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ICA's FDI blog addresses topical issues, views and perspectives on Foreign Direct Investment (FDI), location selection, offshoring, outsourcing and supply chain optimization. The blogs are written by ICA's experts in the field of FDI and you can post your comments.

Rationale behind re-shoring business activities: a business case Print E-mail

A much heard statement in the media nowadays is that the US is steadily losing ground to emerging and developing economies if it comes to locating manufacturing business activities. In contrast, we also saw increasing anecdotal evidence of a trend which is called “re-shoring”, which involves a re-migration of business activities back to the US from overseas locations. This fourth chapter in the series on US competitiveness will take a closer look into the total cost of producing overseas versus producing domestically, and tries to highlight hidden costs of relocating overseas, often ignored by internationally operating companies.

By means of a real business case, we present all relevant cost drivers that should be considered to arrive at accurate financial scenarios for making a strategic decision to relocate overseas or to expand domestically. Any financial base case analysis of the impact of offshoring manufacturing activities must take into account all the costs associated with an offshore initiative. The Total Cost to Ownership approach (TCO) analyzes the entire cost a company incurs when producing or purchasing a particular manufactured part overseas. The TCO approach consists of the following key components:

  • Raw material Costs
  • Packaging Costs
  • Transportation Costs
  • Customs and Duties Fees
  • Inventory Costs
  • Lead times and local warehousing Costs
  • Quality control Costs
  • Travel Costs
  • Training and Productivity
  • IP Risks
  • Exchange Rate Fluctuations
  • Inflation Rates
In practice, corporate decision makers often ignore important cost drivers as listed above, and focus only on the labor cost differential between the US and emerging economies such as China, Vietnam and India. Indeed, in that case China’s labor cost of 2,80 USD per hour versus 25 USD per hour in the US would eliminate all manufacturing activities in the US. However, there is a growing trend of re-shoring business activities from offshore bac to the US, and by means of a case study we will highlight the ratio behind this trend.

5.1 Business Case

Company – XYZ – is productive in the automotive industry and is a first tier supplier to OEM automotive manufacturers. It produces high-technology braking and gearing systems, for which it also uses its own software systems, fully integrated with their “hardware” products.

For their supplies of specific steel products, they are depending on several suppliers that are located globally. The board of directors is following a vertical integration strategy to allow for further growth of the company. One strategic question is to source the steel from third parties or produce and process the steel for their products internally. Second important question is where to locate the steel processing plant. Would it be more beneficial to locate the steel plant overseas and potentially benefit from lower cost levels, or does it make more sense to keep it close to the other facilities located in the US, to minimize lead times and minimize transport costs?

We will apply the TCO approach to these two strategic questions and try to provide a fact based answer to both questions.

Total Cost of Ownership (TCO) Estimator
CoGS (Cost of Goods Sold)

Raw material FOB price$100,00$70,00
Packaging$1,00$1,40unit price x packaging cost %
Duty$0,00$2,80 duty % X price
Fees: % of price$0,00$0,50 fee % x price
Fees: flat$0,00$0,10Fixed fees
Routine surface freight, excluding local$0,00$0,29 % routinely planned for surface freight x (unit weight + packaging weight) X surface freight rate
Routine air freight, excluding local$0,00$0,00 (1- % routinely planned for surface freight) x (unit weight + packaging weight) X air freight rate
Total CoGS$101,00$75,09

Source: 2011

Now let’s consider a unit price of one component steel of $100 versus $70 in China. The reason why packaging costs is typically higher in China, is because of export packaging is much more complex and has to meet specific standards of the countries of destination and origin. An important cost driver here are the import and export duties for this product (i.e. 4% for steel parts), and the associated fixed (Broker and Customs Fees) and handling fees. Given the nature of the product (i.e. weight / value ratio) we furthermore assume that all supplies are shipped per surface freight. Adding all costs for the US and China we have a total Cost of Goods Sold (CoGS) of $101 compared to $75,09.

This case study demonstrates that off-shored production may mean “cheaper price”, but not necessarily “lower Total Cost of Ownership”, as will be demonstrated further below. Sourcing or producing locally means long lead times, transit and warehousing issues, urgent matters which requires traveling, and other hard costs. The next page shows a summary of the different cost drivers for this particular case study.

