BDO International Business Compass

International Location Index for the Medium-Sized Companies

Column 1: Economic Conditions

Economic metrics represent the size and characteristics of the foreign market. The gross domestic product (GDP) is a value of the total economic output of an economic area over a particular period of time. It measures the domestic production of goods and services net of intermediate consumption and imports. In addition, the gross domestic product is also used as an indicator of income, usually in connection to the population size of the national economy. This indicator serves as a reference point for the average per capita income of the population in comparison to other countries in terms of purchasing power parities. A high value of this indicator means that on average the public has more income available. The gross national debt represents the total issued government bonds in the domestic currency less repayments.[1] Public finances, expressed as a percentage of GDP, are used as an indicator for the general macroeconomic situation. The lower the gross national debt, the more stable the economy. Foreign direct investments (FDI) demonstrate the level of confidence foreign investors have in the national economy. A high net inflow of foreign direct investments is a sign that investors expect positive future developments. However, when regarded as flows, they can sometimes fluctuate considerably between years. We used the average inflow of FDI from 2005 to 2010 to demonstrate the medium-term development of foreign investors' confidence. Also, the absolute flow was set in relation to the population size of the relevant country, i.e. calculated per capita.  The inflation rate is a reflection of the annual percentage change of the average consumer prices and is used as an indicator of price level stability. A low inflation rate means that the price level is stable. Business freedom is a quantitative measure of the ability to start, run and close a company The variable reflects the overall regulatory burden as well as the efficiency of the state's regulatory processes on a scale of 0 to 100, where 100 equals the highest degree of business freedom. The measure consists of ten equally weighted factors, derived from the World Bank's Doing Business Report. These factors measure the procedure, time and cost of opening, managing and closing a company.[2] The scope for entrepreneurial activity increases, when the bureaucratic burden of private sector activities is low. Infrastructure quality measures the quality of trade and transport-related infrastructure, i.e. ports, railways, roads and information technology.[3] A well developed and maintained infrastructure means increased cost-efficiency in transporting and trading goods. The aggregate tax rate measures the proportion of taxes, fees and charges levied on company income net of deductions and exemptions. It is used to measure the fiscal burden on company profits.[4] If the tax burden is low, businesses have more scope for investment. The market potential measures the degree of accessibility of a particular region in relation to the number of markets open to a local company in the region. It is not just a question of merely determining the market size, though. Rather, it is taken into account that a large market that is already well served by existing enterprises may offer potentially lower profits than a smaller market with fewer competitors in the area.[5] A high market potential increases the appeal of a particular market for a company.

 



1 The Government Finance Statistics Manual of the International Monetary Fund (IMF) defines gross national debt as a "stock of all liabilities except shares and other equity and financial derivatives" (IMF 2001, 46) - independent of the political level, i.e. local, regional or national government level.

2 Cf. Miller et al. (2012), 458-459.

3 Cf. Arvis et al. (2010), 42. The quality of trade and transport-related infrastructure is one of six dimensions that make up the Logistics Performance Index. 

4 We considered the "Fiscal Freedom" indicator as an alternative. However, this includes not only the direct tax burden in relation to the maximum tax rates levied on incomes of natural persons and companies, but also the total tax income as a proportion of GDP (cf. Miller et al. (2012), 475). The latter is relevant when comparing international economies of in terms of the fiscal burden. Therefore, the total tax income goes beyond the fiscal burden of businesses, which is the focal point here.

5 Head/Mayer (2006), 577.