1. ASSESSMENT OF FDI ATTRACTIVENESS: AN ANALYTIC HIERARCHY PROCESS (AHP) APPROACH SERCIN SAHIN Yıldız Technical University, Department of Economics sercinsahin@hotmail.com ÖZGÜR ŞENER İstanbul Technical University, Department of Industrial Engineering thesener@yahoo.com

2. Overview of the presentation Overview of Foreign Direct Investment Data: UNCTAD FDI Variables Method: Analytic Hierarchy Process (AHP) Results Conclusion Further Suggestions

3. 2.What is Foreign Direct Investment?  Green-field investment  Mergers and acquisition

4. 2.What is Foreign Direct Investment?  Capital stock  Know-how  Technology

5. 2.What is Foreign Direct Investment? Benefits for Host Country Increase in Employment Increase in Exports Increase in Government Revenues Trigger Local Investment (suppliers, distribution channels) Technology Transfer Improvement of Management and Labor Skills Increase in International Competitiveness of Local Firms

6. 3.Data: UNCTAD FDI Variables UNCTAD United Nations Conference on Trade and Development

7. 3.Data: UNCTAD FDI Variables IND i = The Inward FDI Performance Index of the “i”th country FDI i = FDI inflows in the “i”th country FDI w = World FDI inflows GDP i = GDP in the “i”th country GDP w = World GDP. The UNCTAD Inward FDI Performance Index

8. The UNCTAD Inward FDI Potential Index is the unweighted average of the scores on twelve variables (Independent Variables) for each country. 3.Data: UNCTAD FDI Variables

9. Quantitative Determinant used in Potential IndexProxy of Determinants GDP per capitaLevel of economic development The rate of GDP growth over the previous 10 yearsSize of a host-country market The share of exports in GDPOpenness Telecoms infrastructure (the average of telephone lines per 1,000 inhabitants, and mobile phones per 1,000 inhabitants) Modern information and communication infrastructure Commercial energy use per capitaAvailability and cost of energy The share of R&D expenditures in gross national incomeTechnological capabilities The share of tertiary students in the population Extent of higher education and related skills that a country's workforce embodies Country riskPolitical and commercial risk Exports of natural resources as a percentage of the world total Availability of natural resources Imports of parts and components of electronics and automobiles as a percentage of the world total Participation in the leading TNC integrated production systems Exports in services as a percentage of the world total Importance of FDI in the services sector Inward FDI stock as a percentage of the world totalInvestment climate

10. 4.Method: Analytic Hierarchy Process (AHP)  A multi criteria decision making method  Designed by Saaty(1980).

11. 4.Method: Analytic Hierarchy Process (AHP)

12. Pair-wise comparisons between variables C1C1 C2C2 C3C3..CnCn C1C1 1C o1 /C o2 C o1 /C o3..C o1 /C on C2C2 C o2 /C o1 1..C o2 /C on C3C3 C o3 /C o1 C o3 /C o2 1 C o3 /C on....1......1. CnCn C on /C o1 C on /C o2 C on /C o3..1

13. Correlations between “UNCTAD Inward FDI Performance Index” and “FDI determinants that are used to calculate “UNCTAD FDI Potential Index (Criterion)

14. country risk energy use export of nat. res. export service FDI stockGDP GDP growth import elect. and oto.mobilestudent total exportstelephone country risk11.625153.4395132.6481514.712431.552792.333087.279061.146879.065770.570611.32443 energy use0.6153312.1164320.089319.052960.955471.435614.479010.705705.578420.351110.81496 export of nat. res.0.290740.4724919.492084.277470.451460.678322.116310.333442.635770.165900.38506 export service0.030630.049780.1053510.450640.047560.071460.222950.035130.277680.017480.04057 FDI stock0.067970.110460.233782.2190910.105540.158580.494760.077950.616200.038780.09002 GDP0.644001.046602.2150621.025549.4748611.502514.687740.738595.838390.367470.85294 GDP growth0.428620.696571.4742413.993586.306010.6655513.119930.491573.885750.244570.56767 import elect. and oto.0.137380.223260.472524.485222.021200.213320.3205210.157561.245460.078390.18195 mobile0.871941.417042.9990628.4672912.828391.353942.034316.3469217.904830.497531.15483 student0.110310.179260.379403.601251.622850.171280.257350.802920.1265010.062940.14609 total exports1.752532.848126.0278357.2167025.783902.721304.0887812.756732.0099115.8879912.32110 telephone0.755041.227062.5969724.6506911.108491.172421.761575.495990.865936.845030.430831 Pair-wise comparison matrix of determinants

15. 4.Method: Analytic Hierarchy Process (AHP) Eigenvalue vector as the weights of the determinants Total exports 0.261396 Country risk 0.149154 Mobile 0.130054 Telephone 0.112617 GDP 0.096056 Energy use 0.091779 GDP growth 0.06393 Export of nat. res. 0.043365 Import elect. and oto. 0.020491 Student 0.016452 FDI stock 0.010138 Export service 0.004569 TOTAL1

16. Country UNCTAD Inward FDI Potential Index Rank UnweightedWeighted EU-25 United Kingdom32 France123 Germany86 Ireland108 Netherlands119 Belgium and Luxembourg911 Austria1912 Italy2616 Spain2517 Sweden618 Finland1321 Denmark1824 Slovenia2831 Estonia3233 Greece3336 Poland4337 Portugal3640 Latvia4441 Hungary4043 Cyprus4246 Lithuania47 Slovakia4648 Malta3751 Czech Republic3954

17. Country UNCTAD Inward FDI Potential Index Rank UnweightedWeighted Developed Norway 25 Iceland 1419 Switzerland 1723 Acceding Bulgaria 6193 Romania 81108 Candidate Croatia 4957 Turkey 7280 Potential CandidateAlbania 8073 Other Mediterranean Israel 2330 Libyan Arab Jamahiriya 3439 Egypt 7558 Algeria 7161 Tunisia 6766 Lebanon 6482 Syrian Arab Rep. 9590 Morocco 8798

18. 5.Conclusions In this study it is not attempted to define what are the true determinants of FDI. But rather tried to weight the determinants which are used to compute UNCTAD’s FDI Inward Potential Index to make the analysis more reliable And AHP may be an appropriate technique for weighting the determinants.

19. 6.Further Suggestions Proxies which UNCTAD uses may not indicate the real FDI potential of the countries. Therefore, some other variables should be added to make the analysis more accurate: Tax rates Labor and energy costs, Incentives Property rights Corruption, etc.

20. GRAZIE