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9 December, 2020updated 12 Oct 2021 06:11

FDI drivers and the importance of education

Access to a highly educated workforce is a rising priority for foreign investors, with those destinations that excel when it comes to education more likely to attract better levels of FDI.

By Viola Caon

FDI-driver-education

The presence of strong higher education establishments, such as the Technical University of Munich (pictured), can give a location a big advantage when it comes to attracting FDI. (Photo by Joerg Koch/Getty Images)

The highly skilled workforces that are a necessity for many investors are a product of a location’s education system, particularly its universities. Until relatively recently, the investors for whom such workers were essential were multinational enterprises (MNEs) covering sectors such as life sciences, finance, or research and development. For those in manufacturing it was less of a concern.

This remains true to an extent today, with manual labour being predominant in sectors such as manufacturing, construction, textile and logistics in many parts of the world, meaning there is less demand for a highly educated workforce.

While there are sectoral variations when it comes to the quality of labour required, the importance of talent as an FDI driver has been rising in recent years across all locations. Related to this, education is a driver of foreign direct investment (FDI) that is partly linked to the quality of labour, as it requires the presence of good universities in a location to attract MNEs looking for higher-skilled workers.

“As much as there is still a need for businesses to train their staff, highly educated people moving into the workforce can bring new, innovative ideas to perhaps streamline how a business currently operates, which represents a major change from 20 or 30 years ago,” says Investment Monitor’s chief economist Glenn Barklie.

Investing in such a location can guarantee future flows of higher-quality workers too.

“Companies are very interested in ensuring there is a steady flow of graduates with capabilities in their business area to ensure smooth hiring processes and give the potential to grow,” adds Barklie. “It is not just about the current workforce, it is about the future workforce.”

Why education is set to become a crucial FDI driver

Elias van Herwaarden, founder of site selection company Locationperspectives, points out that while education and talent may be important today, they will become crucial in the future.

“Education is definitely an important FDI driver, but today it still is one part of the puzzle,” he says. “However, as we are witnessing increasing automation of manufactured goods, for instance, the importance of education and talent is set to significantly rise in prominence in MNEs’ priorities.”

Data collected by Investment Monitor shows a correlation between locations with good universities and the number of FDI projects that said locations manage to attract in a given year.

The opposite seems to be true for those countries that score poorly and tend to produce a low-skilled workforce.

In the UK, for example, data from the Higher Education Statistics Agency and the Department for International Trade shows that London is the top destination for both students and FDI projects.

It should be noted, however, that traditionally metropolitan centres have tended to attract talent not only because of the quality of the universities that they host, but also because they offer a wide range of other benefits, making education only one component of a larger picture.

On the other hand, the countries that scored poorly on the skill set of graduates within the World Economic Forum’s Global Competitiveness Report in 2019 attracted very low levels of greenfield FDI in the same year.

Angola, for instance, scored the lowest for skilled graduates out of 141 countries surveyed with a score of 25.3, and only attracted 21 new projects in 2019. With a slightly better score of 28.8, Yemen attracted zero new projects the same year.

Other countries at the lower end of the chart include Nigeria, Mozambique and Mauritania, all of which have complicated economic, political and foreign investment environments. These factors, combined with the low levels of education found in these countries, are likely to make foreign investors wary.

The amount a country invests in education also provides an indication of the level of talent likely to be available there, which therefore would make it an attractive FDI destination.

Investment Monitor’s data on the proportion of total education expenditure as a percentage of GDP for certain countries in 2019 shows a correlation with the level of FDI greenfield projects in the same year.

However, other factors, such as the country’s market size or its natural resources, need to be factored in when assessing this link. For instance, Australia attracted 433 new greenfield FDI projects in 2019 and spent about 8.6% of its GDP on education. Canada attracted slightly fewer (395) while spending 10.4% of its GDP on education.

Denmark in comparison attracted fewer projects (147) while spending 9.7% of its GDP –more than Australia and slightly less than Canada. However, Denmark offers a smaller domestic market to investors when compared with Australia and Canada.

Van Herwaarden explains how conversations with his clients have progressively shifted from focusing on more traditional drivers, such as infrastructure and political stability, to that of education.

“Even players in, say, the automotive and manufacturing industry recognise that real value creation is about innovation and it is no longer merely about production,” he concludes. “They are starting to make education and talent their top priority. Increasingly often, if talent is not there the location is out.”

This article is part of a series on FDI drivers. The full list comprises:

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