Foreign Direct Investment

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Foreign Direct Investment

By | November 2012
Page 1 of 1
Question 3
Several factors affect the amount of FDI that pours into many countries. The dimensions of the host country are important as there are more opportunities for bigger economies of scale, as well as spill-over effects. In such cases the investors are also lured by the prospects of a huge customer base, so population of a country plays an important role in attracting FDI. If the country has a high per capita income or if the citizens have reasonably good spending capabilities then it would offer the foreign direct investors with the scope of excellent performances. A weaker real exchange rate might be expected to increase vertical FDI as firms take advantage of relatively low prices in host markets to purchase facilities or, if production is exported, to increase home-country profits on goods sent to a third market. The status of the human resources in a country is also instrumental in attracting direct investments from overseas. There are certain countries, like China, that have taken an active interest in increasing the quality of their workers. Furthermore, inexpensive labor force is also an important determinant of attracting FDI. The boom of the Information Technology companies in countries like India has been a proof of the fact that inexpensive labor force has played an important part in attracting FDI. If a particular country has plenty of natural resources it always finds investors willing to out their money in them. A good example is oil rich countries. Studies have also identified clustering effects. Foreign firms appear to gather together either due to linkages among projects or due to herding as a larger existing FDI stock is regarded as a signal of a benign business climate for foreign investors. Infrastructural factors like the status of telecommunications and railways plan an important part in having the foreign direct come into a particular country. It has been observed that if the infrastructural facilities are properly in place in...