Economic hardships like the recent economic meltdown, call for ways of jump starting different areas or aspects of a countries economy. It is for this reason that many countries have in the recent past designed packages to help breathe life into an otherwise failing economy. Foreign direct investment comes in handy to support government efforts at growing an economy. Ireland is a good example of a country that benefited immensely from FDI. From the brink of bankruptcy, FDI enabled it to transform its economy into a very promising one.
We will write a custom Essay on Instruments to encourage or discourage FDI and their implications for international business. specifically for you
301 certified writers online
FDI becomes necessary because many governments especially in the developing and third worlds cannot afford the kind of capital necessary for setting up of industrial facilities or singly rolling out infrastructural projects like airports development.
Convincing foreign investors to invest in a country is not easy. It is for this reason that governments engage public relations firms and carry out fully fledged marketing campaigns. The aim of such campaigns is to help potential investors realize the investment potential in given countries. To effectively campaign and create awareness about investment opportunities, many countries have well organized agencies that promote investment. IDA in Ireland has been very instrumental in helping attract FDI through its promotional programs.
Foreign investors are not philanthropists; therefore, they do not invest where they do not foresee awesome returns or profits. Therefore, to discourage or encourage FDI, a government has to look into the attractiveness of its economy and play around with its control on industries in the economy.
Some of the control measures a country can manipulate include taxes, licensing, laws regarding partnerships with foreigners, risk security etc. By manipulating such measures, a country encourages international trading or discourages the same completely.
One factor that largely attracts foreign direct investment is availability of natural resources. However, availability of resources alone is not enough; government policies on resource management either attract or discourage investors. Much foreign direct investment goes into the oil well in the Arab world.
However, some oil rich countries have over time attracted more FDI than others. For example, for a long time, UAE has been the centre of the Arab world; attracting the bulk of FDI. However, in the recent past, small countries like Qatar have become the centre of focus. The countries attract FDI because they have natural resources (oil) but, most importantly, they have instituted friendly government control or policies with regard to the resources. When a country with resources applies anti-FDI policies, it affects growth of international trade.
Another factor that a government has to look into to attract foreign direct investment is the infrastructure. Depending on infrastructural developments, a government indirectly controls what sectors are invested into. Investors only go into a country where operation costs allow for a handsome return on investment. Therefore, when a country improves its airports, road transport and has good water access (ports), it is more likely to attract higher FDI than another with poor roads or one that is landlocked.
Privatization policies also attract or discourage FDI. In the recent past, due to the structural adjustment programs demanded of Africa by the IMF, most national companies were privatized.
A consistent privatization policy often attracts foreign investors. For instance, most telecommunication companies in Africa are owned in part by foreign investors. Taking Kenya as an example, Vodafone from the UK has a majority stake in Safaricom a leading telecommunication company. Privatization and participation of foreign investors helps integrate small economies into the international business.