What is the Impact of Brexit on Foreign Direct Investment (FDI) within the UK with a Focus on the Manufacturing, Banking and Finance, and Oil and Gas Industries?

Contents

Acknowledgements

Abstract

1 Introduction
1.1 Chapter Outline
1.2 Theoretical setting
1.3 Topic Preview
1.4 Research Question and Objectives

2 Literature review
2.1 Chapter Outline
2.2 Definition of FDI
2.3 Types of FDI
2.3.1 Resource seeking FDI
2.3.2 Market seeking FDI
2.3.3 Efficiency seeking FDI
2.3.4 Strategic asset seeking FDI
2.4 Eclectic Paradigm Theory (OLI)
2.5 Product Life Cycle
2.6 Host Country Determinates of FDI
2.6.1 Political Determinates
2.6.2 Economic determinates
2.6.3 Business Facilitation
2.6.4 Empirical studies
2.7 Chapter Summary and Contributions

3 Methodology
3.1 Chapter Outline
3.3 Research Philosophy
3.4 Research Approach
3.5 Research strategies
3.6 Time Horizons
3.7 Data Collection Methods
3.8 Quality and Limitations of Research

4 Findings and Results
4.1 Chapter Outline
4.2 United Kingdom Country Portrait
4.3 European Union and Brexit
4.4 Secondary Data
4.4.1 FDI Trends
4.4.2 Industries
4.5 Primary Data and Host country determinates
4.5.1 Host Country Determinates
4.6 Concluding Discussion

5 Conclusion
5.1 Chapter Outline
5.2 Concluding the findings
5.3 Recommendations
5.3.1 Manufacturing
5.3.2 Banking and Finance
5.3.3 Oil and Gas
5.4 Limitations and recommendations for future research

6. References

7 Appendices
7.1 Appendix 1- Research Survey
7.1.1 Manufacturing
7.1.2 Banking and Finance
7.1.3 Oil and Gas

List of Tables

1.1 Types of FDI, definition and motives

4.8 Table 4.8 possible models that could be adopted by the UK

List of Figures

3.1: Research Onion for use in the Design of Methodology.

4.1 UK’s inward FDI source in billions

4.2 FDI inflows, Global and by groups of economies, from 1980-2009

4.3 Global FDI inflows by group of economies, (2005-2015), and projections

4.4 FDI flows, Inward 2005-2016 (Millions of Dollars)

4.5 Percentage of total value of the UK economy by sector

4.6 Historical exchange rates for GBP/EUR

4.7: United Kingdom political stability index from 2000 to

4.9 The importance of technology

5.0 EU workers as a percentage of total workforce

5.1 Percentage of companies and their views on the effects of Brexit

Abstract

Foreign Direct Investment (FDI) has been a complex topic, however its fundamental features have enabled it to shape the world we live in and is the backbone of many countries who would not survive without it. Being part of the European Union (EU), the United Kingdom (UK) was cocooned in a union full of rules and regulations that did not please its residents. The decision to leave the EU was taken and therefore these rules and regulations are not applicable and this in turn will drastically affect FDI.

Despite being one of the world’s greatest powerhouse, Brexit offers a great threat to its industries that have had solid foundations within the EU as well as the workforce it holds as the UK holds over 3 million EU nationals. The UK offers an abundance of incentives for investors although these have been affected by 3 the UK’s top industries, Banking and Finance, Oil and Gas and Manufacturing with many companies in these industries agreeing that Brexit will have a negative impact on their business practices even with the government trying to get the best Brexit deal.

This dissertation will critically analyse the literature on FDI and how the host country determinates will be used in order to analyse their affect and how it would differ after Brexit. The UK’s attractiveness for FDI was evident in the results that were obtained, which provided a similar theme to variables within the host country determinates that in turn allowed for recommendations to be made on the industries and how future practices could be handled.

Chapter 1 Introduction

1.1 Chapter Outline

Foreign direct investment (FDI) has long been the driving force for improving economic conditions of many countries worldwide, and therefore it has been highly scrutinised and debated in academic literature. The intentions of this chapter is to illustrate the importance of this academic topic and its significance to Brexit with reference to the industries in question. Furthermore, this chapter will look at the research question in greater detail alongside its related objectives which will outline the idea and the construction of this dissertation.

