Literature review of determinants of FDI

2.1 Theoretical Model

The theory of internalisation has been put frontward by Tormenting ( 1977, 1981 ) which known as OLI model or Eclectic Paradigm. Before the houses decide to put in other states, they have to fulfill three conditions. First is the ownership advantage where the house should hold. This could be a merchandise or a production procedure to which other houses do non hold entree such as a patent, design or trade secret. In other words the ownership advantage is anything that gives the house plenty valuable market power to outweigh the disadvantages of making concern abroad.

Second, is the “ L ” which means that the foreign market should hold location advantage which makes it more profitable to bring forth in the foreign state than to bring forth at place and export to the foreign market. For illustration, duties, quotas, conveyance costs and inexpensive factor monetary values are the beginnings of location advantages.

Third, is the “ I ” which mean that the MNE should hold internationalisation advantages. This can be done when the MNE think that the merchandise or procedure is better exploited internally within the house instead than open to the market.

2.2 Determinants Of FDI

The determiners of FDI can come from assorted signifiers whether from economic position, political, societal and legal. These determiners play of import functions for the investors to happen new country for investing and spread out their concern. In a more recent survey, Thompson and Poon ( 1998 ) analyse the macroeconomic determiners of FDI from Japan and the United States into East Asiatic states, and the linkage between FDI and trade, and other macroeconomic variables. Their findings back up some of the earlier findings sing FDI influxs, but they besides assert that the determiners of pulling FDI influxs differ between states. In add-on, the extent of the FDI inflows to a peculiar host state besides differs in footings of its beginning state, ( Japan and the United States ) . For case, FDI inflows from Japan into all groups of states studied were strongly affected by alterations in existent bilateral exchange rates, but this was non ever the instance for FDI from the United States ( Ismail and Yusoff, 2003 ) .

These determiners besides supported by Overseas Development Institute ( 1997 ) which focused on the factors act uponing the finish of the investing: host-country determiners instead than industry-specific factors. They found that size of the market should take into consideration before puting in the state. Besides that, openness to merchandise, low labor costs and productiveness, political hazard and stableness, good substructure, authorities inducements and runing conditions and denationalization besides of import elements that should take into history before the houses make a determination to put.

As a drumhead, Mallampally and Sauvant ( 1999 ) find that factors that pulling FDI to developing states can be summarized as follows:

Table 1: Host state determiners of foreign direct investing ( FDI )

Host state determiners

Type of FDI classified by motivations house

Chief economic determiners in host states

Policy model for FDI

Economic, political and societal stableness

Rules sing entry and operations

Standards of intervention of foreign affiliates

Policies on operation and construction of markets ( particularly competition and policies regulating amalgamations and acquisitions )

International understandings on FDI

Denationalization policy

Trade policy ( duties and nontariff barriers ) and coherency of FDI and trade policies

Tax policy



Efficiency seeking

Market size and per capita income

Market growing

Access to regional and planetary markets

Country-specific consumer penchants

Structure of markets

Natural stuffs

Low-cost unskilled labour

Skilled labour

Technological, advanced and other created assets ( for illustration, trade name names ) , including as embodied in persons, houses and bunchs

Physical substructure ( ports, roads, power, telecommunication )

Cost of resources and assets, adjusted for labour productiveness

Other input costs, such as conveyance and communicating costs to/from and within host economic system and other intermediate merchandises

Membership of a regional integrating understanding conducive to the constitution of regional corporate webs.

Economic determiners

Business facilitation

Investing publicity ( including image-building and investment-generating activities and investment-facilitation services )

Investing inducements

Fuss costs ( related to corruptness and administrative efficiency )

Social comfortss ( for illustration bilingual schools, quality of life )

After-investment services

Beginning: UNCTAD, World Investment Report 1998: Tendencies and Determinants, Table IV.1, p.91

Different attack can be carried out in the surveies to happen the determiners of FDI. For case, Normaz ( 2009 ) has study on the determiners of FDI in ASEAN states utilizing semi-gravity theoretical account. The same attack besides has been carried out by Hattari and Rajan ( 2008 ) which compared the possible differences in the determiners of FDI flows to developing Asiatic economic systems from the remainder of the Asia and Pacific part and those from non regional OECD economic systems. Both surveies found that the gravitation factors such as distance, boundary line and linguistic communication are factors that can pull FDI in the part besides other macroeconomic and non economic variables such as market size, GDP, exchange rate, telecommunications and transparence. However, the distance effects disappear as the differences in clip zone is taken into the theoretical account ( Hattari and Rajan, 2008 ) .

