Determinants of Foreign Direct Investment
Choi, Hyelin | August 2016
Abstract
As the world economy becomes integrated and foreign investment becomes liberalized, most governments compete to attract foreign direct investment (FDI) to their country based on the belief that foreign firms bring advanced technology, create jobs, and boost economic growth. Also, since FDI is one of the most stable capital flows, unlike capital flows in the stock and bond markets, it holds particular importance for developing countries. For these reasons, the determinants of FDI have been broadly studied from a variety of perspectives. Since FDI is determined by the behavior of multinational companies (MNEs), the motive behind the investment from the perspective of the investing firm is relevant. The first motive for FDI is to serve the local market by substituting exports from home to host country, called horizontal FDI. In this case, local market size and purchasing power strongly impact the location choice of MNEs. The second motive for FDI is to gain access to production factors including natural resources, raw materials, and human resources, called vertical FDI. In this case, availability of resources and lower factor costs play important roles. The third and last type of FDI is to relocate certain parts of production, produce goods, and then export them to third countries, which is called export-platform FDI. Since the main reason firms seek export-platform FDI is to save production and trade costs, low labor costs, lax market regulations, and trade openness are crucial determinants.
Citation
Choi, Hyelin. 2016. Determinants of Foreign Direct Investment. © Korea Institute for International Economic Policy. http://hdl.handle.net/11540/10549.Keywords
Economic Crisis
Economic Efficiency
Economic Policies
Financial Stability
Financial Management System
Financial Restructuring
Capital Market Development
Market Development
Economics
Erosion
International Economics
Macroeconomic
Macroeconomic Analysis
Performance Evaluation
Impact Evaluation
Foreign and Domestic Financing
Foreign Direct Investment
Economies in transition
Economic agreements
Social condition
Economic dependence
Economic assistance
Crisis
Taxation
Public Accounting
National Budget
Municipal Bonds
Local Government
Local Taxes
International Monetary Relations
International Financial Market
Multilateral Financial Institutions
Economic Recession
Market
Crisis
Economic indicators
Growth models
Gross domestic product
Macroeconomics
Economic forecast
Business Financing
Investment Requirements
Corruption
Money laundering
Financial crisis
Labor economics
Regional economics
Business recessions
Multilateral development banks
Regulatory reform
Capital
Exports
Economic development projects
Economic policy
Economic forecasting
Investment Requirements
Banks
International banks and banking
Capital movements
Central banks and banking
Bills of exchange
Swaps
Banks and banking
Financial crisis
Credit control
Credit allocation
Capital market
International liquidity
Liquidity
Exchange rate
Use tax
Taxing power
State of taxation
Tax-sales
Tax revenue estimating
Tax planning
Spendings tax
Special assessments
Tax administration and procedure
Sales tax
Real property and taxation
Progressive taxation
Effect of taxation on land use
Effect of taxation on labor supply
Intergovernmental tax relations
Inheritance and transfer tax
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