1.2 Theoretical setting

The international movement of money otherwise known as capital flows have been the backbone incentive of international trade for centuries in order to improve a host countries development. With appraisal to the widespread liberalisation across the world in the last few decades, (FDI) has recently exploded. The ease of doing international business made simpler with improved skills alongside the technological advances and the approval of free market economies has lured the use of FDI in this period of globalisation (Rahman, 2015).

In this era, it is essential that firms capitalise on the resources, markets and new technology that is available all over the world in order to be competitive. These incentives of foreign investment highlight how FDI is trending towards globalisation as current data supports and illustrates this statement. With the international migration of capital from nation to nation, come various luxuries to countries involved. These come in the form of technological advances to the host countries which would otherwise be highly-priced and difficult to implement within a firm that has limited knowledge, expertise and local funds. FDI also brings in benefits by generating new jobs and increasing local employment along with developing the human capital in the domestic market through training (Michie, 2001).

The benefits that come from FDI flows are increasingly lucrative however each country has their own rules and regulation into how FDI is carried out. This is where the European Union (EU) was developed which provides a stable single market platform to make FDI easier. Due to Brexit this is going to change. In addition, FDI is not evenly shared and the benefits that come from foreign investment are not shared equally across countries and industries. Government policies and regulations have played a big role in determining the attractiveness of FDI, and this has directed highly towards more developed countries where the bulk of FDI seems to circulate (Michie, 2001). Most of these countries belong to the Organisation for economic Corporation and Development (OECD), where a free economy and democratic governance is present.

Furthermore, since the increased use of FDI in the last few decades, the reasons for attractiveness have changed. FDI is considered the powerhouse of world economic stability, enabling improvements in developing countries while simultaneously satisfying domestic economies. Various factors have influenced how and where FDI takes place, factors such as the financial crisis and country instability has pushed FDI towards more developing countries because of the cheap labour and operational costs where a reoccurrence of such crises would not incur high losses (Mariana, 2012).

In addition, with regards to the question of the dissertation it is important to understand that the nature of FDI along with the UK’s situation is very complex. Addressing the impact on FDI from Brexit with the focus on three industries requires analysing and evaluating the challenges that are faced when the UK are no longer part of the European Union and recipient of its benefits. Furthermore, the UK needs to address the environment for investment and not lose their FDI attractiveness. With the UK having strong trade relations with the EU it is vital not to lose these links. In 2014 the EU was accountable for 44.6% of UK goods and services exported and an import of 53.2%(Office of National Statistics, 2015). This is a great deal of valuable capital to sustain the businesses and increase FDI flows. However, Brexit will come with implications and policy changes and these high values will not be there forever.

Moreover, there is a great volume of theories and observed studies that highlight the motives and determinates for FDI. Many authors have scrutinised FDI about its negative impact to economies therefore making the idea of FDI very complex. FDI is usually built-up of concepts that regard multinational enterprises (MNEs) strategic decisions in how business is practiced and in order to understand the impact of Brexit there needs to be an analysis on what makes the UK such an attractive place for FDI. Looking at the host country determinates such as its locational advantages will illustrate the impact such a historical decision could have.

1.3 Topic Preview

Throughout a globalising world there are various organisations that are trying to develop different countries with regards to international investment. The United Nations Conference on Trade and Development (UNCTAD) has been focussing on the expansion of trade in many developing countries by helping local businesses build up the value chains. The UK falls in with one of the countries that are high in providing aid and support to many countries worldwide as well as its European neighbours (UNCTAD, 2016). They indicate that policy makers should be alert as the worry of such unforeseen event can affect the world and not just the EU zone. Until now there is little empirical study on how Brexit will impact the UK in its FDI flows but for some that are recent, they are speculative publications.

