l Constructing principles of foreign investment environment evaluation
Designing principles are essential for the whole evaluation system. Various principles could lead to completely different results. The principles for designing index system of foreign investment environment evaluation could be summarized into four aspects.
1) Systematic: the certain amount of indices in foreign investment environment evaluation are related and restricted to each other. To avoid over-complexity of the system and optimize the index system, system decomposition and analytic hierarchy process is adopted to systematically and comprehensively reflect the content of evaluation objects, using relatively small amount of indices and hierarchies.
2) Generally comparable: considering about the comparison across countries horizontally and the comparison for one country in its vertical time line, we mainly choose indices that are internationally recognized. When subjective indices are necessary, their connotation and extension should be clearly defined.
3) Practical and exercisable: some indices that have little effect on the evaluation results are abandoned with subjectivity and comprehensiveness roughly guaranteed. Calculating and evaluating processes are facilitated by the moderate and simplified index system. Moreover, reliable sources and collecting methods of data together with qualitative control in evaluation proves and precision of data are guaranteed. Besides, every index with its data and calculating method should be as precise and standard as possible.
4) Pertinent: the evaluation is on foreign investment environment; hence the index system should be stressed from perspective of transnational companies in terms of the influential factors in their investment decision-making process.
l Initial index system for the foreign investment environment evaluation
According to the above principles, initial index system for foreign investment environment is designed based on its five categorises of influential factors (table 1.2)
Table 1. Initial Indices for Evaluating Foreign Investment Environment
| Primary Indices | Secondary Indices | Measuring Objects | Data Source |
| Z1 Demand Potential | Z1.1 GDP | Economic scale | The World Bank |
| Z1.2 Economic growth rate | Economic Growth | The World Bank | |
| Z1.3 Population | Domestic demand scale | The World Bank | |
| Z1.4 Total domestic demand | Total domestic demand scale | The World Bank | |
| Z1.5 Total domestic demand growth rate | Domestic demand potential | The World Bank | |
| Z1.6 Demand per capita | National demand | The World Bank | |
| Z1.7 Urbanization level | Urbanization level | The World Bank | |
| Z1.8 Industrialization level | Industrial demand | The World Bank | |
| Z2 Production Factors | Z2.1 R&D personnel in every million people | Supplying amount of domestic researchers | The World Bank |
| Z2.2 Domestic bank credits in % of GDP | Capital availability | The World Bank | |
| Z2.3 Real interest rate index | Credit funds costs | The World Bank | |
| Z2.4 Foreign exchange assets / GDP | Scale of foreign exchange assets | The World Bank | |
| Z2.5 Energy foreign independence index | Energy foreign dependence | The World Bank | |
| Z2.6 Amount of patents approved | Output of scientific research | the United States Patent and Trademark Office |
| Primary Indices | Secondary Indices | Measuring Objects | Data Source |
| Z3 Infrastructure | Z3.1 Highway network total amount density | Infrastructure for road transportation | The World Bank |
| Z3.2 Railway total length density | Infrastructure for railway transportation | The World Bank | |
| Z3.3 Number of departure planes | Infrastructure for air transportation | The World Bank | |
| Z3.4 Container transportation by port | Infrastructure for nautical transportation | The World Bank | |
| Z3.5 Fixed telephone trunk every 100 people | Infrastructure for communication | The World Bank | |
| Z3.6 Broadband users every 100 people | Infrastructure for Internet | The World Bank | |
| Z4 Government Service | Z4.1 Facilitation for foreign investment | Efficiency of foreign investment process | Fraser Institute |
| Z4.2 Legal frame and property safety | Legal frame and property safety | Fraser Institute | |
| Z4.3 Intellectual property protection | Intellectual property protection | Fraser Institute | |
| Z4.4 Property Registration | Investment process service | The World Bank | |
| Z4.5 Facilitation for business establishment | Investment process service | The World Bank | |
| Z4.6 Permit processing time | Investment process service | The World Bank | |
| Z4.7 Contract execution facilitation | Investment process service | The World Bank | |
| Z4.8 Hiring and firing laws | Investment process service | Fraser Institute | |
