How to read International Site Selection Rankings

in Industry insights, 29.09.2014

Rankings and indices play an important role in site selection. However, the devil is in the detail, and every ranking or index has to be critically questioned before being used to select a location.

Global Rankings and Indices

There are rankings for basically every relevant parameter for site selection. The three most important global rankings, the World Competitiveness Ranking published by the IMD, the Global Competitiveness Report by the World Economic Forum and the Index of Economic Freedom by the Heritage Foundation, assess a plentitude of various business-relevant parameters in order to provide an overall ranking on the relative competitiveness of nations.

Other indices, such as the Global Talent Competitiveness Index published by INSEAD (the Business School for the World), the International Tax Competitiveness Index by the Tax Foundation or the Innovation Scoreboard by the European Commission, focus on specific topics, for instance, labor force, taxes or the ability of countries to generate growth through innovation.

A third group of indices focuses on softer or quality factors. The Environmental Performance Index, published by Yale, the Where-to-be-born Index by “The Economist”, which ranks the chances of a child to live a healthy and prosperous life or the Mercer Quality of Living Survey, which compares the quality of life in various cities on a global scale, provide such information.

Besides typical site selection criteria, such as availability and cost of labor force, office space or land, corporate taxation and incentives, existing industry clusters, logistics, such rankings and indices may provide important additional information. However, when using these rankings and indices, it is important to ask the following questions:

  1. Are the findings plausible? The World Bank, for example, ranks the Netherlands and Switzerland in its Doing Business Ranking as two of the worst countries in the world in terms of minority investor protection, while in reality, both countries enjoy one of the strongest influxes of foreign direct investments in Europe. The same ranking also states that it is easier to do business in Kazakhstan than in Luxembourg. Lesson learned: Always question findings before using them in your site evaluation, since even the economists creating the indices might get them wrong sometimes.
  2. Are the findings relevant? How important is for example the number of employees in the life sciences sector in each country, when a life sciences company is looking for an ideal location for a corporate HQ, and most of the employees do not need to be scientists but experts in finance, law or supply chain management?
  3. Do the findings give you the full picture? When looking at salary costs, don’t forget to also consider the additional social insurance cost attached, the total working hours per year, labor productivity and the flexibility of the labor law. You might be surprised to realize that, at the end of the day, an initially low-salary country might become an expensive place to do business.

Also, it is always recommended to look at a country’s current account balance or the national debt in relation to the GDP and the unemployment rate of that specific country. This might give an indication of whether or not a country will be obliged to increase social insurance contributions in the future or levy other taxes.

And do not forget the anticipated inflation rate, the currency fluctuation or the tax, customs and trade agreements, as they are all factors that may influence the operational costs at a specific location.

Summary

When selecting a location, it is recommended to use indices and rankings in addition to project-specific factors. It is, however, important to first clearly understand what type of activities should be available in a new location, before selecting the right indices.