Foreign direct investment (FDI) is one of the instruments that multinational enterprises (MNEs) can use to enter new markets, produce more effectively, source key raw materials or seek out strategic partnerships. The relation between risk, uncertainty and the location of FDI has been an intense topic of debate.
Our literature review found that most research on risk and FDI concentrated on the relationship between external country risks and the levels or direction of FDI; the MNE was considered a black box and external forces drove FDI location decisions. Gradually, more emphasis was placed on the role of sectors and business activities of MNEs and their impact on the location of FDI. It is fair to say that a firm-level perspective has gained popularity in the international business literature.
MNE and governments communicate, yet seem to use a different vocabulary. Institutions such as industry associations have can play the role of honest broker and synchronize expectations on both sides. These institutions are also an important source for primary data on any operational restrictions MNEs should know prior to an FDI decision.
In terms of risk ratings, the preferred sources of governments and of MNEs seem to differ: MNEs are primarily interested in risk monitors that address operational cost factors in combination with relevant location factors (i.e. internal to the firm). They will invest in databases providing very detailed firm-level information. Country-level risk reports are considered interesting in the exploratory phase, but later are seen as ineffective sources, since they lack the necessary in-depth analysis for building a strong business case. An integrated framework is provided here based on the literature review and the risk methodologies.
Our study aims to make a significant contribution to understanding the risk factors that MNEs consider, and how they use risk information in FDI location decisions. The focus throughout has been at the level of the firm. Based on our review of existing research into FDI and risk, in particular at firm level, the next stages of this study will focus on: clarifying differences in approaches to risk between different categories of MNEs, while noting differences attributable to other factors, such as size of firm, and source country; and using our sample of MNEs to explore details of their processes for assessing potential investments in emerging markets, risk factors that are considered at each stage of the decision process, and how risk is priced into their business case models.
GBRW Ltd; Investment Consulting Associates (ICA). Investor Perspectives On Emerging Market Investments: Stage 1 Report. DFID, London, UK (2013) 84 pp.