Ismail and Yussof ( 2003 ) expression at the determiners of FDI from difference position. Time series informations are used to analyze the consequence of FDI to the rewards, labour force, accomplishments, R & A ; D outgo and involvement rate to the economic development particularly among Malaysia, Thailand, and the Philippines. Their consequences suggested that, with respect to labor market fight, different states may necessitate different policy recommendations in order to pull FDI inflows into the states. In this survey, the existent pay in Philippines has a negative impact to the FDI influx but non for Malaysia and Thailand. However, factor that truly attracts FDI in Thailand is the size of labour force. But for Malaysia, the addition in the figure of professional and proficient workers will cut down the FDI influxs. In term of GDP, it was found that this variable plays an of import function in pulling FDI in the states particularly for Malaysia and Philippines. However, for Thailand GDP degree is non important but degree of openness of the state plays an of import function in pulling FDI.

Stephen Thomsen ( 1999 ) happen out that one country of peculiar importance that encourage FDI is the intervention of foreign investors. The writers has study on the experience of the ASEAN 4 states ‘ policies and suggested that a more balanced intervention of foreign investors will let foreign MNEs to play a greater function in the domestic economic system. Therefore, it will give significant benefits in footings of reconstructing investor assurance and puting economic development in the ASEAN4 on a more sustainable footing in the hereafter. Besides that, engineering transportations are enhanced in a impersonal policy environment which permits equal entree for foreign investors to both domestic and export markets. The common understanding should be justified in order to do certain that both parties are benefited from FDI. Other than that is the gradual riddance of barriers to imports will assist to relieve the most inauspicious effects of the bing dualist FDI policy by taking one of the chief deformations within the ASEAN4 economic systems. But this would still non extinguish the differential intervention between types of foreign investors found in FDI ordinances in most ASEAN states. The reappraisal of development schemes will provides an opportune clip to exchange to be more unfastened and balanced regulative model for FDI.

Besides the traditional macroeconomic variables, the grade of openness can be one of the determiners of FDI. For case, Nonnemberg et Al. ( 2004 ) , Sahoo ( 2006 ) and Botric et Al ( 2006 ) found that openness variables is statistically important and have positive relationship in pulling FDI. This is because, grade of openness can reflect the willingness of a state to open up the economic system to more liberalize and accept the foreign investors.

Exchange rate is found to be important in finding the FDI in the states in most surveies. This is because more hazard will be faced by the investor and the exchange rate volatility will straight lend to uncertainness on the returning of concern dealing from the investment states ( Guerin, 2006 ; Hubert and Pain ; 2002 ; Rose, 2000 ) . Many surveies ( Kohlagen, 1977, Cushman 1985, Froot and Stein 1991 ) concluded that devaluation of the host state ‘s currency induces a decrease in local cost in term of foreign currency therefore it will promote more FDI. A higher value puting spouse currency will enables investors to put in the host state cheaply therefore the sum of FDI will lift. The same reading besides done by Kozo and Shujiro ( 2004 ) which they claimed that a depreciation of the currency in the host state attracted FDI while high volatility of the exchange rate discourage FDI. However, grounds from Caves ( 1988 ) , Froot and Stein ( 1991 ) , Blonigen ( 1995 ) , Blonigen and Feenstra ( 1996 ) and Ang ( 2008 ) found a negative relationship between the state ‘s exchange rate and FDI influxs. The same decision besides found in Sader ( 1991 ) and Tuman and Emmert ( 1999 ) which observed that exchange rate has an undistinguished consequence on FDI.

