Decision making framework for foreign direct investment: Analytic hierarchy process and weighted aggregated sum product assessment integrated approach

• Published date: 01 December 2022
• Author: Srikant Gupta,Babita Jha,Rajesh Kumar Singh
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2771

RESEARCH ARTICLE

Decision making framework for foreign direct investment:

Analytic hierarchy process and weighted aggregated sum

product assessment integrated approach

Srikant Gupta

1

| Babita Jha

2

| Rajesh Kumar Singh

3

1

Department of Decision Sciences, Jaipuria

Institute of Management, Jaipur, Rajasthan,

India

2

School of Business and Management, Christ

(Deemed to be University), NCR, Ghaziabad,

Uttar Pradesh, India

3

Management Development Institute,

Gurgaon, Haryana, India

Correspondence

Rajesh Kumar Singh, Management

Development Institute, Gurgaon, Haryana,

India.

Email: rajesh.singh@mdi.ac.in

Foreign direct investment (FDI) plays a paramount role in economic and social growth

of every country. FDI acts as a source of external capital and helps in economic

growth of the host country. Making decision for FDI during uncertain business envi-

ronment is a challenge for all stakeholders. Therefore, in this study, we are proposing

a decision making framework for FDI. Through literature review, we have identified

the factors, on which FDI depends. A process-based, multi-criterion, integrated

hierarchical approach for deciding about FDI, has been illustrated. In this study,

five sectors are considered, that is, petroleum and natural resource, retailing and

e-commerce, healthcare, information technology, and road and highways for illustrat-

ing the proposed framework. It is observed that information technology sector has

got top priority for FDI followed by retailing and e-commerce and health care sector.

Findings will help in taking appropriate decision by stakeholders for FDI. Ultimately it

will also help in creating employment, economic growth, and welfare of society at

large in the host country.

KEYWORDS

AHP, decision making framework, economy, FDI, WASPAS

1|INTRODUCTION

A country's economic progress depends heavily on foreign direct

investment (FDI). Foreign investors' cash enables developing nations

to improve their infrastructure, increase their production, and provide

new employment possibilities (Crespo & Fontoura, 2007). FDI also

serves as a means of acquiring sophisticated technologies and mobiliz-

ing foreign exchange resources. The presence of foreign currency

reserves in the nation allows the central banking institutions to

engage in the foreign exchange market and manage any unfavorable

movements in order to stabilize foreign exchange rates. Therefore, it

creates a more conducive economic climate for any economy to grow

(Menkhoff, 2013). In the era of globalization, most of the developing

economies have realized the importance of flows of FDI in different

sectors and are making favorable policies concerning the FDI inflows

(Paul, 2016). Indian economy, being categorized as a middle income

developing market economy, started focuses on attracting FDI inflows

in India. To encourage FDI, the Indian government has put in place an

investor-friendly policy that allows FDI into the majority of industries

on an automatic basis (Jana et al., 2019). With the liberalization in the

FDI policy, India has become a preferred destination for FDI. India has

been ranked as the ninth largest FDI recipient in the year 2019 as per

the World Investment Report, 2020. The FDI inflow in India has been

continuously increasing over the number of years. In 2012, it was

24,195.8 million dollars. It was increased to 50,533 million dollars in

2020 (UNCTAD World Investment Report, 2020).

There is a brighter future for the Indian economy due to its large

human capital base, rapidly developing service sector, availability of

sufficient number of skilled individuals, enormous market for every

good or service, growing consumer influence, lack of regulation and

licensing, and the presence of 400 million middle-class Indian citizens.

Of all countries in the world, India offers the greatest returns on FDI

(Sarkodie & Strezov, 2019). In India, FDI inflow has played a crucial

role, and it is encouraged for the overall growth of the economy

Received: 16 June 2021 Revised: 19 August 2021 Accepted: 1 October 2021

DOI: 10.1002/pa.2771

J Public Affairs. 2022;22(Suppl. 1):e2771. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons, Ltd 1of18

https://doi.org/10.1002/pa.2771

(Sahoo & Mathiyazhagan, 2003). Indian government is making policies

to ease out restrictions for creating an investment-friendly environment

for the investors. Reforms in industrial policy have resulted in a consid-

erable reduction in the number of licenses required, the removal of

business expansion limitations, and the facilitation of simple access to

foreign technologyand FDI. In India, sector-wise investment pattern is

witnessed, and it has been observed that the FDI inflow is highest in

the service sector (17.66%), followed by computer science(9.54%) and

telecommunication (8.13%) from the year April 2000 to December

2019 (DPIIT, 2020).FDI inflow in any economy depends upon the mul-

tiple factors, through which other countries attracts for foreign invest-

ment. Piteli et al. (2021) investigated how inward FDI affects migrant

remittance in 46 developing economies. In this study, authors

established a novel framework that describes the fundamental pro-

cesses for remittance interactions. Jushi et al. (2021) examined the

importanceof the impacts of FDI on economic growth for WesternBal-

kan countries. They proposed the use of incoming transfer flows by

introducingnew policies to ensure a steady attractionof remittances.

