Changing Location Factors - a Sign of the Times
Selecting a location for foreign investment has always been about evaluating various factors through comprehensive data analysis. Until around 10 – 15 years ago, this particularly meant costs - led by salaries, and then followed by real estate, incentives, utilities etc. Since that time, there has been a real shift in the importance of factors towards quality, even in locations where low cost is their starting pitch. This has meant thinking about factors such as the quality of the workforce, universities, and broadband speeds. However, this has still been a mainly quantitative, and therefore largely tangible approach to the location decision. However, more recently the role of less tangible, qualitative factors are becoming more important – we can call these “quality of life” and “quality of business”.
Quality of life
While there are plenty of rankings out there for quality of life, its meaning can be interpreted very differently between investors. Are we talking about how good are the parks we can jog in, or how many theaters we can attend in a city? Or do we mean the quality of healthcare and schools? We probably mean all these things and a few more. My view is that however an investor chooses to define it, quality of life matters more now than ever before, despite its limited real influence on the investor’s day to day business. There are at least three reasons for this:
The types of companies now investing are smaller than in the past, particularly in the ICT sector. This often means senior management will themselves relocate during an expansion. So, if the CEO has a personal stake in the outcome, then the decision - rightly or wrongly - becomes about more than just business.
The actual size of investments, in terms of their job creation are smaller too. With just a few roles to fill, the importance of each to business success is amplified, and hence the personal “happiness” of each individual becomes a key consideration for the company.
There is also less differentiation between locations then there use to be – with so many showing the good cost and quality fundamentals cited previously, quality of life gains prominence.
Quality of business
Alongside this, quality of business represents another slightly intangible. It’s not so much about easy-to-capture regulation or tax data, or the World Bank’s Doing Business factors, but more about what an investor’s perceptions of a place are in terms of their economy, politics etc. In other words, is this a place we want to be and will be successful in, irrespective of what the data is telling us?
This is where two of the hot topics of the moment come in. Last month this blog talked about the unfortunate effects of politics on investment – including where “negative” politics around the US election creates the perception of a country less open for business.
A similar argument can be made around the UK-EU referendum. Perhaps a UK exit would make no real difference to underlying investment factors, regulation may be no more taxing, exports within and external to the EU no different. But the uncertainty, and thus the perception to a foreign investor (or indeed a buyer of UK exports) surely serves to make the overall investor proposition weaker.
What does the future look like?
While technology has given us far greater access to data, it has also generated much more “noise” about locations, for the investor or their site selectors to wade through. The ease of air travel and the effects of social media have opened up the world, yet they have also offered a platform for decisions to be made on a much softer, perception-driven and at times, even ill-informed basis.
So, while the availability of reliable quantitative data now allows us to be more robust than ever before, the irony is that investment decisions are increasingly being influenced by a qualitative approach.