The Investment Theory: The Two Gap Model

2.9.2 The investment theory (the two gap model)

Offiong and Atsu (2014) stated that the investment theory model is adapted from the Harrod-Domar’s growth model, which according to Arene (2015) is the simplest growth model formulated by Harrod and Domer and is made up of a goods market and a production sector, thereby creating two gaps. Offiong and Atsu (2014) further postulated that this theory differentiates two gaps in any economy, namely the foreign exchange and the domestic savings gaps. The former is the amount by which imports required for a given output exceeds exports likely to be associated with the output whereas the latter is the difference between the investment necessary for a given flow of goods and services and the savings that

This has become known as the Ownership, Location and Internalization (OLI) paradigm.According to the famous OLI paradigm, Kurtishi-Kastrati (2013) stated that investors choose FDI because of its three determinants: Ownership (O), Location (L) and Internalization (I) advantages and explained them thus: Ownership specific advantages (OSA) refers to certain types of knowledge and privileges, which a firm possesses but which are not available to its competitors. The ownership advantage occurs when superior technology and management knowledge allow the firm to compete on a foreign market in spite of the transaction costs. While, location specific advantages (LSA) refers to certain advantages, which the firm has because it locates its production activities in a particular area. Location advantages will accrue if the host economy can provide large markets or the possibility of creating them through trade liberalization, low cost inputs or good infrastructure. And, internalization specific advantages (ISA) occur when international market imperfections make market solutions too costly. Thus, whenever transactions can be organized and carried out more cheaply within the firm than through the market, they will be internalized and undertaken by the firm itself. In explaining this approach,

Dopfer (2012) applied the model to account for the causes of FDI and its treatment by host countries, who after having to face development challenges after the end of the cold war, brought the development community to realize that neither the developed nor the developing world is monolithic and as such each problem must be evaluated on its own terms, even if it is possible to derive lessons from similar