The purpose of this chapter is to review the existing body of knowledge about foreign direct investment and the studies on strategies adopted to attract FDI. It attempts to present a summary of the relevant theories, hypotheses and schools of thought that contribute to the understanding and fundamental motivation of FDI flows. An exploration of these theories will assist in the study and it will support arguments to be used in empirical estimation and discussion. Additionally the aim of this chapter is to review the theoretical approaches to the determinants of FDI, also known as private foreign investment.

Various theories have been developed since the World War II to explain FDI. These theories state that a number of determinants both at micro and macro level could explain FDI flows in a particular country or a particular region. Various studies have also been published on the assessment of the key determinants of FDI. However, there is no general agreement insofar, especially that in different context, specific factors may vary significantly in their degree of importance as regards to FDI.

2.2 Definition of FDI

“Foreign direct investment (FDI) is a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship” (OECD, year 2008 – Benchmark Definition of Foreign Direct Investment – 4th Edition). The Benchmark Definition is fully compatible with the underlying concepts and definitions of the International Monetary Fund’s (IMF) Balance of Payments and International Investment Positions Manual, 6th edition (BPM6) and the general economic concepts set out by the United Nation’s System of National Accounts (SNA).

In accordance with the Organisation for Economic Co-operation and Development’s (OECD) Benchmark Definition, Foreign Direct Investment (FDI) is said to be an investment which entails a long duration equation and is an indication of sustained interest and authority by a hosted firm in an economy (foreign direct investor or origin firm) in a firm hosted in a country other than that of the foreign direct investor (FDI firm or associated firm of foreign affiliate). FDI entails both the initial dealing between two enterprises and all following money dealing between them and amid the associated firm, both integrated and non-integrated (OECD, 2008).