Foreign Direct Investment Determinants in the South, East and South-East Asia Mohammed Omar Sheriff Supervisor: Micheal Cortez

The thesis is submitted to the Graduate School of Management for the fulfilment of the requirements for the degree of Masters in Business Administration in Finance

Graduate School Of Management, Ritsumeikan Asia Pacific University, Beppu, Japan

Acknowledgement

Many people assisted me to accomplish this task. First and foremost I would like to express my gratitude to my supervisot Dr. Micheal Cortez for his continuous support, guidance and constructive comments. It was a pleasure to do this research under his supervision.

I would also like to express my heartfelt thanks to the who provided me important information about my study

Finally I would like to thank for their support and encouragement.

Table of contents

List of acronyms OLS: Ordinary Least Squares regression technique SAARC: South Asian Association for Regional Cooperation ASEAN: Association of SouthEast Asian Nations FDI: Foreign Direct Investment M&A : Mergers and Acquistions

ABSTRACT Purpose: This paper provides a research proposal investigating the question of determinants of FDI in the ASEAN and the SAARC. significant relationships and differentials between potential Macroeconomic, country specific and Transnational company specific determinants of Foreign Direct Investment in the ASEAN (Indonesia, Malaysia, the Philippines, Singapore, Vietnam and Thailand) and select SAARC countries (Sri Lanka and India) using data sets from 1990-2011 are identified. The paper ascertained all objectives of the study and conducted a literature review where 32 variables and 32 hypotheses were identified to test the research question. The proposal was critically centred on research design and research method but also the research conducted time frames, weaknesses and bibliographic references which are to be proposed for future research in to the authors research topic. Finding of the study are to be conducted as per the time frame. Furthermore the Author provides definitions of all variables in the annexure 2.

Or Abstract This study aims at analyzing the determinants of foreign direct investment inflows for a group of European regions. The originality of this approach lies in the use of disaggregated regional data. First, we develop a qualitative description of our database and discuss the importance of the macroeconomic determinants in attracting FDI. Then, we provide an econometric exercise to identify the potential determinants of FDI inflows. In spite of choosing regions presenting economic similarities, we show that regional FDI inflows rely on a combination of factors that differs from one region to another.

Design/Methodology/Approach A mixed method approach to research is conducted gathering secondary data from the World Bank Statistics, International Financial Statistics (IFS) of the International Monetary Fund (IMF) and the Global Market Information Database (GMID). Global Market Information Database (GMID), the database of Department of Statistics for each country (Malaysia, Indonesia, Thailand, Singapore and Philippines) and the Bloomberg database. Central bank annual reports of all countries. Furthermore primary data analysis will be conducted post testing where interviews with specialists in the field of Finance and economics will help make meaning to the results. The paper proposes to use a multiple regression analysis method where robustness of results and hypothesis are proven/disproven using ANOVA, Correlations and Model significance. This data will be tested using various statistical packages such as SPPS and visually will be shown to the reader via MS project. Then based on the variables ascertained from literature the hypothesis will be proven or disproven. Furthermore to stimulate the interest of the reader the data will be displayed as much as possible in the research report stage using graphical software such as MS project, Microsoft visio, Mind Mapping software and Matlab. Findings:

The following paper is a research proposal and no findings have been ascertained. Research limitations and implications: Certain variables lacked time series data and may prove to have some level of significance on FDI. Certain countries did not have the required data to test Hypothesis. Practical Implications: The finding will be a guideline so that policy planners in emerging markets can use prior to making any type of investment decision related to the markets concerned. Also the paper after the finding will have section on the lessons learnt for each country or region in terms of FDI and it will be catalyst paper for future research and academia. Originality/value The paper extends and expands the knowledge of international capital flows and provides a more nuanced understanding of the importance of internal market dynamism in attracting FDI in the ASEAN and SAARC. Paper type: Research Chapter 1: Introduction 1.0 Background One of the remarkable features of globalization in the 1990s was the flow of private capital in the form of foreign direct investment. FDI is an important source of development financing, and contributes to productivity gains by providing new investment, better technology, management expertise and export markets (Sahoor, 2004). Domestic investment still accounts for the majority of the total investment in developing economies. Foreign investment can only complement this. However, each form of foreign investment plays a distinct and important role in promoting growth and sustainable development, boosting countries competitiveness, generating employment, and reducing social and income disparities. Non-FDI flows may work either in association with FDI, or separately from it. As no single type of flow alone can meet investment needs, it is vital to leverage their combinations to maximize their development impact (UNCTRAD, 2011) Foreign investors are also expected to transfer intangible assets such as technology and managerial skills to the host country and provide a source of new technologies, processors, products, organizational technologies and management skills as a strong impetus to economic development (Dr Catherine S.F. et .al, 2011) As per the Ernst & young report six factors will shape our world including, Emerging markets increase their global power, Cleantech becomes a competitive advantage, Global banking seeks recovery through transformation, Governments enhance ties with the private sector, Rapid technology innovation creates a smart, mobile world and Demographic shifts transform the global workforce. If we Identify the key emerging markets globally as per a study conducted by Ernst and Young suggests "Estimates show that 70% of world growth over the next few years will come from emerging markets, with China and India accounting for 40% of that growth. Adjusted for variations in purchasing power parity, the ascent of emerging markets is even more impressive: the International Monetary Fund (IMF) forecasts that the total GDP of emerging markets could overtake that of the developed economies as early as 2014" also other emerging markets were identified such as . "The emerging markets already attract almost 50% of foreign direct investment (FDI) global inflows and account for 25% of FDI outflows. In fact the largest

The brightest spots for FDI continue to be Africa, the Middle East, and Brazil, Russia, India and China (the BRICs), with Asian markets(Thailand, Indonesia, Malaysia, the Philippines, Singapore and Thailand) of particular interest at the moment. By 2020, the BRICs are expected to account for nearly 50% of all global GDP growth (Ernst & Young,2011). In fact from the top 20 FDI inflow host countries as depicted in figure 3 China, Hong Kong, Singapore, India and Indonesia are among the top recipients in the world. In fact as per the UNCTADs World Investment Prospectus Survey(WIPS) confirms that developing and transition economies are becoming important investors, and this trend Is likely to continue in the near future (UNCTAD, 2011) Therefore Securing a strong base in these countries will be critical for investors seeking growth beyond them" (Ernst & Young, 2011). As depicted below in figure 2 shows the FDI inflows both global and group of economies, and it is estimated that in 2014 share of GDP growth in developing countries will surpass that of developed cuntries as shows bellow in figure 2, furthermore as Krugell, 2009 Suggets The spatial distribution of FDI depends firstly on interregional differences in factor and resource endowments. When foreign firms can choose between different regions, cities or towns, they locate in favourably endowed places. Investors also prefer to locate where other firms cluster together. Agglomeration creates a large local market and ensures diverse intermediate inputs and a thick labour market. This generates positive externalities which reduce costs and increase competitiveness and hence attracts investors. .

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Figure 1 : Top 20, Host recipients of FDI (Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/fdistatistics). a Ranked on the basis of the magnitude of 2010 FDI inflows. Note: The number in bracket after the name of the country refers to the ranking in 2009. British Virgin Islands, which ranked 12th in 2010, is excluded from the list)

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Figure 2: World GDP forecast (World Economic Outlook, Business Source Monitor, 2010) To secure strong base as advised by Ernst & Young for investors require an understanding on the history, policy, trends, important lessons learnt from a global context with an emphasis in the South, East and South East Asian regions to understand its investment environment prior to understanding FDI determinants, which will be covered in section 1 of the report. Then the essay will conduct a literature review looking at various benchmark indices that measure FDI performance together with other literature which will help in understanding the location or regional FDI determinant factors at a country specific and regional level. Then the determinants will be tested by model creation for its significance by using data from a variety of reputed sources and testing panel data using OLS regression and a unit root equation using panel data from 1xxx-2010. Then the findings will be done both for a country specific angle and at a regional level. Then a TOPSIS analysis will be conducted to see if FDI promotes competitiveness. Then the findings will be interpreted and finally the dissertation will be concluded with some considerations for investors/Policy Makers. 1.0.1 History, policy, Trends and Lessons learnt through Global FDI and FDI in the ASEAN and SAARC 1.0.1.1 Global trends and directions in FDI

As stimulus packages and other public fiscal policies fade, sustained economic development fade, sustained economic recovery becomes more dependent on private investment, at present Trans National Corporations (TNC) have taken a customary role as private investors (UNCTRAD, 2011). Global FDI rose to $ 1.24 Billion in 2010 from $1.185 Billion, but were 15% below pre-crisis averages. This in contrast global industrial output and trade, which were back to pre-crisis levels. UNCTAD estimates that Global FDI, will recover to pre-crisis level in 2011, increasingly to $1.4 Trillion-1.6 Trillion, approaching its 2007 peak(as per UNCTAD econometric model), this is baring any global economic shocks, that may arise due to a number of risk factors (UNCTRAD, 2011) risk factors especially for TNCs have become critical as unpredictability of global economic governance, possible widespread sovereign debt crisis, fiscal & financial sector imbalances, rising inflation, apparent signs of overheating certain economies; might derail global FDI. Therefore investors have changed there preferences as the global FDI trends depict below:

Developing (including ASEAN and SAARC) and transition economies contributed more than half(52%) of Global FDI flows while its outward flows were also the highest, while intraregional flows of FDI between developing countries plus TNC were also high. Figure 3 depicts the transition of FDI flows over 3 decades from developed to developing and transition economies (UNCTRAD, 2011). TNC are actively in those countries due to its cost effectiveness and to remain competitive in the global production networks and also since the consumption patterns in the world are shifting (UNCTAD, 2011).

