Term Papers

Term Paper on Foreign Direct Investment

Foreign Direct Investment

Introduction

The concern of most policy makers is the way foreign direct investments should be attracted by their countries. On the other hand, the concern of sender countries is about the policies, political stability and facilities of host countries. Basically, foreign direct investment refers to investment in businesses and production of a country by a company or individual investor from another country. The investment can be about buying a corporation in a target nation or expansion of the operations of a company in the host nation.

Major Concerns for the Host Country

The aim of a host country is to improve political stability in order to attract FDIs. Investors are attracted and retained by a good political climate. As such, the host nation is also concerned about economic environment.  Different business operations’ bureaucracies increase the time that investors take to acquire licenses before starting their business operations. FDIs are attracted by swift processes. Therefore, business procedures should be streamlined in all government institutions by the host nation in order to attract FDIs. This streamlining also enhances reliable and transparent interactions (Moran, 2006). The regulations of the foreign exchange should also be made investor-friendly by the host nation. If the regulations are poor, investors will withdraw investments. Among the vital FDI elements are corporate taxes which determine the amount that investment companies are deducted from their profits. A high amount hinders FDIs. However, when there are low corporate taxes, adequate revenues will not be raised by the government in addition to overshadowing local markets due to cheap imports.

The focus of the host nation is on the infrastructure. For any host country, functional infrastructure plays a vital role in attracting FDIs. When the infrastructure is poor, investors consider the leaders of the country as not being development-oriented. This can compel investors to avert their investments from that country (Peng, 2009). Reforms in the financial sector are important for a host country. A country’s financial outlook is improved by prudential reforms whose role is to regulate interest rates, money supply, price stability and taxation. When the economy improves, investors are attracted because they are assured high profitability potential for their investments.

Additionally, tariff reforms for imports should have regulations in a host country so that the state can enjoy a balanced payment trade. In addition, state and central clearances’ transparency is important in ensuring that investors get returns after investing in a host country. Security and peace are also important issues that should be ensured by the host nation. This averts the fear that investors might have (Baek & Qian, n.d). Finally, friendliness of the state to investors is a very important factor that should be considered by a host nation in its efforts to attract more foreign direct investments.

Major Concerns for the Sender Country

The major issue that a sender country is concerned about is companies’ financial status. In case companies have a financial status that does not allow them to operate within foreign nations, they make plans to provide more funding so that the companies can meet the set FDI proposals. A feasibility study is conducted by a sender company before making any investment move in a foreign state. The study results are used as the basis of making the decision on whether investment moves should be made in a foreign country (Froot, 2008). In addition, labor force issue is also a concern that sender countries face. Before undertaking the investment, an assessment of technical capacity of the host country is done. The sender country strives to ensure that there are individuals who understand the proposal for FDI properly and that their contributions will improve relations with a host country and profit margins.

Political climate in a sender country should also be stable since absence of security and peace will compel most firms to focus their investments on other nations in order to reduce risk within their countries. The existing opportunities in sender countries play a vital role of determining FDIs expansion (Baek & Qian, n.d). Any company’s ability in regards to legal business must be assessed by a sender country. Several companies can claim to involve themselves in legal businesses but eventually involve themselves in illegal operations in a foreign state after getting the approval of their countries. Therefore, sender states must ensure that any company that wants to invest in another country has legit functions and operations to prevent relations’ breakdown between the host country and sender country.

Conclusion

There is a vital role that is played by foreign direct investment in the host nation’s economy. Therefore, it is important to establish an enabling and viable business environment in order to attract more FDIs. In addition, security and political stability are important in maintaining high foreign direct investments in a home country and this improves the country’s overall economy. The focus of the sender nation should be on the legitimacy of any company that intends to invest within a foreign nation because this will assist the home nation in processing FDI. It is important to ensure that the host country is not exploited by the foreign firms. Instead, the companies should hire the host nation’s employees in order to enhance their living standards and to maintain harmonious relations.

 

Reference

Baek, K. & Qian, X. (n.d). An analysis on political risks and the flow of foreign direct investment in developing and industrialized economies. Retrieved 8 March 2014 from: http://faculty.buffalostate.edu/qianx/index_files/PoliRiskFDI_Baek&Qian.pdf

Froot, K. (2008). Foreign direct investment. Chicago: University of Chicago Press.

Moran, T. H. (2006). Harnessing foreign direct investment for development: Policies for developed and developing countries. Washington, DC: Brookings Institution Press.

Peng, M. W. (2009). Global business. Mason, Ohio: South-Western Cengage Learning.

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