Organisations deliberate international chase in search of better ways to nourish themselves through FDI, has become more of a compulsive obligation rather than a choice in order to gain access to better resources, technologies, new markets and a cheaper workforce to increase their competitive advantage. Focussing on one of the industries in question, the oil and gas industry is a very lucrative business, in the UK alone there have been extracting 1.42million barrels of oil equivalent per day (boepd) although consumed over 1.5million (boepd) which resulted in importing oil from abroad. It then increased by 16% in 2016 up to 1.73million (boepd) with a remaining of 20bn barrels left to be extracted from UK areas which would take over 30 years (Oil&GasUK, 2017). This then supports the following acquisition, in 2015 Royal Dutch Shell acquired British Gas (BG), the UK’s biggest oil and gas company, in a multimillion dollar takeover making it the largest company in the UK (Miah, 2017). It is important to mention that manufacturing in the UK was the biggest in the world, at the start of the industrial revolution, the UK built strong and innovative new technologies that have contributed to the economy significantly. Although now the UK is the ninth largest manufacturing hub of the world, its historical background and already made factories brings in many foreign investments from the likes of BMW and German company BRASF, providing the largest chemical plant in the UK (The Manufacturer , 2017). Finally, the finance and banking industry is contributing a vastly amount to the UK economy, with a contribution of over £176bn in 2015 and employing over 7.3% of the UK workforce. Furthermore, this sector is the UK’s leading exporter with over £72bn running trade surplus (Turvil, 2017). In highlight, foreign investors credited £100bn into the UK’s financial services as of 2007, more than any other sector (TheCityUK, 2016). Germany’s largest bank, Deutsche bank have leased a new London headquarters facility to show its commitment to the UK’s financial sector(Evans, 2017).

Generally evaluating the above, it shows that the major factor for investment in the UK is to take advantage of domestic foundations. With a growing market to satisfy and the utilisation of a highly educated workforce along with modern technology, it makes sense too takeover rather than build hence making the UK a lucrative opportunity for investment which soon, could all change.

1.4 Research Question and Objectives

The aim of this research is to try and answer what is the impact of Brexit on foreign direct investment (FDI) within the UK with a focus on the Manufacturing, banking and finance, and Oil and gas industries. The importance of research lies in the focus and the sustainability of its objectives(Jankowicz, 2006). Consequently, the most important aspect to understand is to look at what makes the UK such an attractive place for FDI by emphasising on its host country determinants and therefore evaluating the impact its separation from the EU will have with reference to specific industries.

In relation to the topic question these are the following objectives. The first is through reviewing the literature taking a critical approach at defining what FDI is. This then leads to the second objective which is, reviewing the relevant theories that comes along with FDI and illustrating recent trends. The next objective is to explore the Host country determinates of FDI within the UK, in terms of what makes the UK an attractive place for businesses and how these would be affected after Brexit. Then Critically analyse the 3 industries and how FDI will be affected on the these by Brexit, through the use of secondary and primary data which will illustrate the future path of FDI. From this make recommendations to the industries in question based on how different policies and trends would affect their businesses.

The remainder of the dissertation will be structured into an additional four chapters, starting with the literature review which will critically define FDI and its host country determinates. Then the methodology will discuss in how the research is designed and how data is collected. Then findings and results chapter will look at the recent FDI trends through the use of both primary and secondary data and finish it off with the conclusion and recommendations.

Chapter 2 Literature review

2.1 Chapter Outline

The previous chapter informed an overview of what the research was about. In this section the study will dig deeper to present the literature on foreign direct investment (FDI). This is done so that it enables a build-up of knowledge and understanding of the research and it will provide an indication on how important FDI is for a country. Through meeting the first three objectives, this will be done by taking a critical approach at defining what FDI is, with the use of relevant theories. Furthermore, this chapter will cover the motives behind FDI and explore the host country determinates of FDI within the UK.

2.2 Definition of FDI

Literature on FDI has been far and foremost a very important and highly researched topic in business and its effect on a countries economic performance. The nature of FDI is highly complex which is why Margeirsson (2015) quoted FDI to be a double edged sword that must be handled with care. This type of definition highlights the complexity of such topic. On the other hand, the international monetary fund (IMF), describes FDI in the following manner. “The ownership or control of an enterprises voting power or equivalent must be at a threshold of at least 10 percent to indicate the reality of direct investment” (IMF, 2003). Nevertheless, this threshold does not apply to every country, in the UK the limit is slightly greater, a minimum of 20 percent is required (Jones, 2016). However, this brings implications, as it is difficult to work out FDI because different countries have in place different rules and regulation on measuring FDI, not to say that some countries do not have the means capable of measuring FDI (Jones, 2016).