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figure 3: World FDI inflows, global and by group of economies(Source: UNCTAD, based on annex table I.1 and the FDI/TNC database (www.unctad.org/fdistatistics)

In the South, East and South East Asia inflows rose in the region by 24% in 2010, reaching $300 Bn, as a result of economic growth, good macro-economic fundamentals and higher commodity prices spurred FDI, figure 4 depicts FDI inflows to the developing economies in the region and it is clear that most FDI flows are flowing to South, East and South East Asia.

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Figure 4: FDi inflows to developing and transition economies, by region, average of 2005-2007 and 2008 to 2010 (Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).

International production expansion in foreign sales, assets and employment TNCs account for 1/10 of global GDP and 1/3 of world exports. TNC contribute largely as global presence sustains price advantage, cost effectiveness and make them remain competitive with global production networks. Furthermore state owned TNCs account(650 in number) with its affiliate network (8500 in number), their outward investments account for 11% of global FDI flows. Therefore the governance of state owned TNCs have raised concerns of late, the level playing field, national security, regulatory implications for international expansion becomes important for these companies. Understanding their incentives for capital flows is important to understand FDI flows. o In 2010, 70% projects(Cross border merger and acquisition (M&A) and Greenfield FDI projects) from these were invested in these regions. Mainly FDIs were inherited by BRIC countries in which China and India have gained ground In recent years following rapid economic development in home countries, abundant financial resources are strong motivations to acquire resources and strategic assets abroad. Infact Chinese and Indian companies saw large capital investment beyond their own regions. In fact in 2010, there were seven mega deals(12% of the total inward FDI came from these deals as shown below in table 1 in appendix 2 of this report were done by Chinese companies mainly to the Latin American Region. o TNC ROI on FDI is approximately 7.3%, where leverage has shown decline, as proxy by outward FDI stock over foreign assets. Sales over foreign affiliates increased by 9.1%, reflecting strong revenue in developing and transition economies, employment continued to expand, as efficiency seeking investments increased. A new recent development is that TNCs account for nearly 80% of global FDI and TNCs are in the developing world account for 70% of global FDI flows.

Strong profits of TNCs in emerging markets were incentives for further investments. Infact 100 of the largest TNC companies of Anglo-American origins gained 93% of their profits from these economies, this includes high EBIT positions for Coca-Cola, Toyota Motor, Unilever, SABMiller, Nestle, Barrick gold, Holcim, British American Tobacco, Nissan Motor, BASF, Honda Motor and Bayer. Even state owned TNCs became important to global FDI contributing largely to global FDI inflows and outflows, the 15 largest state owned TNCs account for large chunk of global FDI. Geographically 56% of State owned TNCs are located in China (50), Malaysia (50) and India (20) are among some top participants. Among them include Volkvagen group, GDF suez, General Motors, CITI group, Tata steel to just name a few. If we consider FDI by sector wise classification, FDI towards manufacturing sector increased while services and primary sector saw declines. Within manufacturing business cycle sensitive industries such as metal and metal products, electronics and wood products saw declines while chemicals, food, beverages & tobacco, textile, automobiles showed rapid increases in emerging economies. In fact manufacturing related FDI rose to 23% in 2009 to $554 Billion, this as seen made TNCs more receptive to restructuring in to more profitable and productive units FDI in the primary sector decreased in 2010 despite growing demand for raw materials and energy resources, and high commodity prices. FDI projects (including cross-border M&A and Greenfield investments) amounted to $254 billion in 2010, raising the share of the primary sector to 22 per cent, up from 14 per cent in the pre-crisis period(UNCTAD, 2011). Natural resource-based companies with sound financial positions, mainly from developing and transition economies, made some large acquisitions in the primary sector. Examples include the purchase of Repsol (Brazil) by Chinas Sinopec Group for $7 billion, and the purchase of the Carabobo block in the Bolivarian Republic of Venezuela by a group of investors from India for $4.8 billion. The value of FDI projects in the services sector continued to decline sharply in 2010, with respect to both 2009 and the pre-crisis level of activity. All main service industries (business services, finance, transport and communications and utilities) fell, although at different speeds(UNCTAD, 2011). Business services declined by 8 per cent compared to the precrisis level, as TNCs are outsourcing a growing share of their business support functions to external providers, seeking to cut internal costs by externalizing non-core business activities Transportation and telecommunication services suffered equally in 2010 as the industrys restructuring is more or less completed after the round of large M&A deals before the crisis particularly in developed countries (UNCTAD, 2011). Figure 5 depicts the breakdown of Sectoral distribution of FDI projects during the 20092010 period.

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Figure 5: Sectoral Distribution of FDI projects (Source: UNCTAD. a Comprises cross-border M&As and Greenfield investments. The latter refers to the estimated amounts of capital investment.)o

In terms of mode of entry Greenfield investment has become much larger that cross-border M& A, however TNCs. Recovery of FDI flows in 2011 reliant on the rise of both Greenfield and M&A. as depicted in figure 6 M&A and Greenfield projects have increased by 36% to $ 339 Bn as a result of higher stock prices increased the purchasing power of investors to invest abroad, the higher the values of corporate assets in 2010 raised the leverage of investors to undertake M&A by using shares in part payment. At the same time the ongoing corporate and industrial restructuring is creating new oppertunies for for cash rich TNCs including those from emerging markets. However the total project value of Greenfield Investments over M&A is not surprising as varying conditionality has tilted the favor towards Greenfield projects

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Figure 6: Greenfield Vs Mergers and Acquisitions (Source: UNCTAD, based on UNCTAD crossborder M&A database and information from the Financial Times Ltd, FDI Markets (www.fDimarkets.com). Note: Data for value of Greenfield FDI projects refer to estimated amounts of capital investment.o

If we consider FDI by component; reinvested earnings grew fast, while equity capital investments and intra-company loans declined, cash reserves of foreign affiliates grew substantially. For example the profits to sales ratio of the United States S&P 500 firms, Japanese Firms, Korean firms and developing country firms rose in 2010. However the rise in reinvested earning brought a decline in equity capital, intra-company loans declined as loans were paid back and capital was held for future investments. Given the fact the foreign affiliates hold large retained earnings on their balance sheet, repatriation to their parents become important role in determining the investment flows. Here government policymakers need to take steps. FDI flows in developing economies and transition economies should be treated with caution due to containing some short-term volatile flows, hot money, stabilization of capital flows represents an important challenge to many developing countries. As private foreign capital flows-portfolio investment, bank loans and FDI all contribute to development. But due to the nature of the crisis, official development assistance (ODA) is less prone to fluctuations and is as important to developing countries. But there effectiveness has been questioned on actual development. Private equity sponsored FDI has regained momentum, although it fell of its pre-crisis level. It is directed more towards developing and transition economies as secondary buyouts and smaller acquisitions.

Sovereign Wealth Funds FDI declined substantially because of severely reduced investment from the Gulf region. However its long term potential as a source of investment remains. Poorest countries saw declines in FDI flows such as landlocked countries, small island developing countries or certain regions in south Asia.

