Language Barriers Affect Foreign Direct Investment

Updated: Oct 1, 2019

The role of language in foreign direct investments is often a forgotten factor that plays a crucial role in determining FDI allocation by multinational enterprises (MNE's). Globalization has been accelerated by the rapid development of transportation, communication, and green energy technologies. One tends to forget that language differences increases the complexity of effective communications and interactions between the MNE and economic agents in the host country.

Foreign direct investments involves the production, organization, and management of business activities. The key to successful FDI is open communications sharing a common language between all parties reducing administrative and transactions costs associated with MNE's managing multiple languages. The language distance between the home and host countries tends to affect and influence foreign direct investment allocation. The liability of foreignness, that is the difficulties multinational enterprises must overcome is a critical factor in FDI location.

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