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
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.
Investor Perspectives On Emerging Market Investments: Stage 1 Report