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Figure 5: FDI inflows by component (Source: UNCTAD, based on data from FDI/TNC database (www/unctad.org/fdistatistics). a Based on 106 countries that account for 85 per cent of total FDI inflows during the period 20072010. 1.0.1.2 Policy reform in terms of FDI and Macro-economic reform in East, South, South-East Asia The Peoples Republic of China (PRC) and East/Southeast Asian countries have made rapid enhancement in their macroeconomic situations, investment, exports and employment over the decade of 1980s and 1990s through the use of large amounts of Foreign Direct Investment. Similarly private capital, which was long seen with concern and suspicion, is now regarded as source of investment and economic growth in South Asia. Like other developing countries, South Asian economies focus their investment incentives exclusively on foreign firms. Over the last twenty years, market reforms, trade liberalization and intense competition for FDI have led to reduced restrictions on foreign investment and expanded the scope for FDI in most sectors. However, the South Asian countries have been largely unsuccessful in attracting FDI. These countries, jointly and also individually, receive low FDI compared to PRC, Brazil, Singapore and other East/Southeast Asian countries. South Asia received the smallest FDI flows among developing Asian countries, accounting for around 3 percent of the total FDI inflows to developing countries in the region. All the countries in the South Asian region except India have

received very little attention and negligible FDI inflows. South Asian policymakers realize that credible efforts for economic reforms in South Asia must involve an upgrading of technology, scale of production and linkages to an increasingly integrated globalise production system chiefly through the participation of Multi National Corporations (MNCs). South Asian countries have many advantages to offer to potential investors, including high and steady economic growth, single-digit inflation, vast domestic markets, a growing number of skilled personnel, an increasing entrepreneurial class and constantly improving financial systems, including expanding capital markets. On top of these advantages, South Asian countries have been designing policies and giving incentives to foreign direct investment in several ways (Sahoor, 2006) Till the late 1960s, most of the developing economies, including those of East Asia, adopted closed macroeconomic policies with import substitution industrialization policies, under which self-reliance and indigenous efforts were encouraged. At the same time, a dominant role was assigned to the state in the development process. These import substitution strategies, coupled with the large public sectors, resulted in rent seeking activities and uncompetitive production processes (Bhagawati and Srinivasan, 1975). Therefore, export-led industrialization and liberalization was advocated to make the production process efficient and competitive. Following the export-oriented growth argument (Bhagawati and Srinivasan, 1975 and Kruger, 1975), and the success of East Asian countries with higher exports and economic growth during the period from the early seventies to mid nineties, most of the South Asian countries started opening up their economies from the early eighties. The South Asian economies are currently enjoying the benefits of economic reforms, particularly reforms related to trade and investment. These countries undertook reform processes and opened up their economies after having experienced sluggish growth rates throughout the seventies and eighties (Sahoor, 2006 ). Please see appendix 1 for the types of reforms undertaken by SAARC countries. 1.0.1.3 Current trends in the ASEAN and SAARC * to understand the Policy, policy framework or related public institutions for FDI then foreign policy in terms of its automatic routes, government approval, FDI in attractive zones, repatriation of profit, labour regulations applicable to the South, East and South-East Asian Countries have been shown in appendix 1 of this report.

Figure 6: Various Tables and Graphs (Source UNCTAD, 2011)

In 2010, FDI inflows to South, East and South- East Asia increased by 24 per cent, to $300 billion (Figure A of Figure 6). inflows to the ASEAN countries more than doubled; those to China and Hong Kong (China) enjoyed double-digit growth; while those to India, the Republic of Korea and Taiwan Province of China showed decline (table B of figure 6). FDI to ASEAN increased to $79 billion in 2010 breaking 2007s previous record of $76 billion recorded at pre-crisis level times. The boost was driven by large magnitude of FDI inflows to Malaysia (537 per cent), Indonesia (173 per cent) and Singapore (153 per cent) (table A ; annex table I.1). Positive policy at country level fuelled good performance within region, and seem likely to continue to do so: in 2010, Cambodia, Indonesia and the Philippines liberalized more industries; Indonesia improved its FDIrelated administrative procedures; and the Philippines strengthened the supportive services for public private partnerships.

Singapore the global financial centre and a regional hub of TNC headquarters, has benefited greatly from increasing investment in developing Asia, this accounted for half of ASEANs FDI, recorded record FDI levels of $39 billion in 2010. Due to rising production costs in China, some ASEAN countries, such as Indonesia and Viet Nam, have gained ground as low-cost production locations, especially for low end manufacturing. FDI to East Asia rose to $188 billion, thanks to growing inflows to Hong Kong (China) (32 per cent) and China (11 per cent) (table A). Benefiting greatly from its close economic relationship with mainland China, Hong Kong (China) quickly recovered from the shock of the global financial crisis, and FDI inflows recorded a historic high of $69 billion in 2010. However, inflows to the other two newly industrializing economies, namely the Republic of Korea and Taiwan Province of China, declined by 8 per cent and 11 per cent, respectively. China continues to experience rising wages and production costs, so the widespread offshoring of low-cost manufacturing to that country has been slowing down and divestments are occurring from the coastal areas. Meanwhile China has seen structural transformation shifting FDI inflows towards high technology sectors and services. For instance, FDI in real estate alone accounted for more than 20 per cent of total inflows to China in 2010, and the share was almost 50 per cent in early 2011. Mirroring similar arrangements in some developed countries, China established a joint ministerial committee in 2011 to review the national security implications of certain foreign acquisitions. FDI to South Asia declined to $32 billion, reflecting a 31 per cent slide in inflows to India and a 14 percent drop in Pakistan, the two largest recipients of FDI in the subcontinent. In India, the setback in attracting FDI was partly due to macroeconomic concerns, such as a high current account deficit and inflation, as well as to delays in the approval of large FDI projects;10 these factors are hindering the Indian Governments efforts to boost investment, including the planned $1.5 trillion investment in infrastructure between 2007 and 2017. In contrast, inflows to Bangladesh increased by nearly 30 percent to $913 million; the country is becoming a major low-cost production location in South Asia. Cross-border M&As in the region declined by about 8 per cent to $32 billion in 2010. M&As in manufacturing rose slightly while they declined by 8 per cent in services. Within manufacturing, the value of deals surged in industries such as chemical products ($6.0 billion), motor vehicles ($4.2 billion) and metal products ($1.6 billion), but dropped in industries such as food and beverages ($2.9 billion) and electronics ($920 million) (table D). Greenfield investment remained stable in 2010, after a significant slowdown due to widespread divestments and project cancellations in 2009 (annex table I.8).

FDI inflows to East Asia should continue to grow in the near future, and those to South Asia are likely to regain momentum. The competitiveness of South- East Asian countries in low-cost production will be strengthened, and further FDI increases can be expected. Prospects for inflows to the LDCs in the region are promising, thanks to intensified SouthSouth economic cooperation, fortified by surging intraregional FDI. Indeed, countries in the region have made significant progress in their regional economic integration efforts (within Greater China, and between China and ASEAN, for example), which will translate into a more favourable investment climate for intraregional FDI flows. To get a closer picture of the emerging trends in terms of its industrial patterns please refer appendix 2 of this report.

(UNCTAD, 2011) 1.2 Problem Statement However despite recent improvements FDI flows have declined in 2012, for the first time Developed nations and nations in transition received more FDI than there Asian counterparts during the recent period which has primarily been as a result of volatility in the markets. The capital surge is exposing developing countries to greater unstability, putting direct pressure on their exchange rate and the low interest rate environment will be hard sustain in the long term (UNCTRAD, 2011). While FDI recovery resumes unevenly, the world wide demand for private productive investment is increasing as public investment, which rescued the global economy from declines in FDI in one country after another. With unsustainable level of debt in many countries, with nervous capital markets, governments must now rein in their deficits and let private investment take over the lead role in generating and supporting recovery. Infact responses by TNCs indicate increasing awareness to invest, and clear priority in opportunistic areas but TNCs feel that increased protectionism coupled by regulatory risks have put a brake on capital expenditures. Infact many developed nations require private investment rather than public investment, but TNCs are reluctant to invest due to past FDI performance would seem to warrant(UNCTRAD, 2011). Taking in to consideration the volatility in the markets, TNC investments directed towards the right countries, sectors and the understanding of the current investment environment is pivotal. However current indicies are full of limitations and thus building an index to both understand the current investment environment and reduce the limitations in other indicies is the main problem trying to be solved by this report. 1.3 Objective This study aims to provide an investigation of the determinants significantly affecting FDI flows in to key emerging markets in in East, South and South East Asia. The investigation builds on previous research both from literature & conference proceedings and focuses on a variety of determinants including the policy framework of FDI, economic determinants and FDI determinants in relation to business facilitation for FDI. This is a important consideration in the global context for investors. To construct the variables 3 sets of macroeconomic, country specific and transnational company specific determinants of FDI will be used. The empirical assessment will consider econometric models such as Improved Inward FDI Potential Index (IIFPOI), Inward FDI Potential Index of UNCTAD for 140 countries (IFPOIUN140), Inward FDI Potential Index of UNCTAD, re-calculated for the 49 countries in our sample (IFPOIUN49), Reverse ranking of the Competitiveness Index of Global Competitiveness Report (GCR), World Competitiveness Yearbook (WCY) Index and Economic Freedom Index (ECFREE). Both literature findings and the econometric models will be analyzed and the best fit model or the right mix of FDI determinants will be proposed as a benchmarking index for global FDI flows.

