Sample Essay on Major Factors Affecting Foreign Direct Investment

Factors Affecting Foreign Direct Investment

Foreign direct investment is one of the most essential tools for growing the economy of a country. There are so many countries that struggle to attract foreign investors because of the important roles that they play in building the economy. Amongst the reasons why foreign direct investment is so important include:

  • It can provide substitute products and increase supply of top products in a country through imports.
  • It creates employment for the locals
  • Enhances development of local infrastructure
  • It enables locals to access products that are not produced within the country.

There are a number of factors that affect foreign direct investment in different countries. These include:

  • Government regulations and policies on investment.

    Policies that are favorable to both local and foreign investors determine the amount of foreign direct investment that a country receives. A country which puts in place policies that favor the local investors more than the foreign investors can discourage foreign direct investment within its markets. In addition tax regulations can also encourage or discourage foreign investors. Double taxation for instance often reduces the number of foreign investors in a country.

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  • Availability of raw materials and trade facilitation instruments.

    Raw materials attract more investors into the country. This is because a country endowed with raw materials helps investors reduce costs of production. This is one of the reasons why many investors have recently flocked in African countries. In addition to raw materials, foreign direct investment is also affected by availability of trade facilitation instruments such as proper infrastructure.

  • Availability of appropriate human resources.

    The human resources in a country can determine whether or not investors flock the country. A country with high numbers of skilled and educated personnel that are readily available will attract companies in need of skilled human resources. Similarly some companies which are more labour intensive will often flood poor countries with high populations because of the vast availability of cheap labor.

  • Economic growth of a country.

    A country that progresses economically tends to attract more foreign direct investment because economic growth boosts investor confidence. Countries with high rates of economic growth also tend to have many consumers who have economic muscle and can thus afford to purchase manufactured goods. The opposite is true for countries undergoing recession which reduces spending amongst consumers.

  • Political stability and security of a country.

    Political stability and security of a country also determine the amount of foreign direct investment that a country attracts. Countries which are politically stable and are renowned for secure systems and environments have more foreign investors. On the other hand, the countries which have insecurity issues and political instability attract fewer investors.

  • Cost and ease of doing business.

    The cost of production is a very important factor in attracting foreign direct investment. The ease of starting and running a business also influences the decisions of foreign investors to venture into specific foreign markets. The Ease of Doing Business Index is normally used to rank the ability of countries to facilitate and expedite opportunities for the investors.

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