In order for foreign direct investment to take effect, companies must find ways in which to enter a foreign land to practice their business and build their portfolio. There are many ways in which a company can do this. This leads to the forms of FDI, they are greenfield investment or foreign takeover. Greenfield entry refers to where a company enters a host country and sets up a business entity from scratch with capital that was already made elsewhere. Meanwhile, the other one being foreign takeover refers to the practice of entering a host country by purchasing an already made entity or merging with another company (Balasubramanyam, 2005). Both these methods bring in advantages in entering a country however they both also have huge amounts of risk as the outcome through mergers and acquisitions (M&A) and greenfield investments are not always positive.

2.3 Types of FDI

Exposing the literature deeper reveals that there are different types of FDI. There are four types of FDI that are all seeking different benefits. The types of FDI are as follows; Resource seeking, market seeking, efficiency seeking and strategic asset seeking (Dunning, 1993). These different types of FDI in turn have different motives attached to them. The idea behind market seeking and resource seeking is the ability for a firm to enter a host country in order to take advantage of physical resources and domestic markets whereas the other two is seeking specific products and knowledge (Dunning, 1993).

Table 1.1 Types of FDI, definition and motives

Abbildung in dieser Leseprobe nicht enthalten

2.3.1 Resource seeking FDI

Dunning (1993) explains that resource seeking is the main aim of multinational enterprises who wish to enter a foreign country. It is the involvement of acquiring a specific type of resource where they are not obtainable at home or cost too much (Franco, 2008). For example, this categorises products such as natural raw resources like oil and gas and or a more experienced workforce. Jakubiak (2008) viewpoint on this is that the motivation for such natural resources is so great that FDI is a certainty when there is an abundance of material in one place. The matter here is clear that when a necessity is highly valued it provides a strong incentive to practice FDI.

2.3.2 Market seeking FDI

Market seeking FDI refers to finding and exploiting a market that is in need for a firm’s specific products and services (Jones, 2016). Reasoning into why market seeking is carried out falls to the idea that the market targeted is of a great size and is suggested to increase its market growth. Dunning (2008) alongside (Wadhwa & Reddy S, 2011) suggests that companies enter specific markets to establish a presence with their goods and services. This enables them to achieve economies of scale through production and to be competitive. To benefit from this a sizeable population and a market to be capable of supporting the business (Veliyath & Brouthers, 2010). The argument here is also presentable on the same note, statistically a large market enables large sales as well as the presence in a foreign country will discourages competitors from attempting to contend, while also making it financially cheaper than serving a market from a distance.

2.3.3 Efficiency seeking FDI

Efficiency seeking FDI is one of the more difficult FDI to attract, it’s very niche in what it does. Its aims are to increase efficiency of a firm through integrating its production and markets typically for the lowest financial cost (Dunning, 1993), (Fruman, 2016). (Dunning, 1993) also categorises this to occur when the following situations are in question, firstly when firms want to take advantage of differences in cost and availability and secondly, when they want to take advantage of economies of scale. It also brings motives to enable it to compete in international markets (World Bank, 2016).

2.3.4 Strategic asset seeking FDI

Finally, strategic asset seeking FDI. Strategic asset seeking is to acquire a new technological base that will increase the core competencies of the investing firms (Kumar Sinha & Mohammad, 2015). Some of the strategic assets could come in the form of brands, distribution networks and human capital improving a firm’s competitive presence in a host country and this is usually done through mergers and acquisions (World Bank, 2016). In relation to other authors, Meyer (2015) on the other hand, says this is important because it is difficult to tell and measure if a firm has been successful in its strategic asset seeking FDI.

2.4 Eclectic Paradigm Theory (OLI)

The eclectic paradigm theory otherwise known as the OLI framework was developed by Dunning (1976). This framework was developed in order to provide a way of allowing multinationals to identify if it is worth pursuing FDI. It has been two decades since its development and is still a dominant framework from which in its simplicity provides a different dimension in how multinationals think (Dunning, 2000). The geographical presence and a firm’s foreign production is determined by the satisfaction of three sub components, Ownership, Location and internationalisation (OLI).

