Multinational Enterprise Expansion from an Institutionalist Perspective

Abstract

As World War II was coming to an end and institutions like the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT) were being organized, a theory of multinational enterprise (MNE) expansion was indistinguishable from the general theory of international capital flows. The neoclassical paradigm, which held that differential interest and profit rates were the sole determinants of FDI flows, reigned supreme. Differential profit rates remained the orthodox explanation for foreign direct investment flows at least as late as 1958, as evidenced by Wendell C. Gordon’s description of the prevailing theory as he evaluated FDI’s contribution to economic development [Gordon 1958, 514-32]. As Gordon succinctly put it in 1962, “the generally accepted proposition has been that investments flow from the more developed countries, where the rate of return is relatively low to the less developed countries where the rate of return is higher” [Gordon 1962, 7]. A theory of foreign direct investment (FDI), a theory emphasizing the parent firm’s actual equity in its foreign affiliates plus any liabilities that the foreign affiliates have to the parent through which the parent firm controls its affiliates, was in its infancy in the early 1960s.