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FDI drivers: Counting the costs

While not always a deal-breaker, cost is one of the FDI drivers that is taken in consideration every time a multinational company is going through a site-selection process.

London-FDI-drivers
London is one of the most expensive cities in Europe in which to do business, yet it is consistently one of the continent’s biggest draws for foreign direct investment. (Photo by Daniel Leal-Olivas/AFP via Getty Images)

While not always a deal-breaker, cost is certainly one of the foreign direct investment (FDI) drivers that is taken in consideration virtually every time a multinational corporation (MNC) is going through a site-selection process.

Whether it is property cost, labour cost or utilities cost, setting up an FDI operation will incur at least one of those.

It is true, however, that the importance of cost as an FDI driver in site selection varies depending upon the type of operation.

For instance, while for a financial services operation labour might constitute 90% of overall costs, for heavy manufacturing industries the cost of raw materials, energy and distribution is more relevant.

“Although costs are certainly a key driver, FDI trends suggest that these are not necessarily as important as other factors – for example, labour quality and availability, and market size,” says Investment Monitor chief economist Glenn Barklie.

“In most countries, capital cities and/or key business cities will typically receive the lion’s share of FDI, even though these cities are likely to be the most expensive. Companies typically weigh the costs against the quality offered when assessing a location. Most will encounter some form of a cost/quality trade off to find their optimal location.”

Cost or quality?

Data from crowd-sourced global database Numbeo seems to confirm this.

In Europe, the UK leads the way in terms of the number of greenfield FDI projects between 2006 and 2019, with a total of 17,613. It is followed by Germany with 13,111 projects and France with 9,150.

Top European countries for greenfield FDI 2006–2019 (source: Numbeo)

1 UK  17,613
2 Germany  13,111
3 France  9,150
4 Spain  7,690
5 Russia  6,272
6 Poland  5,432
7 Romania  4,057
8 Netherlands  3,346
9 Ireland  3,182
10 Italy  2,893

 

However, the cost of setting up an operation in those countries, especially the UK and France, is among the highest in the whole continent.

London, which according to EY attracted 48.5% of total UK FDI in 2019, is the most expensive city in Europe for both industrial property rent – €179/m2 per year – and office property cost – €1,407/m2 per year.

Helsinki and Dublin make up the top three for industrial property rent with €120 and €106, respectively. As per office property cost, London is followed by Paris and Zurich with €880 and €850, respectively.

For average wages, however, London is fourth with a net monthly average salary after tax of €3,065, after Zurich, Geneva and Copenhagen with €6,000, €5,322 and €3,200, respectively.

Despite being the most expensive cities for office and industrial property costs as well as average wages, all the cities mentioned are popular business hubs.

Finding the FDI balance

“Cost is always a factor when an MNC is considering setting up a new FDI operation,” says Tom Stringer, national site selection and incentives service leader at advisory firm BDO. “However, it is a balancing act. The number one criterion is always going to be market opportunity and once that is guaranteed then all the different types of costs are taken into consideration.”

Stringer also points out that while it is generally true that large cities tend to take the lion’s share of a country’s FDI, this is dependent upon the type of operation.

“If we are talking about an operation in the services sector, then large cities tend to attract the most projects simply because that tends to be where people who provide services are based and operate,” he explains. “However, that is definitely not the case if we are talking about an industrial operation.”

As Covid-19 has forced many people to work from home, a situation unlikely to change for the foreseeable future, this could provide an opportunity for MNCs to cut costs on certain operations.

“The pandemic has proved that the services industry’s workforce is more mobile than we thought,” says Stringer. “A lot of those jobs can be done from home and as normality is slowly returning, both employers and governments are realising that they can cut property costs in large cities and encourage work flexibility at the same time.

“However, it is going to be rather different for industrials. We have started to see an increase in inventory and warehouse demand versus office space, for instance. One big lesson that the industry has taken away from this pandemic is that overreliance on one location in a supply chain does not guarantee the resilience needed in a crisis such as this.”

As for every driver, the importance of cost to any new operation varies, but while it may not be the key driver for every MNC, it is certainly a factor that is always considered. As Covid-19 seems destined to reset the importance of many drivers, new opportunities may be arising for companies seeking to save money while accessing locations that were previously prohibitively expensive.