In 1967, the US Army Ordinance Office started the MICV-65 program for a new armored vehicle in response to the amphibious Soviet BMP family Infantry Fighting Vehicles. The same year, FMC (Food Machinery Corporation) Ground Systems Division (later become United Defense, today BAE Systems) started to improve the M113 Armored Personnel Carrier (APC). Contracted by the US Army, FMC built two prototypes under the designation XM765. These vehicles were derived from the earlier XM701 prototype aimed to replace the M113 under the MICV-65 program. The XM765 was based on the proven M113 APC, modified to incorporate a fully enclosed one-person turret and a sloped rear deck with firing ports so that the infantry could fight from within the vehicle. Although the US Army evaluated the XM765, it was rejected in favor of the M2 Bradley (XM723), stating that the army needed a better-protected and more mobile vehicle. 

FMC continued development as a private venture, resulting in the Product Improved (PI) M113A1, the first prototype of which was completed in 1970, and decided to market it for export as a cheap alternative to the M2 Bradley and a possible upgrade to the M113 APC. The PI M113A1 had an enclosed weapon station in the center of the hull, placed behind the engine and the driver with the commander's cupola to the rear of the turret. This arrangement caused poor situational awareness for the commander with very poor forward visibility. FMC returned to the drawing board, and the vehicle was redesigned with the commander seated behind the driver on the left side of the hull, and the turret was relocated to the rear of the engine on the right side of the hull. This vehicle was subsequently designated the AIFV (Armored Infantry Fighting Vehicle).