Challenges in the Era of Globalization - iaabd

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Proceedings of the 12th Annual Conference © 2011 IAABD Evaluating the importance of location factors in the decision of MNCs to undertake FDI in Syria and Jordan Abstract Omar Al-Habash, omar.al-habash@brunel.ac.uk Business School, Brunel University, UK. Frederick Mmieh , Frederick.mmieh@brunel.ac.uk Business School, Brunel University, UK. This paper empirically examines the significance of location factors that foreign investors consider when undertaking Foreign Direct Investment (FDI) in Syria and Jordan. A questionnaire was used to collect data from top management personnel of Multinational Corporations’ (MNCs) subsidiaries in Syria and Jordan. Two hundred and sixty eight foreign subsidiaries participated in this study. Available empirical evidence reveals that growing demand in the host market (potential growth), large size of host market, local government regulations and policies towards foreign firms, political stability in the host country, and the legal environment are the most location factors influencing MNCs decision to undertake FDI in this part of the Middle East. These findings indicate that developing countries in general, Syria, and Jordan in particular can attract more FDI by doing two things. They need to improve their investment climate and make it more favorable for MNCs in terms of regulations, policies, and laws, and at the same time, lower the perceived potential investment risk through maintaining political stability. Introduction FDI can contribute positively to the growth and development of developing countries by bringing capital, employment, technology, market access, and managerial skills (Blomstrom and Kokko, 1998; De Mello, 1997, 1999; Pack and Saggi, 1997; Balasubramanyam et al., 1999; Borensztein et al., 1998). According to UNCTAD (2003), FDI plays a ‘vital’ role in the long-term economic development of developing countries with its great potential to create jobs, raise productivity, enhance exports and transfer technology. One of the aspects that will help developing countries in accelerating or sustaining the pace of their economic and social development is to have good quality infrastructure (UNCTAD, 2008). Ramamurti (2004) argues that developing countries need FDI in infrastructure to reach their growth targets as they necessitate foreign capital in order to enhance their domestic savings. Therefore, developing countries require urgent investments aimed to strengthen the infrastructure, industries and services in areas such as water, electricity, telecommunications, and transport (UNCTAD, 2008). Although governments, the private sector and other stakeholders in these countries are contributing in the infrastructural investments, the amount of investments needed still exceeds their contribution (UNCTAD, 2008). According to UNCTAD (2008), developing countries in general currently invest 3–4% of their GDP annually in infrastructure while they need to invest an estimated 7–9% to attain better economic growth and poverty reduction. Obviously, this results in an enormous gap between the current volume of investments and what is actually required. This raises the question of how developing countries should fill this gap. According to Mayer (2004, p. 259), MNCs have a very important role “in linking rich and poor economies, and in transmitting capital, knowledge, ideas and value systems across borders.” Filling this investment gap requires MNCs to involve intensively in infrastructural investments in particular and investments in general, and at the same time maximizing the benefits of host developing countries from MNCs’ technological and other assets (UNCTAD, 2008). The question that readily comes to mind is what urges MNCs to engage in such operations and undertake such investments? Meyer and Estrin (2004) 244
Challenges in the Era of Globalization Edited by Emmanuel Obuah argue that MNCs, especially those with ambitious growth aspirations, put developing countries at the top of the priorities in their global strategies agenda. Therefore, MNCs and developing country policy-makers have ‘a common interest’ in encouraging FDI (Meyer and Estrin, 2004, p. 1). However, there should be great efforts in order to encourage MNCs to undertake FDI in developing countries. Undertaking such investments by MNCs actually depends on a complicated environment since each country has its own political, economic, and legal systems and even its own culture, which makes attracting MNCs a real problem for some developing countries. This raises the following questions: What should developing country governments do to increase their share of FDI? What determines the investment behavior of MNCs? What stimulates their actions to undertake FDI? Is it profit? If so, logically, developing countries should have the largest proportion of the world FDI inflows because these countries enjoy lower costs compared with developed countries. In addition to the fact that the higher profits of MNCs’ subsidiaries, which, according to UNCTAD (2008), reached over $1,100 billion in 2007, are generated mostly in developing rather than developed countries. What is more, developing countries as a possible investment location for MNCs have accessibility to natural resource, market and other investment potentials that have not yet been fully exploited. Additionally, developing countries that followed the global path in attracting FDI have undertaken different types of reforms such as the International Monetary Fund (IMF) and the World Bank assisted Structural Adjustment Programs in order to attain political and economic stability along with improving their infrastructure and taking any other actions to have a better investment climate. This has led to an increase in the competition between the host governments of developing countries in attracting FDI. This competition results in the removal of restrictions, and an increase in the amount of investment incentives, the number of Bilateral Investment Treaties (BITs) and regional agreements on investments. According to UNCTAD (2008), the FDI inflows into developing countries increased by 21% from $413 billion in 2006 to the highest level ever of $500 billion in 2007. In spite of this rise in FDI inflows in 2007, the share of these countries in the global inflows of FDI declined. According to UNCTAD (2008), the share of FDI inflows in developing countries in 2007 was 27% of the global FDI inflows, down from to 29% in 2006, and from 33% in 2005. This was primarily due to the large inflows into developed countries, especially in the Triad nations. This in fact calls for research to discover the forces behind the global FDI inflows trends to developed nations and not to developing countries. In order to understand why the highest percentage of the world FDI inflows goes to developed countries rather than to developing countries, we need to know the forces that influence the investment mechanism and behavior of MNCs. Thus, this study examines the location factors of FDI in two developing countries. Specifically, the objectives are (a) to identify the significant location factors of FDI in Syria and Jordan; (b) to provide host governments in the developing countries, in general, and in Syria and Jordan, in particular, insight on how they can adjust their FDI policies. The next section presents an overview of the research settings. Overview of the research settings Syria and Jordan are neighboring countries in the Middle East. The relations between them have ancient roots; the two countries were in the past a part of one country called “Bilad Ash-Sham” or “Greater Syria”. That explains why those two countries are closely integrated and share very close social, cultural and historical ties. However, both countries enjoy the following common characteristics: • Both countries are located in a distinguished geographical location, where the three continents meet, as they are located at conjunction of Europe, Asia and African. They are well situated as a regional entry point, being well connected to neighbouring countries and global markets through modern transportation and communication networks. They also serve as a focal point for trade and investment 245
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Table of Contents Challenges in the
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Abstract Challenges in the Era of G
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Single 18.1 Masters and above 35.3
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Discussion and Conclusion Challenge
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Abstract What does Globalization me
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Banks in Ghana Challenges in the Er
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The study seeks to: • examine typ
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Relationship Commitment Total 1264.
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