Foreign Direct Investment

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Factors Affecting Foreign Direct Investment Location in the Petrochemicals Industry, the case of Saudi Arabia

By
Fawaz Binsaeed
0531820

BBS Doctoral Symposium 23rd & 24th March 2009

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Factors Affecting Foreign Direct Investment Location in the Petrochemicals Industry, The case of Saudi Arabia

Abstract
Foreign Direct Investment (FDI) is an important source of capital and economic growth in developing countries. It provides a package of new technologies, management techniques, finance and market access for the production of goods and services. However, attracting FDI is a major challenge for host countries as it faces the challenge of identifying the major factors that motivate and affect the FDI location decision. After reviewing the literature we identify the most important major location factors for FDI, which are the cost factors, market factors, infrastructure and technological factors, political and legal factors, and social and cultural factors. However, the previous studies lack the focus on the complexity of the relative important of the location factors to a specific industry and specific country. Therefore, this study will fill the previous studies gaps by studying the relative important of location factors to the Petrochemicals FDI located in Saudi Arabia

Literature review
There has been a considerable literature on the determents of location factors for Multinational Corporations (MNCs) when they choose their foreign market location, but very little on the relative important of the location factors for FDI in specific country and industry. It is widely believed that the trend towards globalize production and marketing has major implications for developing countries' attractiveness to FDI. The boom of FDI flows to 2

developing countries since the early 1990s indicates that multinational enterprises have increasingly considered these host countries to be profitable investment locations. At the same time, various experts argue that the determinants of and motivations for FDI in developing countries have changed in the process of globalization. As a consequence, it would no longer be sufficient to offer promising markets in order to induce FDI inflows. Policymakers would face rather complex challenges in striving for location attractiveness to FDI (Kokko 2002). Reportedly, FDI are increasingly pursuing complex integration strategies, i.e., MNCs "increasingly seek locations where they can combine their own mobile assets most efficiently with the immobile resources they need to produce goods and services for the markets they want to serve" (UNCTAD 1998). This is expected to have two related consequences regarding the determinants of FDI. The Host countries are evaluated by FDI on the basis of a broader set of Policies than before. The number of policies constituting a favorable Investment climate increases, in particular with regard to the creation of Location-specific assets sought by FDI. The relative importance of FDI location determinants have changed. Even though Traditional determinants and the types of FDI associated with them have not disappeared with globalization, their importance is said to be on the decline. More specifically, "one of the most important traditional FDI determinants, the size of national markets, has decreased in importance. At the same time, cost differences between locations, the quality of infrastructure, the ease of doing business and the availability of skills have become more important" (UNCTAD 1996: 97). Likewise, Dunning (1999) argues that the motives for, and the determinants of FDI have changed. According to Dunning, FDI in developing countries has shifted from market-seeking and resource-seeking FDI to more (vertical) efficiency-seeking FDI. It would have important policy implications if globalization had changed the rules of the game in competing for FDI. The

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policy challenge may become fairly complex; host country governments would have "to...
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