volume 10 number 1 april 2001 transnational … · 2020. 9. 4. · 4 transnational corporations,...

VOLUME 10 NUMBER 1 APRIL 2001

United NationsUnited Nations Conference on Trade and Development

Division on Investment, Technology and Enterprise Development

TRANSNATIONALCORPORATIONS

Editorial statement

Transnational Corporations (formerly The CTC Reporter) is a refereedjournal published three times a year by UNCTAD. In the past, theProgramme on Transnational Corporations was carried out by the UnitedNations Centre on Transnational Corporations (1975-1992) and by theTransnational Corporations and Management Division of the United NationsDepartment of Economic and Social Development (1992-1993). The basicobjective of this journal is to publish articles and research notes that provideinsights into the economic, legal, social and cultural impacts of transnationalcorporations in an increasingly global economy and the policy implicationsthat arise therefrom. It focuses especially on political and economic issuesrelated to transnational corporations. In addition, Transnational Corporationsfeatures book reviews. The journal welcomes contributions from theacademic community, policy makers and staff members of researchinstitutions and international organizations. Guidelines for contributorsare given at the end of this issue.

Editor: Karl P. SauvantDeputy editor: Persa Economou

Associate editor: Kálmán KalotayManaging editor: Kumi Endo

Production manager: Tess Sabicohome page: http://www.unctad.org/en/subsites/dite/1_itncs/1_tncs.htm

Subscriptions

A subscription to Transnational Corporations for one year is US$ 45(single issues are US$ 20). See p. 183 for details of how to subscribe, orcontact any distributor of United Nations publications. United Nations,Sales Section, Room DC2-853, 2 UN Plaza, New York, NY 10017, UnitedStates – tel.: 1 212 963 3552; fax: 1 212 963 3062; e-mail: [email protected];or Palais des Nations, 1211 Geneva 10, Switzerland – tel.: 41 22 917 1234; fax:41 22 917 0123; e-mail: [email protected].

Note

The opinions expressed in this publication are those of the authors anddo not necessarily reflect the views of the United Nations. The term“country” as used in this journal also refers, as appropriate, to territories orareas; the designations employed and the presentation of the material donot imply the expression of any opinion whatsoever on the part of theSecretariat of the United Nations concerning the legal status of any country,territory, city or area or of its authorities, or concerning the delimitation ofits frontiers or boundaries. In addition, the designations of country groupsare intended solely for statistical or analytical convenience and do notnecessarily express a judgement about the stage of development reached bya particular country or area in the development process.

Unless stated otherwise, all references to dollars ($) are to United Statesdollars.

ISSN 1014-9562Copyright United Nations, 2001

All rights reservedPrinted in Switzerland

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Board of Advisers

CHAIRPERSON

John H. Dunning, State of New Jersey Professor of InternationalBusiness, Rutgers University, Newark, New Jersey, United States, andEmeritus Research Professor of International Business, University ofReading, Reading, United Kingdom

MEMBERS

Edward K. Y. Chen, President, Lingnan College, Hong Kong, SpecialAdministrative Region of China

Arghyrios A. Fatouros, Professor of International Law, Faculty ofPolitical Science, University of Athens, Greece

Kamal Hossain, Senior Advocate, Supreme Court of Bangladesh,Bangladesh

Celso Lafer, Professor, Faculty of Law, University of Sao Paulo, SaoPaulo, Brazil

Sanjaya Lall, Professor, Queen Elizabeth House, Oxford, UnitedKingdom

Theodore H. Moran, Karl F. Landegger Professor, and Director, Programin International Business Diplomacy, School of Foreign Service,Georgetown University, Washington, D.C., United States

Sylvia Ostry, Chairperson, Centre for International Studies, Universityof Toronto, Toronto, Canada

Terutomo Ozawa, Professor of Economics, Colorado State University,Department of Economics, Fort Collins, Colorado, United States

