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The Effect of Liberalization of Foreign Direct Investment

The degree of urbanization seen in the host area implies more concentrated consumer and labor markets and an integrated infrastructure, itself attractive to investors. This degree of urbanization is thus a worthy variable in its own right, and it is a factor that may have a positive effect on the inflow of FDI and so includes a suitable proxy in the form of population density.

The attributes of the workforce constitute another concern about the host area because of such elements as the costs, availability, and productivity of local labor and the strength of labor unions. High labor costs as such would be likely to deter FDI, meaning that the relationship with FDI inflows tends to be negative. Billington reports that the evidence concerning this relationship is mixed, with some finding labor costs to be significant, while others do not. Billington says that other researchers may be failing to take into account the fact that higher labor costs may be offset by higher productivity. It appears that the more labor that is available locally, the more attractive that area will be to foreign investors. It can therefore be argued that the greater the unemployment rate in the host economy, the greater the FDI inflow. It is argued that a high unemployment level makes people place a higher value on their current or potential future job, meaning that they are willing to work harder and for a lower wage than they otherwise would. This could explain why some find a positive relationship between unemployment rates and FDI inflows, though it could also be argued that high unemployment leads to an erosion of the skills base in the host area. The latter does not seem to be supported by empirical evidence, though.

Another reason for the performance of the host workforce could be union strength. One might reasonably expect that a strong union presence would deter inward investment, but in fact it has been found that the degree of unionizat...

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The Effect of Liberalization of Foreign Direct Investment. (1969, December 31). In Retrieved 18:31, July 20, 2017, from
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