| Z4.9 Bankruptcy liquidation time | Investment process service | The World Bank | |
| Z4.10 Company’s marginal tax rate index | Tax level | The World Bank | |
| Z4.11 Weighted average tax of total products | Tax level | The World Bank |
| Primary Indices | Secondary Indices | Measuring Objects | Data Source |
| Z5 Macro Environment | Z5.1 Social stability | Political and social stability | The World Bank |
| Z5.2 Carbon dioxide emission index | Carbon dioxide emission | The World Bank | |
| Z5.3 Commodity and service trading in % of GDP | International trade scale | The World Bank | |
| Z5.4 Average time for export customs clearance | International trade difficulty | The World Bank | |
| Z5.3 Non-tariff barriers index | Relationship between host country and foreign countries | Fraser Institute | |
| Z5.6 Labor remittances and employee payments in percent of GDP | International human capital import | The World Bank | |
| Z5.7 Capital control | Relationship between host country and foreign countries | The World Bank | |
| Z5.8 Linguistic popularity | Cultural communication | Every country’s statistics | |
| Z0 Revealed Variable | Z0.1 Transnational companies | Foreign investment scale: companies | Processed data from the Fortune Magazine |
| Z0.2 FDI inflows and outflows | Foreign investment scale: amount | UNCTAD | |
| Z0.3 FDI net inflows | Foreign investment amount changes | The World Bank |
Note: (1) Indices design in “Z4 government service” has concerned about investment facilitation appropriately, hence the indices could be used as key indices for investment facilitation evaluation. (2) Majority of data has been collected from international authorities.
2. Sample data collection
l Sample country selection
The world’s countries are developing in different stages and their development levels differ from each other apparently. Meanwhile, for the purpose of spurring political, economic, cultural etc. cooperation and development, countries would form regional organisations and sign agreements. The World Bank report classify countries according to different standards, for instance, countries are classified into low income, moderate income and high income based on income levels. To justify the comparison between countries’ investment environments, this report should include countries of every category. Considering about the accessibility, integrity and authoritativeness of data required in initial indices, 98 countries with relatively complete data have been selected as samples (Appendix 3).
l Indices and data acquisition
Based on the analytical framework that has been introduced previously, the 39 explanatory indices have been initially selected from five aspects, namely domestic demand, production factors, infrastructure, government service and macro environment in order to make comparison across countries and ensure the recognition and authority of evaluating indices and data. Indices and raw data in this report are from world development indices in World Development Report made by the World Bank, annual report of Economic Freedom of the World made by Fraser Institute and indices and data from United Nations Conference on Trade and Development (UNCTAD) and the United States Patent and Trademark Office (USPTO).
To reduce the influence of data volatility, average values of 98 countries’ final evaluation indices from 2005 to 2009 are adopted in comparison of foreign investment environments between different countries. In China’s historical analysis, year data of 2011, 2005, 2007, 2008 and 2009 of 30 countries that include G20 (except for the European Union Countries) and APEC members have been used for comparison.
3. Final indices selection for the evaluation system
The index system for foreign investment environment evaluation is designed fundamentally based on past researches on foreign investment environment and the analytical framework in this report. To construct the evaluation indices system, scientific approaches should be adopted in indices selection. Considering the data’s subjectivity and different levels of completeness, empirical judge is necessary to use factor analysis method to determine the final indices out of the initial indices.
This report firstly chooses 98 countries including 20 APEC member countries as samples to collect data of their relevant variables from 1982 to 2009. By observing and comparing, it has been found that most data before 2000 is unavailable; data between different countries is unbalanced; countries are in different economic stages. Meanwhile, to diminish the yearly fluctuation effect brought by accidental factors, in the factor analysis the time series are divided into two intervals: 2000-2004 and 2005-2009; every factor is analysed respectively by taking their average values.
