Foreign direct investments have become an ever-important aspect of growing the economy as the extra capital injection goes a long way in revitalizing industries while creating job opportunities and leading to the creation of wealth. However, a nation must create an enabling business-friendly environment to attract and maintain foreign direct investment. Foreign direct investment can be described as an investment by a foreign-based firm into the local economy by having a majority stake in a homegrown enterprise (Voicu, Sen, &Martinez, 2018). Governments must therefore take steps to increase the amount of FDI (foreign direct investment) coming into the country and encourage global companies and firms to increase investments into the local economy.
Within the Diamond Theory of National Advantage, features that define the local economy of the country are considered as crucial in the growth of competitiveness in the international business space. The theory defines aspects that lead to the accomplishment of national objectives in the global economy. Divided into four distinct features, they are referred to as determinants of national advantage (Jones &Wren, 2016). Firstly, we have the factor conditions of production then the demand conditions. The other aspects are firm strategy, structure and rivalry and related and supporting industries. In the case study we will restrict ourselves to the United States.
Factor Conditions
Encompasses factors that are necessary for the production process as a country lacking in them would struggle to attract foreign investment. The United States government has to institute measures to allow for exploitation of natural resources at an affordable rate by lessening of environmental restrictions that suffocate industry. Factor conditions also include to a large extent the existence of a highly skilled labor pool that forms part of specialized factors. In the recent past, the United States dominance in this field more so the technological aspect of it has ensured that the country is the number one recipient of FDI in the world (Jones &Wren, 2016). To maintain the position, the government has to increase the green card immigration policy of offering the chance of immigration to the country to highly skilled individuals from other nations willing to make a move.
Skilled workers not only create a larger pool of skilled workers but also bring in new ideas that foreign investment banks can fund therefore leading to increased levels of foreign direct investment. As can be shown by countries such as Japan and South Korea, it is imperative to develop the specialized factors in comparison to the natural factors as they tend to lead to a higher economic growth rate. Natural resources that are undeveloped or underutilized do not spur on the factor conditions in boosting the economy. The need to create a technology base to attract investment capital should also result in a review of the education system with an emphasis to be placed on computing.
Demand Conditions
A demanding consumer base for products leads to a national advantage over other foreign markets thus creates an incentive for foreign direct investment to increase as investors will want to operate in an economy where their products have a high demand. In a scenario where a product has a higher demand locally than in the international market, the producers in the nation will create a competitive environment that leads to an advantage over foreign competitors. The strong demand influences producers to constantly improve the quality and pricing of a product or service. To increasedemand, the government ought to cut taxes on income earned by the citizens which in effect increases their amount of dispensable income therefore driving demand. A market with a high demand for products and services sees an increase in the amount of foreign direct investment as the investors seek to turn a profit by selling more goods comparatively to other nations (Blonigen & Piger, 2014).
Involves the growth of key industries in the economy that spurs on a large part of the economy. For example, the growth of the car industry led to growth in other sectors such as the manufacturing of steel (Voicu, Sen, &Martinez, 2018). A government-led initiative that results in the growth of such a key part of the economy results in more investment from other arising opportunities emerging from them. Recently, the exponential growth of the high-tech business has led to growth to other sub-sectors such as the gaming industry that gross very high turnovers annually and have become an important part of the United States economy. Additionally, other growth sectors noted is the rise of the social media platforms emanating from the United States being a technology leader globally.
Other startups have been formed with mixed fortunes trying to follow the trend set by the market leaders and a good number of them like BnB and Uber have been successful. The nation has overtime become an incubation hub for the startups due to the existence of the technological infrastructure that is unrivaled globally as the market leaders, Google and Microsoft are based in the country. FDI therefore increases as investors seek to have a slice of the pie and invest in the country. The government needs to cut taxes to the huge technology multinationals therefore and offer cooperative incentives to maintain their presence in the United States.
