Factors influencing Foreign Direct Investment in a Country

Foreign Direct Investors look into various factors before making investment decision in a country. After 1990, in India, the government adopted a New Economic Policy which promoted the policy of LPG (Liberalization, Privatization and Globalization). This has resulted in promoting more foreign direct investment into the country.

Factors influencing Foreign Direct Investment in a Country

The following are the various factors an FDI look for before investment:

Investment decision of FDI(Image: Investment decisions of FDI)

1. Stability of the Government:

A stable Government is an essential prerequisite for any investment. The investor will always look for a government which is supporting investment and which will not take any steps that are anti-investment. The investor should not have any fear of take over by the government. This will enable him to go for expansion.

2. Flexibility in the Government Policy:

Certain investments were not allowed in the hands of FDI but such a rigid policy will not help in the growth of industries. With WTO regulation, government has to adopt flexible policies, permitting FDIs in all areas including those in which they were prevented previously. For example, in India, power generation was not permitted to private sector. Now, in Maharashtra, Dabhol Power Company is allowed to do so.

3. Pro-active measures of the Government to promote investment (infrastructure):

The Government should also undertake pro-active measures such as expansion of ports, captive power, development of highways, atomic power etc. These measures will attract more foreign direct investment.

4. Exchange rate stability:

Commercial viability of any FDI is based on exchange rate stability. This means that the value of domestic currency should not drop abnormally by which while repatriating the funds, the foreign investor will lose heavily. Exchange rate should be more or less the same as prevailing at the time of investment.

5. Tar policies and concessions:

Government should adopt uniform tax policies as per international norms. A heavy excise duty or sales tax or customs duty will prevent foreign direct investment. A moderate tax policy should continue so that the FDIs will feel comfortable.

6. Scope of the market:

FDIs must be in a position to exploit the market and expand both in the domestic as well as the foreign markets. This will reduce their cost of production and will give them ample scope for diversification.

7. Other favorable location factors (including logistics and labor):

The productivity of labor in the country should be high. Adequate skilled labor should be available, especially in technical areas. Different transport facilities with a proper coordination between land, rail and air should be available.

8. Return on investment:

One of the major attractions for FDIs is the profit or the return they get for the investment made. Unless the return is substantially higher than what they could have obtained in other countries, they will not venture for investment. The rectum should also be consistent and it should be increasing over a period. These factors are closely looked into while undertaking investment. The financier of the FDIs will also ensure that they get their money back as it is a safe investment.

Thus, return on investment is a major deciding factor for FDls while undertaking investment in foreign countries. They also would like to ensure that the payback period is also less so that the return is ensured within a short period. Weightage is given to each of these factors and decisions are finalized.

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