ASSESSMENT OF FDI ATTRACTIVENESS: AN ANALYTIC HIERARCHY PROCESS (AHP) APPROACH

1
ASSESSMENT OF FDI ATTRACTIVENESSAN ANALYTIC
HIERARCHY PROCESS (AHP) APPROACH

• SERCIN SAHIN
• Yildiz Technical University, Department of
  Economics
• sercinsahin_at_hotmail.com
• ÖZGÜR SENER
• Istanbul Technical University, Department of
  Industrial Engineering
• thesener_at_yahoo.com

2
Overview of the presentation

• Overview of Foreign Direct Investment
• Data UNCTAD FDI Variables
• Method Analytic Hierarchy Process (AHP)
• Results
• Conclusion
• Further Suggestions

3
2.What is Foreign Direct Investment?

• Green-field investment
• Mergers and acquisition

4
2.What is Foreign Direct Investment?

• Capital stock
• Know-how
• Technology

5
2.What is Foreign Direct Investment?

• Benefits for Host Country
• Increase in Employment
• Increase in Exports
• Increase in Government Revenues
• Trigger Local Investment (suppliers, distribution
  channels)
• Technology Transfer
• Improvement of Management and Labor Skills
• Increase in International Competitiveness of
  Local Firms

6
3.Data UNCTAD FDI Variables

• UNCTAD
• United Nations Conference on Trade and
  Development

7
3.Data UNCTAD FDI Variables

• The UNCTAD Inward FDI Performance Index

INDi The Inward FDI Performance Index of the
ith country FDIi FDI inflows in the ith
country FDIw World FDI inflows GDPi GDP in
the ith country GDPw World GDP.
8
3.Data UNCTAD FDI Variables
The UNCTAD Inward FDI Potential Index is the
unweighted average of the scores on twelve
variables (Independent Variables) for each
country.
9
Quantitative Determinant used in Potential Index Proxy of Determinants
GDP per capita Level of economic development
The rate of GDP growth over the previous 10 years Size of a host-country market
The share of exports in GDP Openness
Telecoms infrastructure (the average of telephone lines per 1,000 inhabitants, and mobile phones per 1,000 inhabitants) Modern information and communication infrastructure
Commercial energy use per capita Availability and cost of energy
The share of RD expenditures in gross national income Technological capabilities
The share of tertiary students in the population Extent of higher education and related skills that a country's workforce embodies
Country risk Political and commercial risk
Exports of natural resources as a percentage of the world total Availability of natural resources
Imports of parts and components of electronics and automobiles as a percentage of the world total Participation in the leading TNC integrated production systems
Exports in services as a percentage of the world total Importance of FDI in the services sector
Inward FDI stock as a percentage of the world total Investment climate
10
4.Method Analytic Hierarchy Process (AHP)

• A multi criteria decision making method
• Designed by Saaty(1980).

11
4.Method Analytic Hierarchy Process (AHP)
12
4.Method Analytic Hierarchy Process (AHP)
Pair-wise comparisons between variables
  C1 C2 C3 . . Cn
C1 1 Co1/Co2 Co1/Co3 . . Co1/Con
C2 Co2/Co1 1 Co2/Co1 . . Co2/Con
C3 Co3/Co1 Co3/Co2 1     Co3/Con
. . . . 1   .
. . . . . 1 .
Cn Con/Co1 Con/Co2 Con/Co3 . . 1
13

• Correlations between UNCTAD Inward FDI
  Performance Index and
• FDI determinants that are used to calculate
  UNCTAD FDI Potential Index (Criterion)

