Question

1. Determinants of FDI may also differ, at least slightly, by sector. For instance, factors that significantly affect service sectors may affect infrastructure sector only moderately. Identify key factors that are highly relevant in attracting or impeding the flow of the following three sectors: service, infrastructure, and extractive sectors.

Answer 1

Foreign Direct Investment is investment made in a foreign country by an individual or a firm. Generally FDI is affected by factors such as GDP of the nation, FDI openness, government incentives but when we specifically look at the sectors, the factors that affect FDI in service sector:

1. Skilled Labour- When skilled labour forms a great proportion of the workforce, this invites FDI into service sector of the economy.

2. Openness of the economy- The openness of the economy to trade with other countries determines the level of FDI that comes into the economy for the service sector.

Moreover it was noticed that macreconomic variables tended to strongly effect FDI into service sector than manufacturing sector. Also, a weak exchange rate gets more FDI into manufacturing sector whereas it discourages FDI into services sector.

The factors that affect FDI in infrastructure sector:

1. Quality of physical infrastructure in the host country- This is the most significant factor influencing the FDI in infrastructure sector. This includes the level of infrastructure like roads, railways.

2. Transport Costs- Transportation costs also plays a significant role if individuals are seeking to invest in infrastructure sector.

The factors that affect FDI in extractive sector:

1. Presence of Resources-Those who want to invest in the extractive sector give importance to the resources in the host country. Since it is resource seeking, availability of resources like copper, iron ore is very crucial. If the country is rich in terms of resource availability, more FDI is directed to the extractive sector.

2. Location of Resources- Along with the availability, the location of these resources is important. Location of the resources should be such that labour and other equipment can be taken to the location easily.