The Political Economy of FDI 591 sons of ownership,location,and internalization.0 Firms have ownership advan- tages when they have access to some asset or process that provides some advantage over existing firms in the foreign market.These can be physical,for example pat- ented products or production processes,or more intangible,such as global brand name recognition.Multinational firms invest abroad to exploit these firm-specific advantages in foreign markets and secure higher returns. Firms may also be motivated to invest abroad because of locational advan- fages.Firms often invest in production facilities in foreign markets because trans- portation costs are too high to serve these markets through exports.This could either be directly related to the physical nature of the good,as with a high bulk item or a service that needs to be provided on site,or because of policy factors such as tariff rates,import restrictions,or issues of market access that make phys- ical investment advantageous over serving the market through exports.The loca- tional advantage could also be related to the actual endowments of the host location-either the richness of its natural resources or the high quality and low cost of its labor force. The third and most complex factor is that of internalization advantages.Al- though the other two OLI factors highlight reasons why firms would move pro- duction to a foreign location,they do not give any reason as to why a firm would simply not license a foreign producer to make the item for the parent firm.A multi- national could simply provide the technology needed for the production process and the blueprints for the product to a local firm.This concept of internalization advantages captures the firm-specific motivations for a firm choosing to produce the product within the organization itself in a foreign location. Closely related to Dunning's work,other scholars have developed a number of theoretical models to explain firms'decisions to invest abroad.These models can be roughly classified as theories based on "vertical"firms,"horizontal"firms,and the"knowledge-capital model"of multinational firms.Vertical firms separate pro- duction activities by the level of capital intensity,producing different goods and services at different physical locations.2 Although these theories are important contributions to the understanding of multinationals'investment decisions,theo- ries based on vertical multinationals have failed to account for the existence of firms replicating the production of the same goods and services in different phys- ical locations. Markusen explained this pattern of replicating production by creating a model of "horizontal"firms with firm-level economies of scale that integrate hori- zontally across national borders.3 These horizontal models have been integrated, 10.Dunning 1981.For an interesting discussion on the OLI framework and recent work done in relation to it,see Markusen 1995. 11.See Markusen and Maskus 1999a and 1999b. 12.Helpman 1984. 13.Markusen 1984.For a review of recent contributions to this literature,see Markusen and Maskus 1999asons of ownership, location, and internalization+ 10 Firms have ownership advan￾tages when they have access to some asset or process that provides some advantage over existing firms in the foreign market+ These can be physical, for example pat￾ented products or production processes, or more intangible, such as global brand name recognition+ Multinational firms invest abroad to exploit these firm-specific advantages in foreign markets and secure higher returns+ Firms may also be motivated to invest abroad because of locational advan￾tages+ Firms often invest in production facilities in foreign markets because trans￾portation costs are too high to serve these markets through exports+ This could either be directly related to the physical nature of the good, as with a high bulk item or a service that needs to be provided on site, or because of policy factors such as tariff rates, import restrictions, or issues of market access that make phys￾ical investment advantageous over serving the market through exports+ The loca￾tional advantage could also be related to the actual endowments of the host location—either the richness of its natural resources or the high quality and low cost of its labor force+ The third and most complex factor is that of internalization advantages+ Al￾though the other two OLI factors highlight reasons why firms would move pro￾duction to a foreign location, they do not give any reason as to why a firm would simply not license a foreign producer to make the item for the parent firm+ A multi￾national could simply provide the technology needed for the production process and the blueprints for the product to a local firm+ This concept of internalization advantages captures the firm-specific motivations for a firm choosing to produce the product within the organization itself in a foreign location+ Closely related to Dunning’s work, other scholars have developed a number of theoretical models to explain firms’ decisions to invest abroad+ These models can be roughly classified as theories based on “vertical” firms, “horizontal” firms, and the “knowledge-capital model” of multinational firms+ 11 Vertical firms separate pro￾duction activities by the level of capital intensity, producing different goods and services at different physical locations+ 12 Although these theories are important contributions to the understanding of multinationals’ investment decisions, theo￾ries based on vertical multinationals have failed to account for the existence of firms replicating the production of the same goods and services in different phys￾ical locations+ Markusen explained this pattern of replicating production by creating a model of “horizontal” firms with firm-level economies of scale that integrate hori￾zontally across national borders+ 13 These horizontal models have been integrated, 10+ Dunning 1981+ For an interesting discussion on the OLI framework and recent work done in relation to it, see Markusen 1995+ 11+ See Markusen and Maskus 1999a and 1999b+ 12+ Helpman 1984+ 13+ Markusen 1984+ For a review of recent contributions to this literature, see Markusen and Maskus 1999a+ The Political Economy of FDI 591