FDI INDEX 3
TheForeign Direct Investment describes an investment by a company or anindividual from a foreign company. The FDI index indicates howdifferent countries are attractive to foreign investors (Koyama, &Golub, 2006).A major international Foreign Direct Index calculatingcompany is the World Bank Group.
Thecountry to invest in is the United States of America. The countrytopped the Index for three consecutive years. It has a foreign directinvestment index of 2.10 followed by China at 2.00.The index servesas a summary of several underlying individual indicators that makethe country attractive to FDI. The various indicators may range fromthe population, Gross Domestic Product. Economic activity indicatorsmay include market size potential and GDP growth (Koyama, &Golub, 2006).
Thelegal-political system may include the rule of law and the country’slegal system. The business environment may include labor costs andtaxation. There are also indicators obtained from infrastructure.Theindicators may be qualitative or quantitative as they have beenobserved from some facts. Indicators such as national income may bequalitative due to Gross Domestic Product statistics. However, otherssuch as political stability are qualitative and hence are given theirseparate indices (Koyama, & Golub, 2006).
Consequently,data is obtained regarding the variables for a particular period suchas for ten years from some given countries. There are indicators thatrequire deflation in terms of GDP or population to ensurecomparability. After obtaining the data, there is a methodology toestablish the index. First is consistency analysis. It involvesrelating the data and the indices for aggregation. Consistencyanalysis uses Barletta tests and Cranach’s alpha tests. Second isnormalization. It uses Z-scores, rescaling and standardization. Thirdis weighing and finally there is the aggregation of the variousweights to obtain the overall index (Koyama, & Golub, 2006).
Koyama,T., & Golub, S. (2006). OECD`sFDI regulatory restrictiveness index revision and extension to moreeconomies.Paris: OECD.