Factors that affect Foreign Direct Investment - Essay Example

From the investor’s point of view expansion to increase earnings by exploiting the resources available at a foreign location is the one of the main reason and objective of foreign direct investments. From the point of view of host and the source countries, the attaining and. Or sustaining the economic growth and society welfare are factors that induce foreign direct investments. Other factors that might impact the growth of foreign direct investments include changes in exchange rates, political regime/ development/ considerations, taxation rates and considerations in host country, macroeconomic variables, and the comparative advantages of an economy.

FDIs are attracted basically induced when rate of return on the investment is at least more than internal rate of return. Exchange rate changes between the countries affect costs of productions and also the costs of assets to be acquired or installed using foreign investments. Economic growth and welfare considerations affect FDIs not only directly but also through other factors, as these considerations become the objectives to be attained through foreign direct investments. Politics intrudes in almost every business and social activity, and sometime political risks prove fatal for foreign direct investments.

That is the reason foreign investors prefer democratic regimes in comparison with authoritarian administrations. Taxation rates of host country are often used as tools to promote considerations that affect inflow and outflow of foreign capital. Macroeconomic factors’ impacts bring direct affects on FDIs and include inflationary factors, stabilized exchange rates, GDP generation, availability of skilled labour, and the size of available market. Location advantages are so important that FDI decisions are often termed as location decisions.

This paper studies the impacts and affects of these