Tagi Sagafi-nejad, Professor of International Business, Sellinger Schoolof Business and Management, Loyola College of Maryland, Baltimore,Maryland, United States

Oscar Schachter, Professor, School of Law, Columbia University, NewYork, United States

Mihály Simai, Professor, Institute for World Economics, Budapest,Hungary

John M. Stopford, Professor, London Business School, London, UnitedKingdom

Osvaldo Sunkel, Professor and Director, Center for Public PolicyAnalysis, University of Chile, Santiago, Chile

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Acknowledgement

The editors of Transnational Corporations would like tothank the following person for reviewing manuscripts fromJanuary through December 2000.

Manuel R. AgosinSyed Tariq AnwarDaniel ChudnovskyConstantijn A. ClaessensJeremy CleggWilliam DymondSimon J. EvenettRoger FarrelReinaldo FigueredoDavid GoldIleane GottsEdward M. GrahamH. Peter GrayRobert GrosseKhalil HamdaniGabor HunyaRolf JungnickelTim KellyJohn KlineMark KnellStephen J. KobrinGabriele KöhlerBernard KosacoffSanjaya LallAlexander LehmannDonald LecrawRobert E. Lipsey

Padma MallampallyMichael C. McDermottPeter MihályiTheodore H. MoranLilach NachumRajneesh NarulaLudger OdenthalTerutomo OzawaRobert PearceJosef PöschlHassan QaqayaSlavo RadosevicEric D. RamstetterTagi Sagafi-nejadPierre SauvéMiklos SzanyiMagdolna SassPeter UttingDouglas van den BergheN. T. WangDale R. WeigelLouis T. WellsAlvin WintOliver YauDimitri YpsilantiStephen Young

Transnational CorporationsVolume 10, Number 1, April 2001

Contents

Page

ARTICLES

Henry Loewendahl A framework for FDI promotion 1Maria Giovanna Bosco Does FDI contribute to technological

spillovers and growth? A panel dataanalysis of Hungarian firms 43

RESEARCH NOTES

Gesner Oliveira, Competition policy and FDI:Richard Hochstetler possible relationships basedand Carolina Kalil on Brazil’s experience 69

Prescott C. Ensign Cross-border acquisitions inresponse to bilateral/regional tradeliberalization 89

Bang Nam Jeon and Changing receptivity towards TNCsSe Young Ahn in the Republic of Korea: survey

results and policy implications 119

BOOK REVIEWS 139JUST PUBLISHED 166Books received 171Submission statistics 173

v

A framework for FDI promotion

Henry Loewendahl*

Attracting foreign direct investment has become a centralcomponent of industrial policy in developed and developingcountries across the world. There is a large volume ofliterature identifying why firms engage in internationalinvestment, the economic and political determinants ofinvestment location and the impact of foreign directinvestment on economic development. However, there isminimal research examining the role of investmentpromotion in attracting foreign direct investment. This is amajor caveat, as most countries, and many regions withincountries, have established investment promotion agencieswith the specific objective to attract inward investment. Inthis article, a detailed analysis of investment promotion isprovided, and a framework that investment promotionagencies can use to improve their effectiveness in attractingforeign direct investment and maximize the benefits for theirlocal economies is developed. Based on case-study evidence,it is argued that the most successful investment promotionagencies have developed an integrated investmentpromotion strategy that combines marketing and companytargeting with after-care and product development.

Introduction

Image, brand awareness, and perceptions are major factorsinfluencing the location of foreign direct investment (FDI).Companies make investment location decisions on the basis oftheir information pool and understanding of an area’s location“offer”. Investment promotion is therefore an essential componentof attracting inward investment, and there has been a rapid growthin the number of investment promotion agencies (IPAs) across theworld.1

* Senior Consultant, PricewaterhouseCoopers-Plant LocationInternational, Brussels, Belgium.

