International Location Index for the Medium-Sized Companies
Only two decades ago, companies would normally find their competitors in a relatively restricted market. Due to the rapid development of information and communication technologies such as computerisation, use of the internet and mobile phones, transaction costs are reduced significantly, with a subsequent reduction in production and transport costs of goods and services. As a consequence, international corporations are no longer the only players on the global stage, but medium-sized companies have also long been part of the internationally integrated economic network. The age of globalization, that is, the internationalization of economies, is generally characterized by higher international factor mobility and increased competition for favourable conditions and locations. Therefore, medium-sized enterprises are also always on the look-out for good opportunities. For instance, the German SME sector is discovering Africa as a promising growth market. Globalisation is "synonymous with an irrevocable trend to international networking of companies, an increasingly international competition, and even the need to operate in international markets in order to compensate for the loss of domestic market share."
Before a business decides to invest in a new market, it will usually look into a number of very different factors. In order to reach the decision to start operating beyond the national borders (or to expand a company's current commitment) a variety of information needs to be gathered, processed and evaluated. For instance, the potential of a new market or production site needs to be gauged as accurately as possible. In particular, investments in less developed countries demand certain adaptations. An enterprise needs to adapt its range of products, for example, to the relatively expensive capital and relatively cheap labour of the foreign location in order to be successful in that market. And ideally, possible risk factors should be identified beforehand. Of course, all these decisions are highly individual. The requirements of a potential production site or sales market differ widely, depending on the industry. As a consequence, a particular aspect can play a vital role for one company, but is unimportant for another. Internal factors of the company, such as size or the constitution of the enterprise, also play a decisive role in the assessment of individual aspects.
Despite the differences between individual companies, there are also factors that most likely play a major part in the decision making process for many, if not all businesses. The BDO International Business Compass intends to offer an initial orientation by assessing the overall social situation of each country. Also sub-indices organise countries in terms of their potential as either a sales market or production site. This way, the reader is able to get a sense of the general situation/condition of a less familiar country as well as a first impression with respect to specific issues. However, the BDO Compass and sub-indices are not able to give a specific recommendation for action to any particular company in a particular sector concerning a specific country.
A number of aspects determine the relative attractiveness of a location, in this case a country, in comparison to other locations, i.e. other countries. These factors can be divided into economic, political, and social conditions. These aspects in turn are crucial for investment, both for the development of a new market or a new production site. Underlying economic conditions of a national economy such as public debt, inflation rate or per capita income indicate, if the country is sailing in calm waters or if a storm is looming on the horizon. This is also true for the political situation of a country. Political instability, leading to a power vacuum and quarrels between different political groups is an unfavourable environment for mid- or long-term investments. Lastly, social factors such as health and education are also important indicators of a state of a country. While a particular country may be classified according to the underlying economic, political and social conditions, related aspects also play a role in the decision to invest, but possibly in a different way. Obviously, a future sales market needs to have other qualities than those of a future production site.
The following chapter looks at the pros and cons of the internationalisation process of SMEs. Chapter three focuses on the theoretical framework of the index creation. It discusses the theoretical justification of the chosen indicators, comments on the specific selection of data and explains the methodological steps required for data aggregation. Chapter four introduces the main findings of the index in general and for each specific continent. Finally, there is an evaluation of the BDO Compass against the background of similar, but different type of indices.
1 Cf. Ahlstrom/Bruton (2010), 8-9.
2 Cf. Gerum (2000), 275.
3 Cf. Financial Times Deutschland (2012), 2.
4 Meyer (2005), 7.
5 Cf. Handelsblatt (2012), 48-49.