Transformations of global prosperity how foreign investment

TRANSFORMATIONS OF
GLOBAL PROSPERITY
How Foreign Investment, Multinationals, and
Value Chains are Remaking Modern Economy

Caf Dowlah


Transformations of Global Prosperity


Caf Dowlah

Transformations of
Global Prosperity
How Foreign Investment,
Multinationals, and Value Chains are
Remaking Modern Economy


Caf Dowlah
City University of New York
New York, NY, USA

ISBN 978-3-319-71104-1    ISBN 978-3-319-71105-8 (eBook)
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Preface

This book springs from the insight that the economic globalization of the
twenty-first century—that has arguably been reversing the fortunes of the
advanced industrialized economies of the North and the developing and
emerging economies of the South—may be better understood by looking
into the contemporary nexlus of three major economic forces: foreign
direct investment (FDI), multinational enterprises (MNEs), and global
value chains (GVCs).
This book can also be viewed as a sequel to my earlier works on economic globalization. In Backwaters of Global Prosperity (2004) I argued
that greater integration of the less developed countries into the global
economy may increase economic prosperity in these countries. In
International Trade, Competitive Advantage and Developing Countries
(2016) I argued that greater integration of developing countries in the
global economy has enabled them to capture larger shares in several key

sectors of international trade. This book argues that the emerging nexus
of FDI–MNEs–GVCs may serve as a powerful harbinger for tilting
global prosperity in favor of developing countries.
This book has been an ambitious project. Discerning scopes and magnitude, patterns of growth, and the consequences of global forces such as
FDI, MNEs, and GVCs from both historical and contemporary perspectives involved scrupulous weaving together of cutting-edge research and
v


vi  Preface

contributions of numerous authors, scholars, and researchers from
around the world. I thank all such scholars and researchers. The chapter
on the automobile GVCs of emerging economies—Brazil, Central and
Eastern European region, China, India, Mexico, and Thailand—in particular draws heavily on the works of scholars and researchers of the
respective countries. I owe them a very special thanks.
I am also grateful to many men and women who provided personal
and professional insights and assistance at various stages of the book’s
evolution. First, I must express my profound thanks to Rachel Sangster,
chief editor of Economics and Finance at Palgrave Macmillan, who, in
course of our deliberations back in 2015, suggested that such a study
would be a timely contribution to global knowledge. She had also been
very generous in providing me with detailed feedback and constructive
suggestions during the preparation of the manuscript. I am also grateful
to Palgrave Macmillan’s anonymous reviewers, whose critical but highly
constructive reviews forced me to refocus and reorganize the whole
manuscript.
A special word of gratitude is also due to Professor Gary Hufbauer of
the Petersen Institute of International Economics, who graciously guided
my research and reviewed two major chapters of this book. I also owe
special thanks to Professors João Amador and Sónia Cabral of the Nova

School of Business and Economics, and James Jackson of the United
States Congressional Research Service for allowing me to use some of
their data and research in the book.
During the course of preparation of the manuscript, I had numerous
discussions with many colleagues in my own campus—among them
Professors Paul Marchese, Michael Atimari, and Edmund Clingun
deserve special mention. A good friend, Russel Sapienza, who has just
retired from PricewaterhouseCoopers after a life-long career, deserves
mention for sharing useful insights on the internationalization of
production.
I must also thank Thomas Coughlan of Palgrave Macmillan, project
coordinator of Springer Nature Julia Rosche, copy editor Elizabeth Stone,
and the production team of M. Senthil Kumar for adroit management of
the production process of the book.


 Preface 
  

vii

Finally, while many others have contributed to the book, I alone am
responsible for its errors and omissions.
Bay Ridge, NY
January 27, 2018

Caf Dowlah


Contents

P
 reface   v
Acronyms and abbreviations   xi
Abbreviation of Countries   xv
List of Figures   xvii
List of Tables   xxi
List of Boxes   xxv
1Introduction   1
2The Traditional Nexus of Multinational Enterprises
and Foreign Direct Investment   7
3Theoretical Foundations of Traditional FDI–MNE Nexus  75
4The Traditional Nexus of FDI–MNE—Empirical Findings 119
5The New Nexus of Foreign Investment, Multinationals,
and Global Value Chains 145

ix


x  Contents

6Global Value Chains in Automobiles 199
7Case Studies on Global Value Chains in Automobiles 231
8The New Nexus and the Emerging Trends in Global
Employment and Specialization 307
9The New Nexus of FDI–MNEs–GVCs
and the Transformation of Global Prosperity 377
Index 395

