Baseline Profitability Index Analysis on the Country’s Attractiveness to Foreign Investment

Abstract

This study asserted that a country’s attractiveness to foreign investments is affected by different factors which include corruption level, physical security, capital control, economic growth, expropriation by government, exploitation by local partners, financial stability, and exchange rate. It is based on the concept of Baseline Profitability Index created by Prof. Daniel Altman in 2013. Specifically, this study mainly focused on determining the practices and local policies employed by the countries that are highly attractive to foreign investors. These policies and practices were used as the basis in defining recommendations for policy interventions to address the issues and predicaments of those that lagged behind drawing in more foreign investments. It showed that the country’s attractiveness has significant correlation with corruption, physical security, expropriation, and capital control. Cross-correlation among the factors also demonstrates that corruption, physical security, capital control, economic growth, and government expropriation are significantly interrelated with each other while exchange rate has a significant relationship only with economic growth. Firm’s ability in some countries to evade the capital control was widespread which resulted in increased corruption and lowered economic efficiency. The insubstantial rule of law remains a powerful deterrent to improving economic efficiency. Countries that have oppressive legal and regulatory schemes and very low protection on property rights would be less likely to attract more foreign investors. Thus, countries must recognize the importance and real essence of foreign investment as it helps in building global competitiveness of the economy as a source of newly developed technologies, capital, and management expertise.