What Location Influences Foreign Direct Investment?

What Location Influences contrasted Direct Investment?Chapter 1 establishmentThis chapter projects an introduction to the seek, with paragraph 1.2 detailing the problem it focuses on, hint to the look hesitation in paragraph 1.3. Paragraph 1.4 discusses the relevance of the question. The chapter ends with an outline of the thesis. The contiguous paragraphs block up the various purports and the general interrogation design, and finish with the disposition of the reckon.1.1 BackgroundForeign Direct Investment (FDI) is an big source of capital and sparing harvest-feast in juvenile argument. It provides a package of reinvigorated technologies, management techniques, finance and commercialize access for the production of goods and services. However, quartering FDI is a major challenge for virtually master of ceremonies countries as they face the challenge of identifying the major comp unmatchednts that motivate and tint the FDI kettle of fish decision.Nowadays, r egions try to attract Foreign Direct Investments to stimulate their frugal development (OECD, 2002a). Certain regions consider the ecological issues as well and concentrate sustainable FDI. Recently, while browseing at AgentschapNL, an agency of the Dutch monument of stinting Affairs, the aw beness for sustainable investing rose. AgentschapNL promotes sustainable development and innovation, twain in the Netherlands and abroad.One region that is engaged in an initiative to attract FDI is the Swedish province Jmtland. This initiative is called Mids stackd and it involves stimulating business investments and cooperation (joint ventures, business development, acquisitions, strategic alliances, outsourcing and cutting start-ups). One of their target countries is the Netherlands. The activities that argon discussed argon the sectors cleantech, tourism, windup(prenominal) industry, forestry and call centres. The scope of this query is limited to the cleantech sector. This sector deals with sustainable innovations and investments in Jmtland, with special focus on wind and bio energy. The chief(prenominal) culture of this project is to attract new investments from the Netherlands to Swedish regions.1.2 Problem IndicationThe books dealing with FDI lay rough be classified in two main streams, as pointed out by Agiomirgianakis, Asteriou and Papathoma (2003) the starting let offs the issuing of FDI on the carry out of economic result, while the second unrivalled goes in depth into the study of the decisives of FDI. This thesis focuses on the second part of literature. Among all the factors influencing the spatial relation decisions of FDI, the mend- specialized determinants involve cross exploration, since they substructure help the entertain g all overnments to attract and augment FDI inflows utilise several instruments (Chakrabarti, 2001). Location-specific factors go awaying always run the decision to enter or exit a berth for investme nt purposes (Audretsch and Fritsch, 2002).FDI is a key element of the worldwide economic relations as it is an engine of employment, technology carry and improvement of productivity, which ultimately leads to economic egress. The need to attract FDI forces governments to provide a favourable climate for business activities (Nordstrom, 1991). The foreign flyings can be modeld by the political and economic institutional manikin of the host rustic, which could affect the superior of where to invest their capital (Makino and Chan, 2004).The challenge of this look into is to explore which positioning determinants sustain a region attractive for FDI. The definition of the problem isWhat should Swedish regions do to arrogantly influence FDI?By presenting a thorough overview of FDI and the determinants that could influence the mess choice for a familiarity, this research aims to provide a example, tested in interviews for the applicability of investments.1.3 explore questi onsTo solve the problem the get alonging research questions ar answeredWhat is FDI?Based on a literature review that provides theoretical information on this phenomenon.What be the location factors?Galan and Gonzales (2007) are use as nates for the location factors. some(prenominal) other(a) papers on location factors are evaluated and criticized.What does Sweden draw to offer?This final question deals with the application of the theoretical framework to Swedish region as case study and the relationship in the midst of the factors they possess and the factors they need to stimulate to influence FDI.1.4 Purpose and ObjectiveThe purpose of this thesis is to examine which regional factors influence foreign manoeuver investments. Theories regarding FDI and location-specific characteristics volition be reviewed and analysed in the theoretical framework. A thorough overview of the location factors leave be part of the framework that can be utilize by regions, willing to attra ct sustainable investments. But first of all, the objective as described in the definition of the problem is to give recommendations to Swedish regions regarding the factors they should shine up to attract or influence prepare foreign investment.1.5 Research fleckThe literature framework is ground on relevant papers. According to Ghauri (2005), theoretical data will be used to understand and interpret the research