Friday, December 22, 2017

Quality Brands of Local Businesses Increase Foreign Direct Investment

Areas known for quality are rewarded in the global market by future investment. Consumers responded to location of origin perceptions positively with increased purchases that led to increased economic growth in these areas.  A study of 30 source and 34 host countries between 2005 and 2006 found that an increase of 27% in foreign direct investment occurred as a result of a 1% increase in quality perception of intangibles (Kalamova & Konrad, 2010).

If governments want to improve their economic position by attracting new investments into the area they will need to move beyond thinking exclusively about price and into the perceptional quality of the products produced in their area and how that quality perception improves economies. Locations that are known for high quality products are rewarded through future investments that leads to additional tax revenue, jobs and other benefits as a result of an expanding local economy.

The knowledge-capital model helps understand that local production is often based in the skills that develop around industries. According to the study, the most relevant factors that encourage investment are perceptions of products, social and economic environments and culture. As areas became known positively for such attributes they improved their sales prospects.

One of the reasons why this happens is that consumers use heuristics when making decisions about whether or not to purchase particular products. Some locations are considered high quality producers while others are not and this can hamper them. Selection rates are likely to increase as consumers weigh and balance price and quality.

For business managers this makes quality perceptions an important part of the business plan. While quality and price should improve based on having the quality producers within the same area there is are additional benefits for actively promoting quality outputs.

Branding also leads to future investment as potential investors ponder where and how to invest within certain high growth markets that offer the highest potential for investment return. They will naturally select regions that have existing businesses successfully competing within the market because risks are lower. Improved investment portfolios come with the added advantage of economic growth and prosperity within the region. This investment also leads to robust innovation, production and cluster development.

Kalamova, M.& Konrad, K. (2010) National brands and foreign direct investment. Kyklos, 63 (3).

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