This study will allow good investment insight to develop policy focus on understanding and knowledge as well as provide a systematic framework for various market and risk analysis to assist investors in investment strategy and decision making. In a nutshell it is a bench mark index for investors prior to making any commitments in the intended nation. While also it should help policy maker make certain considerations on rules and regulations as well as trade, investment policies in there host countries mentioned in order to promote more FDI inflows to promote growth and sustainable development, boost countries competitiveness, generate further employment while making it a more attractive place to for investment. Institutions such as the Board of Investment(BOI) and the Also by understanding the significance it will depict important consideration for governments, academics, policymakers and the general populas to understand the constraints pertaining to a countries FDI promotion policies together with key indicators that need correction to maximise the benefits obtained from such investment. 1.4 Data source and methodology The empirical analysis considers a case approach where China from East Asia, five ASEAN countries Malaysia, Indonesia, Thailand, Philippines and Singapore while India are considered from the SAARC countries from 2000-2010. A deep study in to literature initially found that a variety of authors has classified varibales according to market seeking, Resource seeking, asset seeking and considering the Macro-economic determinants, Country specific and TNC specific determinants will be identified. This study will use a case approach to identify the variables and then will use multiple regression analysis to identify the robustness of the determinants of FDI. The data to be tested will come from World Bank Meta Data, World Competitiveness Online(IMD), Bloomberg, International Financial Statistics (IFS) of the International Monetary Fund (IMF) and the Global Market Information Database (GMID). The essay will use visual displays of the data using XLSTAT, MSPROJECT, STRATA and other related software to depict the results making it easier for the reader. Furthermore mixed methods will be used to understand the variables and there meaning to all three factors mentioned in my study. 2.0 Litreature Overview The literature consists of a multitude of research, therefore to create sound policy paradigms, initially the literature will identify the definition of FDI,The benefits and costs of FDI, the microlevel theories of FDI,the Macro-Economic determinants will be asctained via th help of benchmark global indicators. Furthermore the literature reiew will take it one step further by gathering all studies based on the indicators and see various scholars and their view on FDI both at regional and country level. Understanding the benefits and the drawbacks of FDI is imperative to formulate a sound policy. Even if, in recent times, the policy that favors FDI dominates, there are two opposing views as to the role of FDI in developing economies. On the one hand, it is argued that FDI benefits the host country, for instance by creating employment opportunities and bringing new technologies. In contrast, the other group argues that the adverse effects of FDI outweigh its benefits. 2.2.1 Pro-FDI Views Economic growth depends on the rate of investment which in turn largely depends on savings. However, gross domestic savings are too low in the least developed countries (LDCs). Foreign direct investment is an alternative source to fill the gap between savings and the required investment. Foreign firms bring not only financial capital but also managerial techniques as well as, entrepreneurial and technological skills that lack in LDCs and these skills can be transferred to domestic firms through different channels. The governments budget deficits can also be filled by profit-tax may be collected from transnational companies (Todaro, 1992; Woldemeskel, 2008).

The total amount of foreign exchange that can be obtained from export and net public foreign aid falls short of foreign exchange that is required by LDCS. FDI can help to fill this gap by reducing part or the entire deficit in the balance-of-payments. Moreover, multinational companies manufacturing products that can be exported are able to generate net positive export earnings (Todaro, 1992 Woldemeskel, 2008). FDI can also play important role by creating employment opportunities and by integrating the host-country economy in to the world economy (OECD, 2002). 2.2.2 Anti-FDI Views However, there is a group of scholars that strongly disagrees with the positive view on FDI that has been explained above. Their arguments are presented in the following. The first counter argument says that Multinational Corporations (MNCs) increase income for low income groups, which have low propensity to save. If individuals do not save enough, the gap between savings and investments cannot be closed. Besides, foreign firms may also fail to reinvest the profit they generate in the host country; hamper the growth of domestic enterprises and domestic investment by importing the input and intermediate product from their subsidiaries in other countries. FDI might also inhibit the development of indigenous skills as the result of multinational companies dominance over local enterprises (Todaro, 1992; Woldemeskel, 2008). Certainly, initial investment of foreign firms improves the current and the capital account of the host country. However, in the long run, substantial import of intermediate and capital goods, repatriation of profit, interest, royalties and management fees may harmfully affect the foreign exchange position of the host country (OECD, 2002; Woldemeskel, 2008). Transnational companies contribute to close the gap between locally collected tax and targeted revenue. However, governments often enter in to exclusive agreements with foreign firms and provide tax holidays, tariff protections, and investment allowances. Due to these reasons, the taxes that can be collected become quite small. Moreover, these firms can avoid local taxation by transfer pricing techniques -a method used to reduce local profit level by paying artificially inflated prices to the intermediate products purchased from abroad subsidiaries (Thomas A. andPeter H. 2000; Woldemeskel, 2008). 2.3 Theories of FDI Theories of FDI can be split into two groups: micro-level determinants of FDI and macro-level determinants of FDI. The micro-level theories of determinants of FDI try to provide answer the questions why multinational companies prefer opening subsidiaries in foreign countries rather than exporting or licensing their products, how MNCs choose their investment locations and why they invest where they do. The macro-level determinants deal with the host countries situations that determine the inflow of FDI. 2.3.1 Micro-level Theories of FDI 2.3.1.1 The Early Neoclassical and Portfolio Investment Approaches According to the early neoclassical approach, interest rate differentials are the main reason for the firms to become a multinational company. In this line of arguments, capital moves from a country where return on capital is low to a place where return on capital is high. This approach is based on perfect competition and capital movement free of risk assumptions (Harrison et al, 2000). The portfolio approach to FDI reacted to this early theory of FDI by emphasizing not only return differentials but also risk (Almayehu, 1999). However, the movement of capital is not

unidirectional. Capital moves from countries where return on capital is high to countries where return on capital is low and vice versa (Woldemeskel, 2008). 2.3.1.2 The Product Life Cycle Theory of FDI This theory was first developed by Vernon in 1966. A new product is first produced and sold in home market. At the early stage, the product is not standardized. i.e. per unit costs and final specification of the product are not uniform. As the demand for the product increases the product will be standardized. When the home market is saturated, the product will be exported to other countries. The firm starts to open subsidiaries in locations where cost of production is lower, when the competition from the rival firms intense and the product reaches its maturity. Therefore, FDI is the stages in the product lifecycle that follows the maturity stage (Dunning, 1993). Vernons product life cycle theory is a dynamic theory because it deals with changes overtime. However, it seems that the theory is not confirmed by empirical evidence, as some multinational companies start their operations at home and abroad simultaneously (Chen, 1983). (Woldemeskel, 2008). 2.3.1.3 Internalization Theory of FDI To increase profitability, some transactions should be carried out within a firm rather than between firms and this is one of the reasons why multinational companies exist. In other words, there are transactions that should be internalized to reduce transaction costs and hence increase profitability. This theory may answer the question why production is carried out by the same firm in different locations. One of the reasons of internalization is market imperfection. Any kind of economically useful knowledge can be called technology. Mostly, technologies or knowhow can be sold and licensed. However, sometimes, there are technologies that are embodied in the mind of a group of individuals and not possible to write or sale to other parties. This difficulty of marketing and pricing know how forces multinational companies to open a subsidiary in a foreign country instead of selling the technology. In addition, a number of problems may arise if an output of a firm is an input to other firm in other country. For instance,if each has a monopoly position, they may get into a conflict as the buyer of the input tries to hold the price down while the firm that produces input tries to raise it(p.173). Nevertheless, these problems can be avoided by integrating various activities within a firm rather than subcontracting the activities (Krugman and Obstfeld, 2003). (Woldemeskel, 2008). 2.3.1.4 The Eclectic Theory of FDI John Dunning developed an eclectic theory of FDI, which is called OLI paradigm. O, L and I refer ownership advantage, location advantage and internalization conditions, respectively. Operating in a foreign country market has many costs and these costs of foreignness include a failure of knowledge about local market conditions, cultural, legal and many other costs. Therefore, foreign firms should have some advantages that can offset these costs. Ownership advantage is a firm specific advantage that gives power to firms over their competitors. This includes advantage in technology, in management techniques, easy access to finance, economies of scale and capacity to coordinate activities. Unlike ownership advantages, location advantages are country specific advantages. Transnational Companies (TNCs) in order to fully reap the benefit of firm specific advantages, they should consider the location advantage of the host country. This includes accessibility and low cost of natural resource, adequate infrastructure, political and macroeconomic stability. As a consequence, the location advantage of the host country is one essential factor that determines the investment decision of TNCs. Internalization is multinational companies ability to internalize some activities to protect their exclusive right on tangible and

