Research proposal: The new global determinants of FDI flow to developing countries: the importance of ICT and democratization


The purpose of this research in summary is the determinants of Foreign Direct Investment in the Developing countries. The research comprises of a central theme known as Foreign Direct Investment. Before companies take part in participating in the foreign markets, some type of investment are considered. Such as whether the participation in foreign markets will qualify as FDI is down to the entry mode that is selected; the entry mode is broken down into low control entry mode and high control entry mode.

The scale and character of foreign direct investment (FDI) flows to developing countries have long been affected by successive waves in the invention and adoption of new technologies. The latest wave’the revolution in information and communication technology (ICT)’is facilitating a global shift in the service industries, which are now relocating to select developing countries, following the earlier shift in manufacturing.

Global political change also affects FDI flows. Since the early 1980s, a ‘third wave’ of democratization has pushed aside many authoritarian regimes, and the opening up of political systems is often a catalyst for economic reforms that favour investors.1 These two waves, one technological, one political, are interacting to reshape trade and capital flows, including FDI.

FDI (Foreign direct investment) in developing countries has been a key interest in the academic literature over the past 20 years. Within the economies of developing countries, it has been noted that FDI has a significant impact in economic development.

Countries with its well-endowed resources have been aiming to diversify their economies and have observed that FDI transform a slow-growing economy. Countries that are deficient with such energy resources tend to invest abroad in order to lure the foreign currency and create economic opportunities to their weak economy. This has brought about interest from government and companies.

Research objectives:

The main aim of this research is to develop a model of the determinants of FDI flows. This objective aim to provide a fruitful ground for the development of a model that tests the roles played by environmental risk, natural resource endowments and other factors. The structure of the dissertation is as that it is focusing on the role of ICT in determining FDI flows and to illustrate the effects of ICT on a developing economy. This paper also discusses the link between democratization and FDI through the effect of the former on the expected returns to FDI. The relationship between FDI, GDP growth, openness and ICT is investigated. A distinguishing feature of this study is that a number of relevant factors previously not tested in the FDI literature (e.g., Asiedu 2002; Gastagana et al. 1998 and Bjorvatn et al. 2001) are examined. The data include the most recent statistics, and the analysis is based on a larger number of countries. We explore whether factors that affect FDI in developing countries affect countries differently and quantify the magnitude of heterogeneity in effects by region and level of development. We find that both democratization and ICT attract FDI inflows.’research objectives

Research questions:

Based on the research objectives, the main research questions will be:

‘ Why do companies opt to invest in particular countries in developing countries?
‘ What are the roles played by potential determinants of FDI flows in the developing countries?
‘ What are the roles played by different environmental risk factors in attracting FDI?

Literature Review

Foreign direct investment (FDI) is increasingly important to developing countries. 2000, they received US$ 168 billion in FDI inflows, the largest item in US$ 197 billion of net long-term resource flows to this group (UNCTAD 2001: xiii). The share of developing countries in FDI inflows has also risen from 17.1 per cent in 1988-1990 to 21.4 per cent in 1998-2000.

These new global forces must be seen alongside the longstanding determinants of FDI flows to developing countries: their natural-resource endowments, geographical characteristics (country location in particular), human capital, infrastructure, and institutions, factors emphasized in the existing literature (see for example De Mello 1997; Noorbakhsh et al. 2001). These factors have contributed to a highly skewed distribution of FDI across countries: 15 countries account for over 80 per cent of FDI to developing countries, and the 49 least developed countries (LDCs) attracted only 0.3 per cent of world FDI inflows in 2000 (UNCTAD 2001: xiii).

ICT infrastructure and skills are now critical in integrating local producers into international ‘B2B’ networks, and in attracting vertical FDI in services as well as manufacturing. Multinationals providing business services and consultation are now large investors in India where they can draw on the local ICT skills to develop business solutions for international clients. ICT capacity also influences ‘horizontal’ FDI to produce manufactures and services for sale in the host country market, particularly in large markets such as Brazil, China and India, where ICT is increasingly used to manage supply chains (with greater efficiency and lower inventories reducing business costs).

Geo-political shifts can’for good or bad’rapidly overturn investors’ expectations regarding the protection of their property rights and the profitability of their investment. Before the First World War the global political climate favoured all forms of private capital flows, but turned hostile thereafter, and was discouraging for much of the twentieth century (Obstfeld and Taylor 2002; Williamson 2002). FDI flows to developing countries stalled, and became concentrated on a narrow range of countries, after the Russian, Chinese, and Cuban revolutions and the expansion of Soviet rule into Eastern Europe. Distrust of FDI rose as the dependency theory became influential across much of Latin America and the former colonial world in the 1960s and 1970s (Cardoso and Faletto 1979).

Democratization has stimulated market reforms that are favourable to foreign investors (privatization for example), particularly in Eastern Europe and the former Soviet Union, Also the economic policy in the new democracies is now subject to oversight by parliamentarians and civil society, and this may encourage a more stable policy environment for investors. Third, oversight may encourage a more development focused allocation of public spending; especially public investments for creating the skills and public goods that attract investors. Fourth, democratic oversights may stimulate legal reforms that protect the property rights of all investors, including foreign investors.

Research Methodology:

My methodology will predominately take a quanitative approach.

Secondary data will be acquired by conducting an extensive research into relevant books, reports, articles, and other publications relating to the research topic. This starts with the search for articles related to FDI and the developing region which were searched for in the main academic International Business publications, which include journals, books, surveys and trade publications. The literature review also includes papers published by the IMF, World Bank and United Nations that are relevant to FDI in developing regions.

The inclusion of books, articles and other publications in this methodology is based on their contribution to the development of theories and insight into the determinants of FDI in the developing regions as well as around the globe. Each article explored provides a source of references, which are being explored based on the relevance to the research questions on board. With respect to questions on the determinants of FDI flows, references include articles via Inward FDI flows published since 1995 till date. Other references include John Dunning’s original test of Ownership, Location and Internalisation (OLI) factors of 1980 as well as references that are based on their perceived relevance to the research questions addressed in this research.’research methodology.

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