Factors Influencing Foreign Investment Decisions Now that you understand the basic economic reasons why companies choose to invest in foreign markets, and what forms that investment may take, it is important to understand the other factors that influence where and why companies decide to invest overseas. These other factors relate not only to the overall economic outlook for a country, but also to economic policy decisions taken by foreign governments—aspects that can be very political and controversial.
Foreign direct investment FDI means companies purchase capital and invest in a foreign country. For example, if a US multinational, such as Nike built a factory for making trainers in Pakistan; this would count as foreign direct investment.
In summary, the main factors that affect foreign direct investment are Infrastructure and access to raw materials Communication and transport links. Skills and wage costs of labour Factors affecting foreign direct investment 1.
Wage rates A major incentive for a multinational to invest abroad is to outsource labour intensive production to countries with lower wages. This is why many Western firms have invested in clothing factories in the Indian sub-continent. However, wage rates alone do not determine FDI, countries with high wage rates can still attract higher tech investment.
A firm may be reluctant to invest in Sub-Saharan Africa because low wages are outweighed by other drawbacks, such as lack of infrastructure and transport links. Labour skills Some industries require higher skilled labour, for example pharmaceuticals and electronics.
Therefore, multinationals will invest in those countries with a combination of low wages, but high labour productivity and skills. For example, India has attracted significant investment in call centres, because a high percentage of the population speak English, but wages are low.
This makes it an attractive place for outsourcing and therefore attracts investment. Tax rates Large multinationals, such as Apple, Google and Microsoft have sought to invest in countries with lower corporation tax rates. For example, Ireland has been successful in attracting investment from Google and Microsoft.
In fact it has been controversial because Google has tried to funnel all profits through Ireland, despite having operations in all European countries. Transport and infrastructure A key factor in the desirability of investment are the transport costs and levels of infrastructure. A country may have low labour costs, but if there is then high transport costs to get the goods onto the world market, this is a drawback.
Countries with access to the sea are at an advantage to landlocked countries, who will have higher costs to ship goods. Therefore, the size of the population and scope for economic growth will be important for attracting investment.
For example, Eastern European countries, with a large population, e. Poland offers scope for new markets. This may attract foreign car firms, e. Volkswagen, Fiat to invest and build factories in Poland to sell to the growing consumer class.
Small countries may be at a disadvantage because it is not worth investing for a small population. China will be a target for foreign investment as the new emerging Chinese middle class could have very strong demand for the goods and services of multinationals.
Countries with an uncertain political situation, will be a major disincentive. Also, economic crisis can discourage investment.
For example, the recent Russian economic crisis, combined with economic sanctions, will be a major factor to discourage foreign investment. This is one reason why former Communist countries in the East are keen to join the European Union. The EU is seen as a signal of political and economic stability, which encourages foreign investment.
Related to political stability is the level of corruption and trust in institutions, especially judiciary and the extent of law and order. Commodities One reason for foreign investment is the existence of commodities.
This has been a major reason for the growth in FDI within Africa — often by Chinese firms looking for a secure supply of commodities. Exchange rate A weak exchange rate in the host country can attract more FDI because it will be cheaper for the multinational to purchase assets.
However, exchange rate volatility could discourage investment. Clustering effects Foreign firms often are attracted to invest in similar areas to existing FDI. The reason is that they can benefit from external economies of scale — growth of service industries and transport links. Also, there will be greater confidence to invest in areas with a good track record.
Therefore, some countries can create a virtuous cycle of attracting investment and then these initial investments attracting more. It is also sometimes known as an agglomeration effect. Access to free trade areas. A significant factor for firms investing in Europe is access to EU Single market, which is a free trade area but also has very low non-tariff barriers because of harmonisation of rules, regulations and free movement of people.
Evaluation There are many different factors that determine foreign direct investment FDI and it is hard to isolate individual factors, given there are many different variables.'Multinational Companies in India' But, the scenario for 'MNC in India' has changed a lot in recent years, since more and more firms from European Union like Britain, Italy, France, Germany, Netherlands, Finland, Belgium etc have outsourced their work to India/5(3).
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Read this article to learn about the Capital Structure Decision in MNC. After reading this article you will learn about: 1. Concept of Capital Structural Decision 2. Factors Influencing MNCs Capital Structure Decision. In case of an MNC, capital structure decision is concerned with determining the.
Factors Affecting MNC in INDIA. Uploaded by keertheswaran. Related Interests. FACTORS ATTRACTING MNCs IN INDIA "India’s computer scientists are among the leaders of Accelerated depreciation is allowed for investment in plant and machinery made on 5/5(2).