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with the issue of place image while investment promotion mainly deals with highlighting the investment opportunities (Browning, 2016; Matiza & Oni 2014).
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relates to the transaction costs associated with FDI. The changing nature of the economic environment and the need to incorporate the levels and stages of economic development of countries receiving FDI (less developed countries vs developed countries) has paved way for the development of the IDP paradigm. The IDP paradigm can be traced by the works of Narula (1993) and Narula and Dunning (2000). The approach incorporates the FDI recipient’s international investment position international investment position/ level of economic development in the FDI decision making process. The model maintains that that the economic development of countries can be categorized into five stages (see figure 1).
Where least developed countries are in the first two stages of IDP, and newly industrial countries are in the third stage of IDP and finally developed countries are in the final two stages of IDP (Galan et. al., 2007). The model suggests that after understanding the level of economic development of host and recipient countries it will be easier to identify the factors that affect FDI attraction. Using the empirical studies at that time Galan et. al. (2007) classified the factors that affect FDI attraction into five categories: cost factors, market factors, infrastructure and technological factors, political and legal factors, social and cultural factors (see table 1).
Figure 1: Main features of IDP (Narula and Dunning, 2000, 146-147)
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Table 1: Main factors of FDI based on empirical studies of Galan, et. al. 2007 Main Factors (Galan et. al. 2007) Statements
Cost factors Low labour costs (workforce)
Low transportation/logistics costs (supply and distribution)
Low cost of raw materials, energy and water
Availability and low costs of land
Market Factors Large size of host market
Growing demand in host markets (potential growth)
Low level of competition in host markets
Infrastructure and technological factors Very well-developed infrastructures
High industrial concentration (industrial parks, technology networks, etc.)
Availability and expertise of workforce
Access to reliable and cooperative suppliers
Technologically advanced country (learning opportunities)
Political and legal factors Political stability
International trade agreements
Tax reduction incentives in host markets
Grants and tax reductions in the home country More benign environmental legislation
Social and cultural factors Standard of living and public services Attitude of the community towards the firm
Cultural affinity
According to Papadopoulos et. al. (2016) generally it can be said that there are hard and soft factors that affect FDI flow into a country. According to Clodnițchi (2017), hard place factors are objective measures as opposed to the soft factors. Hard factors are the main
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issues considered by FDI investors while the soft factors only supplement the hard factors.
Mainly, the soft factors constitute perception which may directly or indirectly influence investment decisions (Papadopoulos et. al., 2018). Therefore, in as much as the hard factors are the most critical to FDI investment decisions, the soft factors are also important as they can influence decisions in favor or against investments.
Looking at the literature it could be stated that hard factors could be grouped into categories which include; country factors, institutional factors, economic factors and infrastructural factors (see table 2). For example, the size of the market is one of the significant factors that determine whether foreign direct investment will occur as it signifies the potential consumers in the market (Petrović-Ranđelović, 2017). The location of the foreign country and its distance to the home country is an additional factor with relevance as it determines the ease of movement and enables potential intervention of the actual owners in the event of crisis (Amighini et al, 2013). Institutional factors are also considered, mainly looking at the laws of the country especially regarding foreign direct investment. Different countries have particular laws on FDI and these laws may be restrictive or productive for the investors involved (Amighini et. al., 2013). Moreover, economic factors are also considered mostly looking at the costs of labor, rates of taxes and technological levels. Tax policies such as operational and profit tax, is another essential hard location factor that determine the profitability of a business in a specific region or country. Therefore, states should institute favorable taxation policies and infrastructure, among other factors to attract foreign direct investments (Papadopoulos et. al., 2016). Further, Buettner et. al. (2018) provide that multinational companies prefer making investments to countries with lower corporation tax rates because of increased profitability chances. According to Gnangnon (2017), trade barriers that are characterized by rigid tariffs, non-harmonized rules, stiff regulation on movement of people and goods make regions less desirable for FDI investors. Also, Vernon (2017), provides that host countries with strong exchange rates are less desirable because the cost of assets is significantly higher. The costs of rent, construction, and raw material also make up hard factors of FDI. Cost is also associated with hard factors such as the cost of logistics, water and electricity which are essential elements in most businesses operations.