1 Corporate Location estimated that 30 new IPAs were formedevery year in the first half of the 1990s.

Transnational Corporations, vol. 10, no. 1 (April 2001)2

However, there is relatively little research on the role ofinvestment promotion in attracting FDI. In this article, the reasonswhy investment promotion is important and how i t affectsinvestment location are outlined. A practical framework for theestablishment and effective operation of IPAs is then developed,using case studies to provide practical insights into the differentelements of successful investment promotion, from setting up anagency to marketing activities, company targeting, after-care andproduct development. Case studies presented draw in particularon the experience of the mature inward investment agencies inEurope, but also look at examples of investment promotion indeveloping countries. The framework developed here is aimed atboth national and regional IPAs, as the relationship betweeninvestment promotion at the national and regional levels variesmarkedly between countries.

Why engage in investment promotion?

When making a decision on where to locate theinformation base of transnational corporations (TNCs) is far fromperfect, and the decision-making process can be subjective andbiased (UNCTAD, 1999). It is often a bureaucratic process, whichmay be affected by imperfect competi t ion, dis tor ted r iskperceptions and political rivalry between affiliates of TNCs. Theimplication, as the International Finance Corporation (IFC) argues,is that: “Most companies consider only a small range of potentialinvestment locations. Many other countries are not even on theirmap” (IFC, 1997, p. 49).

Countering market imperfections in the location decisionmaking process is the key reason why L. T. Wells and A. G. Wint(1990) found that the net present value of pro-active investmentpromotion to be almost $4 for every $1 expended. Specifically,they found that investment promotion was most effective wheni t :

• Overcame information asymmetries.• Compensated for the imperfect functioning of

international markets, which makes parent companiesreluctant to consider new production sites.

• Led to product differentiation of the host country as alocation for targeted activities. 2

2 See Wells and Wint (2000) for an update of this research.

Transnational Corporations, vol. 10, no. 1 (April 2001) 3

The first two factors provide part of an explanation for the follow-the-leader pattern and “bunching” in FDI that has been observedfor many years (e.g. Knickerbocker, 1973). Companies acquireinformation primarily via learning-by-doing, demonstrating theimportance of comfort factors, such as the FDI track record of ahost country, in determining investment location. Often a “flag-ship ” investment by a major company increases the informationand reduces the risk for other TNCs (see Loewendahl, 2001 forthe case of Japanese automotive investment in Europe). Left tothe market, FDI may therefore be under-supplied (Moran, 1999).

However, despite the positive role that IPAs can play inattracting FDI, there is a lack of research on the subject ofinvestment promotion (Wells and Wint, 1990), even as countriesincrease their expenditure on investment promotion activities.3Drawing on interviews conducted in 2000 with 30 major TNCsand global professional services firms4 and the author’s ownexperience of working with 15 IPAs from across the world in thecapacity of management consultant with PricewaterhouseCoopers,a framework for investment promotion is developed next.

A framework for investment promotion

Building on the work of IFC (1997), P. Christodoulou(1996), S. Young et al. (1994) and P. Dicken (1990), investmentpromotion can be divided into four main areas:

• Strategy and organization (setting the national policycontext ; set t ing object ives; s t ructure of investmentpromotion; competit ive posit ioning; sector targetingstrategy).

• Lead generation (marketing; company targeting).• Facilitation (project handling).• Investment services (after-care and product improvement;

monitoring and evaluation).

3 In the first half of 2000, Saudi Arabia, Brazil, New Zealand andHong Kong have all announced major increases in expenditures to attractFDI. The European Union is also supporting investment promotion indeveloping countries through Phare funds, such as a 1,000,000 Euro tenderin early 2000 to support the Bulgarian investment promotion agency.

4 The interviews were part of a study examining FDI in Turkey andCentral and Eastern Europe, and were based on the open-ended question:how can governments more effectively promote their locations?


