BusinessGovernmentPublic Sector
June 6, 2016

New Strategies in Winning Foreign Direct Investment

Whether it is convincing companies to build R&D centres, factories, or corporate headquarters, Canadian governments have had a ton of success in attracting foreign direct investment (FDI). The numbers speak for themselves: Canada’s inward FDI stock reached $732 billion in 2014, an almost two-fold increase from $379 billion in 2004. Investment incentives have been on an accelerating trajectory in Canada and the US over the last few decades. In Canada, every single province has received foreign direct investments as a result of investment incentives, with Ontario and Quebec leading the way with a cumulative total of USD$1.5 billion and USD$2.1 billion received respectively between 2010 and 2015.

However, having won over half a billion dollars in investment commitments over the last five years, my experience is that American deal makers also have a lot to teach the rest of the world. And within America itself, I would consider Georgia as one of those states that offers a rich source of best practices.

Consider this example: In 2006, Craig Lesser, commissioner of the Georgia Department of Economic Development, was faced with an opportunity to land a $1.2 billion Kia Motors plant that would employ 2,500 jobs directly, and close to three times that number of jobs in their upstream supply chain. Mississippi, Georgia’s rival state, offered $900 million in incentives to land the same investment. Lesser had some difficult choices to make.

For sure, Georgia was already in a strong position. It was part of an existing automotive cluster and its neighbour, Alabama, had recently attracted Hyundai 80 miles away from the Georgia state line. This meant that there were some potential synergies with the regional supplier base. Lesser had an additional motivation: the location that attracted Kia had been hit hard by the legacy of a textile industry that had moved overseas, leaving many families in economic distress. This was a deal that Lesser needed to win. In order to compete, he put together an incentive package worth hundreds of millions of dollars.

Instead of relying solely on traditional incentives, Lesser chose to use a mix of incentives, including what are being referred to as “alternative incentives.” While no standard definition exists, alternative incentives can be thought of as business assistance that is separate from purely financial incentives–property tax abatements, grants, or loans. In contrast, the category of alternative incentives includes infrastructure funding, workforce training, or streamlined permitting. In general, an alternative incentive strategy distinguishes itself from traditional investment incentives, or “vanilla subsidies” as I like to call them, because the proceeds are directed towards the community at large, rather than a single company.

Alternative incentives, much like traditional incentives, can be employed to target specific firms and specific deals. For instance, a province or a state can offer and provide streamlined permitting to fast-track infrastructure such as sewage or wastewater treatment facilities to a particular FDI target. They could also deliver a subsidized employer-specific training program. However, what these examples have in common is that the benefits accumulate to the region even after the incentive has been delivered. Furthermore, benefits continue to accumulate even in the event that the facility closes.

Why does this all matter to Craig Lesser whose most immediate need was winning the Kia deal? It matters because companies locate to a specific region for a mix of complex reasons. To be clear, business costs matter, and so long as companies want to lower costs, traditional financial incentives such as grants, loans, and property tax abatements will have an incremental effect on location decisions. However, research shows that business costs are only one of many factors. Access to the local cluster of suppliers and academic institutions plays an important role. So does the local demand for the product. So does access to public services such as healthcare, education, and infrastructure. And so does a variety of behavioural factors, including how frustrating it is to access information on the region and clearing regulatory hurdles.

In short, alternative incentives can improve the attractiveness of a region. These were the findings of four graduate students at the Munk School of Global Affairs at the University of Toronto, whose research I had the opportunity to guide earlier this year. Under the supervision of faculty member Dr. Shiri Breznitz, the students conducted an analysis of what kinds of alternative incentives have been effective around North America.

In their final report, titled “Best Practices in Employing Alternative Incentives for Attracting FDI Targets,” they concluded through both primary and secondary research that traditional financial incentives are oftentimes necessary, but not sufficient in increasing the attractiveness of a region to potential employers. While financial incentives help to reduce costs for firms, alternative incentives can seal a deal because they address other fundamental needs of foreign companies.

According to their study, certain Canadian provinces and American states are in the game of offering alternative incentives. Massachusetts, for instance, uses a self-organized group of private firms to offer subsidized professional services, such as regulatory consulting and real estate advice, for the potential employer. North Carolina reimburses businesses for the cost of training employees, including textbooks, courses, and certification. Quebec offers potential employers networking opportunities to local companies and government officials. In fact, the managing director of a US multinational once noted that he has Quebec’s investment agency on “speed dial.”

Georgia’s Craig Lesser decided to put together a total incentive package that came to $410 million in incentives, including federal, state, and local contributions. Included in the deal was up to $193 million in alternative incentives, including $81 million in transportation improvements, and $20 million in free, customized training programs for Kia plant employees.

Georgia won the deal, and in March 2006, the contract was signed in Seoul. According to a Kia spokesperson, “[Georgia’s Training Program] brought us 43,000 screened candidates to choose from, with 97% having a high school education. In my experience, attracting such a high-quality pool of applicants in such large numbers so quickly is unprecedented.” This quote from Kia Motors speaks eloquently to the importance of alternative incentives.

Today, the automotive page on the Georgia website showcases the Quick Start Training program. Not tax incentives. Not grants. Not cheap energy. A training program. This is the exact same alternative incentive that was critical to landing the Kia deal in 2006, and is now considered the State’s “signature program,” having trained over 1 million workers.

As for Craig Lesser today, he is now the managing partner of the Pendleton Group, a Georgia-based economic development consulting group. His success in employing alternative incentives to win the Kia deal has left a deep and lasting legacy in the region. To date, it is estimated that the original plant created over 10,000 jobs both at the factory and in the supply chain. The cherry on top for this story is that in 2012, Kia announced plans to invest an additional $1.6 billion to upgrade the facility–a clear signal by any standard that these jobs are there to stay for the long term.

So would alternative incentives like the Quick-Start Program be effective for Canadian governments to deploy? The answer is not so simple to determine. Every region has unique characteristics, including its economic, fiscal, social, and political environment. Before deploying a bespoke portfolio of alternative incentives, Canadian governments need to consider their own unique context, including the region’s existing offerings of policies and programs.

However, with the twin demands of rising competition for global capital and a growing trend towards fiscal scrutiny, public sector leaders around the world will likely be considering how they are using alternative incentives to strengthen their value proposition to foreign companies. Canadian public sector decision makers will be under more pressure to show their best hands.

 

Christopher Lau is a Senior Advisor in the Ministry of Economic Development Employment and Infrastructure, Government of Ontario.

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