What Attracts Foreign Direct Investment (FDI)?
25 July 2016 Category: Topical Review
This is a major question for almost every country, region and city on the planet. FDI influencing and attraction is a highly competitive global activity, undertaken by countless central and regional governments, departments, cities, agencies & consultants, all with the legitimate aim of enhancing the economic wellbeing of local citizens.
Let me clearly state that, there is no one best place in the world for FDI. This may initially sound odd as there are many excellent and extremely successful FDI destinations, for example, – Singapore (small country), Ireland (small country), China, (large country) California (state), London (city) etc. The key point here is, that there is no one location which is best for all FDI from all sectors and origins. Each location can be better for one, or a number, of specific sectors for example, or investment from a particular region or as a market access point for a particular country or region.
Can your Investment Promotion agency (IPA) adequately answer the following vital questions:
- Does your location realistically understand the key decision making drivers of foreign direct investment ?
- Have you a clear and distinctive investor proposition ?
- Are you actively working to address the identified deficits ?
- What kind of investment climate and policies exist ?
- Have you the best possible agency structure and strategy to meet your objectives ?
Lots of serious questions to consider.
I will not be addressing all these large topics in this short blog, but just wish to prompt your thinking. The best IPA’s have a deep understanding and activation of these topics.
FDI accounts for over 12 percent of global GDP and more than 85 million jobs worldwide. Global flows of FDI are altering quite significantly. Each year more and more FDI is flowing not only from developed into developing economies but also from one developing or transition economy to another.
At a high level, FDI can be described as falling in to four distinct categories – market seeking, natural resource seeking, efficiency seeking and strategic asset seeking,
There have been many theoretical and empirical studies undertaken with the objective of identifying the prime drivers of FDI. The results suggest a diverse set of factors influenced by many varying dimensions of the investors and the investment receiving locations.
From my own extensive IPA experience in Ireland (IDA Ireland) and from my current work with the World Bank Group, the following provides a flavour of the prime attractors of FDI:
- Proximity to markets and customers.
- Investment climate – institutional, policy and regulatory framework.
- Availability of skilled workforce.
- Infrastructure and logistics.
- Presence of clusters, suppliers, partners.
- Economic and political stability.
- Competitive cost structures.
- Technology, R&D capabilities.
- Cultural compatibility.
- Receptiveness and welcome for FDI.
The ranking and packaging of the above factors will vary greatly from sector to sector and from the particular international growth strategies of each investor.
Finally, it is important to recognise that FDI seeking is a complex and competitive business which requires clear, well developed strategies and an alignment of a myriad of stakeholders. It is quite appropriate to seek advice and assistance in this important endeavour – do contact us if you feel we can help you.