Strategy and organization

Stage 1: Setting the national policy context

The national policy context is an integral part of effectiveinvestment promotion. An IPA will find it very difficult to marketand promote its location unless the basic policies to facilitate FDIare in place. As UNCTAD (1999) argues, an FDI-enablingframework is a pre-condition. The enabling framework includes:

• Macroeconomic policies set a positive framework for theattraction of foreign investment. Key policies include aliberal trade and payments regime and a favourable taxregime. A minimal state role in the economy and a non-discrimination policy stance are particularly important insending positive signals to investors.

• A degree of economic stability is essential for attractingsignificant inward investment, with low inflation andcountry risk being of particular importance (Loewendahland Ertugal-Loewendahl, 2000).

• Supply-side “product development” policies at the veryminimum need to provide essential investment in thephysical , communicat ions and human infrastructure.Improvement of infrastructure, the supply of sites andproperties for industrial and commercial use, the educationand training of labour and the innovation system of thecountry all have implications not only for the attractivenessof the location to investors, but also for the quality of inwardinvestment (Lall, 1997; Hood and Young, 1997; Thiran andYamawaki, 1995; Mowery and Oxley, 1995; Brunskill, 1992).

• Specif ic regional policies to encourage investment inparticular parts of a country form a major element of thenational policy framework in many countries. While TNCsusually long-list countries rather than regions, it is at thesub-national level that TNCs draw up a short l is t ofinvestment locations for in-depth evaluation and the policiesand facilitation of regional agencies often play a critical rolein determining who wins a mobile investment project.

• Inward investment policies to remove restrictions on FDIand to create or support dedicated national and/or regionalpromotional organizations are central to attracting inwardinvestment.


When these policies are used in a combined and coherent way topromote investment, they can provide a powerful inducement forcompanies to locate or expand in a particular location.

Stage 2: Setting objectives

For an effective IPA strategy, it is important that there isclarity of objectives with a strong logic behind them. Building onYoung et al. (1994), there are several key issues that need to betaken into consideration in setting objectives for investmentpromotion:

• Why does a government want to attract inwardinvestment? This is a fundamental question, as it willinfluence the size, structure and priorities of the IPA.Objectives may include creating jobs in poor regions,technology transfer, increasing competition, compensatingfor a weak indigenous base, f i l l ing-in supply gaps,developing clusters and providing partnering opportunitiesfor local firms.

• What are the national priorities for sectors? This is a keyissue as IPAs have discrete resources and best-practiceevidence (e.g. Wells and Wint, 1991) shows that effectiveinvestment promotion is focused on key sectors or industryclusters.

• Is the objective sector size or sector positioning? Will theIPA focus on any type of project within a sector, or onprojects that meet positioning objectives, such as developinga centre of excellence or a particular business activity (e.g.headquarters or research and development) in a specificsector. The Singapore Economic Development Board (SEDB)is perhaps unique among IPAs in that it will not supportinvestors unless they are in target sectors or clusters.

• Will the IPA differentiate by the modality of FDI? Is theobjective new greenfield investment, expansions by existinginvestors, joint ventures, mergers and acquisitions (M&As)or other types of strategic partnerships? Many agencies inEurope, especially at the regional level, are now spendingas much resources on supporting expansions as on attractingnew investment. Oregon in the United States focusesexclusively on after-care with existing investors as theprimary mechanism to generate new investment. Otheragencies also support joint ventures between indigenous andforeign firms (e.g. SEDB, Welsh Development Agency


(WDA) and CzechInvest), while a few agencies also supportM&As (e.g. Invest in Sweden Agency).

• What is the role for incentives? Incentives can and do affectinvestment location decisions (Loewendahl, 2001). Howeverthe emphasis on incentives varies considerably. Forexample, the Industrial Development Agency (IDA) inIreland, SEDB and Investment, Trade and Tourism ofPortugal (ICEP) are among the few agencies in the worldthat have control over incentives and can put an “offer onthe table ” to an investor even before they have committedto invest. At the other extreme, Denmark does not offerany incentives at all for foreign investors. Other issuesinclude:

- Should incentives be across the board (mandatory)or discretionary? Mandatory incentives create policycertainty as an investor is automatically awardedincentives if they meet obligations set out in a pre-determined criteria, while discretionary incentivesallow focused support for projects that meet inwardinvestment objectives, but involve greaterunpredictability for the investor.

