BDO International Business Compass

International Location Index for the Medium-Sized Companies

Sub-Index Production Site

A number of factors significantly affect the attractiveness of a particular country as potential production site. These are outlined by the indicators annotated below. The question of costs plays a vital role when a company thinks about moving its production or part of its production abroad.[1] Traditionally, cost reduction is the main motive for an overseas move by small and medium-sized businesses, with wage and non-wage labour costs at the forefront of site comparisons.[2] Accordingly, the level of wages in the relevant countries is an important aspect for these deliberations. However, detailed and internationally comparable information about salaries and wages are only available for developed countries. For that reason, we made use of the per capita income as a proxy to approximately determine the wage level. This is based on the assumption that a low per capita income usually reflects a low wage level.[3] Another important factor for production is the quality of trade and transport related infrastructure. Well developed trade routes by land, sea and air mean lower transport costs, because goods can be transported faster and possibly more safely. The aggregate tax rate has an effect on the attractiveness, too. High taxation lowers company profits and restricts the investment possibilities of the business. Under otherwise similar conditions, a high aggregate tax rate therefore reduces the appeal of a particular location. The market potential also has a bearing on the attractiveness of a country as production site. The market potential, rather than just the market size, determines the degree of accessibility of a particular country in relation to the number of other markets open to a local company. Rule of law is of interest in view of possible conflicts, which may arise out of operations at the site. If the regulatory system is reliably implemented, businesses are more confident that disputes are settled in an impartial and fair process.[4] Legal restrictions of the labour market are also significant. A relatively free labour market allows companies to hire and fire workers according to their requirements. That makes it easier for businesses to react to changing conditions. For the same reason, liberties for investment capital also play a part. If movement of capital is relatively unrestricted, enterprises can react flexibly to the economic conditions.

1 There is another viewpoint however, which regards the relocation of production abroad as a cost leadership measure strategy and not as internationalisation strategy (cf. Gerum (2000), 277).

2 Cf. Schulz (2005), 29.

3 We considered the "dismissal costs" indicator of the World Development Indicators as an alternative. This combines the costs of a mandatory advance notice/warning, redundancy payments and penalties for laid-off workers, measured in weekly wages. However, we took these costs into account when calculating the "labour freedom" indicator, which incorporates difficulties of dismissal, statutory notice periods and mandatory redundancy payments.

4 It might also be interesting to know, whether a particular country offers the opportunity of arbitration to settle disputes out of court, if necessary. We decided against including this information, as there may be significant differences between the de jure rules and their de facto implementation.