Final answer:
The oligopolistic reaction theory of FDI suggests firms imitate and react to each other's investment behaviors, especially in markets dominated by a few large firms.
Step-by-step explanation:
The oligopolistic reaction theory of Foreign Direct Investment (FDI) suggests that firms imitate and react to each other's behavior. This theory posits that in markets where a few large firms dominate, a strategic interdependence develops, wherein each firm's actions can significantly impact the profits of all other firms in the market. As a result, when one firm decides to invest in a foreign market, other firms in the industry may follow suit, to avoid losing their competitive position or to capitalize on similar opportunities they believe exist.
This behavior mirrors the concept of adaptive expectations, where firms look at past experiences and gradually adapt their strategies as circumstances change. Unlike the theory of rational expectations, which assumes that firms are perfect synthesizers of information and accurate predictors of the future, the oligopolistic reaction theory acknowledges that firms might not have all the information or might be unable to process it perfectly, and therefore they may resort to mimicry as a strategic maneuver.