- What types of incentives should be on offer? Optionsinclude national, regional, or local grants, tax credits,research and development (R&D) and other specialpurpose incentives; employment incentives,recruitment and training assistance and si te orinfrastructure improvements (Young et al., 1994).Incent ives can be up-front , or dependent oncontinuous upgrading of the investment project (e.g.SEDB and IDA).

- What criteria should be used to allocate incentives?Several commentators argue that only projects thatmeet “quality” criteria, such as R&D, quality of jobs,export intensity and functional mandate, or that arein target sectors or c lusters should be awardedincentives (Rhodes, 1995; Amin and Tomaney, 1995;Amin et al., 1994). The example of Singapore showshow prioritising and integrating incentives with thetargeting of specific investors can have positive effects(Oman, 2000).

- Which body should award the incentives? IPAs canhave the powers to negotiate directly a deal forinvestors, facilitating a “one-stop-shop” approach, butmany countr ies separate this function foraccountability reasons, and to ensure that the IPA


markets its area based on competitive fundamentalsrather than subsidies. A related issue is whetherincentives should be controlled and awarded at thecentral or regional level.

• What are the roles and actions of stakeholders? Acoordinated position on inward investment promotion needsto be developed, integrating the activities of IPAs at thenational and regional levels, and working with otherstakeholders involved in the investment attraction andfacilitation process. For example, many IPAs use theirgovernments& network of overseas foreign off ices foroverseas promotion. There is also increasing cooperationbetween agencies. Examples include the IndustrialDevelopment Board (IDB) in Northern Ireland and the IDAand Locate in Kent (South of England) and Invest in Nordpas Calais (Northern France). In Scandinavia, the IPAsjointly promote the Baltic region.

Stage 3: Structure of investment promotion

A key issue is what kind of structure is most effective forinvestment promotion? In practice, the structure of investmentpromotion varies between countries, due to the different objectivesin attracting inward investment, size of countries and differencesin the importance of regional agencies. No single structure fitsall countries. For example, a single, dedicated national IPA hasbeen established in large countries like the United Kingdom(Invest.uk) and Thailand (Board of Investment) and in smallercountries like Bulgaria (Bulgarian Foreign Investment Agency)and Denmark (Invest in Denmark Agency). National IPAs areusually part of, and financed by, the ministries of trade, economicsor industry, and often have strong links to the ministry of foreignaffairs, which facilitates overseas investment promotion.

In other countries, investment promotion is handledprimarily at the regional rather than national levels. For example,the United States has no national IPA, because of the economicand political weight of federal states. The United States feels itdoes not need promotion at the national level due to the strongbrand awareness of the country as an investment location anddue to the fact that the vast majority of “inward investment” isinter-state rather than inter-country. However, at the state levelit is a completely different picture, with powerful investmentagencies aiming at promoting their states and facilitating inwardinvestment. Similarly, China has no dedicated agency forinvestment promotion at the national level.


While the remit for investment promotion at the nationaland regional levels and structural l inks between investmentpromotion and other government departments varies betweencountries, a common element of successful investment promotionis the establishment of a dedicated agency or department. M. M.Atkinson and W. D. Coleman (1985) highlight three key pre-conditions for the effective operation of an agency:

• The agency has a clearly defined role and value systemthat supports it, which is more likely if the agency has afunctional mandate as opposed to one that obliges it torepresent the interests of a particular clientele.

• Operational autonomy will be greater if functionalresponsibilities for a given sector are clearly assigned to asingle agency.

• The agency requires independent access to expertise andinformation in order to act autonomously from firms andsectoral associations.

