The Impact of Political Factors on FDI Ownership Structure Decision

This paper examines the relationship between political factors and foreign direct investment (FDI) ownership structure decision. It focuses on government trust, democracy, and joint venture. The paper includes a hypothesis on the tendency of democracy to increase the likelihood of MNC to opt for joint venture and how government trust strengthens the relationship between democracy and joint venture.

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The impact of political factors on FDI ownership structure decision
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Abstract
Foreign direct investment has been on the rise in the recent past. The growth in the sector is
owed to the globalization aspect adopted in the business field. This creates the need for a
study on the factors affecting the growth. The paper focuses more on the effect of political
factors on the field since it is a key determiner of development of the field. The aim of this
paper is to develop an understanding of the relationship between political and global business
development. The knowledge acquired is necessary for application in the business field.

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Table of Contents
Abstract......................................................................................................................................2
The impact of political factors on FDI ownership structure decision........................................4
Introduction................................................................................................................................4
Literature review........................................................................................................................4
Conceptual framework...............................................................................................................5
Trust of government...............................................................................................................5
The level of democracy..........................................................................................................6
Joint Venture..........................................................................................................................6
Hypothesis development............................................................................................................7
Hypothesis 1: the level of democracy increases the likelihood of MNC to choose Joint
venture....................................................................................................................................7
Hypothesis 2: the trust of the government strengthens the relationship between the level of
democracy and joint venture..................................................................................................7
Research methodology...............................................................................................................8
Sample and data collection.....................................................................................................8
Measures.................................................................................................................................9
Dependent variable indicators............................................................................................9
Independent variable indicators..........................................................................................9
Control variables.................................................................................................................9
Bibliography.............................................................................................................................10

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The impact of political factors on FDI ownership structure
decision
Introduction
Foreign direct investment involves the ownership of assets or having a share of a
company or a business in a foreign country12. The ownership gives the foreigner a chance to
decide on matters concerning the business since he or she is recruited to the business
management. In the current world, FDI is growing tremendously all over the world. The
growth is associated with the globalization aspect adopted by the business market. Also, the
growth levels are determined by the political factors in different countries. after conducting a
research Jensen and Nathan concluded that most of the benefit involved with FDI investment
is leapt by the developed countries i.e. 68% of the total profit flowed into the developed
countries in 2007. The huge profit is involved with huge FDI investments in the developed
countries. This resulted from restrictions made by developing countries to curtail foreign
development3. As a result, investors made their investments in developed countries where the
conditions were favourable and protective. The paper reviews the effects of political factors
on FDI. More so the paper focuses most on government trust, democracy and joint venture. It
also includes a hypothesis on the tendency of democracy to increase the likelihood of MNC
to opt for joint venture and how government trust strengthens the relationship between
democracy and joint venture.
Literature review
Scholars have focused on global economic growth since it remains a major field with
great impact on world development. As a result, different views have been developed on the
topic based on various research. Among the key factors cited in the study included the
influence of government policies and political factors on the FDI. Studies have shown that
supportive government policy and regional integration have encouraged FDI in various
countries. China serves as an example of countries that have benefited from FDI due to
supportive policies and integration. According to research conducted by Kari, Sergei, and
1 Jensen, Nathan M. 2012. Politics and foreign direct investment. Ann Arbor: University of Michigan
Press, 1.
2 Amadeo. Foreign direct investment, pros, cons and importance to you. (2018).
3 Jensen, Nathan M. 2012. Politics and foreign direct investment. Ann Arbor: University of Michigan
Press, 2.

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Marc (2016) China was the leading country in East Asia on FDI hosting and also led in the
entire world in the year 2013 and 20144. The increase contributed to the country’s revenue by
$128 billion. The investors were encouraged by the supportive policies developed by China
development and the integration created by the country. The supportive climate also helped
China citizens to develop their companies to other countries where favourable growth rate
existed. In addition, taxes imposed on foreign investments have been identified as a factor
affecting FDI globally. The taxes imposition effect may originate from the mother country or
from the foreign country. Hartman argues that high taxes in mother countries do compel
investors to invest in foreign countries where the taxes are lower5. This is mostly related to
the profit-oriented nature of the investors. On the other hand, high taxes in foreign countries
discourage foreign investment since it increases the risk of incurring losses in any investment.
In developing countries, high taxes are put in place to prevent international trade investments.
The restriction is aimed at protecting local industries and an increase in government revenue.
Conceptual framework
Trust of government
Trust is necessary for the transfer of assets belonging to a local company to foreign
investors. In many countries trust is a legal process that is developed as a law. China serves
as an example to trust development since it has developed a trust law that provides for a trust
created during the signing of contracts6. The law also stipulates that a trust can only develop
after all transfer processes have been executed. The existence of trust gives the foreigner a
chance to compel the industry to follow the agreement developed. In addition, the trust
developed helps in solving disputes that may arise from the FDI since it will be used to define
the agreement made. This helps in identifying the lawbreaker and in perfecting the mistakes
that may have occurred in the business. The trust law seeks to protect investors and in return
investments increase since their investments are protected by the law.
4 Kari, L., Sergei, S., Jean-Marc, F. 2016. The Russian Economy and Foreign Direct Investment. New
York: Routledge.
5 Zhang. “Foreign direct investment in China: Determinants and Impacts.” A thesis for a degree of
doctoral of philosophy in management studies, University of Exeter, (2011), 17
6 Ho, Lusina, and Rebecca Lee. 2013. Trust law in Asian civil law jurisdictions: a comparative
analysis. Cambridge: Cambridge University Press, 119.

