Globalization of markets and supply bases and a lowering of barriers to investment have led to an increase in internationalization of production. There has been an attendant increase in competitiveness. To the extent that competitiveness of organizations is dependent on country-specific macro conditions, locational characteristics are an important factor in decisions regarding foreign direct investment (FDI). The guiding motivation of Foreign Direct Investment can be summed up as "enhancing competitiveness" (UNCTAD, 1998).

This study attempts to understand how fundamental country-level factors impact aggregate country-level inflows of FDI. Specifically, the focus of the study is to determine the impact of locational factors which define the overall production and logistic environment of a country. A new variable, supply chain capability of countries (SCC) is proposed as a measure of the production and logistic environment of a country.

The notion of supply chain capability of a country offers a new conceptual framework for understanding the flow of FDI. The study posits that the supply chain capability of a country is a determinant of FDI. Hypotheses are proposed and secondary data analyzed to come up with SCC scores of different countries. The results of the empirical analysis provide broad empirical support for the hypotheses. It highlights the differential impact of SCC on developing and developed countries and confirms SCC's influence on vertical an export platform FDI. The findings also suggest that good governance is essentially an enabler of supply chain capability of a country. Based on the findings a theoretical framework for understanding FDI decisions is presented.