Atkinson and Coleman (1989, pp. 79-80) therefore arguethat a centralized, autonomous and single agency or bureau in agiven area will have the greatest capacity to make and implementpolicy. By the beginning of 2001, countries such as France andBrazil have addressed the fragmented responsibili ty andconsiderable bureaucracy associated with investment promotionthrough merging previous agencies to create a single, dedicatedIPA at the national level for coherent pro-active marketing andstreamlined project-handling and facilitation.

Whether operating at the national or regional level, IPAsneed to be sufficiently independent from governments, giving theagency greater credibility with investors and flexibility. 5 IPAsalso need strong links to stakeholders, both public and private,so that an area& s f inal offer is more than the sum of parts(Christodoulou, 1996). For example, government planning,

5 IPAs are in-between government and business. They areaccountable to governments, but at the same time have to operate in a highlycommercial environment. They, therefore, require a broad mix of skills.Marketing skills are essential, and more specialized skills may be neededdepending on the scope of the agency. Project officers must have a goodgrasp of international business, economics and usually some sector expertise,as well as good contacts in government. Investment agencies, therefore,need to have the flexibility to recruit and keep appropriately skilled staff, ormaintain an external network of contacts (which may include existing foreigninvestors) that can give expert advice when needed, meet with potentialinvestors and attend specialized conferences.


housing and education and small business support departmentsmay play a significant role in facilitating investment projects, asmay universities, training colleges and professional advisers, suchas accountants, lawyers, property developers and consultants.Key governmental links include:

• For major investment projects, government ministers atthe highest level may need to be rapidly mobilized tocreate policy certainty and demonstrate the seriousness withwhich the project is viewed. Ministers can also be used onoverseas visits to potential investors and on visits to existinginvestors at home. In France, a Minister is appointed as an“Ambassador at Large” for promoting investment and hasa small department. Countries like Ireland and theNetherlands appoint designated senior officials withresponsibility for inward investment in each Ministry.However, evidence (e.g. Spar, 1998) suggests that thepromotion effort is often most effective when coordinatedand led by the IPA, which plans the use of ministers.

• Investment promotion needs to be coordinated at thenational and regional levels. Regional agencies within acountry are of ten competing for the same investmentprojects (Oman, 2000), and it is essential that there iseffective coordination of agencies to avoid wastefulcompetition and a duplication of effort and resources. Thisproblem is particularly vivid in the United Kingdom(Loewendahl, 2001). One method that has been used byseveral countries to help overcome zero-sum competitionis a periodic rotation of staff between agencies. Thisgenerates greater understanding and can facilitate personalnetworks and cooperation between agencies. Other nationalIPAs ask regional agencies to “buy-in ” to target sectors sothat investment promotion is integrated at the national andregional levels. The national and regional agencies sharethe cost of marketing, and when the national IPA has aninvestment lead it is clear which regions are most suitable.

• The agency must be strong enough to influence decisionsaffecting individual investments, as well as investmentpolicy, and should have a voice in the policy making process.The agency should have an active say in tax policy,incentives, exchange rate policy and labour policy — all keyvariables affecting location attractiveness. For example,Invest in Denmark is consulted before changes in tax policyand has an influence on immigration policy, while the Investin Sweden Agency produces an annual report highlighting


the key obstacles to inward investment explicitly for othergovernment departments.

Stage 4: Competitive positioning

Successful investment promotion requires clear strategicdirection and effective marketing. The analysis that underpinsstrategy and marketing is described as competitive positioning.Competitive positioning is an important activity for all newinvestment promotion campaigns, and it is therefore relevant forboth newly established and for more mature agencies. It is alsoan important activity for agencies wishing to reappraise theirstrategic position and re-define their offers, as well as to provideproject officers with the most up-to-date key selling messages,supporting information and market intelligence on key sectorsand competitors. Several leading IPAs conduct a competitivepositioning exercise on an annual or bi-annual basis. There aretwo core elements to competitive positioning:

• Research . An analysis of a location&s s t reng ths ,weaknesses, opportunities and threats (SWOT) relative toeach industry sector &s requirements and key competitorsfor inward investment in each of these sectors. This mayalso include a SWOT analysis of the IPA itself relative tocompetitors, as well as the location.

