Question

Key problem (interconnection of the problems) in INDIA question -HOW FDI, investment (low saving cause banks cannot making loan for investment, low fdi, low import and export,)Countries with low production are less attractive to foreign direct investment than countries that are more productive.(800 words )

Answer 1

Answer:Foreign direct investment (FDI) means companies purchase capital and invest in a foreign country.For example,if a US multinational,such as Nike built a factory for making trainers in Bangladesh,this would count as foreign direct investment.

There are lot of factors that affecting Foreign direct investment,will discuss them in detail below:

1) Wages rate:A major incentive for a muntinational to invest aboard is to outsource labor-intensive production to countries with lower wages.If average wages in the US are $15 an hour,but $ 1 an hour in India,costs can be reduced by outsourcing prodiction.This is why many western firms have invested in Indian Sub-continent.

2) Labour Skills:Some industries require higher skilled labour,for example pharmaceuticals and electronics.Therefore,multinationals will invest in those countries with a combination of low wages,but high labour productivity and skills.For example,India has attracted signicifant investment in call centers,because a high percentage of the population speak English,but wages are low.This makes it an attractive place for outsourcing and attracts investment,

3) Tax Rates:Large multinationals,suca as Apple,Google and Microsoft have sought to invest in countries with lower corporation tax rates.For example,Ireland has been successful in attracting investment from Google and Microsoft.

4)Transport & Infrastructure:A key factor in desirability of investment are the transport costs and level of infrastructure.A country may have low labour costs,but if there is then high transport costs to get the goods onto the world market ,this is a drawback.Countries with access to the sea are at an advantage to landlocked countries,who will have higher costs to ship goods.

5) Size of economy/potential for growth:Foreign direct investment ids often targeted to selling goods to the country involved in attracting the investment.Therefore,the size of the population and scope of economic growth will be important for attracting investment.For example,China will be a target for foreign investment as the newly emerging Chinese middle class could have a very strong demand for the goods and services of multinationals.

6) Political Stability:Foreign direct investment has an element of risk.Countries with an uncertain political situation,will be a major disincentive.Also,economic crisis can discourage investment.For example,Russian economic crisis,combined with economic sanctions,will be a major factor to discourage foreign investment.The is one reason why most former communist countries in the east are keen to join to European Union.The EU is seen as a sign of political and economic stability,which encourages foreign investment.

7) Commodities:One reason for foreign investment is the existence of commodities.This has been major reason for the growth in FDI within Africa - often by Chinese firms looking for a secure supply for commodities.

8) Exchange Rate:A weak exchange rate in the host country can attract more FDI bacause it will be cheaper for multinational to purchase assets.However,exchange rate volatility would discourage investment.

Evaluation

There are many different factors that determine foreign direct investment (FDI) and it is hard to isolate individual factors,given there are many different variables,given there are many different variables.It also depend on the type of industry.For example,with manufacturing FDI,low wage costs tend to be most important,as they are a labour intensive industry.For the service sector,FDI,macro-economic stability and political openness tend to be more important.

Also,it depends on the source of FDI,American firms may have value political openness more than Chinese firms.Or American firms may have a preference of countries where English is spoken more.