FDI inflow to a nation is affectedby a variety of factors. However,

based on the degreeof economic development, the linksvary from one

country to another.FDI inflows into India are influencedby a variety of

factors (Kishor & Singh, 2015). Before investing, investors first, deter-

mine the riskinessof the investment atmosphere in the country before

making a choice to invest overseas. Some of the factors that may be

considered, include the availability of natural resources, a good geo-

graphic location, a large and prospective market, a stable cultural and

political environment, inexpensive transportation and labor expenses,

as well as supportive government and economic policy (Kumari &

Sharma, 2017). FDI is also influenced by the number of attributes

including sustainability related factors (Langley et al., 2021). Buchanan

et al. (2012) investigated the influence of institutional quality on FDI

volumes and volatility. They offered new evidence to show that the

quality of educationalinstitutions has a favorable and significant impact

on FDI. Wang et al. (2013) endorsedthat FDI and growth depend upon

the changingpolicy and institutional environmentimpacts the investors'

decision. Guptaand Singh (2016) concluded that there is a positiveand

significantrelationship between FDI and economicgrowth of the coun-

try but all the sectors are not equally benefited with the FDI inflows.

The nexus between FDI and economic growth is essential to study the

impact of continuous investment flows on economic development

(Alfaro & Charlt on, 2013). Hitt (2016) determined that forma l regula-

tory elements may be “evenmore essential”for foreign strategies than

cultural and cognitive characteristics in the host nation. Li and

Tanna (2019) stated that institutions factors are more essential than

human capital factors in deciding productivity benefits from FDI. The

detailed literature related to the factors affecting FDI decision in the

host country is givenin the next section.

Nowadays,experts use multipleanalytical and scientificapproaches

for choosing the best alternative over many alternatives. The decision-

making basedon several criteria, popularly known as multi-criteria deci-

sion making (MCDM), is one of the most reliable methods used in

assessing the different criteria. In MCDM, decision-makers choose the

best alternative from the different independent alternatives (Ferreira

et al., 2019;Galetal.,2013;Mardanietal.,2015; Zavadskas

et al., 2014). In recent years MCDM methods and applications have

been used for many financial studies to address field problems such as

portfolio analysis, general financial planning, capital budgeting, interest

rate and risk analysis, prediction, and classification, working capital and

commercialbank management,auditing, accounting, insurance, and pen-

sion fund management, governmentand nonprofit organizations, strate-

gic planning, mergers, and acquisitions (Dymowa, 2011; Hallerbach &

Spronk, 2002;Steuer & Na, 2003). In context to developing economies,

limitedstudies have been done to suggest a framework for makingdeci-

sions on FDI.Therefore our study willtry to bridge this researchgap by

answeringfollowing researchquestions.

RQi. What are the criteria influencing FDI in develop-

ing economy.

RQii. How to decide best sector for making FDI in

developing countries.

In this study, we employ the integrated approach comprising of

analytic hierarchy process (AHP) and weighted aggregated sum prod-

uct assessment (WASPAS) methods for assessing the preference of

FDI in different sectors of. The first phase consisted of the AHP

framework to delegate weights to different criteria's and sub-criteria's.

The second phase included the use of WASPAS method to set ranks

of sectors according to the preference value to various alternatives.

WASPAS method differs from other approaches because it is easy to

comprehend and use, but very efficient considering the weighted sum

model (WSM) and weighted product model (WPM). Because of its

mathematical simplicity and capability to provide more accurate

results as compared to other methods, it is now being widely accepted

as an efficient decision-making tool.

The rest of this article is structured in the following way. Section 2

includes a summary of FDI literature along with the integrated AHP-

WASPAS methods. Section 3deals with the problem description of

the proposed work. AHP and WASPAS based procedure for determin-

ing the FDI for different sectors is given in Section 4. Section 5

describes the hierarchical problem layout and the findings of the pro-

posed work. Finally, in the last part, conclusions are given.

2|LITERATURE REVIEW

To fulfill the paper's purpose, the literature review has been divided

into two parts, that is, a literature review on FDI and its determinants

and an integrated AHP-WASPAS approach used for determining the

real-life application.

2.1 |FDI and determinants

In their study, Mun et al. (2009) concluded that FDI helps in fostering

economic development. It helps in creating employment, developing

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