A Foreign Direct Investment (FDI) is a tactic which involves establishing an abroad
physical presence by obtaining productive assets like labour, equipment, capital, plant, land
and technology. FDIs are of several types which include mergers and acquisitions,
integrations and joint ventures. Some of the aims of FDIs include obtaining access to other
markets, accessing knowledge and raw materials, avoiding trade barriers, reducing
production costs, among others (Asongu et al., 2018). Volkswagen is an example of an FDI
which spent one billion dollars on building a factory for manufacturing delivery vans in
Poland. Denmark`s Lego Group invested in China by building a factory worth over 100
million Euros in the region.
FDI`s scope and nature depend highly on technological, educational, transportations
and communications infrastructure. These four factors play a big role in attracting investors
to a region—for example, the technological factor. In the modern business world, technology
is critical in giving companies a competitive advantage (Asongu et al., 2018). This advantage
is achieved by making operations fast, easy, and less costly and quality finished products. For
this reason, companies which are seeking to invest abroad will go to those areas where
technology is highly advanced. For instance, many companies are targeting Japan due to its
constant advancement in technology. Undoubtedly, Japan leads in technology and
innovations, especially through automation, robots and artificial intelligence.
Transportation infrastructure is another crucial factor in FDIs. Businesses need a good
transport system to easily move raw materials as well as finished products with ease and fast.
Firms will invest in regions where the transport system is well developed as this will
eliminate the chances of inconveniences brought about by delays. For example, China attracts
foreign investments because of effective transportation, especially in its subways, Maglev
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trains and light rail (Asongu et al., 2018). Additionally, China is a popular investment
destination due to its high growth rate, lower labour costs and size. Volkswagen and General
Motors are examples of US firms that have invested in China.
Communications systems are crucial for maintaining connections with the business
and its customers as well as among employees. As such, the nature of FDI`s highly depends
on the effectiveness of a region`s communication systems (Ly et al., 2018). Advanced
economies like the US, Netherlands, Japan, China, Australia and Canada are popular targets
for FDI because of their superiority in communications like telephone systems. For example,
Walmart, which is a US company, has directly invested in China with over 240 stores and
thousands of workers. Communication flow is needed in these stores as well as among
employees, and as a result, China and its effective communication system was attractive for
Walmart.
The educational factor is all about learning and gaining knowledge. The modern
business world requires knowledge in all its operations: educated managers and educated
employees with the necessary knowledge and skills. In any organization, regardless of the
size, human resources are the most important as they control and drive all other resources (Ly
et al., 2018). Firms engaging in FDI will, therefore, target regions with a talented and
educated workforce. For example, India is preferred because it has a workforce which is
properly educated, and management is highly talented. For example, Axis Bank is a
Singapore company which has invested in India. On top of its managerial talent, India is
attractive to investors because of the low cost of labour.
FDI`s nature and scope will always be dependent on advanced technology,
infrastructure, communications and transport as these four factors play a big role in achieving
a competitive edge.
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References
Asongu, S., Akpan, U. S., & Isihak, S. R. (2018). Determinants of foreign direct investment
in fast-growing economies: evidence from the BRICS and MINT countries. Financial
Innovation, 4(1), 26.
Ly, A., Esperança, J., & Davcik, N. S. (2018). What drives foreign direct investment: The
role of language, geographical distance, information flows and technological
similarity. Journal of Business