It
has been suggested that the worlds advanced economics and those developing
nations, which have been very successful in attracting high inflow of FDI.
Possess some fundamental enabling conditions. These conditions are as follows:
1. ECONOMIC
OPENNESS: Whilst access to specific
markets-judged by their factors are predictably much relevant in the
export-oriented foreign firms. A range of surveys suggest a wide spread
perception that open economics encourage more foreign investment. One indicator
of openness is the relative size of the export sector. Singh and Jun’s 1995
study indicates export, particularly manufacturing exports, are significant
determinants of FDI flows and that tests show there is strong evidence that
exports precedes FDI flows. China, in particular has attracted- much foreign
investment into the export sector. In Bangladesh, on the other hand,
foreign investors have been attracted to the manufacturing sector by its lack
of quota for textiles and clothing exports to European union and US markets.
Garment exports rose from virtually nil in the 1970s to over one-half of its
export earnings by early 1990s. In contract, most low income economies have
remain more inward-oriented.
2. SIZE
OF THE MARKET: Econometric studies
comparing a cross section of countries indicate a well –established correlation
between FDI and size of the market (proxied by the size of G.D.P) as well some
of its characteristics (for example average income level and growth rates).
Some studies found GDP growth rate to be sufficient explanatory variable, while
GDP was not, probably indicating that there were current size of the national
income is very small, and increment may have less relevant to FDI decision down
growth rate performance as an indicator of market potentials. There is a little
doubt that the size of China’s market explains in large part in massive FDI
flows it attracted since the early 1980s. Within China, FDI has been
concentrated (over 90 0/0) in the costal areas. Provincial GNP, reflecting
economic development and potential demand has also been indicated as the major
determinant of this concentration. (Boardman and Sun, 1997) is reported to be
holding back potential foreign investment, especially in manufacturing, it
lessees the attractiveness of investing in productive sector.
3. POLITICAL
RISK: The ranking of political risk
among determinants remains somewhat unclear. Where the host country possess
abundant natural resources, from further incentives maybe required as it is
seen in political unstable countries such as Nigeria and Angola, where high
returns in the extractive industry seem to compensate for political instability.
In Nigeria, so long as the foreign companies is confident of being able to
operate profitability without undue risk to its capital and personnel, it will
continue to invest. Large mining companies for example overcome most of the
political risk by investing in their own infrastructure maintenance and their
own infrastructure maintenance and their own security forces. Moreover, these
companies are limited neither by small local markets nor by exchange rate risk
since they tend to sell almost exclusively on the international market at
currency prices.