Critical Evaluation of Institutional Factors Impact on Outward/Inward Foreign Direct Investment

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Critical Evaluation of Institutional Factors Impact on Outward/Inward Foreign Direct Investment This aim of this essay is to evaluate the impact of institutional factors on outward and inward FDI. This will be done by determination of the major FDI (Foreign Direct Investment) factors, evaluation of the role of institutional factors and investigation of institutional factors impact on inward and outward FDI flows. Several sources (Aswathappa, 2012; Jensen, 2012) have identified FDI as an investment, made by a company based in one country (home country) into another company, which is based in other country (host country), in order to obtain certain degree of management control over that company. Recent evidence (Ho and Rashid, 2011) has demonstrated that a tendency for a firm to engage in foreign investment depends on a combination of different factors and elements. Dunning (2011) has argued that company has to satisfy three conditions in order to successfully engage in international activity, which are ownership (know-how, technologies), localisation (natural resources, low production costs) and internationalisation. This theory is quite unique because it is developed by several important FDI determinants such as natural resources, production efficiency, strategic assets and market size. Nachum (1999) has argued that in accordance with Hymer’s firm’s specific advantages theory, companies are engaging in FDI if they possess specific advantages e.g. access to raw materials, economy of scale, marketing advantages, etc. Aswathappa (2010) has suggested another FDI determinant which is ‘follow the client/rival’. If one of the clients builds a foreign facility, it is reasonably for the company to follow the client and also build a foreign facility in order to continue cooperating with the client. If one company goes to the foreign market it draws the attention of other similar companies, that can potentially exploit similar opportunity and therefore follow the rival. The same source has also stated that market size is another crucial FDI determinant, which play important role for foreign investors. Nevertheless, Seyoum (2011) has argued that FDI inflows cannot be only determined by such variables as qualitative and skilled labour, availability of natural resources, technologies or modern infrastructure. It is essential to highlight the importance of role of institutional factors in attracting foreign investors. It was suggested by Solomon (2007) that foreign investors are seeking for countries with stable political and social institutions. As it was figured out by Bénassy-Quéré, et al. (2007) the main institutional factors are: efficient protection of civil and property rights, economic and politic freedom and stability and corruption. Moreover, Globerman and Shapiro (2003) have stated that good institutions (well developed financial system, private property protection, government services, etc.) have positive impact on both inward and outward FDI. Nevertheless, in some cases quality of institutions depends on FDI for instance, Chinese MNE’s value natural resources more than sound legal system or political stability (Kolstag and Wiig, 2012). According to Jensen (2012) host country’s political regime is one of the most important determinants of FDI. It is considered that authoritarian regime is rather more stable than democratic. The same source has assumed that democracy may be influenced by the interests of the particular groups, which can increase tax rates, trade barriers or implement protectionism policies in order to protect domestic companies from foreign MNE’s. A study carried out by (Knutsen, et al., 2011) has stated that authoritarian regimes can reduce labour costs supressing human or different organisation rights e.g. child labour and trade unions and therefore decrease costs for foreign investors. Nonetheless, there is counterargument provided by the same sources (Jensen, 2012; Knutsen, et al. 2011) which...
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