Ownership (O) refers to the competitive advantage a firm has with regards to acquiring new assets to increase its FDI. The majority of these assets are of an intangible composition, items such as copyright, trademarks and patents, property rights, production processes and knowledge which are solely owned by the firm, giving them a leverage on other firms operating in the same market. It is discussed that ownership is the core reason for the existence of a multinational, as they are an accumulation of assets built into an entity, and keeps the firm alive by protecting the firm from competitors taking their products or ideas (Neary, 2006).

Location (L) refers to the advantage of a geographical location in which a firm may operate in or chose to operate in. This is important to a firm as locational advantage determines how close they are to a specific resource or target market. The main incentive for locational advantage would be natural resources where they are located in specific areas and cannot be changed, adapted or moved to suit a company(Yan, 2005). Furthermore, aspects regarding prices, the foundation of infrastructure and the quality of production need to be considered. If these conditions are not satisfied or not worthy off the location, then the value for this is minimal and firms in this situation would financially benefit from providing its products and services through export only and have a domestic production in place (Ruhl, 2016). Additionally, for the locational advantage to take place the other aspects of the OLI framework need to stand. The ownership (O) and internationalisation (I) should be satisfied first for the value of the locational advantage to increase its worth.

Internationalisation (I) focusses on, if it’s in the firm’s best interest to produce a product themselves or to consider a third party to produce the product on their behalf. This sort of deal would only be applicable if the third party can commit to reaching the stet standards and quality of production at a lower cost, then and only then would they be considered. On the other hand, to take advantage of internationalisation, it would be beneficial that the ownership condition should be satisfied, it will enable a firm to expand by owning specific value chains in which it can produce its product through its own standards and not rely on third party firms (Neary, 2006).

The advantages that the OLI framework bring, is useful for a firm to determine the entry mode with respect to the three sub sections. Nevertheless, in all academic literature there will be some authors who may not agree with such framework and therefore critique it. The main argument against the OLI framework has been denoted as its loose and broad structure that it possesses (Pedersen, 2003). Pedersen (2003) says that the word ‘Eclectic’ basically means ‘taken from other sources’ hence supporting his claim. It goes on to explain where the aspects came from such as the (O) advantages came from firm related theories, (L) advantages from host country related theories and (I) advantages from market imperfection theories (Pedersen, 2003), (Cantwell & Narula, 2010). Devinney et al, (2002) critiques the OLI framework vigorously with four strong points made from within the literature. The first is the OLI frameworks failure to acknowledge the role of the mangers. The second is its inability to cope and keep up with the dynamic changes of the MNC. Thirdly it’s vague specification on what is used as a measurement within the paradigm. Finally, the limitation addressing the interaction between the firm and the policy environment it is in. The theme that is evident, it is difficult to accept the arguments and opinions that have been made and therefore the OLI frameworks historical context should not be deterred by these interpretations as the evidence shows it is still applicable in today’s world. With FDI in all corners of the world the OLI framework can be applied to most of these cases in line with the motivations for the investment.

2.5 Product Life Cycle

One of the older theories comes under the name of the product life cycle theory, which was developed by Vernon (1966) as theories at the time were inadequate and old when explaining international trade. The essence of this theory is to describe a products journey within international trade. Vernon (1966) discovered that products usually go through three different stages in the international market, where they go from a new product and finish being a standard product. Due to the maturing nature of products, FDI is said to be the reaction to the threat of losing its domestic market position, so by dispensing abroad it can slow down its maturity (Latorre, 2008). Its development came after world war II to aid the expansions of American multinationals and it consisted of three stages that influenced how a general product internationalises.

The first stage portrays the product as an innovation where there is some uncertainty engulfing the product therefore the interaction and coordination between manufactures and suppliers is vital to ensure the local demand. The products at this stage are manufactured and distributed in domestic markets (Latorre, 2008). Furthermore, this stage is the most expensive, firms have to invest a lot into promoting and advertising that’s why this stage is also known as the sinkhole.