Export public presentation plays important function in pulling FDI. Harmonizing to Jorge ( 1985 ) , FDI can be a replacement for exports. For case, foreign state sector with higher production costs would increase imports while lower production costs would increase exports. Therefore, the export is expected to be positively correlated with FDI and important determiners in pulling FDI. Surveies by Zhang and Ow ( 1996 ) found that ASEAN ‘s direct investings in China shows complementarily to merchandise which is corresponds with its comparative advantage. However, the state of affairs is different in Singapore which shows that the trade policy had no important impact to the inward FDI flows.

Another facet that the investors will look for is the quality of the substructure. Infrastructure besides can play a important function in pulling FDI. Harmonizing to Wheeler and Mody ( 1992 ) , they find that substructure quality is an of import variable for developing states seeking to pull FDI from the United States, but is less of import for developed states that already have high quality substructures. Besides that, Kumar ( 2001 ) besides found that substructure handiness does lend to the comparative attraction of a state as a location site for FDI influxs. It is besides supported by surveies done by Loree and Guisinger ( 1995 ) and Asiedu ( 2002 ) . The handiness of quality substructure is indispensable by sing electricity, H2O, transit and telecommunications ( Sahoo, 2006 ) . Kravis and Lipsey ( 1982 ) , Culem ( 1988 ) , Edwards ( 1990 ) , Pistoresi ( 2000 ) and Ang ( 2008 ) besides report the same grounds where substructure play s important function in pulling FDI influxs.

2.3 Determinants Of FDI In China and Thailand

As comparing of the determiners of FDI in Malaysia and other developing states, FDI in China and Thailand are explored. As we know, China, as a major emerging market, has attracted important flows of FDI and go the 2nd largest reception in the universe. From the analysis ( Ali and Guo, 2005 ) they found that market size is a major factor that attracts FDI particularly among the U.S houses to China. For local houses, export-orientated, Asiatic houses and low labour costs are the chief factor that encourages FDI. They besides found that China ‘s immense potency market size is the most important factor for FDI influx in China, which is in line with both theory and old surveies. With the rapid growing, China ‘s big population, fast turning economic system and coupled with rank of the World Trade Organization, China has been found as an unbeatable combination for foreign houses to put. Government incentive policies are another of import ground which encourages FDI. Besides that, labour costs and high investing return besides play important function. In the extend with the original determiners of FDI, it was found that planetary integrating is one of the cardinal factors for some foreign houses puting in China. This indicates that China is a really of import market and puting in China is portion of houses ‘ planetary scheme.

Besides that, survey by Yunshi and Jing ( 2005 ) besides give the same consequences. They found that the foreign endeavors account for 28 per cent of China ‘s industrial added value and fifth part of revenue enhancement. While export is about 57 per cent of the state ‘s entire goods and services and history for 11 per cent of local employment. The chief factors that contribute to the investing is about the China ‘s discriminatory foreign investing policies, cheap labour, increasing buying power and bettering investing environment, particularly after entry into the World Trade Organization ( WTO ) in 2001, have made the state a favourite finish for planetary investing.

Tosompark ( 2010 ) has carried out survey on the determiners of FDI in Thailand. Thailand as neighbouring state of Malaysia has a good public presentation in pulling FDI to their state. Before the 1997 Asiatic Financial Crisis Thailand had the fastest turning degree of FDI influxs amongst Asiatic economic systems. But late, the Thailand public presentation in pulling FDI is still equivocal. From the survey, it was found that FDI inflows in Thailand is extremely depended from the United States and Japan, which accounted for at least 50 % of all FDI influx. However, the geographic form of FDI changed unusually from the early 1980s when Japan was looking for production bases abroad to get away appreciating place currencies. After the incident, the beginning of Thailand ‘s FDI, in recent old ages is geographically diversified, with new spouses including those from ASEAN, EU-151, Australia, and New Zealand. Therefore, in order to happen the determiners of FDI, he used variables such as market demand, cost of local labor and capital gift, revenue enhancements levied, the exchange rate, local economic growing, political and the economic hazard and the local substructure. The single consequences for the variables indicate that turning market size, and Thailand ‘s increasing mean existent pay has positive effects on FDI influx. However, the relationship between the trade variables and FDI inflow although insignificant are by and large right signed. At the national degree, FDI has positive relationship with exports. The beef uping exchange rate does look to be negatively related with FDI but is non extremely important.