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The level of democracy
Democracy is a key factor that determines the level of FDI in a country. Democracy
helps develop the virtue of state ownership. This enhances FDI in development sector other
than purely in the business sector. Among the fields that attract investment include the
energy, infrastructure and the extractive industry7. This has enhanced increased FDI
investment, especially in developing countries. As a result, developed countries have taken
the opportunity to extend their companies to the countries, for example, CNOOC Company
of China has invested in petroleum and refining sector in developing countries. Also,
Multinational companies do prefer investing in a stable political environment since adequate
control is offered and the environment poses a low risk to the investments made8. Among the
characters of the stable political environment include; well-defined property rights, respect
for rule of law and indiscriminative court system. This freedom encourages investments
resulting in high levels of FDI in specific countries.
Joint Venture
A joint venture is an act where companies join together to perform a common task
with an aim to increase their profits. Das and Das (2011) research have shown that in the case
of joint venture firms realize more profits compared to those earned in monopoly. The
increase is developed from the cost-sharing developed by the jointed firms. Also, the local
firm may benefit from technology development and better marketing strategies provided by
the foreign firm. This saves the local firm the funds that would have been used to develop the
quality of its products and services and on increasing its market share9. Local firms do prefer
for joint venture since they enjoy Cournot profits. Also, the joint venture can occur through
acquisition of small local companies by large foreign companies10. This enhances FDI
especially in low-income countries whose companies do take the joint advantage to increase
their sales and to obtain Cournot profits. In China, firms have developed joint venture
following the policies developed by China government to encourage foreign investment11.
This has helped the country realize its economic growth.
7 Sun. “The dual political effects of foreign direct investment in developing countries.” Journal of
Developing Areas, Vol 48 Issue 1, (2014), 109
8 Sun. “The dual political effects of foreign direct investment in developing countries.” Journal of
Developing Areas, Vol 48 Issue 1, (2014),108
9 Das, Das. “Foreign direct investment, joint ventures and export.” Journal of business management
and economics, Vol. 3 Issue 5, (2012), 181
10 Alfaro, Chauvin. “Foreign direct investment, finance and economic development.” Encyclopedia for
international economics and global trade, (2017), 5
11 Zhang. “Foreign direct investment in China: Determinants and Impacts.” A thesis for a degree of
doctoral of philosophy in management studies, University of Exeter, (2011), 17

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Hypothesis development
Hypothesis 1: the level of democracy increases the likelihood of MNC
to choose Joint venture
Democracy of a country is mostly defined in its rules which are either oppressive or
offer freedom to the country participants including foreign investors. In most developed
countries they have developed their democracies to protect foreign investments. This has
enhanced good business terms between the countries through the development of business
partnerships following a good peace correlation12. The partnership allows for the merging of
companies from various companies to develop the economy of the nation. Also, the
partnership is aimed at increasing the profit gained from the businesses. America and
Australia serve as an example where the partnership developed enhanced the partnership of
American airline and Australia Qantas airline13. As a result of the partnership, both
companies have realized tremendous growth due to increased profits. Democracy also allows
for protection and extension of privileges to investors in a country14. Due to the freedom
granted international firms develop an interest to invest in the country since conducive
investment opportunities are created. On the other hand, local companies take advantage and
join with the companies in order to realize technological development and increase
innovation in their production. The local companies also act as a landing base for foreign
investments since they are not conversant with the new market. In this regard, democracy
increases the level of FDI investment in a country.
Hypothesis 2: the trust of the government strengthens the
relationship between the level of democracy and joint venture
Trust for government is very necessary for any regime. Trust is usually a key
determinant of policy development and implementation. In countries where citizens lack trust
in the government, it is hard for the regime to pass a bill that can enhance the country’s
economic growth since they lack the support of the citizens. On the other hand, countries
with good rules and regulations often win the citizens support and can comfortably develop
strategies that enhance business growth15. Also, the regime creates rules that favour economic
12 World politics. Online publication. (2017)
13 Bimothy news and views. “National carrier Qantas group public affairs journal.” Issue 2, (2015), 1
14 Lisboa, Latif. “Brazil: Democracy and Growth.” Center for development and enterprise: informing
south African policy, (2014), 6
15 OECD. “Trust in government, policy effectiveness and the governance agenda. Chapter 1.”
Government at a glance, (2013), 20

