In our Latin America class, we looked at direct foreign investment from two perspectives:

A country’s perspective: how can countries attract multinationals? Especially small markets, which must target globally oriented sectors, in need for fast response time from institutions. Especially markets with low cost of labor, how can they balance this with low education levels and still remain an attractive environment to companies? How can labor and tax laws influence company’s selection? How does the rule of law, corruption levels and trust factors affect business? How can the efficiency of their infrastructure impede or favor a country? For instance, how a reliable electrical grid could play in favor of Costa Rica but against India in attracting large production plants? Or how can the 500 000 engineers graduating each year from Chinese universities present an enormous untapped educated workforce to further fuel the growth of the country, vs Brazil where only a small number of middle to upper class people reach this level of education? How can being small and efficient and customer oriented as a country contributed to attracting direct foreign investment compared to slow administrative government, such as the EU…
Why is France revamping its tax incentives to offer better deals to foreign executives? Has the country realized that to be a global force on the world market, utilizing brains brought with the national way of thinking would not be enough?

From a company’s perspective, tax holidays on profits and inputs, lower cost, good education levels, good infrastructure to support production, imports and exports, efficient decision making at governmental level, and free capital flows, flexible labor laws, non-unionized workers seem to play a larger role than political or economical stability and efficient financial markets – if we look at companies’ choice to establish operations in Israel, Malaysia or Mexico.

There was a time when many companies were bending in front of governments to obtain favors. Now is a time when companies make more than the GDP of entire countries, when expenses related to the set up of a new operation in a country represent what the firm can earn in a month, or a couple of weeks in another market. Now is a time when the weight of large corporations in a country’s balance sheet, in terms of direct and indirect job created, tax contributions, GDP contribution, growth factor for universities, boost for the infrastructure and incentives for research clusters, strong underlying of financial market trading has become extremely important to a country’s economy. Governments are forced to make concessions – or see business move elsewhere (Toyota choice to settle somewhere else than in the UK, despite very flexible labor laws, because it was not part of the Euro zone, Intel choice not to pick Chile, because the government was inflexible)

Power today lies in economics. Of scale.