by a desire to simply invest money
to get a return on investment, just as one would do by putting money in a sav-
ings account. British investors, for example, may purchase shares on the stock
market in a Japanese company in order to gain an income from their investment
(dividends and/or gains made by stock fluctuations), either in the short term or in
the long term. However, a portion of this cash flow consists of Foreign Direct
Investment (FDI). These are investments made in foreign countries with the
explicit goal of maintaining control over the investment. By making use of FDI, a
company may, for example, be able to set up production facilities in a foreign
country, thereby joining the ranks of multinational companies.
The question, however, is why a company would choose direct investment
when it can simply export the goods produced in its own country and import
the raw materials or semi-manufactures required, or even license the relevant
know-how. Initially the answer to this question consisted of partial explana-
tions. Firstly, companies in highly protectionist countries made use of direct
investment to get around import restrictions and tariff walls. Secondly, FDI
made it possible for companies whose production relied heavily on certain raw
materials to secure the supply of such materials. A third explanation was that
the high cost of transport made exporting more expensive than establishing
foreign production facilities. Sometimes FDI can also be viewed as a strategic
market tactic. For example, American companies may invest in the Japanese
market simply to make life so difficult there for Japanese firms that they in turn
no longer have the resources left to enter the American market. None of these
arguments, however, offered a systematic explanation for the rise of the multi-
national in general. In the following sections we will discuss two theories that
do offer such an explanation: Vernon’s product life cycle theory and Dunning’s
eclectic theory of direct investment.
Product life cycleVernon’s product life cycle (PLC) theory (Vernon, 1995) takes its name from
the product life cycle familiar to students of marketing theory. In the first
phase, the introductory or start-up phase, the new product is introduced. It is
innovative, it has not yet been standardized and it is relatively expensive.
Because the product will evolve further throughout this phase, the producer
and the consumer must be in direct contact. Production and sales can only take
16 International Human Resource Management