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growth. This ensures compliance with the law, lowers the risk exposure to foreign investors,
enhances investment and innovation. As a result, foreign investor tends to invest in the given
country through mergers as well as single investments. In most cases, mergers are preferred
since they reduce the operational cost and increase the profits of both companies. In addition,
the willingness to invest in the country is developed from the integration developed from the
democratic nature of a country. The development enhances business partnerships and the
removal of barriers curtailing foreign investment.
Research methodology
Sample and data collection
In data collection there is the identification of a sample from which information
concerning the field is deduced. Similarly, in our research a sample of China local industries
was evaluated in 2007. To determine the relevancy of the sample information was obtained
from the ORBIS database. The research targeted the company CEOs, general managers and
marketing mangers since they had knowledge concerning the nature of competition
developed by foreign countries. a questionnaire was developed to aid in collecting
information. The questionnaire was designed to evaluate the understanding developed by
Chinese firms on the advantages and performances of both local and foreign firms. The
questionnaire was translated to Chinese to enhance understanding. The questions aske
answered questions concerning advantages (independent variables), disadvantages
(dependent variables) and their effects to industrial performance. The paper also directed for
self-evaluation on a scale of 1-5 in relation to the advantages and disadvantages cited. In
statistical analysis the average of the various scores was developed to determine common
effect. In the study 935 questionnaires were delivered to the respondents where 185 were
found eligible for screening. According to the result it was identified that developed countries
offered the most competition to the local industries with 70.1% followed by firms from
recently industrialized countries with 25.6% while developing countries contributed 4.3%16.
Measures
Dependent variable indicators
The development of the variables was based on the research conducted to evaluate the
performance of local firms in various fields on a scale of five. Among the fields studied
16 Jieng, Stening. Do indigenous firms incur liability of localness when operating in their home market? The case
of china. Journal of world business, Vol. 48, (2013), 482.

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include; profitability market share, sales growth, competitive position and product and
services delivery. The main challenges facing the local companies was incompetence in
business accounting. As a result, the companies are unable to categorize themselves with
respect to foreign investments that are highly competitive in the accounting field. The
problem is blamed on lack of skilled labor in accounting since most Chinese children and
young people are focused on art other than sciences and business courses17.
Independent variable indicators
The variables analyze the advantages that are posed by both local firm and foreign
firms based on a series of study. The main advantage for businesses in China both foreign
and local is guanxi development18. Guanxi was developed to enhance joint venture in the
market. The strategy has helped develop good relationship with other countries encouraging
FDI in china. Through the joint venture companies have revolutionized their production
technology and market share since they have developed to foreign countries as well.
Control variables
In the study control variables were developed to help distinguish between various
companies for example, in order to distinguish between the productive industry and the
service industry variables were used i.e. 1 was used to indicate the manufacturing sector
while 0 indicated service offering industry. Also, the age of the firm was recorded in of years
since establishment. In addition, there was integration of state-owned firms which were code
0 while 1 was coded for others not meeting the requirement.
Bibliography
Alfaro, Chauvin. “Foreign direct investment, finance and economic development.”
Encyclopedia for international economics and global trade, (2017)
Amadeo. Foreign direct investment, pros, cons and importance to you. (2018). Retrieved
from https://www.thebalance.com/
Bimothy news and views. “National carrier Qantas group public affairs journal.” Issue 2,
(2015)
17 Wu. An analysis of business challenges faced by foreign multination operating the Chinese market.
International journal of business and management, vol.17 issue 17, (2008), 170
18 Wilson, Brennan. Doing business in China: Is importance of Guanxi diminishing? (2010). Retrieved from
https://www.researchgate.net/publication/254188325

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Das, Das. “Foreign direct investment, joint ventures and export.” Journal of business
management and economics, Vol. 3 Issue 5, (2012)
Ho, Lusina, and Rebecca Lee. 2013. Trust law in Asian civil law jurisdictions: a comparative
analysis. Cambridge: Cambridge University Press,
Ho. “Trust law of Hong Kong.” The report, (2015) Retrieved from shintakuhogakkai.jp
Jensen, Nathan M. 2012. Politics and foreign direct investment. Ann Arbor: University of
Michigan Press, 2.
Jieng, Stening. Do indigenous firms incur liability of localness when operating in their home
market? The case of china. Journal of world business, Vol. 48, (2013), 482.
Kari, L., Sergei, S., Jean-Marc, F. 2016. The Russian Economy and Foreign Direct
Investment. New York: Routledge.
Lisboa, Latif. “Brazil: Democracy and Growth.” Center for development and enterprise:
informing south African policy, (2014)
OECD. “Trust in government, policy effectiveness and the governance agenda. Chapter 1.”
Government at a glance, (2013)
Sun. “The dual political effects of foreign direct investment in developing countries.” Journal
of Developing Areas, Vol 48 Issue 1, (2014)
Wilson, Brennan. Doing business in China: Is importance of Guanxi diminishing? (2010).
Retrieved from https://www.researchgate.net/publication/254188325
World politics. Online publication. (2017). Retrieved from
politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/
acrefore=9780190228637-e-287
Wu. An analysis of business challenges faced by foreign multination operating the Chinese
market. International journal of business and management, vol.17 issue 17, (2008), 170
Zhang. “Foreign direct investment in China: Determinants and Impacts.” A thesis for a
degree of doctoral of philosophy in management studies, University of Exeter, (2011)