Acronyms and Abbreviations

AfDB
AFTA
AICO
APEC
APL
ASEAN
ATM
BEC
BIT
BRIC
BRICS
CAAM
CBU
CIA
CKD
CTC
DOE
DR-CAFTA
DTT
EC
ECA
ECB
EEA

African Development Bank
ASEAN Free Trade Area
ASEAN Industrial Cooperation Scheme
Asia-Pacific Economic Cooperation agreement

Average propagation length
Association of Southeast Asian Nations
Automatic teller machine
Broad Economic Classification
Bilateral investment treaty
Brazil, Russia, India and China
Brazil, Russia, India, China and South Africa
China’s Association of Automobile Manufacturers
Completely built-up
Central Intelligence Agency
Complete knock-down
Centre on Multinational Corporations
Domestic-owned enterprises
Dominican Republic-Central American Free Trade Agreement
Double taxation treaty
European Commission
United Nations Economic Commission for Africa
European Central Bank
European Economic Area
xi


xii 

Acronyms and Abbreviations

EFTA
European Free Trade Agreement
EPA
Economic Partnership Programs

EU
European Union
FDI
Foreign direct investment
FFS
Foreign-funded enterprises
FIAS
Foreign Investment Advisory Service
FOE
Foreign-owned enterprises
FPI
Foreign portfolio investment
FSC
Free standing company
FTA
Free trade agreement
GATS
General Agreement on Trade in Services
GATT
General Agreement on Tariffs and Trade
GCC
Global commodity chain
GDP
Gross domestic product
GFCF
Gross fixed capital formation
GPN
Global production network
GTAP
Global Trade Analysis Project

GVA
Gross value-added
HDI
Human Development Index (HDI)
H-OHeckscher-Ohlin
I–OInput–output
IADB
Inter-American Development Bank
ICIO
Inter-Country Input-Output
ICITE
International Collaborative Initiative on Trade and
Employment
ICSID
International Centre for Settlement of Investment Disputes
ICT
Information and communication technology
IFC
International Financial Corporation
IFR
International Federation of Robotics
IIA
International investment agreement
ILO
International Labor Organization
IMF
International Monetary Fund
IMMEX
Maquiladora Manufacturing Industry and Export Services
IPA

Investment promotion agency
IPR
Investment Policy Reviews
IPR
Intellectual property rights
ISI
Import substitution industrialization
ISIC
International Standard Industrial Classification


  Acronyms and Abbreviations 
  

IT
ITT
JTEPA
LCR
LDC
M&A
MIGA
MIIT
MNC
MNE
MOFA
NAFTA
NBER
NEM
NGO
NIE

OAS
OECD
OEM
OFDI
OICA
OPEC
PFI
PTA
QRS
R&D
RCAI
RCEP
ROE
RTA
SADC
SITC
SME
SOE
SOMNE
T&C
TAFTA
TBOI

xiii

Information technology
International Telephone and Telegraph
Japan-Thailand Economic Partnership Agreement
Local-content requirements
Less developed country

Merger and acquisition
Multilateral Investment Grant Agency
Ministry of Industry and Information Technology (China)
Multinational corporation
Multinational enterprise
Majority-owned foreign affiliates
North American Free Trade Agreement
National Bureau of Economic Research
Non-equity modes
Non-governmental organization
Newly industrialized economies
Organization of American States
Organisation for Economic Co-operation and Development
Original Equipment Manufacturers
Outward foreign direct investment
International Organization of Motor Vehicles Manufacturers
Organization of the Petroleum Exporting Countries
Policy Framework on Investment
Preferential trade agreement
Quantitative restrictions
Research and development
Revealed Comparative Advantage Index
Regional Comprehensive Economic Partnership
Return on equity
Regional Trade Agreement
South African Development Community
Standard International Trade Classification
Small and medium-sized enterprise
State-owned enterprise
State-owned multinational enterprise

Textiles and clothing
Thai-Australia FTA
Thailand Board of Investment


xiv 

Acronyms and Abbreviations

TiVA
TNC
TNI
TNZFTA
TRIMs
TRIPs
TTIP
UNCED
UNCTAD
UNCTC

Trade in value-added
Transnational corporation
Transnationality Index
Thai-New Zealand FTA
Trade-Related Investment Measures
Trade-Related Intellectual Property Rights
Transatlantic Trade and Investment Partnership
United Nations Conference on Environment and Development
United Nations Conference on Trade and Development
United Nations Centre on Transnational Corporations