intangible assets, and defend their competitive advantage from rival firms. Accordingly, all the three conditions must be met before transnational companies open a subsidiary in a foreign country (Soderstein (1992), Laar(2004)). (Woldemeskel, 2008). 2.3.2 Motives of FDI Assefa and Haile (2006) assert that the ownership and internalization advantages as developed in Dunning (1993) eclectic theory are firm specific advantages, while location advantages are regarded as host country qualities. Firms choose locations where all these advantages can be combined together to advance the firms' long-term profitability. Asiedu (2002) and Dunning (1993) distinguish the motives of FDI as either market seeking or non-market seeking (efficiency and resource seeking). According to Dunning (1993), a market seeking FDI is that which aims at serving the domestic and regional markets. This means that goods and services are produced in the host country, sold and distributed in the domestic or regional market (Asiedu, 2002). This kind of FDI is therefore, driven by host country characteristics such as market size, income levels and growth potential of the host market and so on. A non-market seeking FDI can either be classified as resource/asset seeking and/or efficiency seeking. Resource seeking FDI aims at acquiring resources that may not be available in the country of origin. Such resources may comprise natural resources, availability and productivity of both skilled and unskilled labour forces as well as availability of raw materials. Efficiency seeking FDI aims at reducing the overall cost of factors of production especially when the firm's activities are geographically scattered (Dunning, 1993). This allows the firm to exploit scale and scope economies as well as diversify risks. Apart from the economic factors that are believed to be the major motivation for FDI, the host country's FDI policy also plays a major role in attracting or deterring FDI. This therefore, suggests a need for the host country to develop policies that provide a conducive environment for business if the authorities believe in the benefits of FDI. This necessitates a regular monitoring of the activities of TNCs and an acceptance by the host government that, if FDI is to make its best contribution, policies that were appropriate in the absence of FDI may require amendments in its presence. For example, macroeconomic policies may need to be altered in order to provide a favourable climate for FDI. Stronger competition as a result of FDI may also induce a host government to operate an effective and efficient competition policy.

2.4 Common Macro-economic determinants of FDI The literature has identified numerous push and pull-side determinants of FDI. Push side factors include intangible assets, internalization, product life cycle, oligopoly reaction and economies of scale, among others. Examples of pull-side determinants are market size, economic growth, labour cost, levels of competition, technology level, infrastructure, cultural distance, political and legal environment, government policy, and so forth. Empirical studies by Lim (1983) and Tonisi (1985) have demonstrated the crucial importance of pull-side factors in determining FDI (Wang, Clegg, & Kafouros, 2011). However many authors have identified many variables with variety of views on their effect on country or region. However to narrow down the variables to ascertain the best variables for the study The world Investment Report 2011 depicted in the introduction is a global conference on trade and development discussing integral issues in relation to FDI and its development policies in the global context. These are traditional determinants, but the current globalization process is likely to induce important changes to location determinants (UNCTAD, 1996). The theoretical argument for explaining these changes is that technological advances, increasing openness to trade, FDI and technology inflows, and the subsequent competitive pressure on firms, would result in a reconfiguration of the strategies pursued by TNCs to achieve their objectives (resources-, markets- and efficiency-seeking FDI). The two possible consequences on the location determinants are: first, host countries would be assessed by TNCs on the basis of a wider set of variables than before; and, second, the relative importance of FDI determinants would be rebalanced.5 Although the traditional economic determinants and the type of FDI associated with these would not disappear, their relevance is likely to decrease, giving a greater weight to

the determinants related to efficiency-seeking and created assets-seeking FDI. Since the aim of this index is to be a useful tool for analysing the relative advantages of countries for FDI inflows, we adopt Dunnings eclectic paradigm as theoretical framework. This paradigm encompasses, as location advantages, a wide range of factors, including those related to policies regulating FDI (and policies that affect FDI indirectly), those of an economic nature, and those related to the climate in which foreign investors operate in host countries. Dunning (1993) provides a long list of factors that may be considered as determinates. In WIRs (UNCTAD, 1998a and 2001), these same factors are included, ordered according to the main objectives that transnational corporations (TNCs) seek when they invest abroad. In these works, mainly in WIR 1998, an extensive review of empirical studies on the determinants of FDI inflows is undertaken. The synthesis of all the literature is that the most significant variables are those related to marketseeking and resources-seeking FDI (in the case of the less developed countries) such as GDP, income per capita, labour costs, etc (Carlos Rodrguez, 2009). These are traditional determinants, but the current globalization process is likely to induce important changes to location determinants (UNCTAD, 1996). The Although the traditional economic determinants and the type of FDI associated with these would not disappear, their relevance is likely to decrease, giving a greater weight to the determinants related to efficiency-seeking and created assets-seeking FDI is interpreted by UNCTAD as a sign that institutional characteristics of the countries have a positive influence on FDI inflows (Carlos Rodrguez, 2009). Recent studies concur with the findings of UNCTAD. Stein and Daude (2001) find that the quality of institutions, as defined by the Governance Indicators of the World Bank, has positive effects on FDI. Globerman and Shapiro (2002) conclude that, for the period 19951997, the attractiveness of a country (for both developed and developing countries) is strongly conditioned by National Political Infrastructure. Moreover, although the Human Development Indicator is not a significant indicator, the level of education is important. Busse and Hefeker (2005) find that the 12 indicators used to proxy political risk have a significant negative impact on FDI inflows. Regarding the institutional framework, Bengoa and Snchez-Robles (2003) find, using panel data for 18 Latin American countries over the period 19701999, that economic freedom (as defined by the Fraser Institute Index) in host countries is a positive determinant of FDI inflows. Addison and Heshmati (2003) conclude that the wave of democratization9 and, mainly, the spread of technologies of information and communication positively affect FDI inflows in developing countries. Asiedu and Lien (2004), in a study of 96 developing, transition and emerging economies, that almost all the indicators for capital control have a significant negative effect in a fixed panel specification (Carlos Rodrguez, 2009). However, Nunnenkamp (2002) questions whether a change in the relevance of determinants amongst developing countries has really taken place. Using data from a survey of companies including 33 questions on a set of economic and political factors related to FDI in 28 developing countries, he concludes that between 1987 and 1999, no important changes took place regarding location determinants. The traditional determinants related to host markets (population and GDP per capita) are still dominant, and the only new determinant with a higher relevance is the skill level of the labour force. Noorbakhsh et al. (2001) also conclude that human capital is a statistically significant determinant of FDI inflows, having a growing relevance, and that other traditional variables (the growth of the domestic market, a stable macroeconomic situation, liberalization policies, a sustaining business framework, etc.) are also significant. Chakrabarti (2001) also reject the hypothesis of a change in the determinants, and argues that the market size and the degree of openness of the host country are more stable than other determinants (wages, net exports, rate of growth, taxes, trade tariffs and exchange rates). (Carlos Rodrguez, 2009)

