market for the product, the physical infrastructure of the host country, the political stability of the
host country and the tax regime.4
The level of education and literacy of the labor pool can influence the amount of FDI
received by the host country. Foreign firms would likely invest in locations and labor that can
grasp complicated processes and maintain high standards of quality. A skilled and productive
workforce can attract manufacturing facilities and services to the host country.
The state of the regulatory and legal environment can facilitate a firm’s entry into a
foreign economy. The location may be chosen to avoid tariffs or other protectionist measures
employed by the host country to protect domestic industries. The foreign firm avoids measures to
protect domestic industry by becoming part of the domestic industry through local incorporation
or partnership with a domestic company.
The economy of the host country plays an important role in determining the allocation of
FDI. Stable exchange rates, limited inflation, the size of the relevant market and potential for
growth are key determinants in attracting investment. The foreign company may specifically
choose to invest in order to meet domestic demand for their products.5
The political stability of institutions in the host country can be of significant importance
in the investment decision. The quality of institutions, amount of corruption and their
relationship to a functioning economy has an impact on the location of FDI. Some studies have
found a negative relationship between levels of corruption and the inflow of FDI.6
4 F. Root and A. Ahmed, “Empirical determinants of manufacturing direct foreign investment in developing
countries” Economic Development and Cultural Change, 27, no. 4 (1979):751-768. Peter Nunnenkamp, Julius Spatz
, “FDI and economic growth in developing economies: how relevant are host-economy and industry
characteristics?” Transnational Corporations,.Vol.13, Issue. 3; (Dec 2004): 53. Foreign Direct Investment in
Emerging Market Countries - Report of the Working Group of the Capital Markets Consultative Group
-http://www.imf.org/external/np/cmcg/2003/eng/091803.pdf
5 Foreign Direct Investment in Emerging Market Countries - Report of the Working Group of the Capital Markets
Consultative Group
6 Wei, Shang-Jin (2000) - 2 articles - “How taxing is corruption on international investors?” Review of Economics
and Statistics, 82(1):1-11, and “Local Corruption and Global Capital Flows” Brookings Papers on Economic
Activity 0(2):303-46.; and Pournarakis, Mike and Varsakelis, Nikos. “Institutions, internationalization and FDI: the