ABSTRACT
Most of the existing studies explaining foreign shares cited above have been made in the framework of the intangible assets hypothesis. Dunning (1983) has argued that possession of intangible assets alone could not explain FDI in the period following the late 1960s as arm’s length licensing2 emerged as an important alternative. Thus, according to the more recent propositions, FDI would be a preferred mode of foreign production only if the external markets of intangible assets in question are subject to high transaction costs and hence internalization incentives are present (Buckley and Casson 1976; Dunning 1981, chap. 4; Rugman
1981). In other cases licensing may be the prime modality. FDI in host countries should, therefore, be found to be concentrated in those branches of industries where intangible assets characterized by high transaction costs provide a competitive edge to the owning firm. If assets with relatively low transaction costs are the source of competitive edge, licensing would be the preferred mode of foreign involvement in the industry. A rigorous test of these predictions has, perhaps, been constrained by the problems involved in classifying the intangible assets between those with high and low internalization incentives.3
