Factors influencing foreign direct investment (FDI) location selection: a review of the literature

Abstract

Foreign Direct Investment (FDI) has long been associated with globalisation. It enables host countries to achieve economic growth by providing possibilities for multinational corporations (MNCs) to internationalise their business operations. To comprehend FDI, one must first grasp the fundamental motivations that drive a company to invest abroad. The objective of this research is to identify the key elements that influence a company’s decision when selecting a location for FDI. The Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines were used to conduct a systematic review and four different databases were considered, namely ScienceDirect, Emerald Insight, Journal Storage (JSTOR) and Web of Science (WOS). The findings indicated that six theories can be associated to the factors influencing the choice of FDI locations, namely capital market theory, transaction cost theory, product life cycle theory, internationalisation theory, the eclectic paradigm, and entry mode theory. The findings also revealed that there are four factors that would influence the choice of FDI locations: (1) micro factors; (2) macro factors; (3) strategic factors; and (4) sector-specific factors. Future research should focus on determining how the factors influencing FDI location selection differ according to the types of FDI, which include vertical, horizontal, and conglomerate FDI. In addition, research should also focus on how the identified factors can affect the FDI inflows in host countries across various business industries.