Foreign Direct Investment (FDI) takes place when companies decide to purchase capital and invest in a foreign country. This type of investment seems to be gaining immense popularity among investors from different parts of the world. And it is easy to see considering it offers numerous benefits.
As enticing as it sounds, you can never attain a foreign direct investment advantage blindly. After all, you need to make the right foreign direct investment decisions for things to work in your favor. That aside, below is key factors affecting FDI.
Wage Rates
A major incentive that will convince a multinational to invest in a foreign country is to outsource labor-intensive production to nations with lower wages. Actually, this remains to be among the reasons why Western firms have invested a lot in developing countries.
Either way, it is worth noting that wage rates alone don’t determine foreign direct investment. This is because countries with high wage rates can also attract higher tech investment. A firm may not be ready to invest in Sub-Sahara Africa since low wages are outweighed by other drawbacks, such as lack of poor infrastructure and lack of transport links.
Clustering Effects
Most foreign firms are often attracted to invest in similar areas to existing Foreign Direct Investment. The reason being they can benefit from external economies of scale- growth of service industries and transport links.
Moreover, there is a greater confidence that comes with investing in areas that boast an exceptional track record. Therefore, some nations can create a virtuous cycle of attracting foreign investment and then these initial investments attract more. This is at times regarded by investors as the agglomeration effect.
Economy Size
We can never conclude without mentioning the sheer fact that Foreign Direct Investment (FDI) is often targeted to selling goods directly to the country involved in attracting the investment. For this reason, the size of the population and scope for economic growth will be essential for attracting investment. Be sure to examine the size of the economy and potential for growth before deciding on anything.
