1.1 Research Background
I
n recent years, the trend of international division of labor has led to economic interaction amongst firms across countries, resulting in increasing the level of international trade. The total global inflow of FDI in the years 2002 has increased from $1,971billion to $ 1,244 billion in the years 2010.1 The total global outflow of FDI in the years 2010 rose from $1,428.6 billion to $1,664.2 billion in the years 2011. 2 The recent ongoing trend towards FDI, prompted both home and host countries government to become a member or/and signatory of international institutions like GATT/WTO (World Trade Organizations), FTA (Free Trade Agreements), bilateral investment and other treaties that improves their trading relationships with partner countries and reduces trade barriers. These international institutions will also serve as a means to protect assets of foreign investors, or serve as a vehicle for MNEs to enter into a foreign country. This will result in an increased in the level of FDI, and also raise a country’s economic growth and social welfare.To enhance country attractiveness as location for FDI, governments have undergone rapid economic transformation by changing several economic policies such as, reduction in tax rate and tariff, domestic and international capital liberalization, privatization, and removing barriers to international capital flows. They have also established promotional policies such as setting up of Special Economic Zones (SEZs) to boost up exports.
Due to certain prevalent condition in their countries, MNEs are prompted to undertake FDI. The factors that motivate MNEs to engage in FDI are to escape from strict environmental laws, high tariff rates, high wage rate and etc. so as to gain competitive advantage over their rival firms. In addition, MNEs may also seek investment in foreign countries to search for natural resources and human resources. Moreover, a search for newer market, upgraded
1 http://www.unctad-docs.org/files/UNCTAD-WIR2011-Chapter-1-en.pdf (2012.08.09).
2. http:// unctad.org/en/PublicationsLibrary/webdiaaeia2012d19 en.pdf (2012.08.09).
technology, and educated workforce are the other motives of MNEs.
During their operation in a foreign country, MNEs often face liability of foreignness due to lack of information and international experience. To increase their success rates MNEs must build up social network with their foreign counterparts through establishment of subsidiary company, or by maintaining good relationships with domestic firms, as these domestic firms normally possess good knowledge about local market condition, and can provide necessary information with regard to investment. The setting up of subsidiary companies in a particular region will lead to formation of agglomeration economies whereby, firms coming from the same industry or same line of business tend to flock together leading to what is known as clustering activities. The formation of clustering activities will act as a signal to other potential investors about the business climate of that particular region, thereby increasing the attractiveness of a region/country as destination for FDI.
1.2 Research Motivation and Research Objectives
MNEs play a major role in bringing huge inflow of foreign capital, skilled labors, resources, and technology in the form of FDI. FDI increases the import and export level alongside increasing countries employment level and economic growth. In this modern world, fierce competition among MNEs both in the domestic as well as foreign market has pushed them to search for better opportunities in countries that best meet their requirements in terms of resources, technology, and market. Majority of MNEs that has undertaken FDI did not succeed due to their inadequate knowledge or information about a country economic and political structure. This has aroused an interest to find out the driven force and the underlying factors for MNEs success in FDI.
The main objective of this paper is to find out the determinants that would enhance the probability of success in FDI undertaken by MNEs from four different angles as outlined below:
1) Home country government through various trade agreements, expansion of diplomatic ties and trade barriers will provide huge support for MNEs to engage in FDI.
2) The presence of abundance of factors in host country such as bountiful resources, political regime, governance infrastructure, presence of agglomeration economies as well as country location will enhance MNEs success in FDI.
3) MNEs by maintaining good political ties and undertaking lobbying activities with host country’s government as well as possessing good business ties with MNEs in host country, and also network linkage in the presence of ethnic ties will facilitate MNEs with the required information and hence increasing their success in FDI.
4) The happenings in the global environment taking the form of financial crisis, and changes in the business cycle, internet bubble as well as herding activities will determine FDI success rate of MNEs.
1.3 Research Procedure
Select research topics
Survey relative literatures
Propose research objectives and problems
Is
the propositions sufficient to describe and explain the objectives and
problems?
No
Fig 1 Research Procedure
1. Analyze the propositions
2. Enrich the propositions for extensive analysis
1. Arrange the research outcomes
2. Explain and conclude their economic and policy implications.
Complete the thesis Yes
Design and modify the propositions
1.4 Research contribution
This study by providing a list of critical determinants will help in the decision making choice and locations for companies planning to invest in a foreign market and may also serve as guidelines for increasing the success of foreign venture.
1.5 Research Structure
The outline of the paper is divided as follows: Chapter 2 gives a brief overview of literatures related to FDI and its types, and what are the motives behind MNEs in undertaking such activities. In chapter 3, significant determinants behind every MNEs success from four perspectives as pointed out in chapter 2 will be raised in the form of propositions followed with a brief summary in chapter 4.