While the cost of labour is not always the most decisive factor when it comes to foreign direct investment (FDI) – with cities that have high labour costs often taking the lion’s share of a country’s total FDI – the quality of that labour is an increasingly important consideration for investors.
For example, while for a financial services company labour might constitute 90% of overall costs, for heavy manufacturing industries the cost of raw materials, energy and distribution is more relevant.
Talent, in regard to the skill sets and education of a workforce, is a factor that many investment promotion agencies often promote heavily to attract FDI across sectors. This strategy will vary from sector to sector, however; for example, life sciences has a stronger talent focus than the textile industry.
While there are sectoral variations when it comes to the quality of labour, the importance of this FDI driver has been rising in recent years across all locations.
“Technological advances have prompted companies to streamline the more manual parts of their operations,” says Investment Monitor chief economist Glenn Barklie. “However, the demand for scientific, professional and technical skills has never been as high.”
Data collected from the UN Conference on Trade and Development’s (UNCTAD) World Investment Report 2020 and the World Economic Forum’s (WEF) Global Competitiveness Report 2019, and then analysed by Investment Monitor, shows that countries with higher-skilled and better educated workforces tend to attract more greenfield FDI projects.
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However, the same correlation cannot be found between availability of labour and levels of greenfield FDI inflows. In other words, a country with high levels of unemployment, and therefore an available workforce, does not necessarily attract a high number of new projects solely on that basis.
Unemployment rates do not indicate a required skill set within that country’s workforce, and a high number of people being out of work is often seen as a sign of an unhealthy economy. Both of these factors are considered likely to deter multinational enterprises (MNEs) from selecting a country to host its operations.
Skillsets and education vital in the FDI talent show
The table below shows the top five and bottom five countries by the skill sets of their graduates, with the top five attracting more greenfield FDI projects.
According to UNCTAD, the US attracted the highest number (2,015) of greenfield FDI projects in 2019 out 141 countries surveyed by the WEF. The US also scored highly in WEF’s skill set of graduates and ease of finding skilled employees metrics, with 71 out 100 and 72 out of 100, respectively.
Switzerland was the country to score the highest in the WEF’s ranking for skill set of graduates. However, the country’s significantly smaller market size when compared with that of the US meant that it ranked lower when compared against the number of greenfield FDI projects in 2019, while still attracting an impressive total of 115.
“Market size is of key importance to FDI flow,” says Barklie. “In general, larger countries receive more FDI as companies can access large domestic markets, which in turn have a larger demand for goods and services. In terms of performance, one could (rightly) argue that Switzerland actually performs better than the US in terms of inbound FDI. An analysis of projects per capita would show Switzerland receives more than double that of the US.”
At present, talent tends to be concentrated in Europe and North America. It is worth noting that the bottom five countries for greenfield FDI attraction in relation to the skill sets of graduates and ease of finding skilled employees are mostly in Africa. This can widen the gap between developing and developed countries.
“One of the primary benefits FDI can bring to developing economies is technological advances and skills,” says Barklie.
“However, companies have no obligations to invest in countries and require many factors to be in their favour in order to invest. In the case of Africa, although the tide is slowly turning, investments in natural resource and labour-intensive sectors have historically been more prevalent.”
How important are employment rates?
As covered earlier in the article, high levels of unemployment do not necessarily equate to high levels of greenfield FDI projects.
Little correlation emerges between the number of new greenfield FDI projects and unemployment rates when looking at the top, middle and bottom three countries out of the 190 surveyed by the ILO.
Lesotho and Eswatini both have high unemployment rates, at 22.8% and 22%, respectively, and only attracted three (Lesotho) and one (Eswatini) greenfield projects in 2019.
However, South Africa has similarly high unemployment levels, at 28.5%, and it attracted a total of 130 projects in 2019 for an announced value of $4.1bn.
On the other hand, the US, which was the country to attract the highest number of new projects globally in 2019 (2,015), had a much lower unemployment rate (3.4%) than all of the countries mentioned above.
Overall, the data seems to suggest that market size is crucial and that between talent and availability, it is the former that sways MNEs in the FDI site selection process.
This article is part of a series on FDI drivers. The full list comprises:
- Business environment
- Political stability
- Domestic market size
- Quality of life