Hallward-Driemeier (2003), making an econometric study of bilateral flows in the OCDE countries over a 20 year period, concludes that there is no solid evidence that BITs stimulate additional FDI flows, although they would act as complement to the institutional framework of the target country by offering sufficient guarantees on property rights to foreign investors. However, Banga (2003), analysing 15 Asian countries using a panel data analysis, concludes that BITs play a significant positive role. Although there are a large number of studies on the effects of taxation on FDI, this is not the case of DTTs. Blonigen and Davies (2001) conclude, by making a regression analysis of bilateral inflows of FDI between the United States and 65 countries, that these treaties do have a positive impact on FDI in the medium and long term (Carlos Rodrguez, 2009) 2.4.1 Problems with current indices The United Nations Conference on Trade and Development has developed several indices to evaluate and compare the location advantages of the countries and their relative success in attracting FDI. Some of the indices include Improved Inward FDI Potential Index (IIFPOI), Inward FDI Potential Index of UNCTAD for 140 countries (IFPOIUN140), Inward FDI Potential Index of UNCTAD, re-caluclated for the 49 countries in our sample (IFPOIUN49), Reverse ranking of the Competitiveness Index of Global Competitiveness Report (GCR), World Competitiveness Yearbook (WCY) Index and Economic Freedom Index (ECFREE) However, these indices suffer from several limitations but it has been used as a benchmark for assessing policy in relation to FDI and it posses as a severe limitation. Therefore Carlos Et.al constructed an improved inward FDI potential index that can solve some of those limitations, making use of 70 variables for 49 countries and data reduction techniques. The correlation analysis shows that it fits better with the Inward FDI Performance Index, and thus this new index explains more precisely countries FDI inflows. Moreover, the larger number of variables included allows us to rank the countries for different kinds of FDI and to assess countries strengths and weaknesses for policy purposes. Furthermore the Index uses not only variables from model but also encompasses a variety of theoretical literature. Infact the choice of the variables included in IIFPOI is justified by the following criteria: the theoretical analysis of the determinants of FDI; the empirical studies testing the validity of the theoretical analysis; the availability of quantitative data on the potential determinant factors and their geographic scope; and finally, the correlation between these criteria and IIFPI (Carlos Rodrguez, 2009). Since the aim of this index is to be a useful tool for analysing the relative advantages of countries for FDI inflows, we adopt Dunnings eclectic paradigm as theoretical framework while also recognising the pro view of FDI and also we adopt the product life cycle theory as well in to the analysis. This paradigm encompasses, as location advantages, a wide range of factors, including those related to policies regulating FDI (and policies that affect FDI indirectly), those of an economic nature, and those related to the climate in which foreign investors operate in host countries. Dunning (1993) provides a long list of factors that may be considered as determinats. In WIRs (UNCTAD, 1998a and 2001), these same factors are included, ordered according to the main objectives that transnational corporations (TNCs) seek when they invest abroad. In these works, mainly in WIR 1998, an extensive review of empirical studies on the determinants of FDI inflows is undertaken.The synthesis of all the literature is that the most significant variables are those related to market-seeking and resources-seeking FDI (in the case of the less developed countries) such as GDP, income per capita, labour costs, etc (Carlos Rodrguez, 2009) At this point, however, we must stress that the number of variables included in an index of this nature is constrained by the availability of data. We must stress that the UNCTADs decision to include only 13 variables in her potential index is not guided by this restriction, although it is proposed as such. Furthermore, the difficulty in quantifying some qualitative determinants related to the political and institutional framework, which UNCTAD cites as the reasons for their

omission in its index, is a problem which can be solved, as most of the above mentioned studies do, with indicators produced by a number of bodies. However, this solution involves that, with the data available at the time of writing, we cannot include all countries in the world, and, therefore, there is a trade-off between geographical scope and the depth of analysis. For this paper, we opted to improve the quality of the index, leaving aside the issue of limited geographic scope. This option allows this index to fulfil better than the current UNCTADs potential index the objectives of being a tool, first, to evaluate the countries competitiveness to attract certain kinds of FDI inflows, and, second, to design policies to improve, or change, the location advantages of host countries. Compared to the correlation analysis done by Carlos et.al 2007 shows that it fits better with the Inward FDI Performance Index, and thus this new index explains more precisely countries FDI inflows. Moreover, the larger number of variables included allows us to rank the countries for different kinds of FDI and to assess countries strengths and weaknesses for policy purposes (Carlos et.al, 2007) 2.5 Varaible selection To choose such Varables Carlos et.al classified the variables after ascertaining a variety of variables and comparing it with models measuring FDI performance. Therefore he classified FDI based on the 3 factors that was the Policy of FDI in a country, Economic Determinants factors and business determinants. Within these factors were determinants again re-classified and certain determinants were having sub-determinants as well to ascertain accurate measurement. The reclassification of Variables have been depicted in table xx below, which depicts the classification of variables ascertained from both literature and improved & refined UNCTAD models are depicted below. Totally 71 variables have been considered and has been divided in to 5 FDI classifications and 12 factors with that will be broken down in to further determinants of FDI.. Therefore the essays variable classification can be shown below, in a colour coordinated sequence to easily identify the variables as per the FDI classification and the category the factors fall under can be easily ascertained. For example Social amenities are coloured in lime green they are classified as a factor under Host country FDI policy. The factor contains a variable known as Access to Capital markets ACM. The variables considered for the study and the literature pertaining to its expected positive or negative significance has been considered. for example the sixth variable under FDI policy is sustainabale development, however studies indicate that While sustainable development had no bearing or relationship on FDI. These findings are similar to that of kamal who suggests the follwing The level of inflows does not necessarily give an indication of the actual contribution of FDI as a source of financing for sustainable development. A closer look at the breakdown of such inflows into the various sectors of the economic, social and environmental components of sustainable development gives a better understanding

Based on the classification the variables can be reclassified as follows: 2.5.1 The variables The list of variables and their proxies are listed in Table 2. The changes in the variables are computed as a measure of the variables in order to avoid spurious analysis of results. Furthermore the UNCTAD improvement index has classified the variables as per several factors and models including Host country FDI policy, Economic Determinants of FDI, Business facilitation of FDI, Market Seeking FDI, Efficiency seeking FDI, Reource Seeking FDI and Asset seeking FDI and a colour coated table has been listed below. These have been classified based on Carlos et.al article and listed below:

Locational determinants CCR MEII PS ERS SD AFC RFCT PSC MA Greenfield CBV FI FFI ACM FC

Measurement composite country rank Macro-economic enviroment Risk of Political stability Exchange rates Sustainable development Protectionism Finance and Banking regulation Public sector contracts sheet Number of M&As Number of Greenfield investments Venture capital Foreign investors % of foreign companies capital markets Investment incentive

Measurement composite country rank ICRG Macroeconomic enviroment GCR Risk of Political stability IMD Exchange rates IMD Sustainable development Protectionism Finance and Banking regulation Public sector contracts sheet Number of mergers and acquisitions Number of Greenfield investments Venture capital Foreign investors % of foreign companies capital markets Investment incentive IMD GCR IMD

IMD or UNCTA IMD IMD IMD IMD IMD IMD IMD

IPS PA

Investment protection scheme Number of patents in force Taxes on international trade (% of revenue) Tariff rate, applied, simple mean, all products (%) Simple mean differeed from most favoured nation Tariff Bariers Customs and other import duties (% of tax revenue) Billateral investment treaties Corporate Tax rate Investment incentives sheet 6 Subsidies and other transfers (% of expense) Control of Corruption Bribing and corruption sheet 6 Beuracracy

CL

MTR

VTR HIB

COI BIT DTT CTR

Ii GS CC BC

EODB GB TRSB

Ease of Doing a business Government Beuracracy Ease of Doing Business Index

Investment protection scheme Number of patents in force Taxes on international trade (% of revenue) Tariff rate, applied, simple mean, all products (%) Simple mean differeed from most favoured nation Tariff Bariers Customs and other import duties (% of tax revenue) Billateral investment treaties Corporate Tax rate Investment incentives sheet 6 Subsidies and other transfers (% of expense) Control of Corruption Bribing and corruption sheet 6 Beuracracy Time required to start a business (days) Government Beuracracy Ease of Doing Business Index

World Bank World Bank

WDI

WDI

World Bank IMD

World Bank UNCTAD World bank ICRG

IMD GCR World Bank ICRG

World Bank IMD IMD

QL GDPgrowth GDPpercapita WFDIS

Quality of life sheet 8 GDP growth GDP per capita % of World FDI stock % of merchant exports by region Total Exports Current % of world total Labour regulations sheet 7 Unit labour cost

IIWRB TE NR LR UCL CB SL FHSKL Its

Quality of life sheet 8 GDP growth GDP per capita % of World FDI stock % of merchant exports by region Total Exports Current % of world total Labour regulations sheet 7 Unit labour cost Skilled labour sheet 7 Foreign high skilled people sheet 7 Information technology skills sheet 8 Secondary school enrolment % sheet 8 School enrollment, tertiary (% gross) Research and development expenditure (% of GDP) Patents granted to residents sheet 8 number of patents in force sheet 8 Technological readiness roads sheet 8 railroads

IMD World Bank World Bank IMD

World Bank World Bank UNCTAD IMD IMD IMD IMD IMD World Bank

Skilled labour sheet 7 Foreign high skilled people sheet 7 Information technology skills sheet 8 Secondary school enrolment % sheet 8 School enrollment, tertiary (% gross) Research and development expenditure (% of GDP) Patents granted to residents sheet 8 number of patents in force sheet 8 Technological readiness roads sheet 8 railroads sheet 8