The second stage is where the product has been standardising, meaning there is increasing demand for the product as it moves through the life cycle. The product then starts to be exported to other countries and as a result, the companies’ production costs decrease and new competitors will enter the market with similar products. In context of expanding, a firm would need to evaluate which country would be most suited in terms of policies, taxes and cost of labour as production would also move to that country to serve a new market and increase the products life cycle (Tenold, 2009). This will also benefit the home market as the foreign production plant will export products back reducing the costs of production at home (Doyle, 2011).

The third stage of the product life cycle is the standardised section which is discussed that the price is very important as competitors are providing cheaper alternatives to similar products. Due to being standardised customers are more aware of what to expect and the technology used becomes easily accessible (Tenold, 2009). At this stage production is ideally moved to developing countries in order to gain a comparative advantage by continuing to produce the product at a lower cost (Wells, 1968). On the other hand, this is an old fashion model which does cater for some products that do not follow the product life cycle curve along with the absence of a specific life span at which a product should be within a given stage. Also the technological gap between countries is getting very low which means firms tend to look for the cheapest production option from inception and not follow the stages in order (Giachetti & Marchi, 2010).

2.6 Host Country Determinates of FDI

Here the literature will build on the host country determinates with regards to FDI. This section will build upon the literature to find what the factors and motives are that allow an investor to enter a host country. As discussed earlier in the chapter about Dunning’s OLI framework, it is discussed that when all three terms of the OLI framework are met FDI will tend to occur. This section will analyse what determinates a country will hold and which ones are the most vital for the absorption of FDI, as well as factors that will push away FDI.

Dunning (1993) discusses four different motives that a firm uses in order to engage in FDI. They are access to resources, entry to markets, efficiency gains and acquisitions of strategic assets (IMF, 2010). Therefore, government interventions and policy changes would alter these motives significantly. Therefore, looking at the host country determinates on what host country conditions can influence the flows of FDI will be able to determine how investors will cope (Giulietti, 2004). The host country determinates are adapted from UNCTAD (1998a), where they are split into three different sections, policy framework for FDI, Economic Determinates and business facilitation.

2.6.1 Political Determinates

2.6.1.1 Host Country Political stability

Political risk is defined by how likely political events within a country will influence the business environment and how much is going to affect a firm’s financial profitability (Choi, 2000). This factor has to be taken seriously by firms entering a specific market, the hint of political instability from host governments poor decision making or the social views of host country citizens that may have a particular view point on foreign firms entering, this would require careful due diligence or even better avoided. This type of instability is more associated with developing countries (Herrmann, 2003), however, developed countries leaving partnering unions is a cause for concern, unpredictable situations are unattractive and volatile which can deter specific firms into doing business. Recent government changes and public elections pour more uncertainty into the decision making minds of foreign and domestic firms, new governments may have different interpretation on foreign firms and may change policies in workforce and increase taxes. It is discussed that government interference and political instability relate highly to the damaging effect on FDI (OECD, 2001). Nevertheless, it is argued by Busse & Hefeker (2005), that whatever the issue, multinationals are attracted to countries where a democratic approach is respected along with stable rights and property protection.

Furthermore, this is aimed at more developing countries where corruption is present, a complicated political system with poor policies and infrastructure could host a larger population willing to participate in corruption. On the other hand, developed countries are not all that innocent, Mickelsen (2014) highlights that even developed countries participate in corruption but on higher more reserved encounters where the value of corruption is worth doing. This type of corruption is mainly based on individuals or firms contributing to money laundering and falsifying tax returns which is against the state and not the state being corrupt (Mickelsen, 2014).

2.6.1.2 Taxes

As mentioned above taxes are a big issue for many large firms, mostly because they are targeted by governments to pay taxes and are carefully monitored (IFS, 2007). The literature on taxes regarding FDI is very sensitive and indecisive and a cause for concern, and that some host country policies on corporate taxes tend to substantially disturb FDI flows while other countries don’t (Demirhan & Masca, 2008). On the contrary authors Ahmend and Root (1979) illustrated that taxes on multinationals entering host countries don not correlate and therefore not affect FDI on a significant level.