question, and it will help to broaden the base from which scientific conclusion can be drawn. The relevance of the papers will be based on quality. To reach the goal of collection qualitative data for the research question, a phased selection is made. The emphasis of the courses Corporate Level Strategy and Research Methods of Strategy within the master Strategic Management is on examination all data on quality. By examining the relevance, publication form and seismic disturbance factor of the information, the quality of the paper will be showed.The research is sepa rate into two parts (1) the literature research and (2) a case study. The first part of the research is explorative, because it is intended to gain more(prenominal) than information on the situation and to get familiar with the research area. Qualitative studies -observations and interviews- are used to gain more knowledge of the research topic (Sekaran, 2003).The research generally relies on secondary data books and articles by various authors are considered. writings is compared and new insights are gained. Interviews are conducted for the verification of the interests, which are characterized as native data. In this research, qualitative data is the main source. The time dimension of this research is cross-sectional, which implies that the research is conducted at one particular moment in time.For expedient literature, the data will be collected on acknowledged databases (e.g. ABI/Inform, JCR, vane of Science). The keywords that will be used during the search period are F DI, launch modes, choice of country, region, and location determinants. All literature sources can be found in the list of references. The theory will be examined by a qualitative case study. Case studies are used to understand a specific case under particular sight (Patton, 2002).1.6 DispositionIn chapter 2 the contemporary theory that has been evaluated and reviewed is presented. An introduction will be followed by a presentation of FDI and the factors that influence the location choice, followed by the location factors that are important for wind and bio-energy. Inchapter 3the methodological analysis is elaborated and provides a description of the way this thesis was written and the choices that are made. In the second paragraph the data and sample surface are explained. hypothetical and experiential frameworks are discussed, as well as the dependableness and validity of this study. Inchapter 4the participating respondents are interviewed, which leads to an analysis and con cludes the empirical results.Chapter 5includes the results of the findings and the discussion that compares the theoretical statements that were researched and found necessary for this research presented in chapter 2. The mode of procedure is explained and the model of the empirical results is presented in this part.Chapter 6includes the answers of this research by modifying the analysis model. The conclusion is based on the discussion in chapter 5. The answers take care as a proposal for further research in a broader context and give an opportunity of generalization.Chapter 2 Theoretical frameworkThe literature review provides the foundation for this research, through discussions of previous studies on FDI and international business. Section 2.2 offers a review of studies regarding FDI. Next, it is essential to identify the location factors that influence that move, as it contains the answer to the second research questionWhat are location factors?The third paragraph contains a de tailed overview of the location factors. An overview of the selected factors can be found in table 1. The list contains determinants to measure the dumbfound-to doe with on the location factors and their impact on FDI. The last paragraph contains a outline of the findings and a conclusion.2.1 What is FDI?Modern day literature increasingly concentrates on subjects finishing the globalization of market places and the internationalization of companies. Governments contri save ife to this situation by exposeding their regulations with the mark to profit from a more open economy (Dunning and Nurala, 2002). The increment tote up of full(a) policies is a driving force for companies to go abroad and arrest FDI (Galn and Gonzlez-Benito, 2001). There are several definitions of a foreign direct investment presented by a outlet of researchers. A central foot of the definitions available on FDI, with the one illustrated by Moosa (2002) as a regular(prenominal) example, is that the companies undertaking such a venture aspire to gain a controlling stake in the asset or entity grease ones palmsd. An FDI is non to be confused with an international or portfolio investment, where the aim just now is to diversify the holdings of the steadfast and make a financially sound investment (Buckley, 1998). FDI is defined as a firm based in one country (the phratry country) owning ten per cent (10%) or more of the stock of a compevery sinkd in a foreign country (the host country). This add together of stock is generally enough to give the home country firm evidentiary control over the host country firm. Most FDI is in wholly owned or nearly wholly owned subsidiaries. new(prenominal) non-equity forms of FDI include subcontracting, management contracts, franchising, and licensing and product sharing .In view of the above, FDI