doi: 10.1111/j.1467-6419.2008.00560.x DETERMINANTS OF FOREIGN DIRECT INVESTMENT – A TALE OF NINE THEORETICAL MODELS Isabel Faeth Department of Economics, The University of Melbourne Abstract. This paper presents a review of nine theoretical models of foreign direct investment (FDI). Discussed are early studies of determinants of FDI (1) as well as determinants of FDI based on the neoclassical trade theory (2), ownership advantages (3), aggregate variables (4), the ownership, location and internalization advantage framework (5), horizontal and vertical FDI models (6), the knowledge- capital model (7), diversified FDI and risk diversification models (8) and policy variables (9). From each of the nine theories, the relevant determinants of FDI are derived. Empirical studies indicate the importance of these determinants in the real world. The paper shows that there is not one single theory of FDI, but a variety of theoretical models attempting to explain FDI and the location decision of multinational firms. Therefore, any analysis of determinants of FDI should not be based on a single theoretical model. Instead, FDI should be explained more broadly by a combination of factors from a variety of theoretical models such as ownership advantages or agglomeration economics, market size and characteristics, cost factors, transport costs, protection, risk factors and policy variables. Keywords. FDI; Literature survey 1. Introduction Increased globalization over the last two decades has led to strong growth of international business activity and foreign direct investment (FDI), which in turn has led to extensive research on the phenomenon of multinational enterprises (MNEs) and FDI. Empirical studies and theoretical models started off being developed as different parts of the same story. Early empirical research was mainly undertaken in the form of field studies with only limited theoretical foundation, as a theory of MNEs did not yet exist. A theory of FDI – or capital movement in general – was developed independently based on a trade theory perspective. Descriptive analysis dominated until the 1960s, while econometric analysis started to emerge in the 1960s and early 1970s. In studies based on secondary statistics, various combinations of research setups are possible. FDI from a single or a group of home countries (these can be developed countries, developing countries or both) into a single or a group of Journal of Economic Surveys (2009) Vol. 23, No. 1, pp. 165–196 C  2008 The Author. Journal compilation C  2008 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.