Sse

World Bank

Set

IMD

RD

IMD

Patent Patentforce Tech Roads railraods

GCR IMD IMD IMD IMD

QofAIR Water transportation DISB Telephone mobile OP

quality of air transportation sheet 8 water transportation sheet 8 Distribution infrastructure sheet 8 Telephone lines Mobile cellular subscriptions Productivity

sheet 8 quality of air transportatio n sheet 8 water transportatio n sheet 8 Distribution infrastructure sheet 8 Telephone lines Mobile cellular subscriptions Productivity GDP per unit of energy use (PPP $ per kg of oil equivalent) Gross fixed capital formation fixed telphone tarrifs sheet 7 Electrical costs for industrial clients sheet 7 Communicati ons technology sheet 7 Energy use (kt of oil equivalent) Cost of living index sheet 5 Apartment rent sheet 5 Office rent sheet 5 Exports of goods and services (current US$)

IMD World Bank World Bank World Bank

IMD World Bank

Energy use percapita 6 2 GFCF

GDP per unit of energy use (PPP $ per kg of oil equivalent) Gross fixed capital formation fixed telphone tarrifs sheet 7 Electrical costs for industrial clients sheet 7 Communications technology sheet 7 Energy use (kt of oil equivalent) Cost of living index sheet 5 Apartment rent sheet 5 Office rent sheet 5 Exports of goods and services (current US$)

IMD

fixedtelephone

World Bank

electricacosts

IMD

Adequecyofcomm Energyuse COL Apartment Office Exports of services

IMD IMD World Bank World Bank

World Bank

Imports of ICT

Imports of ICT (Current US$)

Imports of ICT (Current US$)

World Bank

Table 2: IIOFPI variables ascertained (Carlos et.al, 2009) 2.5 Varaible classifications, definitions and expected outcome as per litreature In the tables found below, we summarize other studies on the determinants of FDI, measurement used for this study and the database of information derivation. It provides all the expected signs (+ or -) from literature as the author is shows as well. It shows that research is finding a diverse set of determinants as new developments in the global economy take place and data availability and econometric techniques evolve. In sum, the findings in the vast empirical literature regarding location determinants justify our approach to include the largest possible number of variables related to the location determinants in constructing our improved index, IIFPOI. All in all, and despite some mixed results regarding some variables, empirical studies FDI potential index is an efficient study to understand the business environment from a variety of angles (Carlos Rodrguez, 2009) Dependednt Variable and independent vaiables The dependent vatibale used is Foreign Direct Investment (Current US$) There are 70 independent variables classified classified in to 5 parts and 12 factor of classification and have been colour coated as described earlier in this this section and is classified from 2.5.1.1.-2.5.6.3 and will include all abrevations used in study, definitions, literal findings and the expected outcome of the variable on the dependent variable will be discussed and classified accordingly. 2.5.1.1 Host Country FDI policy The variables from Country composite risk to Exports of services in the index has also been studied and derived via Carlos et.al article and other literature. The table xxx below sumarises the findings as is shown under host country FDI policy and will later brought up in the findings section country by country trying to link literature with findings. The findings will also contain vital statistics from a variety of literature including central bank annual reports, country reports and other literature to confirm the findings to be country specific. The following section will consider the expected sign of the variables considered and the definition of the variable has been considered in this section.

2.5.1.1 Determinants for Economic, Political and social Stability The determinants are as follows: CCR= Country Credit Rating MEII= Macro Economic Environment PS=Political Stability ERS=Exchange rate stability SD= Sustainable Development

CCR is derived from The International Country Risk Guide (ICRG) rating which comprises 22 variables in three subcategories of risk: political, financial, and economic. A separate index is created for each of the subcategories. The composite scores, ranging from zero to 100, are then broken into categories from Very Low Risk (80 to 100 points) to Very High Risk (zero to 49.9 points) (http://www.prsgroup.com/ICRG_methodology.aspx) and can have positive, negative or no siginificance. relationship similar to the above findings,

where he states that the country has to improve its country risk profile accompanied by cost factors and other common Macro-economic variables, he goes on to state about this The country requires maintaining the stable macroeconomic stability and continuity in reform process of last 17 years of openness policies. This implies continuity of sustained stable macroeconomic policies, improvement in countrys risk profile followed by cost related and investment environment improving factors. The long run scenario is also linked with level of employment of skilled labor,,the process of capital formation and the quality of human capital country produce. Certainly, the fiscal, monetary, investment, social policies are directed towards achieve these goals. Further, the country can indeed realize benefits from present attributes in keeping FDI friendly atmosphere. Therefore as per the research the better the CCR score the larger the FDI flows in which a positive relationship is generally expected(Hakro et.al, 2009).

MEII is derived from the Global Competitiveness report The macroeconomic environment index indicates the quality of the macroeconomic environment of a country also (SOURCE: World economic forum - Global Competitiveness Report 2004-2005.) can have a positive, negative or no significance. The term "Macroeconomic Stability" describes a national economy that has minimized vulnerability to external shocks, which in turn increases its prospects for sustained growth. The hard-data indicators for macroeconomic stability include statistics for government deficits, national savings rates, inflation, real exchange rates and interest rate spreads. These are supplemented by survey questions about the likelihood of a recession and the availability of credits (http://www.oecd.org/investment/investmentfordevelopment/33915741.pdf). is taken from the ICRG and consists of Voice and accountability, Political stability, government effectiveness, rule of law and regulatory quality. Findings in relation to this variable is seen in the ADB Working Paper Series on Regional Integration suggests that Macro Economic Environment index is a good measure against that of FDI. Furthermore Macroeconomic stability is important to the overall business environment and competitiveness of an economy. Although stability alone cannot increase the productivity of a nation, it is recognized that macroeconomic disarray harms economic efficiency and productivity. Firms cannot make informed decisions when inflation is out of control and governments cannot provide services efficiently if they have to make high-interest. A study cnducted by Tan make use of the Macroeconomic Environment Index compiled by the World Economic Forum. It is necessary to emphasise first that this index and its composite sub indexes not only measure macroeconomic policies, but also a countrys performance in a number of related aspects, such as its credit rating. This study uses the world bank governance indicators to empirically test the relationship between macroeconomic level corporate governance and Inwards FDI flows into emerging market countries, using a panel data set of 33 countries between 1997 and 2002. The key finding is that macroeconomic corporate governance has a positive and significant effect on inwards FDI flows, suggesting host country governments and authorities should shape policy. In the study Adeyole finds positive relationship between FDI and the macro economy, however instead of using MEI, he uses a world bank indicator but however his OLS regression output suggests positive relationship as shown in the findings in this report for China, India, Indonesia and Philippines (Adeyole, 2010). Therefore the expected outcome suggests that an improving macro economic index promotes FDI. PS has a significant positive impact indicating that if the risk political stability index increases which means that FDI should increase proportionately. Political stability has been measured via the measure the risk of political stability variable updated by IMD which has defined it as Risk of political instability indicates the level of threat that social protests have towards its own government. The index ranges from 1 to 10 where a higher

value indicating that the risk of political instability in that specific country is very low. Almost no research can be found on the direct effect of political instability on competition law. Therefore a more intuitive approach will be followed, in order to determine the a priori sign of the risk of political instability coefficient. The level of political stability influences deeply the economic environment. A more politically stable government is thought to have less social issues and therefore it can focus more on the economic environment. If a government is politically unstable also the institutions that surround the government, such as the antitrust offices are expected to be inefficient. A more stable government takes care of investment protection, simple tax and bureaucratic procedures; in other words, political stability increases the ease of doing business. (http://oaithesis.eur.nl/ir/repub/asset/8958/Grosso,%20M.%20325335%20id %20thesis8958%20.pdf) therefore the more stable the government or when the PS index increases the expectation is that it will promote FDI.

