DETERMINANTS OF DIRECT FOREIGN INVESTMENT : A REVIEW OF LITERATURE AND EVIDENCE

Abstract

This thesis contains a review of post-1980 literature, regarding determinants of direct foreign investment (DFI) in industrialised and developing countries. The following factors were found to exert a significant influence on DFI flows. Empirically, market size has contributed substantially to the upsurge in DFI. High R&D intensity, skill intensity, economies of scale, tariff barriers, experience, exchange rate differential and rates of return, are also influential factors in encouraging DFI. Advertising intensity, market growth rates and the dependence on host country raw materials, together with oligopolistic reactions and political stability, have been found to influence DFI, but, only in some studies. In contrast, high unit labor cost and capital cost have strong deterrent effects on foreign investments. High tax rates and large geographical distance also discourage DFI. However, wage rates, transportation cost, host government incentives and being in the common market, have insignificant influence on DFI flows, contrary to popular perceptions. In addition to the aforementioned general findings, a few additional factors are worthy of attention. In developing countries, high dependence on host country raw materials, and high labor or land cost in the home country are factors motivating outward DFI. On the other hand, political stability and easy repatriation of dividends and profits are important to attract DFI into developing countries. Two characteristics unique to the service sector : tradability and cultural distance, have negative relationship with DFI. On the contrary, home country business presence in the host country, encourages investments in service industries.