(1974–1992)
UNDP
United Nations Development Program
UNECLAC United Nations Economic Commission for Latin American
Countries
USAID
United States Agency for International Development
USITC
United States International Trade Commission
USTA
United States Trade Administration
VSi
Vertical specialization-imports
VSI
Vertically specialized industrialization
WAIPA
World Association of Investment Promotion Agencies
WB
World Bank
WIOD
World Input-Output Database
WRR
World Robotic Report
WTO
World Trade Organization


Abbreviation of Countries

Country Code Country Name

ARGArgentina
AUSAustralia
AUTAustria
BELBelgium
BGRBulgaria
BRABrazil
BRN
Brunei Darussalam
CANCanada
CHESwitzerland
CHLChile
CHNChina
COLColombia
CRI
Costa Rica
CYPCyprus
CZE
Czech Republic
DEUGermany
DNKDenmark
ESPSpain
ESTEstonia
FINFinland
FRAFrance
GBR
United Kingdom
GRCGreece
xv

xvi 

Abbreviation of Countries

HKG
Hong Kong SAR
HRVCroatia
HUNHungary
IDNIndonesia
INDIndia
IRLIreland
ISLIceland
ISRIsrael
ITAItaly
JPNJapan
KHMCambodia
KORKorea
LTULithuania
LUXLuxembourg
LVALatvia
MEXMexico
MLTMalta
MYSMalaysia
NLDNetherlands
NORNorway
NZL
New Zealand
PHLPhilippines
POLPoland
PRTPortugal

ROURomania
RoW
Rest of world
RUS
Russian Federation
SAU
Saudi Arabia
SGPSingapore
SVK
Slovak Republic
SVNSlovenia
SWESweden
THAThailand
TUNTunisia
TURTurkey
TWN
Chinese Taipei
USA
United States
VNMVietnam
ZAF
South Africa


List of Figures

Fig. 2.1
Fig. 2.2
Fig. 2.3
Fig. 2.4

Fig. 2.5
Fig. 2.6
Fig. 2.7
Fig. 2.8
Fig. 2.9
Fig. 5.1
Fig. 5.2
Fig. 5.3
Fig. 5.4
Fig. 5.5
Fig. 5.6

Global FDI inflows and major recipients, 1980–2015
(US$ million)
23
Shares of country groups in global FDI inflows and outflows,
1980–2015 (%)
25
Global inflows and outflows of FDI, 1980–2015
26
Global FDI stocks—outward and inward, 1980–2015
35
Share of top-5 countries in global inward stocks,
1980–201535
National regulatory changes, 1991–2015
39
Shares of BRICS countries in global outward FDI,
2000–201542
Ultimate beneficiary owners (UBOs) of multinationals
59

Global ultimate owners of foreign affiliates, 2015
63
Vertical value addition with stages of production in a
typical twenty-first century value chain
157
Time line of world trade liberalization (vertical
specialization), 1980–2010
163
Cumulative number of RTAs and world applied tariff
rates, 1980–2013
164
A visualization of backward and forward participation of
countries in GVC trade flows
174
Backward participation in GVCs, 1995–2011
176
Forward participation in GVCs, 2011
177
xvii


xviii 

List of Figures

Fig. 5.7
Fig. 5.8

Total GVC participation by countries, 2011
178

Backward participation in GVCs: Non-OECD countries
(% of gross exports)
179
Forward participation in GVCs by non-OECD countries,
1995–2011180
Total participation of non-OECD countries in GVCs, 2011 180
Reimported imports of intermediate goods, 1995–2011 (%) 181
Share of re-exported intermediate imports as percentage of
intermediate imports
181
Share of value-added in trade in selected industries,
1995–2011 (%)
182
Share of domestic services value-added in gross exports,
1995 and 2011 (%)
183
Value-added share of foreign services in gross exports, 1995
and 2011
184
Income embeddedness of developed countries in GVC
participation (in %)
184
Typical global value chains in automobile manufacturing
210
Typical linkage of local to regional to national to global auto
manufacturing214
Share of top-10 and major developed countries in global
automobile production, 2000–2016
221
Average production of automobiles, selected developed and