can be every inward or outward. FDI is metric either as a flow (amount of investment made in one year) or a stock (the total investment accumu lation at the end of the year).outward-bound FDI can take various forms, home country residents can purchase existing assets in a foreign country make new investment in property, rig equipment in a foreign country participate in a joint venture with a topical anesthetic partner in a foreign country (Dunning, 1976).2.2 Location factors2.2.1 accounting entryThere is considerable literature on the determinants of location factors for multinational Corporations (MNCs) when they choose their foreign market location, but very little on the relational importance of the location factors for FDI in a specific country and industry. It is widely believed that the trend towards globalized production and marketing has major implications for the attraction of development countries to FDI inflows. The telling importance of FDI location determinants have changed. Even though traditional determinants and the types of FDI associated with them have not disappeared as a result of globalization , their importance is said to be on the decline. More specifically, one of the approximately important traditional FDI determinants, the surface of national markets, has decreased in importance. At the aforesaid(prenominal) time, cost differences between locations, the quality of infrastructure, the ease of doing business and the availableness of skills have break more important (UNCTAD 1996). Likewise, Dunning (1999) argues that the motives for and the determinants of FDI have changed.Buckley and Ghauri (2004) point to the limited attention researchers have give to the FDI location factors in the literature. They suggest that international business strategy is plain from main stream or single country business strategy lone(prenominal) because of differences of location. Hence, location specifics are essential to the possibility of international strategy having a distinctive content. They, too, suggest that a focus on location, and mayhap the question of why locations diff er, could be a response to the issue of what forms the neighboring big question in international business research. Dunning (2008) suggests that the more recent lack of attention to location by IB scholars could have arisen from an assumption that the location decision principles are the same for twain international and interior(prenominal) locations. Thus, scholars were either satisfied with existing explanations or as Dunning (1998) points out maybe theywere solely not interested.In attempting to check out the relevant set of location factors, Michael hall porters (1990) work cited in Hodgetts (1993) offers a blue-chip starting point. Porter notes that success for a given industry in international competition depends on the relation back strength of that industry with regards to a set of business-related features or drivers of competitiveness, namely factor conditions demand conditions related and supporting industries and firm strategy, structure, and rivalry. Government and chance are seen to influence competitiveness through their impact on the above quaternary basic drivers. This framework the drivers of competitiveness has been used in a number of studies of industries and individual economies. Porters competitiveness framework has been the subject of major criticisms.Paul Krugman (1994) specifically criticized the opinion that nations, or locations, make do in the same way as firms do, and his wide-ranging critique attacks this concept. Also, the empirical severalise for national competitiveness and the policies that follow are what Krugman (1994) describes as a dangerous obsession. Another criticism is that Porter places government involvement in international business outside of the consequence determinants. Many authors have claimed that Porters framework pays insufficient attention to relevant specific location factors such as globalization (Dunning, 1993), multinational companies (Dunning, 1993 RugmanVerbeke, 1993), technology (Naru la, 1993. Several authors have questioned the validity of the model, and the conclusions drawn from the model, for countries such as Austria (Bellak Weiss, 1993), Canada (Rugman dCruz, 1993), Hong Kong (Redding, 1994) and Mexico (Hodgetts, 1993). A hoi polloi of research interested in providing the determining factors for FDI location decisions is seen to be through with(p) by managers. Some of the major studies are the side by side(p) (Dunning, 2000) theories of risk variegation (Rugman, 1979) agglomeration theories (Krugman, 1993 Porter, 1994, 1996) theories related to government-induced incentives (Loree and Guisinger, 1995) and theories of location (Dunning, 1997). All these new theories are trustedly insightful, but they are all context-specific, and interested solely in stressing the relevance of certain factors to the detriment of others that may be equally significant. None of them has yet provided a satisfactory explanation of the relative importance of specific factor s that lead managers to locate their investments via FDI in a specific country and industry (Dunning, 2008).Dunning (2008) believes that it is not affirmable to formulate a single operationally testable theory that can explain all forms of foreign-owned production any more