Question

(International economics question) - Explain: Why David Ricardo's theory can not explain FDI?

Answer 1

According to the theory of Foreign Direct Investment, countries will export products that utilize their abundant and cheap factor (s) of production and import products that utilize the countries' scare factor (s). However, David Ricardo's theory cannot explain the occurance of Foreign Direct Investments since his theory is based on two countries, two goods and perfect mobility of factors at local level, which did not justify international capital movement.

Such comparative advantage models could not even allow FDI since perfectly competitive world leaves no scope for the existence of FDI's.