An important part of the economic reform of any country is the promotion of foreign direct investment (FDI) inflow. Host countries who want to more inflow of cash should have proper "country" marketing strategy in order to attract foreign investors. Moreover, proper policies for FDI should be in place within the country to enable the latter to have maximum benefit from the FDI.
Introduction
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. Traditionally, Foreign Direct Investment was defined as a foreign company making a physical investment into building a factory in another country (Imad A. Moosa, 2002). In recent years with rapid economic growth and evolution in global investment, the definition has been enlarged to include the acquisition of a lasting management interest in a foreign company. It embodies direct acquisition of a foreign firm, construction of a facility, participating in a joint venture with a foreign company, incorporating a wholly owned subsidiary or company in a foreign country or through a merger.
FDI has contributed largely to the internationalization of business in the recent years. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.
One of the benefits of FDI is that it has played a great role in the economic development of the particular host country where it is made (Walden and Rosenfeld, 1990; Chowdhury and Islam, 1993; Rodan, 1997; Borensztein et al. 1998; Gries, 2002). This especially applies to developing countries. FDI has also allowed the transfer of technologies. This is done by means of provisions of capital inputs by investee firm. Host countries thus get the opportunity to learn about foreign technologies (Urata, 1999; Urata, S. and H.Kawai, 2000).
Additionally, FDI has promoted competition within the market of the host country. Employees in the host country can also get training from the investing firm. This contributes to the development of human capital resources and creations of new jobs. Profits obtained by FDI are subjected to corporate taxation. It thus increases the revenues of the host country. In the long run, FDI also contributes to the infrastructural development of a country. FDI benefits not only host countries but also countries making the investment. These companies have the opportunity to explore new markets.
On the other hand FDI is seen as a process to undermine development (Razin et al., 1999). Razin et al. claim that FDI can have adverse effects on employment, income distribution, and national sovereignty and autonomy. FDI can also have negative trade balance if inputs need to be imported. Foreign reserves can also reduce when profits are repatriated.
Therefore the need of designing proper strategies and policies by the host country is essential so that the host country and its local citizens benefits from the FDI. Initially, the host country should have a marketing strategy. A proper promotion of the host country is an essential tool for attracting investors (Wells et a.l., 1900). Then the host country will be able to segment and target appropriate investors.
Furthermore, the host country should have simplified all the process in the incorporation and setting up of the company. I am going to present the strategies and the policies that should be adapted by the host country in order to gain maximum from a Foreign Direct Investment.
Marketing Strategy of the Host Country
An encouraging investment opportunity in host countries to potential foreign investors is part of the general growing field of marketing of places. The ability of host country to communicate effectively and efficiently their distinctive advantages and to deliver the expected value to investors is a critical requirement for success. Therefore, the host country has to adopt a strategic marketing approach for FDI, which involves the understanding of the role of FDI in the development program of the country, the identification and building of locational advantages, and the formulation and implementation of adequate marketing strategies.
The Host Country at a Glance
A full plan consisting of the following issues should be presented to the investors:
Physical aspects of the country
Geography and Demography
Location
Capital
Population
Workforce
Main Language
Climate
Time Zone
Land & Marine Zone
Whole country size
Agricultural land
Forests & grazing lands
Reservoirs, swamps and rocky lands
Roads & footpaths
Built-up areas
Exclusive Marine Economic Zone (if any)
Economical aspects of the country
Currency
GDP [1] (Gross Domestic Product)
GDP breakdown - Breakdown of the GDP in all the sectors which brings revenue (Agriculture, Industry, Construction, Real Estate, Renting and Business Activities, Hotels, Financial intermediation, etc.)
Inflation - The rise in the general level of prices of goods and services in an economy over a period of time (over 1 year)
Government and Legal System
Political status
Head of Country
Head of Government
Constitution
Legal system
Means of Communications
Fixed telephone lines
Mobile telephone subscribers
Internet subscribers
Television operators
Radio Operators
Local Press (Dailies/Weeklies)
Healthcare facilities
Hospitals & health centres
Private clinics
Medical practitioners
Dentists
Pharmacists
Business Costs
Indicative labour costs
Accountants, lawyers, engineers and other professionals
Computer operators
Secretary
Administrative officer
Receptionist
Clerical staff
Maid
Driver
Gardener
Telephone, Cellular and Internet Costs
Installation charges
Deposit per exchange line
Rental charges
Call charges (IDD Rate)
Call charge (local)
Call charge (international)
ADSL Business Lines
Transport Costs
Taxi fare
Bus fare
Two way ticket Fare
Rent
Office space
Apartment
Detached HouseCompelling Reasons to Invest in the Host Country
The host country has to find some compelling reasons to lure the investors. Some reasons to tempt investors are mentioned below:
Social stability
Political stability
Economical factors
Educational Level of human resources
Skilled and qualified professionals workforce
Business environment
Ease to access to international markets
Reliability of Existing Infrastructure
Legal Framework
Ease to dealing with International business
Safety place to work and live
Segmentation of the Industry by clusters
The host country can segment its existing industry in clusters. An industry cluster is a theoretical network concentration of interconnected businesses, buyers, suppliers, and institutions in a particular field. The host country can cluster its industry as follows:
Cluster 1: International Business Services
Cluster 2: Manufacturing, Agri-Business, Energy and Environment
Cluster 3: Hospitality and Property Development
Cluster 4: Sciences and Healthcare Industry
Cluster 5: Emerging Sectors
The main idea behind clustering is to enable to investor to choose in which industry he wants to invest.