Carrying cost for in transit offshored product if paid before shipment$0,00$0,47 shipment time in years X interest rate X price
Carrying cost for inventory on-site$0,82$2,57 unit price X ( avg. cycle inventory mos. + safety stock mos. + buffer stock mos.) / 12 X carrying cost %
Prototype cost$0,03$0,12 prototype cost/annual units/ product life
End-of-life inventory$2,41$5,83 1/12 x unit price x (Delivery time + avg. inventory) x annual quantity/annual quantity/product life
Travel: start-up$0,02$0,17 start-up cost / annual units / vendor life
Travel: audit/maintain$0,08$1,57 annual # of trips X (per trip cost of travel time + expense) / annual units
Pick/place into local inventory$0,00$2,00 (1- % of inventory delivered JIT) x U.S. unit price x pick and place cost as % of U.S. unit price
Purchasing cost, excluding travel$2,00$3,00 U.S. unit price x purchase cost %
Total Other Hard Costs$5,37$15,72
Cumulative Total$106,37$90,81 2011

A carrying charge is the cost of storing a physical commodity, such as grain or metals, over a period of time. The carrying charge includes insurance, storage and interest on the invested funds as well as other incidental costs. When producing locally we assume no transit carrying costs, while the cost for inventory on-site are significantly lower in the US with 100% Just-in-Time solutions, compared to China with average lead times of 45 – 60 days. In addition, long lead times require local warehousing stock for continuous delivery with coordination costs to place and pick the right products for the right shipments.

The prototype costs, including industrial design, are also generally higher offshored compared to the US, with local US firms adding a risk premium to compensate for not getting the production.

One straightforward cost driver frequently underestimated is the travel cost back and forth. En economy class fare from the US to China easily amounts US1,500 per tickets, with business class tickets 3 - 4 times more expensive, and this is even without any accommodation costs. In addition, factor in the time and expenses necessary to visit several suppliers and then audit at least one or more to finally select one.

If all hard costs are factored in, the price difference decreases to $16, still in favor of the scenario to start production in China. Undeniably for different products and commodities, China or any other emerging economy might be an interesting sourcing or production destination taking into account hard cost figures only. Yet, per definition there are also business risks involved in producing overseas. One of the major concerns relates to the protection of intellectual property protection, with relatively poor enforcement regimes in many emerging economies. One other aspect that relates to several major concerns is the quality levels of producing or sourcing overseas.

Emergency air freight$0,00$0,37 % air freighted x (unit weight + unit pkg. weight) x air freight rate
Rework/quality$1,00$2,10 unit price X quality cost %
Product liability non-recovery risk$0,10$0,42 unit price X liability risk cost %
IP risk$0,10$1,40 unit price x IP risk cost %
Opportunity cost: lost orders, slow response, lost customers$0,50$1,05 unit price x opportunity risk cost %
Economic stability of the supplier$0,10$0,35 unit price x supplier economic instability risk
Total Risk$1,90$6,04
Cumulative Total$108,17$96,50
Source: 2011 and Investment Consulting Associates

There are daily examples of shipments being delayed due to difficult logistics, strikes or customs issues. Additional costs are necessary to get the supplies in time, and avoid capacity constraints at the other production plants or delivery expectations with final customers.

Moreover, there are higher risks with working with overseas suppliers due to the fact that they will incorporate rapidly rising cost levels to you as customer, face language and cultural barriers and increasingly, behave opportunistically. Opportunistic behavior frequently occurs with local overseas suppliers breaching contracts when they negotiate a better deal with competing firms. Quantifying these risk levels based on estimates found in international business literature, results in a further reduction of the cost differential between the US and China (i.e. $108,17 and $96,50 respectively).

In relation to some of the business risks, there may also be strategic reasons for senior management to keep production in close geographical proximity with R&D departments. There is much debate on the advantages of face-to-face meetings, with personal interaction, superior to conference or video calls. Physical distance is considered a negative indicator for the impact on innovation and the extent to which one is able to differentiate production or adjust production due to changed customer demand.

Impact on innovation of distance from mfg. to R&D$0,00$0,35 unit price x innovation risk cost %
Impact on product differentiation / mass customization$0,00$0,35 unit price x commoditization risk cost %
Total Strategic Costs$0,00$0,70
Cumulative Total$108,17$97,20
GRAND TOTAL$108,17$97,20
Source: 2011

When we include these strategic cost differentials we arrive at a total cost of ownership of $108,17 compared to $97,20 in China. In other words, the US is facing a cost disadvantage of 11,3% for this particular part compared to China.