than it is possible to construct a generalized theory to explain all forms of merchandise or the conduct of all kinds of firms. Cohen (2007) believes that location factors for a specific location and industry that affect the location decision are based on the perceptions of a keen group of senior managers, not a scientific formula. Furthermore, Buckly et al(2007) argue that canvass a single firm or group of firms in the same industry is the best way to identify the most important factors, because firms in the same industry usually follow a systematic parade for location choices, and seek to prioritize certain location factors as they become more internationally mature.Cohen (2007) argues, No standard set of a ttributes, each with an delegate relative weight of importance, exists in the many lists of what matters in location make by business groups, international organizations, and scholars. Determining where to invest is a individual decision. Cohen (2007) overly suggests that no single formula exists because specific strengths and indistinctnesses of a country or region might receive high precession by one team of corporate evaluators and can be snub by another, depending on what kind of investment is contemplated, which in turn will determine a subsidiarys objectives and operational needs. Furthermore, individual corporate cultures will deal out a different relative importance to what attributes they require in a country, what they would like to see, what negatives they can work around, and what is unequivocally unacceptable. Calculating barter-offs between dictatorial and negative location characteristics is an art, not a science.Galan et al (2007) conducted an empirical rese arch into location factors that has been researched by several theorists. This list provides a detailed overview of the main location factors and sub factors considered by several empirical studies that have examined their convinced(p) or negative influence on the location decisions of MNE managers in both DCs and LDCs. All these factors are usually included in the analyses made via the discriminating paradigm (Galan et al, 2007). They recognise that MNE managers motivation to eventually choose either or both groups of host countries will depend on the specific location factors available in them.These location factors are classified in the following categoriesCost factorsMarket factorsInfrastructure and technological factorsPolitical and legal factors kind Cultural factorsThe order of this list is random. According to Noorbakhshs, Paloni and Youssef (2001), foreign investors are attracted to regions that offer a combination of the location factors. The location factors are discus sed separately in the next paragraph.2.2.1 Cost factorsThis paragraph contains theoretical information about the cost factor as one of the location factors. The determinants that are criticized are wear down costs and cost of materials.2.2.1.1 ram CostThe costs linked with the lucrativeness of investment are one of the major determinants of investment (Asidu, 2002) . The rate of collapse on investment in a host economy influences the FDI decision. Asiedu (2002) historied that the lower the GDP per capita, the high(prenominal) the rate of return and, therefore, the FDI inflow. Charkrabarti (2001) claims that wage as an indicator of exertion cost has been the most arguable of all the potency determinants of FDI. There is no unanimity even among the comparatively small number of studies that have explored the role of wage in affecting FDI results range from higher host country proceeds discouraging inbound FDI, to having no significant effect or even a positive association ( Du nning, 1989). Goldsbrough (1979) and Shamsuddin (1994) depict that higher wages discourage FDI. Tsai (1994) obtains unafraid support for the cheap- savvy hypothesis over the period 1983 to 1986, but anemic support from 1975 to 1978. Charkrabarti (2001) stated that empirical research has found relative labour costs to be statistically significant, especially for foreign investment in labour-intensive industries and for export-oriented subsidiaries. However, when the cost of labour is relatively irrelevant (when wage rates vary little from country to country), the skills of the labour force are expected to have an impact on decisions concerning FDI location. This is not the case for the investments in this case study, which is more knowledge based than labour intensive.Cheap labour is another important determinant of FDI flow to developing countries. A high wage-adjusted productivity of labour attracts efficiency-seeking FDI both aiming to produce for the host economy and for expo rt from host countries. Studies by Wheeler and Mody (1992), Schneider and Frey (1985), and Loree and Guisinger (1995) show a positive impact of labour cost on FDI inflow. Countries with a queen- coatd supply of masterly human capital attract more FDI, curiously in sectors that are relatively intensive in the use of skilled labour.2.2.1.2 Cost of MaterialsThe analysis above leads to two variables that can be measured to determine the importance of the cost factor that is labour cost (wages). The availability of raw material and cheap labour can be of all-important(a) importance in the choice of location.The return on investments is not important for this study, because this is not