Interdisciplinary Journal of Contemporary Research in ... - Webs

ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
2. Literature Review
There are lots of studies that have determined the major factors that affect on inflow of
Foreign Direct Investment and the impact of Foreign Direct Investment on economic
growth. Better infrastructure facilities, Market potentials and Market size positively effect
Foreign Direct investment inflow. On the other hand high cost of start-up business and
unfriendly business environment discourage FDI inflow in the developing countries
(Mottaleb at el. 2008). Market size, Labor costs and exchange rate factors are important
variables in determining location choices of direct investors (O‘Sulliva. 1985, Pan-long
Tsai. 1994). Democratic Government as a very important determinant of FDI Democratic
government attract high level of investment because in democratic country there is low
country risk and Debt risk also which encourage the investor to invest in that country.
The country where there is Democratic government attracts 70% more FDI then
authoritarian regimes (Jensen, N. M. 2003).
Political instability is also an important determinant of FDI. If we consider only political
instability it offer distorted picture of reality so other factors such as income inequality,
social welfare, history, location, experience with democracy, the relationship with
superpowers, the countries' infrastructure, membership in World institutions such as
International Monetary Fund, and other related factors should be carefully examine.
Return on investment is also very important determinant when there is political risk the
investors may not decrease or withdraw their funds because of the expected return on
investment. Keeping this in mind, the investigation of the relationship between political
risk and the flow of FDI without accounting for the return on investment would be
incomplete. Therefore, expected or actual rate of return on investment should be
somehow incorporated into the analysis (Fatehi-Sedeh at el.1989). In the presence of
financial and political corruption FDI develop the financial markets which bring financial
development in developing countries (Kholdy at el. 2008).
Weather a country is following the import substituting (IS) or Export promoting (EP)
strategies the volume and efficiency of FDI inward also vary accordingly. FDI is likely to
be much more efficient in promoting growth in Export promotion (EP) countries because
it is operating in suitable environment. So FDI is more growth enhancing factor in EP
countries then IS countries (Balasubramanyam et al. 1996).
Beside the local conditions and policies of the country the sector in which Foreign Direct
Investment is invested is also very important. Flow of FDI into different sector likely
(services, primary and manufacturing) produces different effect on economic growth.
Flow of FDI into service sector has ambiguous effect. It has negative effect on growth if
it is invested into primary sector, where as the effect is positive if it is invested into
manufacturing sector (Laura, A. 2003).
Developed countries attract more FDI as compared to developing countries. According to
UNCTAD (2007) there was total 945.8 billion USD flow of FDI in the world in 2005.
Out of which, only amounted 314.3 billion US$ which was remained only 38.6 % of
entire Foreign Direct investment received by developing countries whereas 590.3 billion
US$ received by developed countries which is 62.4 % of total Foreign Direct Investment
in the same year. According to the UNCTAD (2007) report low-Middle income
COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 199
JANUARY 2011
VOL 2, NO 9