BDO International Business Compass

International Location Index for the Medium-Sized Companies

Formation of the BDO International Business Compass

In order to form a multi-dimensional concept for an index, the information of individual indicators are normally selected, weighted and combined. Indices that compare countries have become increasingly important in recent years. They are a useful way to provide succinct information. Indices enable quick comparison of countries to outline complex and elusive issues. An index aggregates different types of information, thus allowing easy interpretation. However, the crux lies therein: Primarily, an index is suited to stimulate discussion and to attract the attention of the public, rather than to derive direct recommendations for action.

Theoretical Framework

The theoretical framework is the foundation of a clearly constructed index. It defines the phenomenon that is to be measured and its sub-components. In this way, the selection and weighting of the individual indicators need to adequately reflect their respective relative significance for the index and its various dimensions.

The BDO International Business Compass measure the attractiveness of a country as a multi-dimensional concept in three dimensions: the economic, politico-legal and socio-cultural conditions. The appeal of a country is associated with its level of development. It is understood as a combination of economic, politico-legal and social factors. On the one hand, the attractiveness of a particular country with regard to potential investment decisions is at the forefront, which clearly expresses an economical perspective. On the other hand, economic factors alone can only reflect the situation of a country in a limited fashion, because political, legal, social and cultural aspects also play a part and ultimately have an influence on how appealing a country is as an investment location. The three dimensions correlate with each other and are therefore statistically not entirely independent. However, this is neither required for their aggregation within the index, nor is it realistically achievable. From a statistical point of view, the attractiveness of a country is a level variable as a result of the interaction of a number of factors. The selected indicators may have both a positive and a negative effect on the overall structure, i.e. increase or decrease the attractiveness. The selection of indicators is based on whether they have a logically explicable and, if possible, already proven influence on the attractiveness construct. The second step aggregates specific factors in two sub-indices. The aim is to bundle information through indicators that have an influence on the appeal of a particular country as a potential market or production site.

The BDO Compass differs substantially from other know indices, such as the World Bank's Doing Business Index or the World Economic Forum's Global Competitiveness Index (GCI). Although there seems to be some duplication at a first glance one has to take into account that the indices have different aims. Doing Business presents quantitative indicators in ten regulatory areas. Primarily, the survey takes on the perspective of local, mainly smaller, businesses and measures the regulations that apply to them over their lifetime. Doing Business does not take all aspects of the business environment into account. This is important for companies and investors, or may affect the competitiveness of the economy.  Aspects relevant to the BDO Compass are included in the sub-components of the Index of Economic Freedom such as the procedures for establishing or winding up a company and rules for hiring and firing workers. These are explained later in more detail. The GCI investigates primarily the different factors that lead to sustainable economic growth and long-term wealth of national economies. The aim is to give decision makers in the political and the economic sector an instrument that allows them to compare the competitiveness of national economies and to identify possible obstacles.  Since there is some duplication in the questioning, many of the the indicators used for the GCI are also taken into account in the BDO Compass. In order to make the calculation of the BDO International Business Compass transparent and replicable, only publicly available information was used.

Firstly, the BDO International Business Compass classifies countries according to their overall societal situation. Secondly, the sub-indices "sales market" and "production site" sum up the most important aspects of the business environment and competitiveness of a country. A number of different factors make up the appeal of a country or a site, which can be classified in economical, politico-legal and socio-cultural dimensions. Below is an outline of the twenty indicators considered and their assignment. Each dimension includes six to eight indicators. Some of the twenty indicators were newly combined in the sub-indices "sales market" and "production site".

Composition of the Indicator[1]

1 The designation of "population growth" and "population" points out that these indicators are directly related, but not identical. The indicators "per capita income" and "labour costs" are also marked to show that the underlying data are identical. As described in paragraph 3.1.4, the per capita income is used as a proxy for labour costs.