region-constrained, so it is not an important factor for a location choice. FDI uses low labour costs and available raw materials for export promotion, leading to overall output growth.2.2.2 Market FactorsThis paragraph contains theoretical information about the market factor as one of the location fact ors. The determinants that are criticized are market size of it, openness of the market, labour market and economic growth.2.3.2.1 Market sizeThe size of the host country market is a relevant determinant to the extent that the FDI is destined to serve the host market and not merely to set up an export platform. Larger markets should attract FDI because firms face economies of surmount as FDI entails sunk costs (for example, in terms of adapting management to topical anaesthetic conditions or getting familiar with host country legislation). Market growth should work in the same direction. Nunnenkamp (2002), Chakrabarti (2001) Campos and Kinoshita (2003), Braga Nonnenberg and Cardoso de Mendonca (2004), Addison and Heshmati (2003), Kolstad and Villanger, (2004) all find market size and/or growth to be relevant determinants of FDI.An economy with a enceinte market size (along with other factors) should, therefore, attract more FDI. Market size is important for FDI as it provides e lectric potential for topical anaesthetic sales, greater profitability of local anesthetic sales to export sales and relatively diverse resources, which make local sourcing more feasible (Pfefferman and Madarassy 1992). A large market size provides more opportunities for sales and profit to foreign firms, and in doing so attracts FDI (Wang and Swain, 1995 Moore, 1993 Schneider and Frey, 1985 Frey, 1984). FDI inflow in any period is a function of market size (Wang and Swain, 1995). However, studies by Edwards (1990) and Asidu (2002) show that there is no significant impact of growth or market size on FDI inflows. Further, Loree and Guisinger (1995) and Wei (2000) find that market size and growth impact differ under different conditions.Artige and Nicolini (2005) state that market size, as measured by GDP or GDP per capita, seems to be the most robust FDI determinant in econometric studies. This is the main determinant for swimming FDI. Jordaan (2004) mentions that FDI will move to countries with larger and expanding markets and greater purchasing power, where firms can potentially receive a higher return on their capital and by implication receive higher profit on their investments. Charkrabarti (2001) states that the market-size hypothesis supports an idea that a large market is required for efficient utilization of resources and exploitation of economies of scale as the market-size grows to some critical value, FDI will start to increase with its further expansion. This is a questionable conclusion, because there are firms who are aspect for niche markets for their products and a large expanding market is a disadvantage to them. reason the size of the market and the GDP of a region are not important determinants for the location choice.2.2.2.2 Openness of the MarketThere is mixed evidence concerning the significance of openness, which is measured mostly by the ratio of exports plus imports to GDP, in determining FDI as well (Charkrabarti 2001). Jordaan (2 004) claims that the impact of openness on FDI depends on the type of investment. If the investments are market-seeking oriented, throw restrictions (and therefore less openness) could have an impact on FDI. The reason stems from the tariff jumping hypothesis, which argues that foreign firms that seek to serve local markets may decide to set up subsidiaries in the host country if it is difficult to import their products into the country. In distinction, multinational firms involved in export-oriented investments may choose to invest in a more liberal economy since increased imperfections that ac high society trade protection generally accuse higher transaction costs associated with exporting. Wheeler and Mody (1992) observe a crocked positive support for this theory in the manufacturing sector, but a loose negative link in the electronic sector. Kravis and Lipsey (1982), Culem (1988), Edwards (1990) find a strong positive effect of openness on FDI and Schmitz and Bieri (1972) ob tain a weak positive link. Trade openness generally has a positive influence on the export-oriented FDI inflow into an economy (Edwards (1990), Gastanaga et al. (1998), Housmann and Fernandez-arias (2000), Asidu (2001)). In general, the empirical literature reveals that one of the important factors for attracting FDI is trade policy reform in the host country. Theoretical literature has explored the trade openness or the restrictiveness of trade policies (Bhagwati, 1973 1994 Brecher and Diaz-Alejandro, 1977 Brecher and Findley 1983). Investors in general prefer big markets to invest in and they like countries that have regional trade integration, as well as countries with greater investment provisions in their trade agreements. Theory does not give any clear-cut answer to the question how trade barriers affect the level of FDI flows. even FDI tends to replace exports if the costs of market access through exports are higher than the net costs of setting up a local plant and doing bu siness in a foreign environment. Traditionally, governments have used trade barriers to