developing countries, 2005–2016
225
Brazil’s automobile production, 2000–2016
237
Brazil’s automobile and auto parts production and exports,
2013–2017 (US$ millions)
238
Motor vehicle production in the CEE region, 2000–2016
249
Foreign direct investment stocks in Central and Eastern
Europe, 1995–2015
251
Production and exports of passenger cars and light vehicles
of China, 2009–2016
260
India’s vehicle production trends, 2011–2016
268
Mexico’s auto production and exports, 2007–2016
281
Thailand’s automobile production, 1961–2016
289
Auto exports of Thailand, 2008–2016 (US$ in million)
292
Declining tariff rates around the world, 1980–2005 (in %) 313
Relationships between imports/GDP ratio and unemployment rate in OECD countries, 2003–2015
316

Fig. 5.9
Fig. 5.10
Fig. 5.11

Fig. 5.12
Fig. 5.13
Fig. 5.14
Fig. 5.15
Fig. 5.16
Fig. 6.1
Fig. 6.2
Fig. 6.3
Fig. 6.4
Fig. 7.1
Fig. 7.2
Fig. 7.3
Fig. 7.4
Fig. 7.5
Fig. 7.6
Fig. 7.7
Fig. 7.8
Fig. 7.9
Fig. 8.1
Fig. 8.2


  List of Figures 
  

Fig. 8.3
Fig. 8.4
Fig. 8.5
Fig. 8.6
Fig. 8.7

Fig. 8.8
Fig. 8.9
Fig. 8.10
Fig. 8.11
Fig. 8.12
Fig. 8.13
Fig. 8.14
Fig. 8.15
Fig. 8.16
Fig. 9.1
Fig. 9.2
Fig. 9.3
Fig. 9.4

xix

Decline of manufacturing employment in selected countries,
1970–2013318
Trends in employment and real output in the US manufacturing sector, 1980–2016 (1980 = 100)
318
Share of multinationals in the US employment and private
gross product, 1995–2010
329
Shares of US multinationals in US total exports and imports,
and intra-­MNE trade, 1995–2004
330
Employment created abroad by US multinationals,
2008–2013 (in thousands)
332
Shares of business sector jobs that depend on foreign final

demand, 2011
341
Shares of manufacturing jobs that depend on foreign final
demand, 2011
341
Global GDP, FDI stock and trade, 1980–2015
346
Growth rates of global merchandise trade, 1992–2015
346
Changing demand for skill levels across selected countries,
1995–2008350
Relationship between productivity growth and unemployment rates in the US, 1890–1990
352
Global working age population and employment,
1990–2015354
Aggregate wage bills of selected countries as shares in GDP,
1975–2005 (in percentages)
356
Gaps between net productivity and hourly compensation in
the US, 1948–2014
357
Changing shares of developed and developing countries in
global GDP, 1700–2060
378
Composition of global GDP in 2010 and 2060
388
Shares of developed and developing countries in manufacturing in GDP and total employment, 1970–2013
389
Shares of developing and developed countries in global FDI
flows and stocks, 1980–2015 (in percentages)

391


List of Tables

Table 2.1

Global foreign investment inflows and outflows,
1913–1914 (in US$)
Table 2.2 Foreign investment of the US, 1914–1939 (excluding war
debts, US$ in billions)
Table 2.3 Outward foreign investment and FDI from major source
countries, 1929 and 1938 (US$ in billions, in 1900 prices)
Table 2.4 FDI inward and outward flows, 1980–2015 (US$ billions)
Table 2.5 Top-10 recipients and their shares in global FDI,
1980–2015 (US$ billions, shares %)
Table 2.6 Top-10 outward sources of FDI, 1980–2015 (US$ in
billions, shares in %)
Table 2.7 Global inward and outward stocks of FDI, 1980–2015
(US$ billions)
Table 2.8 Share of top-five countries in inward and outward FDI
stocks in the world, 1980–2015 (US$ billions)
Table 2.9 Outward FDI from developing and emerging countries,
1970–2015 (US$ in billion, unless indicated otherwise)
Table 2.10 Top-20 multinational enterprises from emerging
economies, 2015
Table 2.11 Flows of FDI and the numbers of multinationals in the
world, 1995–2016 (US$ billions)