14

• Pair-wise comparison matrix of determinants

  country risk energy use export of nat. res. export service FDI stock GDP GDP growth import elect. and oto. mobile student total exports telephone
country risk 1 1.62515 3.43951 32.64815 14.71243 1.55279 2.33308 7.27906 1.14687 9.06577 0.57061 1.32443
energy use 0.61533 1 2.11643 20.08931 9.05296 0.95547 1.43561 4.47901 0.70570 5.57842 0.35111 0.81496
export of nat. res. 0.29074 0.47249 1 9.49208 4.27747 0.45146 0.67832 2.11631 0.33344 2.63577 0.16590 0.38506
export service 0.03063 0.04978 0.10535 1 0.45064 0.04756 0.07146 0.22295 0.03513 0.27768 0.01748 0.04057
FDI stock 0.06797 0.11046 0.23378 2.21909 1 0.10554 0.15858 0.49476 0.07795 0.61620 0.03878 0.09002
GDP 0.64400 1.04660 2.21506 21.02554 9.47486 1 1.50251 4.68774 0.73859 5.83839 0.36747 0.85294
GDP growth 0.42862 0.69657 1.47424 13.99358 6.30601 0.66555 1 3.11993 0.49157 3.88575 0.24457 0.56767
import elect. and oto. 0.13738 0.22326 0.47252 4.48522 2.02120 0.21332 0.32052 1 0.15756 1.24546 0.07839 0.18195
mobile [phone].99906 28.46729 12.82839 1.35394 2.03431 6.34692 1 7.90483 0.49753 1.15483
student 0.11031 0.17926 0.37940 3.60125 1.62285 0.17128 0.25735 0.80292 0.12650 1 0.06294 0.14609
total exports 1.75253 2.84812 6.02783 57.21670 25.78390 2.72130 4.08878 12.75673 2.00991 15.88799 1 2.32110
telephone [phone].59697 24.65069 11.10849 1.17242 1.76157 5.49599 0.86593 6.84503 0.43083 1
15
4.Method Analytic Hierarchy Process (AHP)
Eigenvalue vector as the weights of the
determinants
Total exports 0.261396
Country risk 0.149154
Mobile [phone]
Telephone [phone]
GDP 0.096056
Energy use 0.091779
GDP growth 0.06393
Export of nat. res. 0.043365
Import elect. and oto. 0.020491
Student 0.016452
FDI stock 0.010138
Export service 0.004569
TOTAL 1
16
  Country UNCTAD Inward FDI Potential Index Rank UNCTAD Inward FDI Potential Index Rank
  Country Unweighted Weighted
EU-25 United Kingdom 3 2
EU-25 France 12 3
EU-25 Germany 8 6
EU-25 Ireland 10 8
EU-25 Netherlands 11 9
EU-25 Belgium and Luxembourg 9 11
EU-25 Austria 19 12
EU-25 Italy 26 16
EU-25 Spain 25 17
EU-25 Sweden 6 18
EU-25 Finland 13 21
EU-25 Denmark 18 24
EU-25 Slovenia 28 31
EU-25 Estonia 32 33
EU-25 Greece 33 36
EU-25 Poland 43 37
EU-25 Portugal 36 40
EU-25 Latvia 44 41
EU-25 Hungary 40 43
EU-25 Cyprus 42 46
EU-25 Lithuania 47 47
EU-25 Slovakia 46 48
EU-25 Malta 37 51
EU-25 Czech Republic 39 54
17
  Country UNCTAD Inward FDI Potential Index Rank UNCTAD Inward FDI Potential Index Rank
  Country Unweighted Weighted
Developed Norway 2 5
Developed Iceland 14 19
Developed Switzerland 17 23
Acceding Bulgaria 61 93
Acceding Romania 81 108
Candidate Croatia 49 57
Candidate Turkey 72 80
Potential Candidate Albania 80 73
Other Mediterranean Israel 23 30
Other Mediterranean Libyan Arab Jamahiriya 34 39
Other Mediterranean Egypt 75 58
Other Mediterranean Algeria 71 61
Other Mediterranean Tunisia 67 66
Other Mediterranean Lebanon 64 82
Other Mediterranean Syrian Arab Rep. 95 90
Other Mediterranean Morocco 87 98
18
5.Conclusions

• In this study it is not attempted to define what
  are the true determinants of FDI.
• But rather tried to weight the determinants which
  are used to compute UNCTADs FDI Inward Potential
  Index to make the analysis more reliable
• And AHP may be an appropriate technique for
  weighting the determinants.

19
6.Further Suggestions

• Proxies which UNCTAD uses may not indicate the
  real FDI potential of the countries. Therefore,
  some other variables should be added to make the
  analysis more accurate
• Tax rates
• Labor and energy costs,
• Incentives
• Property rights
• Corruption, etc.

20
GRAZIE