Sekkat and Veganzones-Varoudakis (2007) have grouped the factors determining the inward flow of FDI into three categories: basic economic factors, trade and the exchange market policies, and other aspects of the investment climate. The basic economic factors include the difference in the rate of return on capital across countries, portfolio diversification strategy of investors and market size of the host country. Trade and foreign exchange policy considerations relate to trade liberalization and exchange rate movements and their volatility (Froot and Stein 2001). Business climate factors relate to infrastructure (Wheeler and Mody, 2002), labor costs and availability of skilled labor/education, incentive factors, political risk, economic factors (per capital GDP, GDP growth rate, economic integration, importance of transport, commerce and communication), social factors (degree of urbanization), political stability (the number of 11constitutional changes in government leadership), the role of institutions (in terms of commitments to and enforcement of rules) (Root and Ahmed, 2009; Schneider and Frey, 2005), the catalyzing effect of foreign aid (Harms and Lutz, 2006; Kimura and Todo, 2010), and the stability of basic macroeconomic policies (fiscal, monetary, and social) (Baniak et al, 2005).
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