Factors Influencing FDI

Factors Influencing FDI

Foreign direct investment not only brings in capital, it also brings in latest technologies and modern
management practices. Such investments are crucial to ensue that any country’s industries would be able to
create products and services in future that can be sold in international markets. As such FDI is important not
just for the developing countries, it is also equally important for developed nations. Industrialized nations are
among the largest recipient of FDI.
Factors that are important for a country to attract FDI are give in the following;
Supply factors:
– Lower production costs for certain products / industries compared with other countries attract foreign
investment in those industries
– Better logistics, warehousing and transportation infrastructure and systems (by air, sea or over land)
also attract foreign direct investment
– Abundant availability of natural resources and other factors of production lead to cheaper prices of
these resources and may attract foreign direct investment
– Firms also make foreign direct investment in foreign countries to access to key technologies
Demand factors:
– Closer and good customer access also factors to bring in foreign direct investment
– Advantages in marketing, being closer to customers, may also bring in FDI
– Firms may need to establish operations in foreign markets for exploiting of competitive advantages
– Companies that have strong global brands may want to have full control over their brands in world
markets and my engage in FDI for preservation of brand names and trade marks
– Customers of firms are also often traveling / moving to foreign countries. Firms may also need to
establish operations in foreign countries due to their customers mobility
Political factors:
– Firms may also invest in foreign countries for avoidance of any trade barriers posed by the home of
host countries
– Home country or foreign country government may provide economic development incentives for FDI,
encouraging firms to invest overseas.