Impacts Of Political Factors On FDI Ownership Structure Decision

Overview of FDI

Foreign direct investment involves the ownership of assets or having a share of a company or a business in a foreign country.  The ownership gives the foreigner a chance to decide on matters concerning the business since he or she is recruited to the business management. In the current world, FDI is growing tremendously all over the world. The growth is associated with the globalization aspect adopted by the business market. Also, the growth levels are determined by the political factors in different countries. after conducting a research Jensen and Nathan concluded that most of the benefit involved with FDI investment is leapt by the developed countries i.e. 68% of the total profit flowed into the developed countries in 2007. The huge profit is involved with huge FDI investments in the developed countries. This resulted from restrictions made by developing countries to curtail foreign development. As a result, investors made their investments in developed countries where the conditions were favourable and protective. The paper reviews the effects of political factors on FDI. More so the paper focuses most on government trust, democracy and joint venture. It also includes a hypothesis on the tendency of democracy to increase the likelihood of MNC to opt for joint venture and how government trust strengthens the relationship between democracy and joint venture.

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Scholars have focused on global economic growth since it remains a major field with great impact on world development. As a result, different views have been developed on the topic based on various research. Among the key factors cited in the study included the influence of government policies and political factors on the FDI. Studies have shown that supportive government policy and regional integration have encouraged FDI in various countries. China serves as an example of countries that have benefited from FDI due to supportive policies and integration. According to research conducted by Kari, Sergei, and Marc (2016) China was the leading country in East Asia on FDI hosting and also led in the entire world in the year 2013 and 2014. The increase contributed to the country’s revenue by $128 billion. The investors were encouraged by the supportive policies developed by China development and the integration created by the country. The supportive climate also helped China citizens to develop their companies to other countries where favourable growth rate existed. In addition, taxes imposed on foreign investments have been identified as a factor affecting FDI globally. The taxes imposition effect may originate from the mother country or from the foreign country. Hartman argues that high taxes in mother countries do compel investors to invest in foreign countries where the taxes are lower. This is mostly related to the profit-oriented nature of the investors. On the other hand, high taxes in foreign countries discourage foreign investment since it increases the risk of incurring losses in any investment. In developing countries, high taxes are put in place to prevent international trade investments. The restriction is aimed at protecting local industries and an increase in government revenue.

Influence of Political Factors on FDI

Trust of government

Trust is necessary for the transfer of assets belonging to a local company to foreign investors. In many countries trust is a legal process that is developed as a law. China serves as an example to trust development since it has developed a trust law that provides for a trust created during the signing of contracts. The law also stipulates that a trust can only develop after all transfer processes have been executed. The existence of trust gives the foreigner a chance to compel the industry to follow the agreement developed. In addition, the trust developed helps in solving disputes that may arise from the FDI since it will be used to define the agreement made. This helps in identifying the lawbreaker and in perfecting the mistakes that may have occurred in the business. The trust law seeks to protect investors and in return investments increase since their investments are protected by the law.

Democracy is a key factor that determines the level of FDI in a country. Democracy helps develop the virtue of state ownership. This enhances FDI in development sector other than purely in the business sector. Among the fields that attract investment include the energy, infrastructure and the extractive industry. This has enhanced increased FDI investment, especially in developing countries. As a result, developed countries have taken the opportunity to extend their companies to the countries, for example, CNOOC Company of China has invested in petroleum and refining sector in developing countries. Also, Multinational companies do prefer investing in a stable political environment since adequate control is offered and the environment poses a low risk to the investments made.  Among the characters of the stable political environment include; well-defined property rights, respect for rule of law and indiscriminative court system. This freedom encourages investments resulting in high levels of FDI in specific countries.

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A joint venture is an act where companies join together to perform a common task with an aim to increase their profits. Das and Das (2011) research have shown that in the case of joint venture firms realize more profits compared to those earned in monopoly. The increase is developed from the cost-sharing developed by the jointed firms. Also, the local firm may benefit from technology development and better marketing strategies provided by the foreign firm. This saves the local firm the funds that would have been used to develop the quality of its products and services and on increasing its market share. Local firms do prefer for joint venture since they enjoy Cournot profits. Also, the joint venture can occur through acquisition of small local companies by large foreign companies. This enhances FDI especially in low-income countries whose companies do take the joint advantage to increase their sales and to obtain Cournot profits. In China, firms have developed joint venture following the policies developed by China government to encourage foreign investment. This has helped the country realize its economic growth.

