Academic journal article Multinational Business Review

Factors Affecting the Foreign Direct Investment Decision Of

Academic journal article Multinational Business Review

Factors Affecting the Foreign Direct Investment Decision Of

Article excerpt

A firm's decision to make a foreign direct investment (FDI) can significantly affect the firm and the host country. Firms make this decision for variety of reasons and the expansion of global markets and the global economy has provided an additional impetus to make investments. This study presents a comparative analysis of 21 factors affecting American, British, Canadian, French, German, and Japanese firms' decisions to locate in the other five countries. Previous studies have not directly compared them to determine if systematic differences exist. Are the same factors equally important to a firm regardless of the locating country and do firms from different countries perceive the same factors or country similarly? Results of analysis of variance indicate that home country, firm size and factor did affect the perceived importance of the factors influencing the decision and that host country did not.

INTRODUCTION

The decision to make a foreign direct investment (FDI) is a very important one which requires a large capital commitment and can have a significant effect on the firm and the host country. There are many benefits to the host country, primarily because the establishment of such plants can aid in the country's economic development or expansion. For example, it increases the level of employment and encourages the transfer of new technologies.

In the competition for foreign investment, a country (and local areas within said country) wants to provide the most attractive package feasible, making it competitive with other countries (and localities) and insuring that the package is fiscally responsible. From the firm's perspective, the plant location decision also is very important and requires a careful analysis of all the factors. New-site decisions are part of the strategic decisions and are made by management for longer periods of time (Rees and Stafford, 1986). The firm wants to locate the plant in the most advantageous area, and in addition to

what the government may be proposing in its package, the firm also must evaluate other factors. The problem of plant-site location...is one of the most crucial decisions that industrial management has to make in considering a new plant...faults of location are forever carried as a manufacturing burden (Tong, 1978, p. 3, ft. 9). The key question seems to be "Is this a location at which the company can remain competitive for a long time?" rather than "Is it cheaper to do business here?" (Schmenner, 1979, p. 131). The process is exacerbated when firms consider foreign locales for a plant.

The expansion of global markets and the global economy has provided additional impetus for firms to locate a plant in a foreign country. However, other factors such as the locating country's receptiveness to foreign investment also have become more evident. Thus, many competing factors appear to have become more prominent in the plant-site location decision. Because of these events and the importance of the decision, analyzing the factors that affect a firm's decision to make an FDI still remains critical. This is especially true in the case of firms from the "Group of Seven" (Canada, France, Germany, Italy, Japan, United Kingdom and United States of America) which have a very significant effect on world markets and economies.

While there is much research on the plant-site location decision, there is little research that directly compares the significance of factors on the decision between firms from these countries when they are considering an FDI in each others' countries. Are the same factors equally important for a firm regardless of the host country, of does the importance vary as a firm considers different countries? Also, do firms from different countries perceive the same country similarly (e.g., do Japanese firms rate U.S.A. factors in the same way that English firms do?), and do they perceive the factors overall (regardless of host country) similarly? …

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