Is this sufficient reason to move production to China, and what about forecasting trends? Skilled wages in low labor cost countries have been rising at about 10% per year vs. 2% in the U.S. Recent major labor strikes in China have resulted in wage increases of 24% to 100% annually. Transportation costs are rising again as oil prices increase and OEMs who have sourced work overseas continue to report problems with quality, counterfeiting and intellectual property violations. In addition, China’s currency is appreciating against the US Dollar(on average 5%), which will further increase local product prices denoted in USD. By forecasting the annual cost increases based on the yearly impact of wage inflation and the appreciation of the Chinese Yuan, we can model the cost of ownership for a longer period.

Annual impact of wage inflation and currency appreciation on $ price of product0,40%3,00%0.2 x (wage inflation % + currency appreciation %) 2011 and Investment Consulting Associate

A 5-year forecast model in this case study shows that the total cost of ownership will be eliminated in the medium to long run (i.e. 5 year time span).

Source: 2011 and Investment Consulting Associates

This is perfectly in line with Boston Consulting Group’s recent study showing that after adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely.

The revival of US Competitiveness for Foreign Direct Investment (FDI) Print E-mail

In our series regarding the US competitiveness for FDI, we began examining the different drivers behind corporate FDI decisions, followed by a closer look of different views and opinions by various subject matter experts addressing these FDI drivers. Now we continue our assessment with a factual benchmark of the global competitiveness of the United States (US) versus emerging and low cost economies. Based on several comparative global benchmark reports as well as national statistical resources, we have computed and modeled a competitiveness score for all countries under study.

To assess the competitiveness of the US we have used Investment Consulting Associates´ (ICA) web-based location benchmarking software product Below are the aggregated location groups that we took into consideration for this benchmark analysis. More specifically, the six location groups consist of several location factors, and in total we modeled 61 location factors.

  1. Business environment
  2. Business risks
  3. Infrastructure
  4. Labor cost
  5. Macro economy
  6. Tax

Based on our scoring model that transforms the actual country values in a relative score between 10 and 100 (e.g. best in class country for a particular location factor receives a relative score of 100) we have calculated the overall country competitiveness scores:


The overall competitiveness score implies that the US not only has been, but still is a very competitive investment location compared to all emerging low cost and high growth markets. The US consistently score well in terms of business environment, business risks, infrastructure and tax. However, the location groups Macro Economy and labor puts China, Vietnam and Indonesia on the forefront due to China’s strong future growth figures and the low labor costs of Vietnam and Indonesia.

In terms of labor costs the US obviously are still far behind, but whereas in the past we saw a trend of corporates making investments decisions based on cost levels only, in present times we see examples of companies re-entering the US again after a low cost adventure. This indicates that corporates are increasingly giving (and should also give) more priority to the softer factors, as these embrace a lot of hidden costs.

The next sections will stipulate further on the different details per location group, included in this competitiveness benchmark assessment.

Business Environment

This location group not only consists of several criteria of the most recent World Bank’s Doing Business In Reports, but also includes the FDI Confidence Index, the Intellectual Property Protection Index and statistics relating to the Efficiency of the Legal Framework. In total we included 42 different location factors relating to this location group only. Overall, the US scores significantly higher compared to its competitors, i.e. 90.87 with maximum scores on 30 out of the 42 location factors. Behind the US and ranking second is Mexico, with a competitiveness score of 64.08 followed by Vietnam with a competitiveness score of 57.43.

The findings suggest that the business environment of Vietnam is considered more favorable than China’s. This is also what we experience in our daily corporate site selection activities: bureaucratic concerns that corporates face in China are reflected by low scores on dealing with construction permits, starting a business, closing a business and employing workers.

India and Brazil have the least appealing business environment according Yet, these countries have and still do enjoy large inflows of FDI projects, and this can partly be explained by the fact that these countries represent a significant internal market, which is still one of the most important drivers for foreign investment. In this perspective it is therefore not that surprising that these countries were popularly labeled as the BRIC’s.

