Foreign direct investment (FDI) refers to the act of companies or investors that purchase capital and invest in a foreign country.
The globalization of business, rising operating costs and tightening competition prompt big businesses in developed countries to look for grounds that allow them to reduce cost of production without compromising the quality of their products. It is one of the triggers of FDI and the best candidates for these are emerging markets like Brazil, Russia, India, China, South Korea and other Asian countries.
The factors that play a role in foreign direct investments include:
1. Wage Rates
Low wage rates are a major attraction for multinational companies to invest abroad. Outsourcing labor intensive operation to countries with lower wages is beneficial not only to investors but to the host country as well.
2. Labor Skills
Industries such as electronics and pharmaceuticals require highly skilled labor. Combined with low wages, countries with highly skilled population can offer multinationals greater advantages including reduced costs and sustained operation.
3. Tax rates
Most large multinationals prefer to invest in countries that levy lower corporate taxes. Low taxes can lead to reduced costs. It allows businesses to garner savings and increase their return on investments. This is a factor available in many emerging economies.
4. Transport and Infrastructure
Multinationals need easy availability of land, air and sea transport to facilitate delivery and distribution of raw materials and finished products. Roads, bridges and other infrastructure also play a part in the smooth operation of their businesses. These are key factors that attract foreign direct investments.
6. Political Stability
Investing in emerging markets is associated with identified risks such as political uncertainty of the host country. Political unrest is major investment risk no foreign direct investor is too willing to take. The success or failure of investors can depend largely on the political scenario of a host country.
7. Rate of Exchange
A weak currency of a host country means stronger currency for a foreign investor. It allows capital investment to acquire assets and pay wages at lower costs.
Lori Palermo is a corporate consultant who is experienced in the areas of fund administration, corporate solutions, human resources, technology and small business. He likes to share his knowledge about business and human interests. .