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Introduction

Foreign Direct Investment is related to investment made by the firm or an individual in the interested business which is located in another country. It generally takes place when an investor plans to take part in foreign business operations or acquires any foreign business assets. It can be inclusive of ownership establishment or related to controlling interest in some foreign company. FDI can be pivotal in company’s growth strategy, and thereby helping the country to grow and enhance its economic standing. (Lee, 2013).

The aim of this report in Section 1 is to provide a comprehensive understanding through various empirical studies about the importance of FDI and its roles in progressing different economies worldwide, and also it elaborates the factors affecting FDI, particularly it focuses on sovereign credit rating in developed and developing countries in general. Additionally, the report focuses on Germany’s economy and illustrates the crucial factors attracting FDI inflow in Germany including political and economic stability, sovereign credit rating, market size and so forth.  In Section 2 the analyses the economic situation of Germany statistically in terms of FDI inflow, GDP, market size and risk rating extracted from the risk rating agencies. In Section 3 the report evaluates the current and future economic situation of Germany. Eventually, the report sums up all the findings and conclusions retrieved from the analysis and literature review.

LITERATURE REVIEW

2.1 The Importance of FDI and Its Impacts on Different Economies

According to Moran, (2012) a strong relationship has been assessed on foreign direct investment and economic growth. Large inflow of investment is generally required by countries, so as to achieve sustainable high trajectory of economic growth. Foreign investments and borrowings help in bridging the gap between investments and savings. FDI It is considered as a powerful engine which enables low income countries to build physical capital, generate employment opportunities, enhance skills of their labours, increase productive capacity and managerial competency. Moreover, FDI also contributes in integrating domestic economies with global ones. (Morgan, 2012).  However, in contrast to this, as per the views of Alfaro and Johnson, (2012) a considerable change in flows of trade and finance have been noticed due to extensive surge in FDI. There are various underlying factors that are directly contributing in increasing the flows of FDI in Bangladesh. Those factors are trade exchange liberalisation, appropriate emphasis on development led by private sectors and opening and enhancing of infrastructural services. The most important factor which led in increasing the FDI in the country is the privilege of the advanced energy and telecommunication sectors and thus, in turn, foreign investors will be benefited. Myanmar has also become a new destination for multinational companies, due to its stable economic growth and its ability to deliver higher rate of interests to the foreign investors. (Alfaro and Johnson, 2012).

According to Ramasamy, Yeung and Laforet, (2012) FDI acts as a supplement to Australia’s national savings, develop infrastructure, supports local businesses and also helps in building its regional economies. (Yeung, et al., 2012).

Figure 1: Foreign Direct Investment in Australian’s economy

  

(Source from: Impact of Foreign Direct Investment on Gross Domestic Product, 2011)

As per Blonigen and Piger, (2014) FDI can be categorized as being horizontal, vertical and conglomerate. A horizontal direct investment is related to investment made by a company in same type as it operates in its home country. For instance, a mobile phone provider, currently operating in United States, planning to open up new stores in China. (Blonigen and Piger, 2014). Jadhav, (2012) defined a vertical investment as the one which is related to investment made in some different organuization, but related companies, from that of investor’s main business, so as to acquire some foreign company for its smooth operations. For instance, a manufacturing concern acquires the interest of some other foreign company which is involved in supplying raw material required to its main businesses. A conglomerate type of FDI is one when a company plan to invest in some other organization which is totally unrelated to the existing one in home country. (Jadhav, 2012). 

2.2 Factors Attracting FDI

According to Fernandes and Paunov, (2012) there are various factors that can tremendously affect the flows of FDI positively or negatively. Investor are driven to go for FDI in order to access to cheap raw materials, natural resources, communication and transport links, wage and skills related to labour, availability of strong infrastructure, new customer base, and potential and bigger market sizes. On the other hand, political instability can negatively affect FDI aspects of any country. Exchange rate measures have to be taken into consideration by multinational firms in order to go for FDI, due to their huge impacts on the business transactions of those firms, whereby any company operates in any foreign country, has to use the local currency of that foreign country, which, in turn, will result in appreciation of that local currency, and if the volatility of the foreign currency is not high, this will help companies to reduce their costs and achieve economies of scale. Hence, it can be stated that a preferable flow of these factors can lead to create a positive impact over its functioning. However, factors questioning the existence of the company can act as a negatively affecting factor of FDI. In contrast to this, as per the views of Buchanan Le and Rishi, (2012) investment criteria may differ based on the opportunity cost available in some other countries. For instance, if a multinational company finds that it will be able to generate higher profits by investing in China rather than US, then, despite of having favourable conditions in later, it will invest in the later one. (Buchanan, et al., 2012). 

2.3 Effect of Sovereign Credit Rating on FDI

According to Kasemsap, (2017) Sovereign credit rating is an evaluation which is performed by credit rating agencies based on the future abilities and willingness of sovereign governments with respect to their fulfilment of debts. There are approximately 150 national, regional and global credit rating agencies that are being involved in addressing the competencies of companies based upon various factors. The stars are given to the companies on five major factors. These are, economic scores reflecting economic structure, political risks, external liquidity, international investment position, debt burden and monetary flexibility of the company.

  Figure 2: Factors Affecting Rating

 Factors Affecting Rating

                          (Source: Impact of Foreign Direct Investment on Gross Domestic Product, 2011)

However, in contrast to this, as per the views of Alfaro and Charlton, (2013) based upon financial stability of the company, creditworthiness of the organization is determined. It ultimately helps in taking decisions that whether to invest in the organization as FDI or not.&nbsp

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