Attracting And Retaining Foreign Direct Investment Using Porter’s Diamond Of National Advantage

Background

FDI (foreign direct investment) is considered as a type of investment which is made by one company situated in other than the country of investing company. This investment is considered as an effective tool for growth and development for the developing countries and in relation to this, developing countries invest a huge amount of their national income in making the country’s infrastructure attractive as well as effective through which multinational corporations from different nations could be attracted and invest in their countries. Due to globalisation, tech-revolution and introduction of internet, drastic changes have been observed in the functionalities of business entities at international level. These factors have been the major determinants for the organizations to expand their businesses in the international market. FDI have become a necessary part of GDP for the developing countries and in relation to this, these countries regularly take relevant steps in order to attract FDIs especially from developed countries (Grant, 1991).

Even as the world has observed increasing number in GDP numbers and growth in the trade, although, global flows of FDIs fell by 16% in 2017 which is estimated to $1.52 trillion. In 2016, global flows of FDIs stood at $1.81 trillion. FDIs in the developed countries were decreased in the last year and at the same time; FDIs in the developing economies were increased. The increase in the FDIs in the developing economies has helped them to pace up towards sustainable development and growth. Despite the decrease in the FDIs in the developed countries, United States stood at the leading position in the list of highest global FDIs i.e. $311 billion followed by $1.44 billion in China.

In this report, FDI structure and the requirement of FDI in Kuwait will be discussed by application of the Porter’s Diamond National Advantage theory. In the second part of the report, appropriate policies will be discussed which could be adopted by the government in order to enhance the capacity of their industries in terms of innovation and upgradation (International Trade Administration, 2017).

Kuwait is one of the biggest exporters of petroleum products and with the help of this; Kuwait has been able to acquire seventh position in the list of leading millionaire countries in the globe. Primary source of income for Kuwait is petroleum industry as it contributes approximately 90% in the overall government’s income and contributed more than 50% towards the GDP of the nation (International Trade Administration, 2017). In the last few years, Kuwait’s income from the petroleum industry has decreased slightly, thus, Kuwaiti government has transferred their interest towards secondary financial services (Smit, 2010).

In relation to this, application of Diamond of National Advantage theory in order to attract and retain FDIs will be discussed below:

Diamond of National Advantage theory has four elements which are as follows:

• Factors of production: Every country is blessed with certain natural resources while some are blessed with effective manpower which helps them to boost up their productivity along with developing effective position in the global market. For example, Kuwait is blessed with various natural resources which have made them one of the largest exporters of oil and on the other hand, Japan and China has effective technology and human resources respectively that have made both the countries to stand in the list of favourite destinations to invest for gaining positive outcomes. Due to slight decrease in the income from petroleum industry, organization has moved towards other sectors such as financial services in order to retain its acquired position in the global market. With the rise in the usage of technology by other countries, FDI in Kuwait has been decreased and to regain the lost FDIs as well as to attract other companies from the international market, Kuwaiti government has decided to adopt measures on the basis of latest trends to retain the country’s image in the global market and to attract the FDIs (Rossi, 2015).
• Demand conditions: This factor refers to the analysis of demand for the products of one organization in their home market. With regards to this, appropriate measures are being adopted for increasing effectiveness of those products in order to enhance organizational performance (Porter, 2000). Consideration to this factor, demand for the products are analysed in the home market in order to promote them into the international market. For example, Kuwait is one of the biggest oil exporters in the international market and the demand for crude oil is much high in the Asian market as it is one of the largest consumer segments across the globe. In the same manner, Kuwait is focusing towards other sectors rather than the petroleum in relation with marking up its position in the list of top countries with highest FID inflows (Vizer & Sears, 2017).
• Related and supporting industries: Kuwait is focusing towards other industries and their primary area of interest is financial services. Apart from this, Kuwait is also focusing towards one of the most rising industries i.e. information and technology and automation sector. With the increasing demand of these industries, Kuwait could also invest in these industries with the objective of attracting FDIs from behemoth multinational corporations along with making their primary sector i.e. petroleum industry more effective along with generating higher results (Delgado, Porter & Stem, 2015).
• Organizational strategy, structure and rivalry: As every country has unique set of strategies, resources and other factors, in the same manner, every country is blessed with certain sort of minerals, natural resources, etc. This makes difference between countries and these factors become the major attractions for the multinational companies to expand their business in these countries. Recently, Kuwaiti government has established its presence in other fields also with respect to the retention of their position in the global market along with enhancing the rate of FDIs (Rothaermel, 2015).