Business Risks

Business risks encompass corruption levels and economic freedom. Here the US score best on both aspects, while Vietnam has the highest degree of business risks among all competing countries. A large gap exists in general between the US and the runners up Mexico and Brazil with scores of respectively of 100, 36.52 and 28.86. This implies that the US are much more stable than its global competitors, and provide corporate investors with a low risk investment location.


The quality of road, rail, air transport, and sea ports is, among others, a measure of the physical effectiveness of corporate supply chains. A higher score implies a more effective supply and distribution of finished goods to final customers by using different modes of transport. The US clearly stand out as reflected by the best possible score of 100. China ranks number two, but with a large difference in score with the US, i.e. almost 50 base points out of 100. Interestingly Brazil has the worst overall score in infrastructure. However, with the World Cup and the Olympics in the next 6 years, improvements in this area are expected.


The location group Labor in our benchmark analysis includes the average hourly compensation costs for all direct employees in manufacturing. Here we clearly see the relative high labor costs of the US and the favorable low costs in Indonesia and Vietnam. The results here coincide with our experience in Asian corporate site selection activities that routine and labor intensive production is relocated out of China to countries such as Vietnam and Indonesia.

Macro Economy

As a proxy for purchasing power, we used the GDP per capita and the estimated GDP growth rate over the next 5 years. China ranked first based on these two location factors. This is due to the high GDP growth rate forecasts for the next five years, whereas the US has the lowest growth figures among the competing countries. The highest score for US relating to the location factor GDP per capita does not compensate sufficiently to overtake China.


The location group Tax encompasses the corporate income tax for resident companies, ease of paying taxes, number tax payments, time to comply and total tax rate. Also here, it is the US that score best with maximum scores for the ease of paying taxes and the time to comply. Second place with less than 10 base points difference is Mexico. The US, however, scores lowest on corporate income tax for resident companies, whereas Brazil scores best by far. Interestingly, the total tax rate in Brazil is ranked lowest, which illustrates President Lula’s social agenda and strict taxation rules on foreign capital entering Brazil.

The final ranking in competitiveness as illustrated below suggests 4 main groups:

  1. Competitiveness score 61< US
  2. Competitiveness score 51-60: Mexico and China
  3. Competitiveness score 41-50: Indonesia, Vietnam and India
  4. Competitiveness score 30-40: Brazil


A competitive and low risk investment climate, with relatively stable wage inflation, increased productivity levels and a skilled labor pool in the US compared to rapid rising labor costs and seemingly overheating economies in South East Asia are shifting the global landscape of FDI. It does however all depend on the type of business you are in. As Tim Ryan, co-chair of the House Manufacturing Caucus said: “We must face the fact that the US will not produce any sport shoes anymore” and While much of manufacturing has become more competitive and efficient, advanced manufacturing in areas such as green technology is critical to the country’s economic future”, illustrates the new direction and era in US manufacturing.

According to the US department of Labor, US output per hour at US non-farm businesses rose 5.2% from mid-2009 until the end of 2010, while hourly wages rose only 0.3% in relative terms. This increased productivity in combination with the strong competitive environment (highly favorable for market, efficiency and strategic asset seeking FDI) plays a big role in the current “reshoring” movement – repatriating production back to the US from overseas, as surveyed by Reuters and Of all the companies surveyed, as much as 15% say they have repatriated production back into the US in the past 2 years. Trends like reshoring often sustain for decades as opposed to years (just as the offshoring trend), and now that the balance between cost levels versus risk levels is changing in favor of the US, we expect to see more and more jobs re-generated due to reshoring.

Investment Consulting Associates (ICA) will publish the last and final FDI blog next week. This final FDI blog will demonstrate a business case simulation of a manufacturing plant in the US versus the competing low cost locations.The final report on “The United States: The revival of a manufacturing powerhouse” is presented by ICA and Atlas Advertising at the 2011 IEDC conference in Charlotte, North Carolina.

Dr. Douglas van den Berghe

CEO Investment Consulting Associates - ICA

America’s Manufacturing Future: Market Indicators and Trends Print E-mail

In a series of blog posts discussing the competitiveness of the U.S. for Foreign Direct Investment (FDI), we are continuing the conversation with this topic: the market voices.

