Home Country’s Perspectives

Home country government memberships in international trade agreements (BITs and NAFTA) will provide strong support for MNEs to engage in FDI by overcoming informational barriers (Raff & Kim, 1999) and solving FDI related issues like settlement of disputes, expropriation risk, and IPRs protection (Büthe & Milner, 2008; Egger & Pfaffermayr, 2004).

Government investment expansion and diplomatic ties has led to diversification of economic relation away from increasing number of projects in neighboring countries (Harwit, 2000).

Majority of firms especially those from emerging economies are using international trade as a springboard to acquire strategic resources with the aim of reducing market and institutional risk faced at home countries (Yiu et al., 2007).

It can be seen that governmental support in the form of incentives and diversification of economic relation with other countries will encourage MNEs to engage in FDI. This raises proposition 1 as:

Proposition 1: Home Country government providing strong supports and/or incentives will promote MNEs’ success while engaging in FDI.

In support of the above proposition, an in-depth analysis on the various key determinants that would promote MNE’s success during their endeavor in FDI is been discussed. For MNEs to undertake in any type of foreign trading activities, it is necessary to have strong governmental support, government can provide MNEs with important information that will be useful when undertaking investments in other countries. Government by taking active participation in international agreements such as BITs, NAFTA, and PTAs etc. can help MNEs to solve FDI related issues like expropriation risks, political outcries, removal of trade and investment barriers that MNEs might encounter when they undergo any types of cross border activities. Participation in international agreements has also been responsible for many developing countries being incorporated into the global capital and trade flows, leading to synchronization of business cycles with their main trading partners.

For example, Mexico after coming under NAFTA due to elimination of non tariff barriers such as quotas, import licenses, reduction in tariff rates etc. has been able to attract greater inflows of FDI into export oriented assembly-line sector, banking, finance, energy and assembly line industry, but due to the small economy of Mexico the U.S. gained the least benefit (Ramirez, 2003). Under NAFTA the trading relationships between member countries has increased with trading activities in the U.S. being reoriented towards Mexico, this has led to economic integration and synchronization of business cycles between these two neighboring countries, whereby any changes in industrial activities in the U.S. will influence the demand for exports in Mexico and thus affecting the Mexican business cycles (Torres & Vela, 2003).

Alternatively, NAFTA has also caused regional disparity between countries, leading to rich countries nearest to the region getting richer and poor countries getting poorer, and regions with dense population reaping the least benefits (Baylis et al., 2012).

Besides creating a suitable platform for MNEs to endeavor in FDI, government can act as a pillar for MNEs success in FDI by providing them with necessary information and help them in solving any business disputes that are caused by social, political and economic environment.

Many MNEs have lost their business deals due to lack of knowledge with regard to a country’s geographical variations, culture, business practices and so on. Moreover, government intervention also helps in overcoming any informational barriers that MNEs might encounter

during their entry into a foreign market. For example, Taiwanese businessmen undertaking FDI in China often find difficulties in conducting business activities due to her complicated legal system. As one of the solutions, the government of Taiwan through the implementation of e-government facilities has provided on-line business legal contract to Taiwanese businessmen (Liao & Jeng, 2005).

To expand international influences, countries are changing their destination for investment and are looking for opportunities in less developed countries or states that can offer full diplomatic ties as well as supports during voting time but on an occasional basis. For example, Taiwan diplomatic ties with Palau has increased the number of votes in Taiwan due to Palau’s membership in the United Nations and the increased tourist flow into Palau has created a vision in the minds of leader that setting up of tourism industry might be the right decisions (Harwit, 2000).

Any action or policies undertaken by the government will have an impact on a country’s economy, this impact can be positive or adverse. When government impose economic sanctions like embargo, it will create an adverse impact on the country’s economy and lead to decline in investment growth rate, output per worker and capital. As a result of strict regulations on import, foreign investors often start to withdraw their investment from the country. For example, when the world imposed an embargo on South Africa to change its political system, many foreign companies withdrew or stopped their investments in the country, this caused an adverse affect on the economy, but when the embargo was lifted it led to an increase in average growth rates, investment, capital, and output due to tax relaxation (Coulibaly, 2009). Moreover, when the U.S. imposed an embargo on import of medicines on Cuba, it had resulted in a decline of mortality rates and nutritional levels on Cuba’s population which had caused rapid spread of infectious diseases (Garfield, 1997).

Thus from the above discussions we can suffice that strong governmental support will help in facilitating MNEs success in FDI.