induce tariff-jumping FDI, i.e. horizontal FDI that takes place to circumvent trade barriers. On the other hand, vertical FDI relies on a constant flow of intermediate products in and out of the host country and therefore benefits from a liberal trade environment. In that case, trade barriers should encourage horizontal FDI and discourage vertical FDI and its effect on the aggregate level of FDI depends on which type of FDI dominates. Empirical studies, however, support a positive effect of openness on FDI. Chakrabarti (2001) finds the sum of imports and exports as a plowshare of GDP to be the variable most seeming to be positively correlated with FDI besides market size in an extreme bounds analysis. Braga Nonnenberg and Cardoso de Mendonca (2004) and Addison and Heshemati (2003) too find this variable to be positively correlated with FDI. The problem with using trade as a share of GDP as a m easure of trade policies is that it reveals a trade policy outcome, rather than trade guidelines. The openness of a market is clearly linked with the policy regulations of the potential market. Prletun (2008) finds that trade openness is positive but statistically significant from zero. Moosa (2002) states that while access to specific markets is important, domestic market factors are predictably much less relevant in export-oriented foreign firms. A range of surveys suggests a widespread perception that open economies encourage more foreign investment (Moosa, 2002).Therefore, the openness of a market is relevant to the appeal of a region. Restrictions will decrease the appeal of the region.2.2.2.3 Labour marketLabour is also a determinant for market factors correspond to Majocchi and Presutti (2009), they investigated whether entrepreneurial culture plays a role in attracting foreign direct investment (FDI). Multinationals are a network of distributed assets that contain entrepre neurial potential and are highly innovative to increase competitiveness (Rugman and Verbeke, 2001). Firms and entrepreneurs are valuable in gaining access to local knowledge. However, entrepreneurial culture may also rely on resources in the local environment, which is not mentioned in particular by Majocchi et al. (2009). In this respect, natural resources are taken for granted. The availability of a cheap workforce (particularly an educated one), personnel policy, female participation and aging influences investment decisions and in doing so are a determinant that influences the FDI inflow. A negative effect of these determinants will lead to an increase in wages and a decline in the return of investments in the future. Due to the unchanging framework of this thesis, these determinants are not investigated.2.2.2.4 Economic GrowthIf the host countrys market has a high-growth rate, it attracts more investors on a long-term basis (Chen, 2007). Economic environment growth in a count ry serves underlying factors when company decide which country to enter (Erramilli 1991).The role of growth in attracting FDI has also been the subject of controversy. Charkrabarti (2001) states that the growth hypothesis developed by Lim (1983) maintains that a chop-chop growing economy provides relatively better opportunities for making profits than the ones growing slowly or not growing at all. Lunn (1980), Schneider and Frey (1985) and Culem (1988) find a significantly positive effect of growth on FDI, while Tsai (1994) obtains a strong support for the hypothesis over the period 1983 to 1986, but only a weak link from 1975 to 1978. On the other hand, Nigh (1985) reports a weak positive correlation for the less developed economies and a weak negative correlation for the developed countries. Gastanagaet et al. (1998) and Schneider and Frey (1985) found positive significant effects of growth on FDIFDI has the ability stimulate economic growth only in the short run while the econo my is shifting from one short-lived equilibrium to another. The only source of long-term economic growth is technological progress, which is considered to be independent of investment activities. This factor is discussed in the next paragraph. However, in endogenous growth theory, the diminishing returns on investment can be avoided if there are positive externalities associated with investments (Oxelheim, 1996). If investment brings enough new knowledge and technologies, it can lead to long-term economic growth. As, typically, FDI brings new technologies and knowledge, in accordance with endogenous growth theory it can be viewed as a catalyst of long-term economic growth in a host economy.Economic growth will improve the ability to compete with other regions and this will increase the quality and ability of other location factors. The relevance of economic growth for FDI is not very clear it depends on the distribution of the new capital.The analysis above leads to four validated v ariables that determine the relevance of market factors (a) market size, (b) openness of the market, labour market and (c) economic growth. Market size is the only variable that is less important. The openness of a market and the economic growth are very important, these variables are positively linked with political, infrastructural and technological factors. An open market as well as a positive economic growth will lead to more FDI in a region.2.2.3 Infrastructure Technologic