The U.S. suffered hard during the latest economic downturn. Even today a lot of uncertainty concerning the economic situation exists. When scanning through news reports and articles, not surprisingly, the creation of jobs and stimulating economic development is the single most important theme in American politics. The United States faces a daunting challenge in creating jobs: at current rates, it will take until 2016 to replace the 7 million jobs lost during the 2008–09 recession. Research from McKinsey & Company titled Job Creation and America’s Future, indicated recoveries are becoming increasingly jobless due to firm restructuring and skill and geographic mismatches between workers and jobs. Technology is changing the nature of work. Where jobs are being disaggregated into tasks, work is becoming virtual and firms are increasingly relying on flexible labor.

These trends offer new opportunities for creating jobs in the U.S. This voice is echoed and built upon by Wired Magazine which states that “as the smoke from four years of charred capital starts to dissipate…we can see the gradual emergence of a whole new category of middle class jobs: a realm of work that could begin to close the gap in American employment. These new middle class jobs are what you might call smart jobs.”

Smart jobs are defined here as innovative and high tech but don’t require employees having a PhD, although they do require on the job training or a vocational program. These smart jobs tend to scramble the line between blue-collar and white-collar. Their titles tend toward the white—technician, specialist, analyst—but the underlying industries often tend toward the blue, towards the making of physical objects. While these jobs involve factories and machines, plastics and chemicals, the operating of the necessary instruments demands far more brains than brawns.

Interestingly, these new innovative middle class smart jobs are also located far from the traditionally innovative regions such as Silicon Valley and New York. They are cropping up all over the United States, in regions where you don’t traditionally expect. Dayton, Ohio, for example, is a hot spot for Radio Frequency Identification (RFID) technology. Calcasieu, Louisiana, has become a hub for PVC and synthetic rubber, while job growth is flourishing from Richmond, Virginia to Provo, Utah in the information technology industry. To emphasize the development, an article from titled New, High Tech Hope in Poverty-Wracked Old South , illustrates I-85 as the new high tech corridor and is located in two of America’s poorest regions.

This development has not been unnoticed by the federal and state governments. As Industry Week quotes Tim Ryan, co-chair of the House Manufacturing Caucus, as saying “while much of manufacturing has become more competitive and efficient, advanced manufacturing in areas such as green technology is critical to the country’s economic future”. Ryan continues by saying “Everybody has to come to grips with the fact that we are not making tennis shoes any more. We are not going to make certain low-end manufacturing products. One of the real assets the U.S. always had was the fact that we supported that kind of cutting edge research and partnered with industry to make it work.” Even the government is calling for the U.S. to lead the world in advanced manufacturing.

Adding to the discussion on moving production back to the U.S. was Industry Week’s article titled Are You Sure it is Cheaper to Go Offshore? The article demonstrates that the total cost of the supply chain or Total Landed Costs (i.e. the sum of all costs associated with making and delivering products to the point where they produce revenue), is not only dependent on item by item product costs. Observing transportation costs, customs and duties and costs associated with increased lead times makes the U.S. much more attractive compared to many competing locations in Asia. Among others, the existence of third party logistics (3PL) and even 4PL providers who specialize in optimal supply chain management justifies this statement. A trend is emerging in the U.S. where 3PLs are helping manufacturers better understand the total cost of their supply chain and are therefore seriously beginning to look into the viability of adopting nearshoring strategies.

Combining the innovative characteristic of the U.S. and the increased focus on efficient supply chain management with the continuing rising labor costs in China (according to a study by the Boston Consulting Group), it is no surprise that Reuters and confirm a “re-shoring” movement in the U.S., (i.e. repatriating production back to the U.S.).

A few examples of re-shoring and new foreign investments in U.S. manufacturing industry:

  • Ford Motor Company and Wham-O (the makers of the Frisbee®) are cited as having already brought production back to the U.S.
  • Germany-based Automaker Quaprotek USA invests $22 Million in a new Tennessee facility that brings over 120 jobs to the area.
  • Presair, a manufacturer north of New York City, will return production of its switches from China by this Fall, 2011. The reasons included long lead times for product and the tying up of capital needed for expansion. While Presair will see its costs jump 8% with the move back to the U.S., its CEO Art Blumenthal believes those higher costs will evaporate with the rising costs of manufacturing in Asia.
  • NCR plans to begin a second production shift, which will result in a total of 800 new (re-shored) jobs to Columbus, Georgia.
  • In July 2011, American chocolate manufacturer Mars Inc. has announced plans to build a brand new “state-of-the-art” chocolate manufacturing facility in Topeka, Kansas—its first such site in the U.S. in over 35 years.

