Factors Influencing Foreign Direct Environment

Topics: Investment, Foreign direct investment, Developed country Pages: 9 (3215 words) Published: May 6, 2012

Factors Influencing Foreign Direct Investment

The world is becoming a global village and more companies are now operating at an international level. This essay critically analyses some of the factors which influence Foreign Direct Investment (FDI). Morrison (2006) defined FDI as the establishment of a company of a productive nature in a foreign country involving large volume of shareholding in foreign operations. The essay will investigate how important FDI is in the process of globalisation and in the activities of multinational enterprises as well as examining how international trade and FDI are interlinked. There will also be a discussion of different reasons why companies decide to go international as this will highlight some of the factors which influence FDI, the benefits of FDI to both the host and home countries will be taken into account. In addition, the essay will look at different types of FDI and how these differ from each other as well as identifying strategies underlying each of these FDIs. Issues which can have a negative impact on the company’s decision to go overseas will be critically investigated and identify why other organisations do well while others are failing after making the decision of going overseas. Furthermore, the essay will also look at the factors which should be considered by an organisation prior to making a decision of investing overseas. The essay will also discuss Political, Economical, Social and Technological (PEST) factors which can either have positive or negative impact on the company’s decision to go international. There are so many benefits and risks associated with FDI. There will be an examination of the benefits as to whether both the international company and the host country benefit from the investment as well as analysing whether both foreign and domestic countries equally enjoy the benefits of FDI. According to Chryssocoidis et al (1997) there are five different types of foreign direct investment. The first one is taken in order to gain specific factors of production which include technical knowledge, resources, materials and brand names if these are not available in the home country or are not easily accessed. The second type is whereby a company invest in a foreign country in order to gain access to cheaper factors of production, for example access to cheap labour. This form of FDI was developed by Raymond Vernon (1966) in his product life cycle hypothesis. He stated that governments of host countries may encourage this type of FDI in an effort to pursue an export orientated strategy development. As such, the governments of the host countries may encourage foreign investors through offering investment incentives such as grants and tax concessions. The third form of FDI is about international competitors undertaking mutual investments in one another so as to acquire access to each other’s product ranges (Chryssochoidis et al, 1997). This resulted from increased competition among similar products and both companies find it difficult to compete in each other’s home market leading to the companies investing in each other’s area of knowledge thereby promoting each other’s sub-product specialisation in production (Chryssochoidis et al 1997). In addition, the fourth form of FDI is market seeking and it is about accessing customers in the host country. Finally, the fifth type of FDI occurs when there is a location advantage for the foreign company in their home country but the existence of tariffs and other barriers prevent the company from exporting to the host country leading them to overcome these barriers through establishing a local presence in the host country (Chryssochoidis et al 1997).

FDI plays an important role in global business; it provides companies with access to new technology, new marketing channels, cheaper production facilities and new skills (Spaulding and Graham, 2004). For the host...

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