WHAT ARE THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT (FDI)?

It has been suggested that the worlds advanced economics and those developing nations, which have been very successful in attracting high inflow of FDI. Possess some fundamental enabling conditions. These conditions are as follows:

1.       ECONOMIC OPENNESS: Whilst access to specific markets-judged by their factors are predictably much relevant in the export-oriented foreign firms. A range of surveys suggest a wide spread perception that open economics encourage more foreign investment. One indicator of openness is the relative size of the export sector. Singh and Jun’s 1995 study indicates export, particularly manufacturing exports, are significant determinants of FDI flows and that tests show there is strong evidence that exports precedes FDI flows. China, in particular has attracted- much foreign investment into the export sector. In Bangladesh, on the other hand, foreign investors have been attracted to the manufacturing sector by its lack of quota for textiles and clothing exports to European union and US markets. Garment exports rose from virtually nil in the 1970s to over one-half of its export earnings by early 1990s. In contract, most low income economies have remain more inward-oriented.

2.         SIZE OF THE MARKET: Econometric studies comparing a cross section of countries indicate a well –established correlation between FDI and size of the market (proxied by the size of G.D.P) as well some of its characteristics (for example average income level and growth rates). Some studies found GDP growth rate to be sufficient explanatory variable, while GDP was not, probably indicating that there were current size of the national income is very small, and increment may have less relevant to FDI decision down growth rate performance as an indicator of market potentials. There is a little doubt that the size of China’s market explains in large part in massive FDI flows it attracted since the early 1980s. Within China, FDI has been concentrated (over 90 0/0) in the costal areas. Provincial GNP, reflecting economic development and potential demand has also been indicated as the major determinant of this concentration. (Boardman and Sun, 1997) is reported to be holding back potential foreign investment, especially in manufacturing, it lessees the attractiveness of investing in productive sector.

3.         POLITICAL RISK: The ranking of political risk among determinants remains somewhat unclear. Where the host country possess abundant natural resources, from further incentives maybe required as it is seen in political unstable countries such as Nigeria and Angola, where high returns in the extractive industry seem to compensate for political instability. In Nigeria, so long as the foreign companies is confident of being able to operate profitability without undue risk to its capital and personnel, it will continue to invest. Large mining companies for example overcome most of the political risk by investing in their own infrastructure maintenance and their own infrastructure maintenance and their own security forces. Moreover, these companies are limited neither by small local markets nor by exchange rate risk since they tend to sell almost exclusively on the international market at currency prices.

4.         INFRASTRUCTURE: Infrastructure covers many dimension, ranging from roads ports, railway and telecommunication system to institution development (e.g accounting and legal services etc). Studies in China reveal the extent of transport facilities and proximity to major ports as having a significant positive effect on the location of FDI within the country. Poor infrastructure can be seen, however, as both an obstacle and an opportunity for foreign investment. For the majority of low-income countries, it is often cited as one of the major constraints. But foreign investors also points to the potential for attracting significant FDI it host government permits more substantial foreign participation in the infrastructure sector. Recent evidence seem to indicate that although telecommunication and  airline have attracted foreign direct investment flow (e.g. to India and Pakistan), other more basic infrastructures such as roads- building remains unattractive, reflecting the low return and high political risk of such investments