16

18
19
24
27
31
33
34
41
43
48

xxi


xxii 

List of Tables

Table 2.12 Top-10 global multinational enterprises based on revenues,
market capitalization, assets, employment, and profits,
201652
Table 2.13 Top-20 privately owned multinational enterprises in the
world, 2016
53
Table 2.14 World’s largest nonfinancial state-owned multinational
enterprises ranked by foreign assets, 2010
55
Table 2.15 Top-20 nonfinancial multinational enterprises from
developing and transition economies, 2015a (ranking based
on foreign assets, US$ in millions)

61
Table 3.1 Stocks of inward and outward FDI/GDP ratios,
1980–1995 (%)
97
Table 3.2 The determinants of FDI viewed from a host country and
investing firm perspective
107
Table 5.1 Major international agreements and binding and nonbinding regulations
161
Table 5.2 Global quality assurance, food safety, social and environmental standards
162
Table 5.3 International databases of world inputs and outputs, as of
June 2016
171
Table 6.1 Global automobile production, share in exports, and share
in absorption of exports, 1980–1990 (production in
million units, share in exports and export absorption in
percentages)204
Table 6.2 Classification of automobile-producing countries, 2002
(production in millions)
206
Table 6.3 Top-10 global original equipment manufacturer (OEM)
parts suppliers, 2000–2015 (revenues US$ in million)
216
Table 6.4 Top-10 motor vehicle producers in the world, 2000–2016 220
Table 6.5 Top-10 car manufacturing countries in the world,
2000–2016222
Table 6.6 Top-10 motor vehicle assemblers in the world, 2000–2015 223
Table 6.7 Automobile production of leading developed and
developing countries, 2005–2016

224
Table 7.1 Market shares of top automakers in Brazil, 2011 and 2016
(in percentages)
235
Table 7.2 Brazilian auto production, exports, and imports,
2013–2017 (US$ millions)
238


  List of Tables 
  

Table 7.3
Table 7.4
Table 7.5
Table 7.6
Table 7.7
Table 7.8
Table 7.9
Table 7.10
Table 7.11
Table 7.12
Table 7.13
Table 7.14
Table 7.15
Table 7.16
Table 7.17
Table 7.18
Table 7.19
Table 7.20

Table 7.21

xxiii

Privatization of automotive manufacturing in Central and
Eastern Europe in the 1990s
242
Foreign investment stocks in Central and Eastern European
countries, 1995–2015 (US$ millions)
243
Top-10 multinational auto assemblers and auto parts
suppliers in Central and Eastern Europe, 1990–2000
(in sales revenues, US$ in millions)
245
Motor vehicle production of Central and Eastern Europe,
2000–2016248
Share of automotive products in total exports of Eastern
and Central European countries, 2000–2015
249
Major features of automobile industry in Central and
Eastern European countries
250
Foreign joint ventures in Chinese automobile industry,
1984–2006254
Top auto assemblers and best-selling car brands in China,
2015258
Private vehicle ownership in China, 1985–2009
259
Major joint ventures/foreign companies in Indian
automobiles264

Indian automobile production trends, 2011–2017
267
Top-10 auto assemblers in India and their market share
in 2016
268
Exports and domestic sales of Indian automobiles,
2011–2017269
Comparative growth rates of annual salary costs of automotive OEM workforce in selected countries, 2009–2014
(% change)
274
Inflows of foreign direct investment into Mexican auto
industry, 2011–2015 (US$ in million)
275
Automobile production and exports of Mexico,
2007–2016278
Share of foreign automakers in Mexico’s cars and light
vehicle production and exports, 2012 and 2016
280
Automobile production of Thailand, selected years,
1961–2016283
Top automakers and production of passenger cars and
commercial vehicles in Thailand, 2016
290


xxiv 

List of Tables

Table 7.22 Foreign direct investment inflows to Thailand, 2007–2016,

selected countries/regions (US$ in million)
291
Table 7.23 Automobile exports of Thailand, 2008–2015 (US$ in
million)293
Table 8.1 Relationships between tariff rates and employment,
1980–2005314
Table 8.2 Selected statistics for US multinational enterprises
(MNEs), US parents, and majority-owned foreign affiliates
(MOFAs) for selected years, 1999–2014
325
Table 8.3 Employment of US multinational enterprises (MNEs), US
parents, and foreign affiliates for selected years, 1999–2014 327
Table 8.4 Employment of multinational enterprises in the US, as
shares of US civilian employment, 1992–2010
328
Table 8.5 Share of US-MNEs in total US exports and imports, and
intra-MNE trade, 1995–2014
329
Table 8.6 Employment by nonbank US foreign affiliates by major
sector and area, 2008–2014 (in thousands)
331
Table 8.7 Output and employment changes in Western European
automobile production and employment, 2000–2012
343
Table 8.8 Global GDP, exports and outward foreign direct
investment, 1980–2015 (US$ in billion)
345
Table 8.9 Annual growth rates of global merchandise exports,
1992–2015346
Table 8.10 Manufacturing value- added and employment share in

