Other things equal countries with more restrictive

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mandating a certain proportion of value-added be produced in the local market. Other things equal, countries with more restrictive policies toward FDI tend to be less attractive FDI locations. Despite a global trend toward liberalization of policies toward FDI (OECD 2006), restrictions continue to exist in some form in almost every country. Other features of a country's policy environment also affect its attractiveness. Labor market institutions such as the degree of unionization affect FDI flows. Similarly, the protection of property rights and intellectual property, strong
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88 institutions for contract enforcement and capital market governance, environmental regulation and trade policy may also affect MNCs' FDI location choices (Javorcik and Spatareanu, 2005). Recently, researchers have studied various types of political risk as influences on MNCs' FDI location decisions. MNCs make location decisions based upon expected future profits, and greater risk creates greater uncertainty with regard to future income streams. Thus, other things equal, risk reduces FDI inflows. Countries that are politically risky in the sense of having a history of expropriating FDI, weak institutions, endemic corruption, autocratic governments, periodic coups d'etat, or ethnic tension tend to receive negligible FDI flows (or far less than would otherwise be expected). Many of the poorest countries in the world, e.g., Haiti, Honduras and much of sub-Saharan Africa, are beset with political risk, and receive very little FDI. To a greater or lesser extent, some of the aforementioned risks are present in many countries, some of which, e.g., China and Nigeria, are recipients of large FDI inflows, as other things are not equal. Nigeria is one of the most oil-rich countries in the world, and China has the largest population in the world and a rapidly growing economy. These factors offset some of the risk MNCs encounter in China and Nigeria. However, if these countries were less risky, they likely would enjoy larger inflows of FDI. Economic Environment Features of a country's economic environment are also important determinants of FDI location. Capital, human and natural resource endowments such as labor in China and oil in Nigeria continue to be significant influences on FDI location choices. The importance of neoclassical factors of production (e.g., land, labor, capital, raw materials) to MNCs' FDI location choices is consistent with the predictions of location theory. Factors of production can be intrinsic or created. The Silicon Valley area receives large inflows of FDI due in part to the quality of its human capital. The geographically concentrated pool of specialized human capital arose, in part, from the presence of leading edge domestic companies and the entry of foreign companies. Hence, specialized labor in Silicon Valley can be viewed as a created and dynamic factor of production: Created in the sense that high-tech workers developed their knowledge through their experience working at different Silicon Valley firms, dynamic in the sense that the entry of more firms into the area expanded the skill set and enlarged the pool of specialized labor.
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