10 Apr The revival of US Competitiveness for Foreign Direct Investment (FDI)
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 LocationSelector.com. 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.
- Business environment
- Business risks
- Labor cost
- Macro economy
Based on our LocationSelector.com 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.
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 LocationSelector.com. 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 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.
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:
- Competitiveness score 61< US
- Competitiveness score 51-60: Mexico and China
- Competitiveness score 41-50: Indonesia, Vietnam and India
- 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 MFG.com. 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