Additionally, transportation costs are also critical factors considered by investors (Buettner, Overesch, & Wamser, 2018). Further, the author asserts that investors may be encouraged against an investment due to high transportation costs even though the labour costs might be relatively low. Matiza & Oni (2014) have also investigated the impacts of people on FDI.
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They claimed that the stereotypes that people of a particular nation (labour) hold may impact potential investors' decision to invest in a destination (Matiza & Oni, 2014). Factors such as skill levels, abilities and motivation levels, and primary education or professional qualifications have a bearing on investment programs' operations. The availability of labour in the potential destination can make or break the investment process. Culture has also been studied as another factor that impacts the behaviour of investors. A country that is known for creativeness, innovation, and research excellence may create positive associations in potential investors' minds.
Jeong et. al. (2018) states that the quality of institutions in the host country, political stability, and government policies are significant hard factors that affect FDI attraction.
Researchers have indicated that political and macroeconomic stability is a crucial park attracting potential foreign investors (Kim, 2010). However, there is somewhat a mixed empirical result concerning the impacts of politics. For example, one of the studies of political stability (Osunkwo, 2020) has found out that U.S firms' decisions are rarely affected by political risk and administrative efficiency. On the other hand, studies Mohanty & Sethi (2019) and Schneider Vu (2020) found out that political instability does affect the FDI inflows significantly. This is particularly common to emerge economies. In more specific, it is difficult to attract investors in developing countries that have political instability. There have also been researchers that have investigated the impact of institutions of the host countries on the flow of FDI. It was found out that institutions' quality could be one of the key determinants of FDI, particularly when it comes to developing nations due to various reasons (Sabir, Rafique & Abbas, 2019). A study by (Vu 2020) argued regulatory framework, red tape judicial transparency, and bureaucratic hurdles in the host countries rarely affect investors' decisions. However, the study (Wach & Wojciechowski, 2016) shows that corruption significantly impedes FDI inflows due to additional firm costs.
Pikkujämsä (2018) also introduces the issue of non-physical infrastructures such as information and communication technologies, other than physical infrastructures such as new road and railways systems. According to Pikkujämsä (2018), foreign investors would prefer to invest in countries that have a well-planned technological upgrade plan. Regions that have favorable production costs are thus more desirable for investors as they increase the profitability of their investments. Overall, profitability is the primary issue that concerns FDI decisions where investment decisions are made only when individuals see that there are higher probabilities of gaining profits.
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Soft factors on the other hand are subjective and can play an important role in the FDI attraction. The factors include the perception of people towards a region, and include recreational value, social climate, image location, and the local government (Clodnițchi, 2017). The study of Sykianakis and Bellas (2005) look into the personal characteristics of firm’s leadership (age, education and experience) as another factor. Moreover, from the limited studies available on the subject some authors confirmed that FDI decisions are affected by investors’ image of potential locations and cultural distance between them (Thomas and Grosse, 2001) and the target countries’ reputations (Fan, 2010). Moreover, Murphy and Redmond (2009) found that there is a positive relationship between urban aesthetics with FDI. They assert that cities that are historically considered creative such as London and Paris received hosts of FDI hence they have experienced economic growth and development over the years.
Table 2: Additional Hard vs Soft factors of FDI attraction based on recent empirical studies
FDI Attraction Hard Factors Soft Factors
Country factors (size of market, political stability)
Place Image Location (distance from
host country)
Cultural distance Institutional factors (laws) Firms leadership
characteristics Economic Factors (Tax and
Costs)
Quality of institutions Infrastructure factors (psychical/non psychical)
As can be seen the scales developed by Galan, et. al. (2007) still incorporate most of the factors except for the place image as a factor. Thus after incorporating place image as a factor can be highly relevant to this study.