Question
Discuss the factors that stimulates FDI in a country. Explain the influence of taxation policy of host country on FDI.
Answer :
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Skip in 10
FDI decisions depend on a variety of characteristics of the host economy,
Size of the Market
There can be seen a well well-known relationship between FDI and the size of the market and as well as with some of its characteristics (e.g. average income levels and growth rates). When the GDP of a country is relatively small, it is an indicator of low level of national income. As such investors prefer to invest in countries where there is a high growth potential and where there is a large market for their products and services.
Openness
Even though the investors pay attention on the size and the growth of the market as important, all the other domestic market factors are predictably much less relevant in export oriented foreign firms. Wide spread insight is that open economies encourage more foreign investment. One indicator of openness is the relative size of the export sector. Particularly manufacturing exports are a significant determinant of FDI inflows. Investors prefer countries where there are lenient rules and regulations in relation to foreign trade.
Labour costs and productivity
Labour cost is a significant factor for foreign investors specially when making their investments in labour intensive industries and for export oriented subsidiaries. (For an example opening up garment factories, export processing firms where larger number of employees is required) Low wage
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