Targeting Investors
Targeting is the selection of segments of investors on which the host country wants to focus its activities. It needs knowledge on the existing segments, the characteristics and needs of investors. Basically five types of segments are listed by a survey of the practices of FDI (UNCTADs, 2000):
Segmentation by region of origin of the investor: European, American, Asian, African, etc.
Segmentation by industry: Basic manufactures (textile and clothing), advanced manufactures (electronics, biotechnology, and aerospace), infrastructure (transport and telecommunication), agro-food industry, services (call centers and electronic commerce), strategic investment (research and development, regional directions, and distribution centers) and natural resources.
Segmentation by specific investments: High technology, green technologies, intensive labor investments, training investments, creation of logistic chains, exploitation of natural resources, health services and alternative energy.
Segmentation by type of investment: Joint-ventures/strategic alliances, Greenfield investments, location investments or purchases of existing installations, mergers and acquisitions, and privatization.
Segmentation by investment amounts: Investments less than $10 million, investments between $10 million and $50 million, etc.
The raison d'être for the segmentation of investors is that investors of the same segment react identically, while those belonging to different segments react differently. The host country has first to analyse and identify the investors who may be interested in its locational advantages and policy designs.
Policies by Host Country
Till now we have seen the way to market the host country in front of the investor and the method we segment investor so that we can target them easily. Another essential point which an investor considers is the ease he can setup his company and start operating. Furthermore, the investor has to have working permit and residential permit to be able to work in the host country. Below is the list of policies that the host country should adopt.
Incorporation of the Company
The incorporation of a company normally includes the Business Name verification and issue the Certificate of Incorporation.
The host country should have a very simple process for this activity:
Figure 1: Company Incorporation Process
Land Use and Building Permit
Depending on the host country, a Land Use and Building Permit is an authorisation certificate to give permission to the investor to carry out a proposed development/building. This process should also be as simple as the Incorporation of the Company.
Figure 2: Land Use and Building Permit Process
Occupational Permit
Traditionally a foreigner has to have a working permit and a residential permit. But to make the FDI become more straightforward, the host country can issue an Occupational Permit. So, the investor will have to apply for an Occupational permit instead of a working permit and a residential permit. The process should be very simple as defined in Figure 3.
Figure 3: Occupational Permit Process
Labour Market
The host country can formulate policies to help the investor company to recruit human resources. A database of skilled professional can be provided to the company so that they can choose the best local human resources to their company. It is also to the benefit of the host country if the investor company recruits more local employees as this will reduce unemployment in the host country.
Employment of non-citizens
Non-citizen personnel are required to have a work permit and a residence permit. The host country has to ensure that employers are active in training and localization of local staff and recognises that it will usually be in the natural interests of investor company to localize quickly in order to reduce costs.
The host country Government has to take flexible approaches to recognise the need for the investor to employ group staff in key positions and will not apply a labour market test to positions that are justified on such grounds.
Taxation
The government of the host country will depend on taxes paid by the investor company to generate revenues. So a proper taxation system should be put in place so that both the investor company and the host country benefit from it.
For instance the revival of VAT rebates in support of import or export-oriented products, which will benefit FDI. Low corporate tax, Exemption from customs duty on equipment and free repatriation of profits, dividends and capital have to considered by both the host country and the investor company.
Competition Policy
The host country should have a competition policy in order to protect the investor company from potential competitors. The investor company will have to be sure that after investing large amount of money; the host country allows another company to do the same business as him.
Protection of intellectual property
The host country has to make provision for a copyright law in the process of finalizing a best practice law on industrial property e.g. patents, trademarks and industrial designs. The intellectual property regime should be consistent with WTO [2] requirements.
Corporate governance
The positive effect of corporate governance is to strengthen the economy. Hence good corporate governance is a tool for socio-economic development. The host country should employ best practices regime. The investor company should be obliged to adopt international accounting standards.
Counclison
FDI allows more cash flow in the host country and this obviously stimulates the economic activity of the host country. Thus the international community will take notice and the Government of the host country will be taken seriously in the international summits because the number of stakeholders in the host country has increased. Furthermore, the unemployment rate of the host country will also go down.
From the investor point of view, a foreign direct investment may be an attractive and viable option. The main important issue to do a FDI is to save cost by finding cheap labor. But before any decision on investing, the investor will look at a combination of a number of key factors including: Political, Economical, Social, Technological and Legal aspects of the host country before doing the investment. FDI surely affects the host country welfare significantly. Hence, while designing FDI polices, the governments need to be careful about the reason for FDI.
I have discussed about nine policies that the host country Government can use while planning for the FDI policy. However it is not all about formulating policies, the host country should have a proper way to market itself so as to attract investors. An investor segmentation plan is very important so that the host country can group the investors and make proposal to them. The host country can also segment its industries to let the investor choose in which sector he wants to invest.
