Discuss various factors that influence the Foreign Investment Decisions.

Model Answer:
Factors affecting Foreign Investments:
Trade barriers
Government may impose tariffs, quotas, embargo and other restrictions on export and imports goods and services hindering the free flow of these products across national boundaries.
Discovery of resources:
Discovery of new natural resources such as metals, minerals and oil induce investment.
Government Policy:
The monetary and fiscal policies of the government affect investment in different ways. Liberal policies adopted by government in terms of allowing higher FDI in different sectors, government’s expansionary policy; lower taxation policy, boost the economy and increases investments in the form of FII and FDI.
Foreign Trade:
When there is a possibility of increase in a country’s foreign trade, it will have a favorable effect on investment, i.e., more investment will take place.
Political Environment:
Peaceful and stable political environment favor foreign investments
Business Expectations:
Business investments are very much dependent on expected profit, so favorable business expectations induce investment.
Price Levels:
When there is a tendency for the price level to rise, it will increase the possibility of the profits of investors and so they will go on for more investment.
Other Factors:
Availability of finance, stock of capital goods, aggregate demand and conditions of labour market are other factors.

Question for UPSC Mains:
Discuss various factors that influence the Foreign Investment Decisions.

Published: February 6, 2016 | Modified:June 27, 2019

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