Understanding the main motives for foreign direct investment, an East‐West country contrast: is the host country legislation an important factor?

Abstract

Purpose

The purpose of this paper is to show that foreign investment continues to play an important role in business activity across the globe. Understanding the main trends and reasons behind this increased activity is necessary in order to make effective business decisions on how to best engage in further global expansion. The positive benefits on employment and enterprise resulting from FDI will also be considered. A contrast will be made between Eastern and Western countries through an analysis of the main determinants of activities in these countries. The importance of country‐specific legislation on the decision‐making process will also be considered.

Design/methodology/approach

The paper utilises a business history perspective, draws on theories of internationalism and uses investment data in order to explain investment behaviour. The paper then considers future possible trends in light of these recent developments.

Findings

The evidence suggests that both Eastern and Western countries are now benefiting from high levels of foreign investment. Investment flows are influenced by political as well as economic factors. Legal factors and levels of corruption are also relevant. It appears that the investment flow is affected by a mix of these factors. So for instance, in relation to a country like China, despite its strong performance, corruption still limits the potential investment into this country. The internal issues need to be redressed in China as these directly affect investment. To this end, the Chinese government and private enterprise will have to take action which requires support by the establishment of international standards of patent protection. This will help China achieve the goal of becoming one of the largest centres for manufacturing in the world in a broad range of industries

Practical implications

The paper provides a useful starting‐point for explaining the pros and cons of either staying in the West or expanding into new emerging markets. In addition practitioners can appreciate the reasons behind issues of corruption and corporate governance as well as understanding how these need to be tackled.

Originality/value

The paper draws on a business history perspective which is valuable for current firms that do not wish to underestimate the mistakes and misconceptions made in the past. The work is also useful to those organisations wishing to promote international trade in the most effective way.

Citation

Floyd, D. and Summan, S. (2008), "Understanding the main motives for foreign direct investment, an East‐West country contrast: is the host country legislation an important factor?", Corporate Governance, Vol. 8 No. 5, pp. 661-668. https://doi.org/10.1108/14720700810913313