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Lesson#26
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Factors Influencing FDI
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MODES OF ENTRY INTO INTERNATIONAL MARKETS
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.
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