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Title
Determinants of FDI and MNEs’ Investment Motives in BRIC and Kazakhstan
Introduction
The main aim of this research is to provide appropriate empirical disclosure of macroeconomic determinants that have significant impact on the attraction of foreign direct investments (FDI) in BRIC (Brazil, Russia, India ; China) countries compared to Kazakhstan and to investigate whether the motivations for multinational enterprises (MNEs) to invest in these countries correspond to findings.
The choice of the topic is based on my interest in Investments and International Business, as well as my knowledge, which was gained through writing my Masters dissertation at the University of Liverpool. I have investigated factors that affect FDI in developing countries, such as Kazakhstan, Russia and Turkey, and presented some appropriate measures for the encouragement of significant determinants in light of the study findings.
This project will extend and improve the research by rejecting not relevant information and including additional analysis of macroeconomic determinants of FDI in selected developing countries as well as determining microeconomic (firm-specific) factors driving the location investment decisions of MNEs under the pressure of globalization.
The World Investment Report names FDI a “primary force” shaping globalization (UNCTAD, 2011). As the globalization of the marketplace continues, companies that conduct business only within their national boundaries will find it difficult to survive. One way to cope with this problem is for companies to expand their operations beyond home country frontiers into other countries through FDI. FDI plays an important role for MNEs as a tool in worldwide competition.
The urgency of attracting foreign investment to developing countries is also subject to discussion. The desire for openness of the economy, improving competitiveness of national production, and the conquest of confidence at the global market as well as participation in the international financial exchange makes it necessary to create conditions for attracting foreign investment. Moreover, countries which have embarked on the path of market reforms have the particular importance in investing. Therefore, FDI in developing countries is considered to be mutually beneficial to the host country and MNEs.
Traditionally, FDI were typical only for advanced economies that have mature market economies, similar standards of production, and stable political systems. Since the early 2000s, the first time in history the majority of FDI has been directed to developing countries and countries with transition economies, reflecting the increasing ability of these economies to participate in the competition on a global scale.
The United Nations World Investment Report (UNCTAD, 1999) defines FDI as “an investment involving a long-term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate)”. The most important feature of the FDI definitions given above lies in terms ‘control’ and ‘controlling interest’ which distinguishes FDI from portfolio investment.
The selected developing countries adopt FDI as a major factor in economic development and modernization, income growth and employment. They have liberalized FDI raising regimes and implemented certain measures to attract investment into the countries. They have attended to the finding the best solution options for executing their domestic policies in order to receive maximum benefits from the presence of foreign capital in the national economy.
Vast empirical studies that have been carried out using different econometric techniques to determine which are the most important factors influencing the volume of FDI mainly based on two particular aspects. The first type of studies is macro-oriented and seeks to establish a functional relationship between the level of inward FDI and its possible macroeconomic determinants, such as GDP, GDP growth, market size, inflation rate, trade openness, etc. The other type of research focuses on the core firm-specific motives or MNE strategies influencing outward FDI decisions. However, the conformity of the exogenous FDI determinants found statistically significant and observed MNE’s motives for investment in studied country(ies) is unexplored in the existing literature.
Therefore, the proposition to construct a new conceptual model or framework that focuses on the interrelationship of both macroeconomic and microeconomic theories simultaneously is the ultimate goal of this research.
The value of this study is in extending the scope of previous studies by providing a comprehensive examination of the classic national determinants of inflow FDI versus factors influencing MNEs’ investment decision making.
The practical significance of this research is that the implementation of empirically found results could be considered as a guideline for public policies of selected countries to maximize the benefits from arranging conditions most suitable for the relevant motives underlying FDI decisions of international companies.
Research questions:
1) What are the main determinants of FDI in Brazil, Russia, India, China and Kazakhstan?
2) Why do MNEs take decision to invest in particular developing country?
3) What are the factors that MNE considers when starting its FDI activities in developing countries, especially Brazil, Russia, India, China or Kazakhstan?
4) Do MNEs take into consideration macroeconomic FDI determinants in the selected country?
5) What factors should selected countries improve to attract more FDI?
Literature Review
So far a large number of empirical studies have been conducted to identify the factors that influence the inflow of FDI. However, as for answering the main question “Why do companies invest abroad?” no consensus has been achieved in the sense that there is no widely accepted set of explanatory factors that could be regarded as the “real” determinants of FDI. The variables vary from study to study and from country to country. Researchers agreed only in one – under conditions of growing internationalization the basic rationale for firms is to increase or protect their profitability and/or capital value by engaging in FDI.
There is an extensive literature on FDI based on theories assuming perfect and imperfect markets, starting with the pioneering work of Stephen Hymer (1960) to the new trade theory popularized by Markusen (1984).