More interesting findings of the Reuters/ survey show that 40% of North American manufacturers with off-shored production are investigating bringing that work back to the U.S. within the next year. Additionally, Peter Dorsman, Senior VP of Global Operations for NCR, who recently moved production back to the U.S. from China to respond more quickly to competition and market trends, has received many phone calls from CEOs of other companies looking to follow suit and re-shore some or all production.

In this FDI blog post we have taken an anecdotal perspective from the market on the competitiveness of the U.S. and the revival of a future manufacturing powerhouse. Our next FDI blog post will make a fact-based analysis of U.S. competitiveness by benchmarking the U.S. against competing emerging markets on cost as well as risk levels.

Investment Consulting Associates (ICA) and Atlas Advertising will continue the conversation around this idea through a shared series of blog posts. The full presentation of research will be presented at the 2011 IEDC conference in Charlotte, North Carolina by ICA.

The Revival of US Competitiveness for Foreign Direct Investment Part 2 Print E-mail

In a series of FDI blog posts discussing the competitiveness of the US for Foreign Direct Investment (FDI), we are continuing the conversation with this topic.

Four General Motives for Companies to Engage in FDI

  • Market seeking
  • Resource seeking
  • Efficiency seeking
  • Strategic asset seeking

MARKET SEEKING: foreign investments are driven by the market potential of the foreign market.

According to the recent World Wealth Report by Merrill Lynch Global Wealth Management (MLGWM) and Capgemini, globally the High Net worth Individual (HNI) population is still concentrated in three markets: the US, Japan and Germany, who together accounted for 53% of the world’s HNIs in 2010. More specifically, the US alone constitutes 28.6% of the global HNI population and will remain the largest market now and in the near future.

RESOURCE SEEKING: recent trends in raw materials seeking FDI show that Chinese firms invested significantly in African countries to secure the increasing demand for raw materials.

Typically these types of investments are rather labor and capital intensive, instead of knowledge intensive. The extent of value added logistics is in most cases very limited and does not add to any capacity building for the foreign local economy.

EFFICIENCY SEEKING: investors are continuously exploring ways to optimize their current footprint of facilities by shifting activities to new locations that offer increased efficiency, hence lower cost levels.

However, selecting locations providing lower labor costs only can result in a very costly mistake. If the production process is capital and knowledge intensive, and the main markets for high value added goods and services are United States, Canada or Mexico, then an integrated financial model must prove the feasibility of the offshore business case compared to keeping the production in the US.

STRATEGIC ASSET SEEKING: multinational corporations (MNCs) as well as small and medium sized enterprises engaging in strategic asset seeking FDI are motivated mainly by the quest for strategic resources and capabilities.

The underlying rationale for such asset-seeking FDI is strategic needs. The United States have a distinct competitive advantage over emerging economies in terms of developed industries, number of specialized suppliers, and clusters of supporting industries. These are unique selling points to potential investors that cannot be imitated in the short to medium term by other countries.

As the US economy needs to create 21 million jobs by 2020 (according to the latest analysis by McKinsey) for the unemployed and the new entrants into the labor force, Foreign Direct Investments to the United States can facilitate the boost in new jobs as the largest economy of the world is still very well positioned to attract market seeking FDI and strategic asset seeking FDI. In some business cases, the United States may even be more competitive than the BRIC (Brazil, Russia, India and China) for attracting efficiency seeking FDI, especially when you take into account the overall supply chain and operating costs, customs and duties and exchange rate risks.

The last decade the BRIC and emerging countries did enlarge their competitive position in manufacturing projects significantly, but low labor costs is only a temporary situation as the case of China today clearly demonstrates. The transition to the next level in economic development requires different conditions, where the US can again show its economic muscles: knowledge, strategic infrastructure and purchasing power.

Investment Consulting Associates - ICA and Atlas Advertising will continue the conversation around this idea through a shared series of blog posts. The full presentation of research will be presented at the 2011 IEDC in Charlotte, North Carolina by ICA.

