Inside fDi: how soft factors can influence FDI's hard sell

While preparing the magazine for press, I was asked to participate in a survey about ‘soft power’ and its value to nations who wield it. Certainly soft power (which could be defined as cultural weight and influence, and the extent to which a country’s values are seen as appealing to others) has a virtuous relationship with tourism, the topic of this issue of fDi: locations that attract lots of international visitors by their nature enjoy some level of ‘soft’ appeal, and opening the door to the rest of the world to come and experience the local culture can boost soft power if visitor experiences are broadly positive.

But it also got me thinking about how soft power influences FDI. The answer is complex, and related to the importance of what in site-selection lingo are classed as ‘soft factors’ in the investment decision-making process; namely quality of life, culture and societal dynamics. So, how much does it matter?

For an example, let’s turn to Portugal, currently one of the best-performing countries for FDI globally. When one considers the top roles in international institutions that Portuguese officials have held in recent years, as a small country it has an outsized international influence: in other words, soft power. It is also a popular tourism destination. And among its stated selling points for investment is its level of social peace and political tolerance.

This makes sense as a draw. Unlike more speculative forms of investment, greenfield FDI likes stability. These are long-term investment decisions so companies making on-the-ground investments want to have certainty about the future direction of a country. Populism is destabilising and not terribly good for business, so to the extent that social peace and tolerance keep the forces of populism and protectionism at bay then I would argue there is indeed an FDI dividend to be had.

This has always been the case, but the political shockwaves that have roiled other parts of Europe as well as the UK and US in recent years have likely heightened awareness in the minds of investors of the value of stability. Anti-immigration, nativist sentiment can be off-putting for inward investment because it affects the talent pool and the ability to attract international staff, so that is another way in which open, tolerant societies may have an investment advantage. Large countries offering large opportunities (such as the US) can just about get away with fits of protectionism, however unfortunate that may be, without completely alienating investors. Small countries have no such luxuries, something Portugal’s leadership seems to understand very well.

Of course, in isolation, soft factors are not enough. The other, ‘harder’ investment fundamentals also need to be there. In the case of Portugal, certainly the country is benefiting from looking like one of the saner parts of Europe lately, but its strong FDI performance is also down to other factors, such as a good cost-to-quality ratio, skilled workforce and tech capabilities.

The places that possess true FDI power are therefore those that manage to combine the hard and soft – and tourism, as a mechanism for showing the world a location’s softer side while bringing in hard revenue and incentivising improvements in tangible elements such as infrastructure, connectivity and service skills, is a valuable way to merge the two.

Courtney Fingar is editor-in-chief of fDi Magazine. Email: courtney.fingar@ft.com