3. IMPACT OF INVESTEMENT ENVIRONMENT ON FDI ATTRATION
3.1. Factors from investment environment in the host country countries
3.1.1. Natural environment
The natural environment includes natural factors such as geographical location, topography, climate, natural resources ... of a given area. The elements of the natural environment affect the selection of investment sectors and the profitability of the project. This is one of factors that affect the investment structure in a given area. If countries have abundance natural resources, they can attract investment to
develop the mining sector. National sources being abundance in raw materials will attract investment, reduce costs and product prices.
Geographical location and natural conditions are inherent incentives of a country, a territory. Advantages of a national geographic is that these countries are located in the area of active economic development, in the international traffic routes where can be controlled for large areas. Countries having such position can take benefit from information flow, new development trends, and can facilitate the flows of capital, goods transportation. For investors, the natural preference is places which provide more business opportunities, higher profitability.
Many developed countries in the world rely on advantages of geographical position and natural resources. However, there are also poor resource countries such as Japan but they have strong economic power. Therefore, natural resources are important but not vital to economic development.
3.1.2. Politic environment
The stable political system ensures the Government's commitment to the investor about the capital property, the investment incentives and the development orientation. This factor specifies level of assets risk and business activities of investors.
The foreign investors only invest in a country with a stable investment environment, which is safe for the movement of their capital. Political stability is the most important factor for attracting foreign investment because it ensures the implementation of the Government's commitment to the issue of investment ownership, planning and policy priorities and investment development orientations of a country; political stability will create socio-economic stability and reduce risks for investors, especially foreign investors. It is the enactment of laws, policies and
regulations related to the foreign investment activities, creating the stable development of the economy, social stability.
Political instability will lead to the developing ways inconsistencies and policy instability. The contempous government commits not to nationalize assets, capital of foreign investors, but the new government is not necessarily agreed with this view and might make changes, ownership of foreign investors is threatened. In some countries, the new government leadership will change the investment orientation of the host country (changes in encouraging field, export strategy ...) that makes investors in a state of not being able to either withdraw or finish and have to accept losses.
3.1.3. Law and policy environment
FDI activities relate to many organizations and individuals and are conducted for a long time. So the legal system of a country must ensure the following elements:
First, adequacy and synchronization of the legal system: FDI activities are affected by many policies of the host country laws, including policies of direct effects such as regulations on investment fields, the provisions of foreign ownership, exemption tax for investment, competition, intellectual property rights ...; the policy of indirect effects such as monetary policy, trade, security, foreign policy ... the inconsistent legal system will make difficulty for investors to follow policies or regulations in right way, they are easily to be pushed into the law violations state of the host country.
Second, the ability of law implementation: working in the countries abroad with large amount of property, investors must rely on the laws of host countries to ensure their interests. So if the law implementation is lax and ineffective, the interests of investors will be threatened.
Third, administrative procedures: The procedures relate to all stages of investment process such as establishment of project, application requirements for investment licenses: what to do, which departments to be responsible for the investment license, whether investors receive information from the Government, local administrative department in the host countries, the average time to obtain an investment license, the administrative convenience or inconvenience...
Finally, the preferences and restrictions given to investors by the legal system;
Transparency, fairness, openness and stability of the legal system 3.1.4. Economical environment
The economic environment reflects the level of economic development of a country, and may affect the attraction and effective use of FDI investors. The level of economic development is reflected by some index such as economic growth, infrastructure, human resources, inflation, interest rates, exchange rates, GDP / capita, financial system…
a) Economic growth
Capacity of economic growth affects prospects of attracting investment capital effectively (both domestic and foreign countries). High and sustainable economic growth proves that entities in an economy operate efficiently, leading an increase in the accumulation ability of the economy, as a result, investment capital increases. In addition, the growth prospects are high signal to attract foreign investment; higher growth shows high efficient use of national capital. Thus, FDI inflows will flow from the low effective place to higher effective place. The high capacity of economic growth also suggests that countries have created a favorable investment environment.
High economic growth leads an increase in purchasing power thus facilitate the consumption of goods and attract investors.
b) Market size
A country with a large population, large market has an irresistible attraction to foreign investors. The bigger market size is, the more attraction for foreign investors, especially investors have market searching policies. For example, China is one of the countries which attracted a largest amount of FDI in the world by an advantage of large-scale population, more than 1 billion people – such an advantage that other countries are difficult to obtain
c) Labor sources
One of the important social elements of the investment environment is the human source and labor rates. Investors will select an area which meets quantity, quality and labor rate together. The quality of labor is a competitive advantage for investors in high technological sector or using modern technology. In addition, cultural factors also influence labor characristics such as the hard work, discipline, sense …while working ... Quality of labor affects FDI attraction, foreign investment structure, investment in a specific sector. The higher-quality workers and lower labor costs will lead to more attractive investment environment, reduce costs and increase profits. But to have good labor force, it depends on the education system, training, training quality....
d) Infrastructure
Infrastructure system includes power systems, water supply, traffic network, communication systems. Levels of these factors reflect the economic development level of a country, creating an environment for investment activities. Infrastructure affects strongly to business performance, speed of capital flows. This is the top concern of investors before making investment decisions. Good infrastructure is one of the important factors that help to reduce production costs of investors. The
insufficent or outdated infrastructure affects investment costs and create barriers to investment activities. The less quality of infrastructure services has direct impact to the manufacturing and business activities as well as foreign investors’ life, which increases production costs, reduce quality of product. Investors only invest in a region where it has good and favorable infrastructure for qualified production activities.
Power supply and clean water system ensure for the large-scale and continuous production. These services which do not meet the needs of continuous production will cause a lot of problems for investors.
Traffic network contributes significantly to economic development. It caters for material supply, product consumption. The transport hub which is adjacent to the world as seaports, airports is most important. The vital roads are important linkages for the economic exchanges between localities of the country. A multi and mordern trafic network will help investors reduce unnecessary transportation waste, reduce transportation costs.
Communication system is an important factor in the context of the information explosion recently, all the information about market fluctuations transmits continuously anywhere in the world. Delay information contact will loose business opportunities. Attractive investment environment in the eyes of investors is an environment with better communication system and cheaper cost.