Dr. Douglas van den Berghe

CEO Investment Consulting Associates – ICA

United States – The Revival of a Future Manufacturing Powerhouse Print E-mail

It is now two years ago when we successfully launched our location benchmarking tool LocationSelector at a number of events and institutions around the world. Our audience largely consisted of corporate senior management and economic developers. During our presentation we presented the competitiveness for Foreign Direct Investment (FDI) of emerging markets versus Europe and North America. The results were not very surprising, with the usual suspects and some new hotspots in South East Asia and some in Sub-Saharan Africa. However, as a young innovative strategic advisory firm we challenged the established view by posing that the United States could be re-invented by investors as a favorable location for manufacturing processes as well as some outsourcing activities. Currently, we increasingly see our pioneering view become reality.

Since then numerous corporate executives asked our advisors “whether their companies were missing out on any competitive opportunities to locate their business activities”. In most cases we responded: “perhaps the solution to what you are looking for is close to home than you think or may or may perceive”. The United States has a well educated workforce, a large number of the best universities and business schools in the world, an excellent infrastructure for IT, a dynamic entrepreneurial economy, attractive grants and (tax) incentive packages at state and federal level (please see our ICAincentives deal database), is host to some of the most promising new companies that dominate the international landscape of IT and social media, a lot of experience in manufacturing, good infrastructure and given the exchange rate of the US dollar a very cost competitive business environment. Labor costs in some US States are becoming very competitive versus those in some emerging markets, especially if we filter productivity into the equation. I am sure the above unique selling points for the United States can be strongly emphasized by the recently launched national IPA of the United States Select USA, in which Invest America will be incorporated and integrated in the investment promotion strategies of many US States.

This is the first of a series of FDI Blogs on the competitiveness of the US. The FDI Blogs that will be posted over the next two months will cover some of our research results on the same topic. The overall research project will be presented at the annual IEDC 2011 event in Charlotte, North Carolina. Topics that will be addressed are: how competitive is the United States really? Benchmarking the FDI competitiveness of the United States versus Emerging Markets. What drives this competitiveness? Incentive packages supporting the revival.

I encourage you to discuss and challenge the views and analyses that we will publish. You can follow us on our corporate FDI Blog, Twitter FDIexecutive and LinkedInGroup FDIexecutive as well as our upcoming webinar organized by our US strategic partner Atlas Advertising.

Dr. Douglas van den Berghe

CEO Investment Consulting Associates – ICA

Forecasting wages in emerging markets over the next 5-10 years Print E-mail

One month ago, I started a discussion “Which indicators can be used to forecast wages in emerging markets over the next 5-10 years” on our “FDIexecutive” LinkedIn group as well as the LinkedIn Group from the “Economist Intelligence Unit”. This issue came to the surface as ICA is currently involved in many corporate site selection projects in emerging countries where insights into future wage development is crucial for the final location decision making process. Professional input via social media outlets such as LinkedIn and Twitter on this significant issue related to Foreign Direct Investment (FDI) can only contribute to more insights.

As the discussion received considerable attention from LinkedIn members and the media, triggering more than 50 posts, ICA has summarized the main points of this issue below:

All participants to the discussion agreed that the development of wages in emerging in the next 5-10 years will obviously be shaped by macro-economic indicators, such as inflation, unemployment rate, domestic and foreign investments, governmental policy etc. However, in the end it boiled down to the fact that competition will drive wages up: Law of supply and demand.

Some members used theoretical approaches such as the gross fixed capital formation to labor intensity ratio in a domestic perspective and in an international perspective and the use of the Phillips curve with the inverse relationship between the rate of unemployment and the rate of inflation in an economy. The latter theory however is not observed in the long run. An interesting post was written by Jacque Vilet, who used her business background instead of an economist view. She stated that the improvement in the lives of people in emerging markets and the consequent increase in the middle classes with more disposable income led to a new vast customer base for products from the developed world. A similar strategy that Henry Ford envisioned when he set up his production cost strategy for the T-Ford model in the early 20th century. Henry Ford emphasized that if he would pay his workers well, they would also be able to buy his cars. To sell products in these markets, investments are made and labor is hired in these markets to win market share, which increases competition for labor and thus higher wages. This is supported by Guy Navon who stated that wages are determined by the demand and supply of labor hours in the economy and therefore relates to real GDP growth and labor supply indicators. Henry Loewendahl agreed and elaborated that demand is elastic (GDP growth) while supply (labor) is relatively inelastic as policies to significantly increase the labor supply are long term or longer than the investors’ business planning.

