Foreign Direct Investment

This paper will first compare the foreign direct investment (FDI) environment of three countries in South America: Chile, Peru, and Ecuador based on the most relevant factors in FDI consideration for a U.S. based company. Then, a conclusion identifies the best opportunity for FDI.
According to Ball, Geringer, Minor & McNett, 2010, the most important factors to consider before investing in another country are the countries’: 1) political environment, 2) economic environment, and 3) legal environment (p. 44-59).

Political Environment:
Stability and minimal government intervention lead to ideal FDI. Chile has a very stable political environment with the government’s economic role limited to regulations and few enterprises. Peru has a relatively stable political environment. However, investors are concerned about current president Ollant Humala’s potential to increase state interference in the economy and private sector policies. Conversely, Ecuador suffers from political instability, social inequalities, and tensions caused by dissenting political parties and high corruption ("globaledge," 2012).  

Economic Environment:
Foreign Trade Agreements (FTAs) between nations create a favorable investment climate by eliminating bilateral tariffs, lowering trade barriers, and promoting economic integration (Ball et al. p. 54). The United States formed FTAs with Chile (2003) and Peru (2006) but not with Ecuador ("Doing business in," 2010). Therefore, investors prefer Chile and Peru over Ecuador.

Foreign market size and growth rates relative to domestic market size and growth rates determine ideal investment location (Ball et al. p. 55). Therefore, larger market sizes and growth rates yield increased returns on foreign investment and help absorb local production costs. Populations for Chile, Peru and Ecuador are about 17 million, 29 million and 15 million respectively. Their growth rates are 1.21%, 1.14%, and 1.95% (“globaledge”). Since the United States population...