• Market planning. Based on the above analysis, keypropositions (often called unique selling points or USPs)are developed for key sectors and specific types of projects.The aim is to define a location&s offer and provide IPAproject officers with competitive arguments to use whenapproaching potential investors.

A competitive positioning exercise should therefore provide atthe strategic level a detailed understanding of a location&s positionrelative to competitors and different sectors, and at the project-level information allowing project officers to promote effectivelytheir areas as a location for inward investment and handle investorenquiries.

Stage 5: Sector targeting strategy

Investment promotion agencies are moving towards asector-based targeted investment strategy in order to attractinvestment most effectively and to prioritize limited resources to


where they are the most useful and to where the probability ofwinning projects is the highest.

Sector targeting should identify sectors in which the hostcountry is best placed to attract investment and which meetinward investment objectives (Potter and Moore, 2000; Brand etal., 2000). Figure 1 illustrates one method IPAs can use to evaluatesectors. The aim is to identify sectors in the right-hand cornerthat meet investment objectives.

Figure 1. Sector evaluation matrix

The evaluation matrix positions sectors according to:

• FDI opportunities — sectors with the best potential formobile projects. The key aim is to identify sectors that aregrowing and internationally mobile.

• Competitive position — the strength of the location vis-à-vis competing locations for the sector. It is important toidentify sectors in which the host country has an existingcompetitive strength, or one that can be realisticallydeveloped.

• Degree to which it meets FDI objectives — extent towhich the sector meets the overall objectives in attractingFDI. Increasingly, leading IPAs are:


- Focusing not only on job creat ion, but are alsoprioritizing sectors and activities that will need skilledlabour, domestic research and development capability,and will help to build networks among innovativefirms (OECD, 1999, p. 25; Christodoulou, 1996, p. 84).

- Attracting FDI that takes into account and capitalizeson the strengths of indigenous industry (de Vet, 1993),in order to generate the most benefits from FDI andembed TNCs in the local economy.

Furthermore, the most advanced IPAs, especially at theregional level, focus business activities within their target sectorsand sub-sectors to complete and upgrade value-adding chains anddevelop advanced clusters. An example of a sector-activitypositioning matrix is given in figure 2 below. It shows an IPAtargeting three main industries (automotive, pharmaceuticals andtelecommunications). Within these industries, the IPA is focusingon several sub-sectors where it has a competitive advantage todevelop clusters.

Figure 2. Sector-activity positioning matrix (example)

Head- Logistics and SharedManufacturing R&D quarters distribution services

Automotive- Assembly T T- Components T T

Pharmaceuticals- Biotechnology T- Medical goods T T T

Telecommunications- Equipment T T- Software T T

• In the automotive industry, the IPA is focusing on R&Dand headquarters activities. By attracting strategic andhigh value-added activities, the IPA may be aiming toembed an already strong automotive manufacturingindustry.

• In the pharmaceuticals industry, the IPA is focusing onR&D in biotechnology and manufacturing and logisticsand distribution activities in the complementary medicalgoods sub-sector. Here the strategy may be to fill in the


value-added chain and develop clusters, as well as benefitfrom the worldwide rapid growth in biotechnology.

• In the telecommunications industry, the IPA is focusingon manufacturing, R&D and shared services intelecommunications equipment and R&D in the softwaresub-sector. The strategy could be to develop an export-intensive manufacturing industry and also create a largenumber of supporting high quality service sector jobsthrough attracting shared service centres and softwaredevelopment in telecommunications.