To determine the demand and supply of labor of an emerging market, Roger Botto mentioned that the point of departure is the initial level of life and future projects, i.e. endowments. Pedro Dudiuk contributes further to this statement by saying that future projects can be monitored by the movement of capital, international solvency and development of the internal market. Further considerations then are education and skills levels and workers outbound and inbound mobility, also addressed by Snehal Manjrekar.

Another interesting aspect of wage forecasting in emerging markets was posted by Mahima Khanna, who suggested not to disregard the size or strength of the informal markets in emerging markets. As example she mentioned India where 80% of employment is in the informal sector which constitutes a significant wage determinant.

To sum up all contributions were very relevant and ranged from integrating macro economic and political fundamentals into the equation and modeling. However, strong industry effects remain relevant as well. In some industries wages tend to increase faster than in other. Similarly, multinational corporations also tend to pay higher wages and salaries. Finally, it is important to note that the existing level of FDI and the potential future absorptive capacity of new FDI projects in the same industry within a country is an important factor of future wage growth. Countries like China, with its vast labor reserves, have been able to much longer facilitate and host new FDI projects as the supply of new labor keeps wage levels stable. It is only since the last two years that China experiences wage increases in the Coastal Provinces within various industries. Other countries will reach their absorptive capacity at a much earlier stage and need to adjust and diversify their economies to attracting higher value added activities sooner due to limited supply.

Given the above and all the input that needs to be integrated in a forecast, it remains to be seen which countries and for how long they can maintain their competitive position in the global economy and successfully attract more Foreign Direct Investment (FDI).

To be continued………

Dr. Douglas van den Berghe

Managing Director

VIPE's: the next BRIC's Print E-mail

In 2005 Goldman Sachs posed the question: “Which countries will be the next BRIC’s?” Their Global Economics Paper No. 153, identified 11 countries that could rival the G7 over time, even if they lack the scale to become the next BRICs. The countries they identified included Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. These N11 countries all share the characteristics of rapidly growing populations combined with significant industrial capacity or potential. Together, these factors indicate a growing consumer market with increased earning potential, creating business opportunities for both local and international firms.

As strategic advisor I have taken a closer look at these countries in terms of their competitiveness for attracting investments. Using ICA’s proprietary software I benchmarked the N11 countries on several factors like accessibility, business environment, business risks, education and foreign direct investment. Below are the findings:

Based on the competitiveness scores of the N11 countries resulting from the benchmark study in, 3 groups can be distinguished:

Group 1: South Korea, Mexico and Turkey.

Group 2: Vietnam, Indonesia, Egypt and the Philippines

Group 3: Nigeria, Pakistan, Bangladesh and Iran

Assessing all groups’ average GDP per capita and average GDP growth from 2006-2009 (at market prices based on constant local currency) from the World Bank, we find the following results:

CriterionGroup 1Group 2Group 3
Average GDP per capita 2009 in current US$
Average GDP growth in %2,05,95,3

From the data provided by the World Bank we observe 2 important aspects:
  1. A large difference is observed in average GDP per capita in 2009 between Group 1, i.e. $11145, and Groups 2 and 3, i.e. $1871 and $1791 respectively
  2. The average GDP growth from 2006-2009 of Group 2, i.e. 5,9%, outperforms Group 1 and 3, i.e. 2,0% and 5,3% respectively

Combining the competitiveness, strong growth figures, and the large growth potential in GDP per capita of Group 2, I want to introduce the VIPE’s as the next BRIC’s. The VIPE’s, consisting of Vietnam, Indonesia, Philippines and Egypt (despite its recent political turmoil), are in the best position to generate significant above average returns in Foreign Direct Investments (FDI) and portfolio investments in the next 5 years. Interestingly, in my daily profession as corporate site selection advisor at ICA, I also see a continuing trend in corporate site selection projects shifting towards the VIPE’s. The combination of low labor costs with a relative stable and competitive investment climate contributes to these trends.

Forecasting is always difficult, but the VIPE’s will play an increasingly significant role on the international investment podium for the next 5 years.

Frank Peterse

Senior Consultant - ICA


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