BDO International Business Compass

International Location Index for the Medium-Sized Companies

Weighting and Aggregation

The three dimensions of economic, political and societal conditions contain different indicators. Eight indicators are included in the economy dimension, compared to only six each in the two others. For each dimension, the various indicators are weighted by the arithmetic mean and aggregated into a value for the pillar of the IBC. The arithmetic mean is preferable here to the geometric mean, as time changes for individual indicators would give too much influence in the ranking, were the geometric mean to be used.  From the values obtained for the three pillars, an overall index value is then calculated by averaging. Here, the equally-weighted geometric mean is used. Compared to the arithmetic mean, this has the advantage of not assuming perfect substitution between individual values. As a result, poor individual values a country may record in one area, cannot simply be offset by good individual results in another area. In terms of the sub-pillars of the IBC, the assumption of limited substitution makes intuitive sense: the contents of the dimensions differ, but they need to complement each other to ensure a location’s quality. A country will only benefit to a limited extent, if from an economic point of view it has excellent infrastructure and low tax rates, but at the same time faces significant political instability and weaknesses in the rule of law. According to our method, a country must achieve sufficiently high values in all three pillars, in order to obtain a good ranking in the overall index.

Since the indicators of the market and production sub-indices do not clearly fit into one specific pillar or another, the equally-weighted geometrical mean was used here in calculations from the outset. Even with regard to the choice of factors influencing market and production locations, it is reasonable to assume limited substitutability. Each of the selected indicators may act as a knock-out or elimination criterion for a location. For example, trade protection could severely damage the attractiveness of a country, even if other factors like the potential for demand or local infrastructure are promising. Equally-weighted, individual indicators are gathered together to calculate a geometric mean to evaluate sub-indices. This allows a balanced calculation of location factors to be made.