Countries strive to enhance their competitiveness in attracting investments, especially foreign direct investments (FDIs), which involve a foreign investor engaging in economic activity in another country through ownership or establishment of an economic entity. The urgent need to attract foreign investments arises from their effective contribution to boosting national economic growth, creating job opportunities, improving economic welfare, and transferring technological advancement and innovation-supporting factors to the host country.
Amid monitoring global investment trends, various stakeholders have issued indicators to measure the competitiveness of countries in attracting foreign investments. Therefore, the annual report of the German Economic Research Institute Ifo evaluates the competitiveness of countries in attracting investments in 2024 through an index that tracks variations in attractiveness and the factors that hinder or promote competitiveness, with a focus on the development of the German economy’s attractiveness and a discussion of the reasons for the current decline.
Measurement Methodology:
The results of the economic report on countries’ competitiveness in attracting investments are based on a survey conducted by the Ifo Institute in Munich and the Swiss Economic Policy Institute (IWP) with around 8,000 economic experts from 130 countries worldwide. The survey aims to gather economists’ opinions on economic policy measures and prevailing political conditions in their countries, considering mechanisms for future expectations and assessments of various economic indicators such as economic growth rates, expected inflation, infrastructure quality, existing regulatory frameworks, tax systems, and energy resource prices in the countries under study.
To ensure the accuracy of the survey results conducted in the last quarter of 2023, experts were selected based on specific criteria to ensure their competence, such as most of them holding a doctorate in economics, in addition to their political participation in shaping public awareness in their countries, which was measured using several quantitative methods, such as the average citation of participants’ academic works from Europe being around 4,000 times according to Google Scholar.
According to the report, 12 main factors contribute to promoting or hindering investment attractiveness, and participants in the survey were asked to choose the three most positive and negative factors affecting investment attractiveness in their countries. 40% of the experts agreed that bureaucratic obstacles were the most significant hindrances to investment attractiveness, followed by high labor and tax costs and security stability at 20%. The main reasons for these obstacles were the shortage of skilled labor and the poor performance of political institutions. As for positive factors, education resulting from human capital multiplication topped the list at 40%, with the human experiences and knowledge it encompasses contributing to enriching the production process, followed by digital transformation and investment-friendly infrastructure at 20% each.
Assessment Results:
The Ifo Institute’s report evaluates a country’s competitiveness regarding domestic and foreign investments on a scale from 0 to 100. Examining the competitiveness results for domestic investment companies, the report indicated that North American countries ranked first with percentages ranging from 80 to 90%, which can be evaluated as very good, followed by Western Europe, East and West Asia, and Oceania with slightly lower percentages. As for countries with poor competitive attractiveness, a significant portion of them were in the African continent, Eastern Europe, and South Asia in the lower third of the evaluation scale, while Central Asia ranked the lowest or last, with site attractiveness there reaching only 20 to 30 points.
The competitiveness results of countries for foreign investment companies vary somewhat compared to domestic investments, especially regarding less attractive regions, where West, Central, and South Africa, along with Central and South Asia, recorded the worst evaluations. While Africa as a whole is generally considered unattractive to international companies, there is a slight improvement in East and North Africa compared to their counterparts in the West, Center, and South. When it comes to evaluating the rest of the world’s regions – except for Eastern Europe – there are no significant differences in site attractiveness for international companies according to the experts, except for Western Europe, which achieves a slight superiority with an average attractiveness score ranging from 60 to 70 points for international companies.
Italian, British, Maltese, and North Macedonian experts consider their countries less attractive to international companies, with ratings ranging from 30 to 40 points. In contrast, experts in the Netherlands and Switzerland view their countries as among the most attractive sites for both domestic and international companies, with ratings ranging from 70 to 80 points.
Future Investment Attractiveness:
The report also monitored the development of the index of countries’ attractiveness to foreign investment over the past ten years to provide results from which a vision for the global future map of the competitiveness index can be drawn. The most notable of these results are as follows:
1- Variation in the index of countries’ attractiveness to investment over the past decade: The majority of experts see a tangible decline in the index in South and East Asia and South Africa over the past decade. On the other hand, Southern Europe and Southeast Asia witnessed significant positive development during that period. Meanwhile, experts evaluate the situation in West Asia and Northern Europe as having slight positive development, while the rest of the world’s countries fall within the range of slight negative development of the index.
2- Future changes in countries’ attractiveness to investment over the next decade: There is a global sense of optimism regarding the expected improvements to the index of countries’ attractiveness to investment in most parts of the world over the next decade, with experts expecting significant development in regions such as Central America and the Caribbean, West and Southeast Asia, and large parts of the African continent, as well as Southern Europe. On the other hand, they see the development as slight in regions such as North Africa, South Asia, and South America, while experts’ opinions are more optimistic regarding the index in regions such as Western and Eastern Europe, North America, and Central Asia, with the only exception being the negative outlook for the index in East Asia due to the expectation of slight negative development.
As for experts in the United States, they look to the future with a somewhat divided perspective, with around 29% expecting an improvement in the investment attractiveness index, while nearly 28% of experts anticipate a decline. Meanwhile, 42% believe that the economic site attractiveness of the United States will remain unchanged over the next ten years. Experts attribute the reasons for improvement or decline over longer periods to factors such as bureaucracy, human capital, and digital transformation mentioned earlier.
The German Situation:
Germany enjoyed a period of economic development for a considerable time, especially after achieving unity between East and West, which marked the beginning of numerous economic reforms in the early 2000s, followed by a golden economic period for the German giant; this naturally reflected on the investment attractiveness index at the time.
However, the situation is no longer what it used to be, as the German economy suffered from economic stagnation until the first half of 2023, and the situation did not change much by the end of that year; this was not unexpected but rather confirmed the International Monetary Fund’s forecasts that Germany would be the only advanced economy to experience economic contraction in 2023.
According to the economic conditions, German experts participating in the survey believe that Germany still maintains a positive index of attractiveness concerning domestic companies, with a rating ranging from 60 to 70 points, while their assessment of attractiveness for international companies is noticeably worse, with ratings ranging from 40 to 50 points. According to experts’ opinions, Germany is completely unattractive to international companies, similar to Iceland, Latvia, and Albania.
Regarding the factors affecting the investment attractiveness index, 70% voted for regulations or bureaucracy as the primary negative hindrances, followed by lack of digital transformation, energy-related issues, and a shortage of skilled labor at 50%. Infrastructure problems and the tax system followed at 20%. As for positive factors, education and human capital hold a prominent position in Germany, while notably, 60% of German experts see German political institutions as a supportive advantage for the index. In stark contrast to the previous two factors, the availability of capital and the availability of safety in the work environment rank third and fourth among the most mentioned positive factors.
When addressing the development of the index over the past ten years, the experts have a gloomy outlook, with the vast majority (72%) believing that Germany’s attractiveness index has declined in the past decade, and 6.7% of them describing that decline as “significant”; meaning that the German experts’ assessment is noticeably highly negative compared to other European countries. This pessimistic outlook does not differ regarding the future of the index, as 48.3% expect the decline to increase over the next ten years, including 3.3% who anticipate a significant decline, while only 15% of experts expect Germany to become more attractive in the competition for investments.
In conclusion, the report recommends that countries should work to avoid the factors hindering the competitiveness index for attracting investments, such as bureaucracy and the complexity of the tax system, and hasten to leverage the supportive factors such as digital transformation and support for human capital.
Source:
Ifo Institut, Experteneinschätzungen zum globalen Standortwettbewerb, Ifo Institut, March, 2024.