We firstly analyse the five primary indices of the 98 countries by using the stata software. Concerning about the creditability of variables, we use anti-image correlation matrix of derived data and estimate them through MSA standard. MSA is based on anti-image correlation matrix that evaluates whole model as well as single variables. Its value falls between 0 and 1, Kaiser and Rice evaluation criteria are: (1) when MSA ≥ 0.9, very suitable; (2) MSA ≥ 0.8 means suitable; (3) MSA ≥ 0.7, normal; (4) MSA ≥ 0.6 barely suitable; (5) MSA ≥ 0.5 unsuitable; (6) MSA < 0.5 unacceptable.
After the factor analysis and comparison of average cross-section data values for every initial index, the final selected indices are listed as below in table 1.3:
Table 2. the Final Indices System for Evaluating Foreign Investment Environment
| Primary Indices | Secondary Indices | Measuring Objects |
| Z1 Demand Potential | Z1.1 GDP | Economic scale |
| Z1.2 Population | Domestic demand scale | |
| Z1.3 Domestic total demand growth rate | Domestic demand potential | |
| Z1.4 Urbanization level | Urbanization level | |
| Z2 Production Factors | Z2.1 R&D personnel in every million
people |
Supplying amount of domestic researchers |
| Z2.2 Domestic bank credits in % of GDP | Capital availability | |
| Z2.3 Energy foreign independence index | Energy foreign dependence | |
| Z2.4 Amount of patents approved | Output of scientific research | |
| Z3 Infrastructure | Z3.1 Highway network total amount
density |
Infrastructure for road transportation |
| Z3.2 Railway total length density | Infrastructure for railway transportation | |
| Z3.3 Container transportation by port | Infrastructure for nautical transportation | |
| Z3.4 Broadband users every 100 people | Infrastructure for communication | |
| Z4 Government Service | Z4.1 Facilitation for foreign investment | Efficiency of foreign investment process |
| Z4.2 Procedure to Property Registration | Investment process service | |
| Z4.3 Permit processing time | Investment process service | |
| Z4.4 Company’s marginal tax rate index | Tax level | |
| Z5 Macro Environment | Z5.1 Social stability | Political and social stability |
| Z5.2 Commodity and service trading in % of GDP | International trade scale | |
| Z5.3 Non-tariff barriers index | Relationship between host country and foreign countries | |
| Z5.4 Capital control | Relationship between host country and foreign countries | |
| Z0 Revealed Variable | Z0.1 FDI net inflow | Foreign investment amount changes |
a) Comprehensive evaluation on foreign investment environment
Due to the foreign investment environment is related to a large number of indices, multi-index comprehensive approach could be used to calculate the overall scores to reflect the whole picture of foreign investment environment. Currently the multi-index comprehensive evaluation methods mainly comprise: principal component analysis, analytic hierarchy process, entropy method, analytic network process, fuzzy synthetic evaluation model, neutral network evaluation, comprehensive evaluation method based on wavelet network multiple attribute, grey relational analysis, etc. In total, analysis on indices’ weights can be classified into: subjective assignment method and objective assignment method. The former normally use qualitative approaches, in which indices’ weights are subjectively determined by scholars’ judgement based on their experience, such as analytic hierarchy process, fuzzy synthetic evaluation model, etc.; objective weighting methods rely on objective information, such as principal component analysis, entropy method, multi objective programming approach, etc. Subjective weighting can reflect the decision maker’s intentions despite of their subjectivity; objective weighting has the mathematical theoretical foundations to avoid the arbitrariness of the results, but the shortcoming is inflexibility.
After comprehensive consideration of reality and data characteristics in this report, combined with subsequent comparison and trials, we use entropy method to evaluate foreign investment environment. In entropy method, information of every unit is firstly quantified comprehensively and then they are weighted by entropy method to simplify the evaluation process. The specific steps are as follows:
Firstly the data is processed by threshold method, namely data’s non dimensional alteration and normalization; afterwards, determine the indices’ entropy values and lastly, determine every index’s comprehensive entropy value. Multiply every index’s weight by their respective standardized value and add up the results, we get every sample country’s comprehensive evaluation value and their rankings (specific calculation in Appendix 2).