AbstractThe motives and prospects of FDIare explained by various theories.

The most used by economists is the eclecticparadigm (OLI), which expresses the need for benefits that exceed the costs ofdirect investment abroad. In order to understand the reasons why Germanyinvests in China, in this essay I am going to use the OLI framework.  IntroductionChina’s economic reforms successfully built an improvedenvironment for both state and private companies, providing them with thenecessary resources, such as infrastructure, access to capital and a moreprepared workforce. In 1986, China was granted the status of observer by the GeneralAgreement on Tariffs and Trade (GATT) and since then, it has begun working towards accession to theWorld Trade Organization (WTO).China became a member of the World Trade Organization in 2001 and agreed tobecome a “responsible participant” and to accept the rules of the worldtrading system. Its market was opened to foreign investment and quotas andtariffs were reduced. At present, it is the second largest exporter afterGermany and the second largest importer after the United States.Chinahas become a global manufacturing platform, and currently has the largestmanufacturing economy in the world.

For example, China produces around 80% ofthe world’s air conditioners, 80% of the world’s umbrellas, 70% of mobilephones and 60% of the country’s footwear. It also became, in 2007, the world’slargest producer of carbon dioxide, the main greenhouse gas responsible forglobal warming. This was due to the growing demand for coal to generateelectricity and an increase in the production of cement to buildinfrastructure.Therapid development of China is an economic miracle. No country in the world hasgrown in such a vertiginous way. According to The Economist, Britain took morethan 150 years since the beginning of the industrial revolution to double GDPper person (measured in purchasing power parity), from $ 1,300 to $ 2,600.About 120 years later, the United States, with a population similar in size tothe United Kingdom, achieved the same in one third of the time.

China hasachieved it in only twelve years.  LiteratureReviewThe OLI framework, or eclectic paradigm was proposed by J.H.

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Dunning in 1976. Itrefers to the words Ownership, Location and Internalization. This model establishes the decision guidelines anddrivers for foreign growth, which allows companies to operate in internationalmarkets.

In recent years this model has been used significantly to analyze theactivities of Multinational Companies (MNEs) and the economic reason behindtheir international operations. This paradigm, which is supported by severalempirical studies, does however not have complete acceptance, and it has beencriticized as limited in its precision in predicting international outcomes. Nowadays, other different factorsbeyond the economic advantages of the OLI framework, are also determinants inFDI operations. For example, the gravity model, that attempts to avoid thelimitations of the eclectic paradigm (OLI) by analyzing the factors of bilateraltrade such as common borders, common languages, similarity of legal systems,monetary system and past colonial ties.

Other problems associated with the OLIframework are the scarce distinction between vertical and horizontal models interms of the location of production centers within the new countries. Anotherproblem is that the underlying reasons for production that vary between regionsare not addressed. A case to show this fact is, for example, that the factorsthat influence foreign investment of metal are abundant in a region of LatinAmerica but are different from those that influence the investments ofmanufacturing of cars in a region in Africa.

Despite all of the above, the OLIframework is useful for driving a large amount of FDI researches and proves tobe useful in establishing international operations guidance for multinationalcompanies, since it is a developed and well-argued model for expansion studiesand economics forecasts.  Its author,Dunning, made later improvements in his model and reasoned that the competitiveadvantages, the market obstacles, the associations and the variables of thecontext should, similarly, be added to the model to guide in the expansiondecisions. The case study proposed, uses threequestions to analyze the reasons and prospects of German investments in China.These questions form the basis of this study.

They state: what seems tomotivate German companies in China? To what extent can these motives fallwithin the OLI paradigm? What are the main obstacle to German Investment inChina? Following the case study, the OLI model was used to evaluate the reasonsfor FDI in China. The following chapters will explain the conclusions of thesequestions.