Understanding What Assets or Strengths Matter to Foreign Investors

This section discusses the types of factors that determine location decisions by foreign investors. Understanding what foreign investors care about is the first step in developing a strategy to promote your region.

Voice of the Practitioner

 FDI “doesn’t require that much different from what a decent and well thought out economic development strategy should be…If a community already has a fairly good idea as to what its strengths and weaknesses are — from an industry and a use perspective — and understands the kinds of economic networks that it plays well in, it’s a simple matter from there of taking a look at what kinds of companies [and] what kinds of investors would find that appealing…[the EDO] should be relatively agnostic as to whether that’s a domestic or a foreign [firm]…it all starts from that same place of ‘know thyself’.” (from Podcast- Chris Steele Transcript, 12:07)
Chris Steele, COO & President North America, Investment Consulting Associates

Guidance

FDI location decisions are complex and high risk. Prospective investors consider numerous factors as they determine which location will best address their objectives while minimizing cost, uncertainty and risk. Furthermore, the objectives of investors, the factors they consider, and their relative importance, can vary widely even among competitors. This is good news for regions as they may be able to promote themselves based on a variety of potential strengths, which may be a good match for the right investor.

Many of the factors that affect domestic business attraction decisions are critical for foreign investors as well. But additionally, foreign companies have some unique requirements stemming from their desire to feel comfortable and welcome in a business and cultural environment that may be very different than their home country (IERC Final Report, p. 45-46).

Foreign investors consider many of the same assets as domestic investors
These decision factors include

  • The regional base of companies and institutions. This includes: local concentrations of major industries, clusters, or supply chains; research and innovative capacity (e.g., major research institutions); and major companies or original equipment manufacturers (OEMs). To foreign investors, this base of companies represents potential customers, suppliers, sources of skilled labor, and research and development partners.
  • Factor input costs relative to competitors. These can be described in terms of labor rates, unionization levels, land costs and availability, overall tax burden, and regulatory costs.
  • General labor availability and quality. This is especially important as the U.S. unemployment rate has dropped, increasing the value of training programs that can contribute to the supply of workers desired by a foreign investor or growing exporter. The Golden Triangle area of Mississippi, which ranks 45th in FDI deals per capita among 536 micropolitan regions, illustrates the value of this type of program for FDI. The success of this rural area in attracting large investments, including billion-dollar FDI, can be attributed in part to the local training program.
  • Programs or practices that provide fast start-up or site readiness. These reduce the risk (and cost) of site development and can be critical to companies under pressure to get operations up and running. A foreign company selected a Rhode Island location for its investment partly due to this factor. The CEO articulated a clear need to build quickly because of commercial pressures on the company to launch operations.
  • Other well-documented factors that are important for domestic business attraction and FDI include available incentives, infrastructure (including transportation and trade infrastructure, such as seaports, rail links, interstate highways, and inland ports), and geographic location to effectively serve target markets across the country, to name a few.

Source: IERC Final Report, p. 45

FDI attraction is part of a region’s overall business attraction strategy.
Observations from a regional EDO

Joe Max Higgins, CEO, Golden Triangle Development — THE LINK (Mississippi): My take [on FDI strategy] is different from other people’s. We have site, water, sewer, labor training/ workforce development. The same things that domestic companies want, international companies want. It’s the same…

However, foreign investors also select regions where they have relationships, have familiarity or feel welcome.

Consequently, proactive FDI attraction requires knowledge of existing foreign connections. These “foreign connections” to specific markets are regional assets. Regional EDOs can make prospects aware of existing foreign assets, and foreign investors are more likely to select regions if these assets can make them feel more comfortable.

These foreign connection assets include

  • International partnerships (such as sister cities, or innovation and research collaborations with foreign entities or regions);
  • Concentrations of immigrants, foreign residents, foreign students, and alumni from particular countries;
  • Proximity to particular countries (e.g., Canada or Mexico, or North Atlantic markets for New England); or
  • International organizations, such as foreign chambers of commerce, language schools
  • Relationships with foreign sources of supply (importers or distributors that are owned or have strong connections with foreign suppliers);
  • Foreign countries or peer regions with similar clusters/sectoral concentrations and specializations

Resources

IERC Final Report: “International Engagement Ready Communities: Effective Practices & Determinants of Foreign Direct Investment & Export Success, Final Report”{link to}

IERC project Analysis of FDI Determinants, i.e. what factors determine foreign investor location choices in the U.S.

Podcast: Chris Steele, COO & President North America, Investment Consulting Associates (global management consultants) interviewed on Regional Business Talk podcast by Ed Burghard.

Site Selection Magazine offers valuable coverage on foreign investment. See a recent article on Foxconn’s decision to locate in Wisconsin, which discusses the factors that influenced the decision. Also see a report which they helped to produce on the world’s most competitive cities for investment.