The local prevailing conditions affect firms and foreign direct investments. A case in point is the difference between German companies that tend to be hierarchical and Indian firms that maintain the family ownership and are small in size. Such conditions determine the type of industries the nation develops. The United States is in a privileged position when it comes to structure as the American economy is built around high competitiveness and existence of huge multinationals (Voicu, Sen, &Martinez, 2018). Whereas a very competitive environment makes Investors shy away, over the long run, a competitive market innovates and surpasses its counterparts. The government must therefore maintain a high level of competitiveness that also attracts other actors and encourages FDI. Laws that are prohibitive towards monopolies have to be enacted and enforced to guard against anti-market practices that may derail the economy (Westeren et al., 2018).
Government Policy
Policies adopted by the government impact on the well being of industry in the economy and generally determine the productivity of firms operating in the country (Lazzarini, 2015). Additionally, the government can actively undertake measures aimed at boosting the capacity of its industry players to innovate and upgrade thus is competitive on the international scene. Legislation of anti-monopoly laws that guard against the rise of market hegemonies (Gereffi & Lee, 2016). The laws would serve to ensure competition within the market is maintained and not threatened. Competition in the domestic market ensures that companies have to innovate to remain relevant. The policies foster the creation of strong domestic rivals who through competition seek to do one another out therefore innovating and upgrading on their product offering. Innovation that results from such industries gives the country an edge on the international stage (Manuel, Al-Hamadi and Qureshi, 2015).
The government in a bid to boost the capacity of its industry to be more innovative and upgrade their goods can implement a policy of lower taxation (Gereffi & Lee, 2016). Strong local demand for goods creates a strong market for firms to operate in and have an incentive to innovate. A strong demand also ensures profits for the firms who can then use the extra income to develop Research and Development departments using the profits gained. Lowering of income taxes leads to increased demand because households have more disposable income to spend on goods and services (Wonglimpiyarat, 2015).
Implementation of safety and industry standards to provide benchmarks for grading forces the market to respond accordingly. For example, raising the standards needed for a hotel establishment to be awarded five- or four-star arm twists the industry players into raising their product offering (Lazzarini, 2015). Within the transport industry the enforcement of standards in car or shipbuilding ensures that manufacturers adhere to them and therefore create an advantage over other products on sale from nations that do not have similar safeguards.
A government must also adopt a global outlook strategy to ensure that local firms sell their products worldwide and build brands (Gereffi & Lee, 2016). Innovation is not an end in itself and a failure to upgrade can decimate a nation’s industry. The government can help in this end by actively negotiating international agreements that open new markets for its companies. The addition of more consumers leads to firm expanding their production capabilities and quality to cope in the much bigger and competitive market. Implementation of the above-stated strategies therefore helps a nation cultivate its capacity to innovate and upgrade.
References
Blonigen, B. A., & Piger, J, 2014. Determinants of foreign direct investment. [Online] Available from: https://onlinelibrary.wiley.com/doi/abs/10.1111/caje.12091 [Accessed on 14th November 2018].
Gereffi, G., & Lee, J. 2016. Economic and social upgrading in global value chains and industrial clusters: Why governance matters. [Online] Available from: https://link.springer.com/article/10.1007/s10551-014-2373-7 [Accessed on 14th November 2018].
Jones, J., &Wren, C. 2016. Foreign direct investment and the regional economy. [Online] Available from: https://www.taylorfrancis.com/books/9781317134053 [Accessed on 14th November 2018].
Lazzarini, S. G. 2015. Strategizing by the government: Can industrial policy create firm?level competitive advantage? [Online] Available from: https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2204 [Accessed on 14th November 2018].
Manuel, P., Al-Hamadi, H. and Qureshi, K., 2015. Challenges, strategies and metrics for supply-driven enterprises. Annals of Operations Research, 233(1), pp.293-303.
Voicu, V. A., Sen, S., &Martinez, Z. 2018. Foreign Direct Investment.[Online] Available from: https://link.springer.com/chapter/10.1057/978-1-349-59005-6_5 [Accessed on 14th November 2018].
Westeren, K.I., Cader, H., de Fátima Sales, M., Similä, J.O. and Staduto, J., 2018. Competitiveness and Knowledge: An International Comparison of Traditional Firms. Routledge.
Wonglimpiyarat, J., 2015. New economics of innovation: Strategies to support high-tech SMEs. The Journal of High Technology Management Research, 26(2), pp.186-195.
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