Nevertheless, Taxes are part of business and wherever business is practiced, the host country is going to want a share from it. This is where the government of host countries as mentioned earlier can intervene and change policies on taxes and privatisation of local firms. It is logically stated that if governments increase taxes for foreign multinationals would reason a decrease in inward FDI flows (OECD, 2001). Building upon privatisation of firms is a reasonable method in the quest for growth. Privatisation is the transferring of public services and assets to private firms, from which brings a change in the way they are managed. This privatisation brings in many incentives for foreign firms who can then act on a business foundation for their own interests. UNCTAD (2009) illustrates that privatisation is a major incentive for FDI. It boots FDI inflows and allows firms to take advantage of domestic human capital and business brand, and developed countries have the highest human capital rate and best technological advances.

2.6.2 Economic determinates

2.6.2.1 Market size, growth and economic conditions

Dunning (1993) discussed that one of the most important factors in the OLI framework was location which in turn supports the types of FDI, and in this case market seeking FDI needs to be discussed. In order for market seeking FDI to occur there has to be a market worth entering. Therefore, a specific market with significant size and growth will pose a more attractive incentive for FDI (Naguib, 2012). In addition, horizontal FDI is the most common form of FDI, where firms invest in the same business abroad as they do in the home market. This then makes sense in the ‘market seeking’ aspect of FDI, the search for a big market and a growing market provides firms with a larger customer base that needs satisfying (Busse & Hefeker, 2005). In order to increase market size some countries pull down trade barriers which invites in FDI, as well as trading among unions (Dunning, 1977). The openness of an economy to trade is important to FDI, being part of unions enables easier access and therefore better economic performances and increased FDI flows.

Stepping aside and looking at the empirical relationship between how gross domestic product (GDP) which is used as a tool to measure the economic environment within a country and the FDI processes undertaken at a specific time will statistically highlight its significance. Authors Leamer (2010) describes the GDP formula as follows,

This equation is consisted of the C consumer spending, I for investment, G for government spending and X, M is Exports –Imports.

Looking at the investment variable where FDI falls under, the percentage of FDI to GDP plays a big part in the outcome. The UK’s FDI percentage is just under 2% where as many EU countries are well above the 20% mark (World Bank, 2016). In contrast authors Mun, Lin & Man (2008) looked at the relation between FDI and GDP within Malaysia using the following regression;

The research carried out was done using annual data from the International Monetary Fund and FDI financial statistics tables. The results obtained from the analysis found that there is a significant positive correlation between FDI and economic growth hence the positive sign in front of FDI. Authors Moolio & Guechheang (2013) and Duanmu (2015), both within their respected research in different countries still allow a theme to be built on accepting the relationship that an economy is highly reliable to its FDI and that in order for development the encouragement for FDI has to also increase. In addition, FDI also requires advanced technology with a more skilled workforce which in turn increasing productivy, although in most economies this can ruin local demand of domestic firms (Stoian & Filippaios , 2008).

2.6.2.2 Infrastructure

Infrastructure provides a country with the basic groundwork of providing the best working environment. It covers many aspects such as telecommunication, roads, buildings, railways and shipping ports and all this provides a visual interpretation to investing firms on what the quality of this is like, as it is one of the fewer things that can be hidden (Demirhan & Masca, 2008). On the one hand this is one of the biggest constraints for FDI in less developed countries. Countries that perform well and are strongly structured which provide a solid foundation reeling in FDI. It is rational to suggest that the better the infrastructure the greater the incentive for the investor. It is discussed that infrastructure holds aspects such as energy production, the ICT base and its transportation (Bakar, Mat, & Harun, 2012). This boosts up Dunning’s locational advantages, as a well organised infrastructure allows transportation of products to circulate with ease. Nevertheless, it is not just developing countries suffering from poor infrastructure. The OECD (2015) studied the United Kingdom, a strong developed economy with plentiful potential in the line of FDI opportunities. The studied indicated that out of all the OECD countries, the UK spend the least amount of money on infrastructure over the past three decades. These have taken a toll on a few sectors within the UK, the capacity of electricity, the roads, and air transport (OECD, 2015). In order to stimulate and attract FDI, improvements to FDI is vital for the movement of people products and resources.

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