**4. Literature review**

This section is divided into theoretical (which adds to the theories already discussed in Section 3) and empirical literature reviewed by the study.

#### **4.1 Theoretical review**

#### *4.1.1 The eclectic paradigm theory*

Based on Dunning's three conditions in the Eclectic Paradigm, Boddewyn [10] found that foreign direct divestment occurs when a firm no longer enjoys the net competitive advantages over firms of other economies; or when it has competitive advantages but is not profitable to adopt these advantages; or it no longer benefits or enjoys less benefits to remain in other foreign markets through this mode as discussed earlier. In other words, Boddewyn [10] found that foreign direct divestment is the opposite of FDI, which entails that before divestment, there must be investment. According to the eclectic paradigm, multi-national corporations engage in foreign direct investment based on three advantages: ownership, location and internalisation advantages.

#### *4.1.2 Strategic motivations of foreign direct investment*

Strategic Motivations of Foreign Direct Investment was also adopted by the study. This theory was established by Knickerbocker [12] and later advanced by Graham [13, 14]. The distinguished feature of the strategic approach to FDI is that it believes that an initial inflow of FDI into a country will produce a reaction form

the local producers in that country, so that FDI is a dynamic process. Dunning [15] explains that the process from the domestic producers can either be aggressive or defensive in nature. An aggressive response would be a price war or entry into the foreign firm's home market while a defensive response would be an acquisition or merger of other domestic producers to reinforce market power.

#### **4.2 Empirical review**

The influence of trade openness and real gross domestic product (GDP) per capita on FDI is controversial and little or no attention has been paid on FDD. It also seems as if there is no data available for the FDD proxy. However, Chen and Wu [16] add that the determinants of foreign direct investment are also the determinants for foreign direct divestment but with the opposite sign. Therefore, the study will review theoretical and empirical literature on foreign direct investment.

On utmost occasions, it is common that countries seek to attract FDI for several reasons, with various beliefs that FDI allows for more variety of positive societal activities that enable the flow of capital across nations. The variables found to be the most significant determinants of foreign direct investment are openness, market share, return on investment, infrastructure, market size, human capital, real labour costs, exchange rates, political risks, agglomeration and government incentives [2].

Past experiences provide an abundant clarification that FDI encourages exports and allows domestic firms and infant industries to enter the world markets while operating resourcefully by adopting latest technologies and attempt to be competitive, which highlights economic freedom worth to attracting FDI [17] and confirms the cause-and-effect mechanism for exports. Lipsey [18] defines the macroeconomic view as perceiving foreign direct investment as a specific system capital flow across national borders, from home economies to host economies, measured in statistics of balance-of-payments. These flows give rise to a precise form of capital stocks in host economies, precisely the value of home economy investment in entities, such as corporations, regulated by a home-country owner, or where homecountry owner has a certain share of voting rights.

The Keynesian theory of investment by Keynes and Fisher as supported by Baddeley [19] and Alchian [20] state that speculations are made until the present estimation of future expected incomes at the margin equal to the opportunity cost of capital. Further, the return on speculation equals to Fisher's internal rate of return and Keynes' nominal productivity of capital. The theory highlights the significance of interest rates for investment decisions. A decrease in the interest rates amount to a decrease in the cost of investment in relation to the possible returns. According to this theory, a firm will only invest if the discounted return exceeds the cost of the project. Keynes yet believed that savings do not rely on interest rate but on level of income [21].

Khamis, Mohd and Muhammad [22] attempted to find the influence of inflation rate and GDP per capita on FDI inflows in United Arab Emirates during 1980 to 2013. The study used the ARDL model to examine the long-run relationships between the dependent and independent variables. The findings of the study revealed that inflation has no significant influence on FDI inflows. However GDP per capita proxy used for market size was found to have a significant positive effect on FDI inflows.

There are empirical studies such as those by Edwards [23], Gastanaga, Nugent and Pashamiva [24], Asiedu [25], Na and Lightfoot [26], Cevis and Çamurdan [27], Rogmans and Ebbers [28], Bagli and Adhikary [29], Donghui, Yasin, Zaman and Imran [30] found that FDI was positively related to trade openness of any economy. Musyoka and Ocharo [31] attempted to find the effect of real

#### *Foreign Direct Divestment Phenomenon in Selected Sub-Saharan African Countries DOI: http://dx.doi.org/10.5772/intechopen.100304*

exchange rate, competitiveness and inflation on foreign direct investment in Kenya using time series data for the 1970 to 2016 period. The study used ordinary least squares regression technique for the variables in study. The findings of the study concluded that competitiveness has a positive and significant influence on FDI inflows, inflation was insignificant for the studied period which concur with the findings of Khamis *et al.* [22], and lastly real interest rates and exchange rates were found to have a negative significant impact on FDI inflows in Kenya. The study recommended that there is need for favourable interest rates, desirable exchange rates and trade liberalisation over comprehensive programmes to trade reforms, aimed to open the economy and increase its competitiveness, and government must encourage freedom of foreign capital transactions and competition in the local markets.

Kumari and Sharma [2] identified key determinants of FDI inflows in developing countries using unbalanced panel data for the 1990 to 2012 period. The study selected 20 developing countries from the South, East and South-East Asia. Using seven explanatory variables (market size, infrastructure, trade openness, interest rate, inflation, human capital and research and development), the study attempted to find the best fit model from the two models in consideration (fixed effect model and random effect model) with the help of Hausman test. The findings have shown that fixed effect estimation confirms that interest rates, market size, trade openness and human capital yield significant coefficients relative to FDI inflow for the panel of developing countries under study. In addition, findings revealed that market size was the most significant determinant of FDI inflow. The authors recommend than interest rates and inflation must be controlled and monitored since they have an influence on FDI.

Tahmad and Adow [3] investigated the long-run equilibrium relationship of trade openness and foreign direct investment in Sudan by sector during the 1990 to 2017 period. The study used the Johansson co-integration technique and the findings revealed that there is a long-run equilibrium co-integration between trade openness and FDI inflows estimated at negative 0.53 for the aggregate economy when trade openness is measured in terms of the sum of exports and imports over GDP. The degree of openness was estimated at positive values of 0.55, 0.17, and 0.9 for the industrial sector, the aggregate economy and the agricultural sector respectively. The findings indicated that for the studied period, FDI flows for the aggregate economy by sector are influenced by the extent of trade openness in terms of their combined measurement. Furthermore, the greatness of the extent of the industrial trade openness model is a strong one and the government must prioritise this sector regarding exports. The government must also encourage the manufacturing sector, thus promoting attentiveness of FDI in the country's production sectors and developing infrastructure, particularly those which support the paradigm that Sudan, like various Sub-Saharan African countries, should promote its primary exports to convert from a developing country to a developed one. The study suggests that, according to size of industrial sector trade openness degree, government should use more energy for it to expand and detect this sector as a leading sector utilising trade efficiently and therefore prioritise it in the export.