Trust and Democracy as Political Factors Affecting FDI

Hypothesis 1: the level of democracy increases the likelihood of MNC to choose Joint venture

Democracy of a country is mostly defined in its rules which are either oppressive or offer freedom to the country participants including foreign investors. In most developed countries they have developed their democracies to protect foreign investments. This has enhanced good business terms between the countries through the development of business partnerships following a good peace correlation. The partnership allows for the merging of companies from various companies to develop the economy of the nation. Also, the partnership is aimed at increasing the profit gained from the businesses. America and Australia serve as an example where the partnership developed enhanced the partnership of American airline and Australia Qantas airline. As a result of the partnership, both companies have realized tremendous growth due to increased profits. Democracy also allows for protection and extension of privileges to investors in a country. Due to the freedom granted international firms develop an interest to invest in the country since conducive investment opportunities are created. On the other hand, local companies take advantage and join with the companies in order to realize technological development and increase innovation in their production. The local companies also act as a landing base for foreign investments since they are not conversant with the new market. In this regard, democracy increases the level of FDI investment in a country.

Hypothesis 2: the trust of the government strengthens the relationship between the level of democracy and joint venture

Trust for government is very necessary for any regime. Trust is usually a key determinant of policy development and implementation. In countries where citizens lack trust in the government, it is hard for the regime to pass a bill that can enhance the country’s economic growth since they lack the support of the citizens. On the other hand, countries with good rules and regulations often win the citizens support and can comfortably develop strategies that enhance business growth. Also, the regime creates rules that favour economic growth. This ensures compliance with the law, lowers the risk exposure to foreign investors, enhances investment and innovation. As a result, foreign investor tends to invest in the given country through mergers as well as single investments. In most cases, mergers are preferred since they reduce the operational cost and increase the profits of both companies. In addition, the willingness to invest in the country is developed from the integration developed from the democratic nature of a country. The development enhances business partnerships and the removal of barriers curtailing foreign investment.

The Role of Joint Venture in FDI

Sample and data collection

In data collection there is the identification of a sample from which information concerning the field is deduced. Similarly, in our research a sample of China local industries was evaluated in 2007. To determine the relevancy of the sample information was obtained from the ORBIS database. The research targeted the company CEOs, general managers and marketing mangers since they had knowledge concerning the nature of competition developed by foreign countries. a questionnaire was developed to aid in collecting information. The questionnaire was designed to evaluate the understanding developed by Chinese firms on the advantages and performances of both local and foreign firms. The questionnaire was translated to Chinese to enhance understanding.  The questions aske answered questions concerning advantages (independent variables), disadvantages (dependent variables) and their effects to industrial performance. The paper also directed for self-evaluation on a scale of 1-5 in relation to the advantages and disadvantages cited. In statistical analysis the average of the various scores was developed to determine common effect. In the study 935 questionnaires were delivered to the respondents where 185 were found eligible for screening. According to the result it was identified that developed countries offered the most competition to the local industries with 70.1% followed by firms from recently industrialized countries with 25.6% while developing countries contributed 4.3%. 

The development of the variables was based on the research conducted to evaluate the performance of local firms in various fields on a scale of five. Among the fields studied include; profitability market share, sales growth, competitive position and product and services delivery. The main challenges facing the local companies was incompetence in business accounting. As a result, the companies are unable to categorize themselves with respect to foreign investments that are highly competitive in the accounting field. The problem is blamed on lack of skilled labor in accounting since most Chinese children and young people are focused on art other than sciences and business courses.

The variables analyze the advantages that are posed by both local firm and foreign firms based on a series of study. The main advantage for businesses in China both foreign and local is guanxi development. Guanxi was developed to enhance joint venture in the market. The strategy has helped develop good relationship with other countries encouraging FDI in china. Through the joint venture companies have revolutionized their production technology and market share since they have developed to foreign countries as well.

In the study control variables were developed to help distinguish between various companies for example, in order to distinguish between the productive industry and the service industry variables were used i.e. 1 was used to indicate the manufacturing sector while 0 indicated service offering industry. Also, the age of the firm was recorded in of years since establishment. In addition, there was integration of state-owned firms which were code 0 while 1 was coded for others not meeting the requirement.

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