More on how to Attract Foreign Direct Investment
Market growth potential is a significant ingredient for FDI inflow into a country. Developing and transitioning countries can specially benefit from market potential as the emerging market created with their population and income growth will become ripe for FDI in the right large market. Investor attraction in this case will be the high potential return on investment the growth effect fosters economically. There has been an FDI boom in the world’s leading emerging markets: Brazil, the Russian Federation, India, China, South Africa (the “BRICS” with average foreign Investment inflow growth rate of 28% per year) and Nigeria (the most populous nation in Africa). The caveat of market potential affords developing regions hope of prosperity for the future. A 2010 research report by the Mckinsey Global Institute suggests that Africa has more high-return investment opportunities than any other developing region. A survey by Ernst & Young 2011 buttresses this fact with their forecast of foreign direct investment inflows for Africa estimated at $150 billion in 2015.
Investment Climate is also significant
Holding market size and potential constant the next factor investors weigh is the investment climate. This can be seen from a review of 30,000 FDI projects in the FDI Markets database for which a location was selected, the dual factors of business regulations and government support was the third most incentivizing. This knowledge is also quite evident in that in the last five years, 85 percent of economies made it easier to do business by reforming their regulations.
The investment climate is especially crucial in determining other factors that might affect foreign investment inflows. This includes incentives such as reduced tax rates. A real eye opener is the understanding that though reduced tax rate incentives can help booster foreign investment inflow, the effect of the latter is eight times as strong with a good investment climate (James 2009). Other beneficial spillovers from foreign investments include the welfare gains through technology transfer to local suppliers that many economies seek.
In conclusion, Market size and market potential are the most likely top two considerations to attract foreign direct investment into a country. The third though following the top two is the investment climate and is pivotal in that it accelerates the effect of almost every other incentivizing ingredient to investment inflow. While public policy might not easily influence the market size and natural resources that could be of investor interest in foreign capital inflows, it can influence human capital, quality of the infrastructure, economic and political stability which all bolster the investment climate within a short period and even at a comparatively low cost to government and a near term resulting benefit from the investment.
Foreign investment cannot be pragmatically accomplished even with the ingredients in place without an adept local facilitator to open up the “doors”, the investment vehicles and to help smoothen the investment process. Without the facilitator, the stigma of “too risky, it is foreign” will stifle the process. Make it easier and also easy by getting the market information necessary and access to launching a successful Foreign Direct Investment in an emerging market. Contact our adept team today.