2
draws up the conclusions and policy implications as well as provides some agenda for future
research.
LITERATURE REVIEW
Based on initial evidence, the host country’s factors that are found to have critical
impact on FDI inflows are the demand (market) size, production costs, exchange rate, political and
economic stability, and investment and trade policies.
The role of market size, which is represented by GDP or GNP of the recipient country, in
inducing FDI inflows is well recognized in many previous studies, for instance, Kravis and Lipsey
(1982), Schneider and Frey (1985), Lucus (1993), Wang and Swain (1995) and Love and
Lage-Hidalgo (2000). It is argued that if the host country’s market is large enough, the foreign
enterprise is able to apply large-scale production to reach the lower cost of production. This cost
reduction raises the firm’s competitiveness, which further enables the firm to supply its products to
the international market. Thus, it is expected that the bigger the host country’s market, the larger the
FDI inflows.
In the developing country, the availability of labor and low labor cost are considerably
prominent inducements for the foreign investors. China and other Asian countries’ experiences are
good examples for this proposition. In the case of Thailand, previous studies have confirmed the
importance of this low labor cost as the key stimulant of FDI inflows, related evidence can be found
in Pongpisanupichit et al. (1989) and Lucus (1993) and Kongruang (2002).
The capital cost is another component of production costs faced by investors. Although in
the early years it was believed that the MNEs financed their capital inputs from home or external
borrowing facilities, this circumstance has changed. As stated by Krugman and Obstfeld (1997),
multinational firms tend to raise money for the expansion of the subsidiaries in the country where the
subsidiary operates rather than in their home country. Therefore, the comparative high capital cost in
the host country may have a negative impact on inward FDI. The importance of capital cost as the
determinant of FDI is supported by the findings of Wang and Swain (1995) and Love and
Lage-Hidalgo (2000). It is important to note that the impact of capital cost on foreign investment
may depend on the characteristics of FDI. As pointed out by Yang et al. (2000), if capital and labor
inputs are substitutable in the firm’s production process, a rise in capital cost will lead to a change in
the technology of production in which the firms hire more labor and use less capital inputs. That is,
the negative effect arising from increasing capital costs on capital-intensive FDI may be larger than
that of labor-intensive FDI.
The role of exchange rates in influencing the location of multinational firms is widely
acknowledged. The pioneering work by Aliber (1970) explains that according to the reputation effect,
firms from countries with strong currencies have a greater ability to borrow or raise capital in