ERS can have a positive, negative or no impact at all. Goldberg and Klein (1997) indicates that exchange-rate movements are an important determinant of both trade and FDI flows between Japan and several Southeast Asian countries. For instance, a real appreciation of the Japanese yen against the US dollar tends to induce Japanese FDI flows into these countries, thereby contributing to the development of local export capacity, which supports the earlier findings of Kawai and Urata (1995) (http://www.jbic.go.jp/en/research/report/research-paper/pdf/rp15_e.pdf). Catherine et.al who conducted a study on the east asian five tigers found mainly positive and negative significance. In Malaysia found a negative correlation which means that apreciation of the Malaysian Rupiah to other internatonational currencies will discourage FDI. (Catherine et.al, 2011) Sustainable development has no impact to FDI flows and will be omitted from the findings. Sustainabale development is defined sustainable development as development that can continue forever or at least for a very long time; say, for several generations. Given the discussion above,this statement can be put more fundamentally: sustainable development is increasing well-being over a very long time. Yet more fundamentally: sustainable development is increasing consumption, following its broadest economic interpretation, over a very long time. (http://www.google.co.jp/url? sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0CFAQFjAF&url=http%3A%2F %2Fwww.ine.pt%2Fngt_server%2Fattachfileu.jsp%3Flook_parentBoui %3D143216390%26att_display%3Dn%26att_download %3Dy&ei=GCPHUJ3eCeXomAWMlIH4Aw&usg=AFQjCNEh8mIoWs8_9woRFzV0v2BFnYoRA&sig2=mLBggMMfqFMTiQD1KgEmkQ). However Most studies have found little significance by Kamal et.al who found no significance in his case analysis with econometric research for a variety of research papers taken from 1990-2003 revel that it has no significance in East Asian Countries. At the same time, it is generally recognized that FDI is only a complement to domestic investment and that sustainable development benefits to host countries depend, to a high degree, on the absorptive capacity among the local enterprise sector. Therefore SD increase does not encourage FDI. (http://unctad.org/en/Docs/iteiit35v12n3_en.pdf) In a better climate of investment environment in which private sector activity can flourish, each type of foreign investment can make a valuable and contribute to economic growth, then sustainable development. The study found that FDI stimulates not only economic growth but its impacts are greater than investment by domestic firms. The study encourages host government to continue promote policies concerning foreign investment. Therefore this suggest that it does not have direct effect on FDI but will indirectly be a significant effect on the nation. (http://dspace.wul.waseda.ac.jp/dspace/bitstream/2065/28631/4/Honbun-4575_01.pdf)

2.5.1.2 (Determinants for Rules regarding entry and exit) AFC=Access to Foreign Capital RFCT=Restriction on Foreign Capital Transactions PSC=Public Service Contract

AFC was known to have a positive significance on FDI. AFC was measured via protectionism. The theory or practice of shielding a country's domestic industries from foreign competition by taxing imports. . AFC was measured through the level of prodtectionism and the findings were similar to those of Boden et.al suggest that One argument holds that trade protection may increase FDI, in particular horizontal FDI. Multinational firms may aim to enter markets that are protected by high trade barriers by setting up affiliates in the protectionist country, thus increasing FDI flows. By contrast, another argument holds that trade protection may in fact deter FDI, in particular vertical FDI. For one, multinational firms might find it less attractive to offshore affiliates that are part of the value chain if the import and export of intermediate and final goods is inhibited by trade protection measures. He further goes on to state that More generally, trade protection may evoke distrust in possible foreign investors regarding future trade openness or other economic or institutional characteristics of a certain protectionist country. However the expected sign is positive implying that trade protectionism will promote FDI. RFCT is defined by the level Banking and Finance regulations posed on the foreign investor, the findings in this study is similar to that of Cheng et.al who suggests for a panel study conducted in Africa he finds negative correlation between the cost of regulation and FDI growth rate is self-evident, considering the economic environment for trade and investment in the five countries finds negative growth (cheng et.al 1998). This suggest that the expected outcome is an increase in banking and regulation(RFCT) will discourage promotion FDI. . The higher FDI growth rate in South Africa, Mali and Ghana were related to their relatively lower costs caused by over regulation. However in other studies it is Noted that Mali, albeit with higher costs of regulation, has high FDI growth rate compared to Ghana. We believe this is due to specific locational advantages and natural resources the country poses as observed by Basu and Srinivasan (2002) for some African countries. PSC Contracts other than public works or supply contracts having as their object the provision of services referred to the public good. A public contract having as its object both products and services within the meaning for creating the public good shall be considered to be a public service contract if the value of the services in question exceeds that of the products covered by the contract. PSC can have mixed results in for FDI based on the governments conditions related to the contract and hence may affect crucial FDI sectors. (http://europa.eu/legislation_summaries/internal_market/businesses/public_procurement/l2 2009_en.htm) . Therefore based on government policy can result in positive, negative or no significance effects on FDI.

2.5.1 3 (Determinants for standards of treatment of Foreign Affiliates) M&A=Mergers and Acquisition Greenfield = Greenfield Investment CBV= Cross Border Ventures

FI= Foreign Investors FFI= Foreign Financial Institutions ACM= Access to Capital markets FC= Foreign Companies IPS=Investment Protection Scheme

Mergers and acquisitions Acquisition:

M&A is defined as The purchase of the controlling interest or ownership of another company. This can be affected be Agreement with the persons having majority of the stake, Purchase of shares in the open market, To make takeover offer to the general body of share holders, Purchased of new shares by private treaty and Acquisition of share capital while a Merger is the fusion of two or more companies (OR) Merger is a combination of two or more companies into a single company where, it survives and others loose the corporate identity. The survivor acquires the assets and liabilities of the rest. Mergers and Acquisition are based on the number done in a given year, the effect to FDI is based on the incentives provided by the host country (http://www.karvy.com/mergers/glossary.htm). While Greenfield investment A type of foreign investment in which a parent company will begin a new venture in another, usually developing, country. This parent company will construct new facilities as well as create new jobs when they hire new employees for these facilities. Thesecompanies are typically offered tax breaks and other incentives for setting up green field investments (http://www.investorwords.com/11625/green_field_investment.html#ixzz2EkjSuvi2). Greenfielf investments are also determined by the number and again its effect on FDI is based on the conditions of the host country policy environment for FDI. Byun et.al where they suggest that Greenfield Investment was positively significant in China and Indonesia while in Phillipines it was negatively significant.. Using the dataset of FDI, M&A and Greenfield FDI with a comprehensive set of external and internal factors to estimate a dynamic panel model, this paper offers new findings which may have implications for designing a policy framework to attract FDI, particularly in a type that is more conducive to economic development, to emerging countries. First, country-specific factors (such as GDP per capita, macroeconomic and political stability, etc) matter a lot for FDI flows both in the form of M&A and Greenfield FDI. This suggests that the role of governments may play an important role in helping stabilize FDI flows, to emerging countries. The policy focus should be on strengthening economic fundamentals and maintaining macroeconomic and political stability in order to sustain high FDI flows. Second, the results suggest that there are global and regional spillover effects on FDI flows to an emerging country and such effects are stronger on M&A than on Greenfield FDI having greater positive correlations. In other words, if there is an increase in FDI to all emerging countries, it is likely that FDI to any individual emerging country increases as well, and this phenomenon is more visible when we consider M&As. Moreover, the spillover effect seems to be stronger in all types of FDI flows if it is originated from within the region than if it comes from outside the region. Therefore, here may be a merit in considering policy coordination at the regional level when designing a policy framework to manage FDI flows (particularly M&As) to emerging countries. For example, instituting a sound macroeconomic management framework in an emerging country can generate positive externalities on FDI flows to other regional economies. Hence, promoting good institutions at regional policy forums and dialogues shall help increase the regions attractiveness as an investment destination. hird, we find that financial stability of emerging countries has a negative association with M&A sales, although its effect on Greenfield FDI is positive. In other words, countries with greater financial risks tend to have greater M&A sales. It is also found that income growth has a

negative association with M&A sales, but it has a positive association with Greenfield FDI. Last, but not least, when the total value of M&A sales is split into the number of deals, it is found that both financial stability and income growth have a statistically significant negative association with the average value of each deal, while they have a significant positive association with the number of deals. These findings suggest that fire-sale of firms in the crisis-hit emerging countries is driven largely by an increase in the average value of each M&A case, rather than an increase in the number of M&A cases. In this study the variable considred is the number of M&A deals and Greenfield investments and the relationships can be explained as stated (Byun et.al, 2012). Therefore the expected outcome is that Greenfield and M&A have generally encourage FDI. However all outcomes are possible.

A joint venture is a contractual agreement between two or more parties for the purpose of executing a business undertaking in which the parties agree to share in the profits and losses of the enterprise as well as the capital formation and contribution of operating inputs or costs. It is similar to a partnership, but typically differs in that there is generally no intention of a continuing relationship beyond the original purpose. A joint venture may not involve the creation of a new legal entity. CBV create a significant positive impact and is measured in the index by the value of cross border venture deals (http://jointventures.uslegal.com/distinction-between-joint-venture-and-partnerships/). The finding related to CBV can be explained by Mahavan et.al who finds a positive correlation between FDi and CBV and hypothesize that transnational technical communities accelerate cross-border venture-related activities, especially when they possess an entrepreneurship orientation. A regression analysis of factors determining cross-border venture capital investments provides evidence supportive of our argument where positive correlations were found. The expected outcome is that Cross border ventures will encourage FDI in an environment which has experience and entrpreneurship orientation. Foreign investors are defined as from the objective of establishin