The most fundamental researches of FDI factors were conducted by Dunning in 1977, 1988 and 1993. His eclectic paradigm provides a conceptual and theoretical framework for analyzing FDI determinants by specifying three necessary conditions (OLI):
– ownership advantage,
– location advantage,
– internalization advantage.
The theory points out that a firm must possess an ownership advantage in order to compete with foreign and domestic firms in the foreign market it wishes to invest; internalization factors that make it preferable to exploit the ownership advantages within the firm, rather than to license production; and a location advantage to produce in a foreign market, otherwise the firm would export its products to the foreign market.
In the late 90s by analyzing the microeconomic approach of the FDI location, Dunning (1998) further pointed out that the attractiveness of FDI locations is determined by investment motivation, which he classified into four categories:
– market-seeking (horizontal strategy to access the host-country domestic market);
– resource-seeking (to access raw materials, labor force, and physical infrastructure resources);
– efficiency-seeking (vertical strategy to take advantage of lower labor costs, especially in developing countries);
– strategic assets-seeking (to access research and development R;D, innovation, and advanced technology).
He argued that much of the recent FDI in developing countries are stimulated either by market-seeking motives or by efficiency-seeking and resource-seeking motives.
The similar classification was given in 2002 by UNCTAD in the World Investment Report. They have analyzed the FDI determinants of host country and classified these factors into the five major groups. These are:
– policy variables;
– business variables;
– market-related economic determinants;
– resource-related economic determinants;
– efficiency-related economic determinants.
A large body of literature investigating the determinants of FDI has aimed to examine how exogenous macroeconomic factors affect the investor’s FDI decision with the primary focus on macroeconomic factors: exchange rate movements, taxes and tariffs, market potential and labor costs, infrastructure, institutional factors, and trade liberalization (Blonigen, 2005; Faeth, 2009). Some of the late studies on FDI determinants focus on the institutional factors, while others on socio-political factors (Sahti et al, 2018).
While research in the area of inward FDI has largely focused on understanding motives of FDI, not much investigation has been carried out on the actual decision-making process that guides the investment decision. Most theoretical contributions and conceptual understanding established on the subject have revolved around the general strategic decision-making process, and enhancing existing literature on FDI processes.
In this research I will use organisational decision-making theory, specifically the idea of rule-based decision-making of March (1994) and Weick’s (1995) notion of sense-making, in order to develop a process model of MNEs FDI decision-making, which is a largely unobserved phenomenon in the FDI literature according to my knowledge.
The study seeks to fill the gap in the FDI literature by adding up more in-depth study of the firm-specific FDI determinants on a global perspective with following comparison to country-specific determinants.
Research Methods
The econometric methods will be used to assess the degree of influence exerted by a variety of macroeconomic factors on the level of inward FDI in BRIC countries and Kazakhstan.
In order to analyse the macro determinants of FDI in selected developing countries, more than twenty variables will be picked up, one of them is the dependent and the others are explanatory variables. The net inflows of foreign direct investments (FDI) in current US dollars will be defined as the dependent variable. Explanatory variables will be selected on the basis of FDI theories as the most significant in determining the amount of inward FDI. The period will cover at least 20 years, giving that all series have yearly data.
The data proposed to be taken from the World Bank collection of development indicators (http://data.worldbank.org), which are compiled from officially recognized international sources. It presents the most current and accurate global development data available, and includes national, regional and global estimates. Additional secondary data will be used by conducting extensive research into relevant books, published reports, articles and other academic publications (journals, surveys, research papers) related to the topic of dissertation.
In terms of analysis of the macroeconomic determinants of FDI the Ordinary Least Squares (OLS) method as the conforming analytical technique will be employed. I will include in the primary model the factors cited in vast empirical studies as important FDI determinants and use EViews computer software for results derivation.
As for the second part of the research, it will examine the impact of determinants of the strategic decision-making process on foreign market entry by MNEs through a triangulation research approach including: a literature review, content analysis of government policies and interviewing or conducting survey (sending questionnaire) of selected individuals (executives) from selected international companies located in Brazil, Russia, India, China and Kazakhstan. The MNEs’ representatives will be asked a set of identical questions about reasons to invest in selected countries.
The research is based on application both quantitative and qualitative analysis methods with subsequent empirical comparison of obtained determinants that have significant impact on the attraction of FDI in developing countries to the motives underlying MNEs to locate investments in selected host countries.
The key results of this paper can be put into practice both by politicians enabling host countries to attract more FDI and maximize the gains from it and by MNEs’ managers to determine the location of foreign investments more accurately.