GDP by region, 1970–2013 (in percent)
348
Table 8.11 Worldwide annual supply of industrial robots, 2003–2016
(thousands of units)
352
Table 8.12 Global working age (14–64) population and employmentpopulation ratio, 1990–2015
353
Table 8.13 Wage as a share of gross domestic product, selected
countries, 1975–2005 (in percentages)
357


List of Boxes

Box 2.1
Box 2.2
Box 2.3
Box 3.1
Box 6.1
Box 7.1
Box 9.1

The conceptual Contexts of FDI, FPI, MNE and MNC
Chinese Outward Foreign Direct Investment
Various Ranking of Multinational Enterprises
Location Choices of Multinational Enterprises
Mega Suppliers of Automotive Parts and Components
India’s TATA Motors’ Outward Foreign Direct Investment
Potentials for Radical Innovations in Developing Countries
with Developed Country Technology

10
45
49
105
207
270
383

xxv


1
Introduction

Since the mid-1980s, inexorable forces of economic globalization have
been dramatically and profoundly transforming global patterns of production, investment, trade, and employment, in other words, remaking
the world economy once again. Some of the formidable forces that
underpin such momentous and transfixing changes, and the consequent
transformation in global prosperity include foreign direct investment
(FDI), multinational enterprises (MNEs), and global value chains
(GVCs). This book is about these forces, and how they are remaking the
modern economy in the twenty-first century, and consequently reversing
the fortunes of the advanced industrialized countries of the North and
the developing and emerging countries of the South.
A rudimentary form of a nexus between MNEs, international business
ventures that own and operate affiliates in more than one country,
and FDI, through which capital moves to foreign countries with a
controlling stake of owners, can be traced back to the Phoenicians and
the Carthaginians who pursued internationalization of production, trade,

and investment back in 1200 bc. The modern form of nexus between
MNEs and FDIs is, however, a post-Industrial Revolution phenomenon,
which evolved and matured over the course of the eighteenth through twentieth centuries when massive international capital moved in both ­directions
© The Author(s) 2018
C. Dowlah, Transformations of Global Prosperity,
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2 

C. Dowlah

across the Atlantic, numerous resource- and market-seeking MNEs
expanded their global operations, and many nations across the world specialized based on their comparative advantage or resource endowments.
This book’s journey begins with the nineteenth-century world economy—when the rapid industrialization of Western economies propelled
economic agglomeration and ushered in the first classic web of economic
globalization; when the movement of international capital signified
essentially a one-way traffic, with capital flowing from wealthier Western
countries with abundance of capital and loanable funds to capital-scarce
developing countries of the South; when the world economy was clearly
divided into capital-exporting and capital-importing countries, and interest rate differentials determined international capital movement; and the
needs and the opportunities of capital-rich and capital-scarce countries
complemented each other.
Chapter 2 of the book explains how the internationalization of investment and production progressed historically under the traditional nexus
of FDI and MNEs beginning from the early nineteenth century, how the
FDI–MNE nexus reached its climax in the post-WWII period under the
dominance of vertically organized US-based multinationals, how horizontally organized Japanese multinationals challenged that status quo in
the 1970s through the 1980s, and how reverse FDI flows from emerging
economies have been reshaping the traditional FDI–MNE nexus in

recent decades.
The classical stipulations that international capital movement—no
matter direct or portfolio investment—was a function of differences in
real interest rates faced formidable challenge in the post-WWII period as
international capital tended to move across capital-rich countries and did
not flow much into capital-scarce countries as the theory had predicted.
Furthermore, among other factors, the ascendancy of American MNEs
in global stage in the immediate aftermath of the WWII, and the subsequent emergence of Japanese MNEs, created the need for articulating a
framework for explaining and predicting international trade, movement
of capital, as well as the expansion of MNEs around the world. As a
result, in the early 1960s, the traditional explanation of interest rate differential gave way to more serious theoretical stipulations on the origin
and proliferation of FDIs and MNEs across the world.