A proposal to improve UNCTAD’s inward FDI potential index

In the literature of foreign direct investment (FDI) and international business, an increasing attention is being paid to the comparative study of countries’ attractiveness for FDI. The United Nations Conference on Trade and Development has developed several indices to evaluate and compare the location advantages of the countries and their relative success in attracting FDI. However, these indices suffer from several limitations. We have constructed an improved inward FDI potential index that can solve some of those limitations, making use of 70 variables for 49 countries and data reduction techniques. The correlation analysis shows that it fits better with the Inward FDI Performance Index, and thus this new index explains more precisely countries’ FDI inflows. Moreover, the larger number of variables included allows us to rank the countries for different kinds of FDI and to assess countries’ strengths and weaknesses for policy purposes.