2.4 Determinants of FDI In Malaysia

A batch of surveies have been carried out to happen the determiners of FDI in Malaysia. Ang ( 2008 ) highlighted the policy deduction as determiners of FDI besides other economic variable. In his survey, he found that the market size and GDP have a important positive impact on FDI influxs. Besides that, the consequences suggest that addition in the degree of fiscal development, substructure development and besides merchandise openness can lend to the increased of FDI in Malaysia. However, the corporate revenue enhancement rate and grasp of existent exchange rate has discouraged the FDI influxs. For case, the corporate revenue enhancement in Malaysia is 28 % higher than Hong Kong, Singapore, South Korea and Taiwan. He besides suggests that higher macroeconomic uncertainness will bring on more FDI. This is the instance where foreign investors perceive a higher degree of uncertainness will give greater investing return when covering with the uncertainness state of affairs compared to the conventional findings.

Different attack has been put frontward by Yol and Teng ( 2009 ) in their survey to happen the determiners of FDI in Malaysia. By utilizing the cointegration trial, they want to happen the relationship between the variables. From the consequences, they found that FDI flows in Malaysia are positively influenced by existent exchange rate, GDP growing and substructure and non for the Malayan exports in the long tally. However, in the short tally, FDI flows are negatively influenced by its ain slowdown, GDP growing, substructure and exports. But for economic system ‘s openness and existent exchange rate is positively correlated with increasing FDI flows in Malaysia.

Aw and Tang ( 2009 ) nevertheless has extended the conventional theoretical account by utilizing variables such as the market size, openness, substructure, involvement rate, exchange rate, and rising prices rate by integrating the degree of corruptness ( capturing political place ) and the consequence of China fall ining the World Trade Organization ( WTO ) in 2001 ad determiners of FDI in Malaysia. By utilizing ARDL attack, Engle-Granger trials and the Johansen ‘s multivariate trial, it was found that there is a cointegration relation among influx of FDI, market size, openness, substructure, involvement rate, exchange rate, and rising prices, after sing the event of China joined the WTO in 2001 and inclusion of corruptness variables. These variables are important determiners of pulling FDI to Malaysia. However, the interesting portion is the effects of China fall ining WTO which give a negative impact on the degree of inward FDI in the short tally. But in term of policy dimension of corruptness variable, increased in corruptness would promote more inward FDI in short tally. But this is non the instance as the policymakers have to supervise and command the corruptness since it will deter FDI in Malaysia in the long tally.

The consequence of China besides has been included in Choong and Lam ( 2010 ) survey. They want to happen whether the external factors in Malaysia economic such as the rapid growing of China will give impact on Malaysia FDI inflows public presentation. Therefore, they used the growing rate of Malaysia and China to see the impact on FDI influx. Besides that, they besides take into consideration the consequence of state import and export public presentation or grade of openness, the literacy rate and utilize the silent person variables during the fiscal crisis. By utilizing the cointegration trial for the period from 1970 until 2006, they found that Malaysia existent GDP give positive and important impact to FDI influxs. The consequence is in line with Ang ( 2008 ) and Pradhan ( 2008 ) surveies on the consequence of GDP to the FDI influxs. Besides that, they besides found that the market size of China give positive impact on FDI influx in Malaysia. They revealed that the better the China economic public presentation will take to more FDI in flow to Malaysia. Other than that, the grade of openness and literacy rate besides showed a positive impact of FDI influxs. The consequences are same with surveies by Borensztein et Al ( 1998 ) on human capital development and instruction degree as the importance determiner to pull FDI while Balasubramanyam et Al ( 1996 ) emphasis on the importance of trade policy in promoting FDI to the state.