The major concerns for every country’s government is to adopt strategies for enhancing their performance in the global market, empowering their citizens with appropriate knowledge to match up with the international standards, generating employment opportunities for the local citizens in relation with making them capable enough to get standard basic life standard (Shapiro, 2013). Following are the strategies which could be adopted by the Kuwaiti government for enhancing the capacity of their industries in terms of encouraging innovation in the business industries:

• Promoting creativity and innovation: This is the best measure through which an organization, industry or the whole country could move towards sustainable growth and development. With regards to this, it is recommended to the Kuwaiti government to encourage innovation and creativity amongst their citizens by providing all the available resources in order to make them think out of the box. This will not lead to generate new ideas which could be used for the objective of development of secondary industries in terms of enhancing country’s productivity as well as to retain the interest of multinationals in the country (Hsu, Tian & Xu, 2014).
• Removal of unclear laws: Kuwait’s laws and regulations are considered bit old and the major reason behind this is still ruled under monarchy system. Thus, there are sundry rules and regulations which not only put barriers in the growth of the organization in the international market but it also affects the whole business industry of the country, thus, these rules and laws required to be abolished in order to encourage the companies to expand their businesses along with enhancing the overall country’s performance.
• Development of infrastructure: Infrastructure development is one of the most effective and appropriate aspect through which one country could easily target big multinationals in terms of setting up their business in their country. With the help of attractive infrastructures, developing countries in Asian region have received huge FDIs in past few decades and this have been the primary factor for them in terms of moving towards development at fast pace (Fanack.com, 2018). Thus, it has been recommended to the Kuwaiti government to invest certain portion of their earnings towards development of infrastructure as per the requirement of multinational corporations in order to attract FDIs from different parts of the globe. This factor will also lead to generate various employment opportunities for the local citizens and it will ultimately enhance the GDP and national income of Kuwait (Laeven, Levine & Michalopoulos, 2015).
• Providing subsidies for the new start-ups: Promoting start-ups has become a trend in the international market. Under this system, entrepreneurs come up with new business ideas along with the blueprint of the overall business plan. Further, funding is raised in the market by searching appropriate investors by explaining them the idea of business. In relation to this, it has been recommended to the government to promote start-ups and ensure them the minimum investment which will be provided from the government in order to encourage and motivate them towards generation of more new business ideas. The more  new business ideas will be, the more country will move towards sustainable growth and overall development.

References 

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Grant, R.M., 1991. Porter’s ‘competitive advantage of nations’: an assessment. Strategic management journal, 12(7), pp.535-548.

Hsu, P.H., Tian, X. and Xu, Y., 2014. Financial development and innovation: Cross-country evidence. Journal of Financial Economics, 112(1), pp.116-135.

International Trade Administration. 2017. Kuwait – 1-Openness to & Restriction on Foreign Investment [online]. Available at: https://www.export.gov/article?id=Kuwait-Openness-to-Foreign-Investment [30/10/2018].

Laeven, L., Levine, R. and Michalopoulos, S., 2015. Financial innovation and endogenous growth. Journal of Financial Intermediation, 24(1), pp.1-24.

Porter, M.E., 2000. Location, competition, and economic development: Local clusters in a global economy. Economic development quarterly, 14(1), pp.15-34.

Rossi, E., 2015. Modulating the sensitivity to syntactic factors in production: Evidence from syntactic priming in agrammatism. Applied Psycholinguistics, 36(3), pp.639-669.

Rothaermel, F.T., 2015. Strategic management. McGraw-Hill Education.

Shapiro, G. 2013. Six Ways to Create Economic Growth [online]. Available at: https://www.forbes.com/sites/garyshapiro/2013/01/23/six-ways-to-create-economic-growth/#2beb39bb7e32 [30/10/2018].

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Vizer, L.M. and Sears, A., 2017. Efficacy of personalized models in discriminating high cognitive demand conditions using text-based interactions. International Journal of Human-Computer Studies, 104, pp.80-96.