Both the drivers and effects of foreign direct investment (FDI) are complex and multifaceted. This thesis provides a conceptual overview of a selection of the most frequently considered drivers and economic effects of FDI in literature. The overview aims to support host countries in providing targeted incentives to attract FDI by raising the awareness of controllable drivers. Drivers for selecting a specific host country are presented hierarchically according to their controllability by the host country.
The governance infrastructure as a driver, for instance, is easier to control by the target country than market characteristics, cultural distance, or resource endowments. This thesis discusses the drivers according to their decreasing controllability, starting with political factors, followed by economic, social, and cultural, as well as geographical factors. The reasons why these factors may attract FDI are outlined in the respective subsections. Moreover, this overview presents the economic effects of FDI on the host country. These effects include increased competition or spillover effects from foreign to local companies.
The composition of direct and indirect effects leads to the conclusion that all these effects impact economic growth, which represents both a driver and an effect of FDI simultaneously. Thus, this thesis refers to the dependencies between drivers and effects with their interrelated factor economic growth. Further, it is argued that the effects of FDI are significantly interdependent among each other. Therefore, the realization of specific effects, such as economic growth, strongly depends on conditions and specific characteristics, such as the particular threshold level of human capital in the host country.
Table of Contents
1. Introduction
2. Theoretical Background
2.1 Foreign Direct Investment
2.1.1 Definition
2.1.2 Conceptual Foundation
2.2 The Eclectic Paradigm
2.3 Economic Effects
3. Method: Theoretical and Analytical Procedure
4. Results
4.1 Drivers of Foreign Direct Investment
4.1.1 Political Drivers
4.1.2 Economic Drivers
4.1.3 Social and Cultural Drivers
4.1.4 Geographical Drivers
4.2 Economic Effects of Foreign Direct Investment
4.2.1 Direct Effects
4.2.2 Indirect Effects
4.3 Dependencies Between Drivers and Effects
5. Conclusion and Research Directions
5.1 Theoretical Implications
5.2 Managerial Implications
5.3 Limitations and Future Research
Objectives and Research Themes
This thesis aims to provide a comprehensive conceptual overview of the primary drivers and economic effects of foreign direct investment (FDI). It explores how host countries can strategically influence controllable factors to attract FDI while managing its economic impact, specifically addressing the bidirectional relationship between FDI and economic growth.
- The hierarchical classification of FDI drivers based on host-country controllability.
- The distinction between direct and indirect economic effects of FDI.
- The role of human capital and other thresholds in shaping the FDI-economic growth relationship.
- The interdependence between political, economic, social, and geographical determinants.
- The identification of research gaps in existing literature regarding the simultaneous analysis of drivers and effects.
Excerpt from the Book
Governance Infrastructure
The institutional framework of the host country can significantly influence the success of an FDI. As a result, the institutional environment, here referred to as governance infrastructure, is a decisive factor. The term covers public institutions and policies, meaning the framework for legal, economic, and social relations established by the government. Institutions form the foundation for efficient markets as they declare formal and informal rules for the market economy and thus enable lower transaction and information costs, protect property rights, and reduce uncertainty. (Bevan, Estrin, & Meyer, 2004, p. 45; Globerman & Shapiro, 2003, pp. 5, 24f.; North, 1990, p. 3)
Therefore, a country’s political system is an essential consideration for investors. It can be shown that democratic institutions, along with federal political systems, can promote FDI. As Jensen (2006, p. 85) examines, an increase of 50% in FDI flows could occur as a result of a change from an authoritarian to a democratic regime. This increase results from the fact that democratic systems are known to protect property rights. In contrast, a system characterized by corruption would reduce FDI, as the costs of doing business increase. (Blonigen, 2005, p. 14)
Summary of Chapters
1. Introduction: This chapter highlights the relevance of FDI for sustainable development goals and addresses the observed decline in investment flows, which necessitates a deeper understanding of investment drivers.
2. Theoretical Background: This section establishes the conceptual foundation by defining FDI and explaining the OLI paradigm as the core framework for understanding international production.
3. Method: Theoretical and Analytical Procedure: This chapter outlines the three-step literature review process, including the acquisition of information, quality assessment based on journal rankings, and the establishment of concept matrices.
4. Results: This chapter presents an analysis of FDI determinants categorized by controllability, followed by an exploration of direct and indirect economic effects and the interdependencies between these factors.
5. Conclusion and Research Directions: This final section synthesizes the theoretical and managerial implications of the findings and identifies future research opportunities, particularly concerning data limitations and the impact of digitalization.
Keywords
Foreign Direct Investment, FDI, OLI paradigm, Governance Infrastructure, Economic Growth, Technology Spillover, Host Country, Political Drivers, Economic Drivers, Cultural Distance, Sustainable Development Goals, Determinants, Controllability, Bidirectional Causality, Market Characteristics.
Frequently Asked Questions
What is the core purpose of this research?
The research provides a comprehensive overview of the complex relationship between the drivers of FDI and its economic effects on host countries, filling a research gap that previously treated these elements separately.
What are the primary thematic areas covered?
The study covers political, economic, social, cultural, and geographical drivers, as well as direct and indirect economic effects like productivity spillovers and economic growth.
What is the primary research question?
The research focuses on identifying the determinants and economic effects of FDI, determining their controllability by host countries, and analyzing how economic growth serves as an interconnecting element between drivers and effects.
Which methodology was applied?
A systematic literature review was conducted using databases such as EBSCOhost and Google Scholar, filtering for high-quality, ranked publications to synthesize current knowledge through concept matrices.
What does the main body address?
The main body systematically analyzes FDI determinants in a hierarchy of controllability and evaluates the multifaceted economic impacts FDI can have on domestic firms and the overall host economy.
Which keywords characterize the work?
Key terms include Foreign Direct Investment, OLI paradigm, economic growth, technology spillover, host country determinants, and institutional infrastructure.
How does the OLI paradigm contribute to the findings?
The OLI paradigm serves as the guiding theory to structure the analysis of locational aspects and the attractiveness of FDI for multinational corporations.
Why is "governance infrastructure" considered a primary political driver?
It is classified as a top-tier driver because it encompasses the fundamental legal and regulatory frameworks that host countries can directly influence to protect property rights and reduce uncertainty for investors.
What is the significance of the "threshold level" concept?
The thesis concludes that FDI only contributes effectively to economic growth if the host country possesses certain threshold levels of human capital and income, which allow it to absorb technological spillovers from multinational corporations.
What does the bidirectional causality between FDI and economic growth imply?
It implies that while FDI can act as a driver for economic growth, a growing economy in the host country simultaneously acts as a powerful driver to attract further FDI, creating an interdependent cycle.
- Quote paper
- Antonia Haberger (Author), 2019, Foreign Direct Investment. A Review of the Determinants and Economic Effects, Munich, GRIN Verlag, https://www.grin.com/document/901015