Competitive positioning and sector/activity targeting is acomplex process and requires:

• A detailed knowledge of industry sectors and trends, FDItrends, cluster development, company strategy, typicalproject requirements and parameters and best-practice IPAactivities.

• Up-to-date, fact-based comparative research providinghard data to support image-building and investmentpropositions made to companies.

• A reflective analysis of the location and activities of theIPA.

For these reasons, many IPAs prefer to hire independentconsultants. However, it is recommended that IPAs also exploitfully market intelligence gained from monitoring and evaluatingtheir own investment promotion activities (stage 10).

Lead generation

Stage 6: Marketing

In order to promote a location, it is essential that there isan internationally recognized brand name that overseas investorscan identify with. Brand and image can be critical in attractinginward investment as overall perceptions by companies andinvestment brokers (“multipliers”) of a particular location mayprevent the location from making the long and short-lists (see box1 for the case of Turkey).


Box 1. Turkey& s FDI performance: the importance of investmentpromotion

Given the size and dynamism of its economy, quality of itsworkforce, liberal FDI legislation and incentives and the presenceof a customs union with the European Union, Turkey should behighly attractive as an investment location. However, Turkey hasgreatly under-performed in attracting FDI. From 1993-1999, Polandattracted nearly six times more FDI than Turkey and, adjusted forGDP, Hungary attracted nearly 13 times more. Key reasons forTurkey& s under-performance are minimal levels of privatization-related FDI and high inflation. However, a recent survey of 30major investors and multipliers found that the third most frequentlycited factor explaining Turkey& s under-performance was lack ofinformation and poor perceptions. This indicates the weakness ofTurkey & s investment promotion, with 85 per cent of respondentsstating that it is ineffective. Turkey is an example of how badpractices in investment promotion can reduce FDI in the contextof increasing competition for investment. Several key weaknessesof Turkey &s promotion include:

• The national IPA is not distinct enough from the governmentbureaucracy, and does not have the autonomy and budgetto employ the necessary ski l ls and engage in effect iveinvestment promotion.

• There is no widespread support for at tract ing FDI, withminimal commitment from many parts of the Government.

• There is no clear investment promotion strategy and sectoralfocus, an inadequate understanding of Turkey &s competitiveposit ion, and no capacity to identify and exploit marketopportunit ies.

• For such a large and diverse country, there is a total absenceof regional agencies to support the investment promotioneffort. It is extremely difficult for a national IPA to promoteall of Turkey &s regions, facilitate the investment process andengage in post-investment services.

• Investment promotion act ivi t ies revolve around investorconferences that generally lack business focus and do notinvolve the participation of the investment community. TheIPA places minimal emphasis on and has little capacity toconduct focused marketing and company targeting, whichare widely recognized as delivering the best long-termresults.

• Investment promotion efforts generally lack commercialorientation and awareness.

/...


Box 1 (concluded)

• Reflect ing the above, the inward investment Web si tecombines all the worst features: i t can only be accessedthrough the Treasury &s Web site, it is extremely slow, it hasno sectoral or regional information, it provides unique sellingpoints that are not supported by any verifiable and up-to-date facts, it has no information on existing investors and itmakes poor use of English.

It is, therefore, not surprising that, in the survey of TNCsand multipliers, 60 per cent of respondents thought that Turkeyhas a poor brand image, 70 per cent said they would like moregeneral information and 20 per cent said they would likeinformation on regional differences. Over half of the respondentssaid that Turkey &s IPA needs to be able to provide very specific,investor-related information. In fact, after European Unionmembership, better investment promotion was identif ied as animportant means for increasing FDI in Turkey.

Source: based on Loewendahl and Ertugal-Loewendahl, 2000.

Marketing aims at creating awareness of an area as alocation for new investment among potential investors andmultipliers and to correct weak or misperceptions about the areathat could act as a “killer ” factor. In other words, marketing aimsat building up the image of the location and at putting it on themap. Marketing can also assist in repositioning areas that wantto change the external image or perception of themselves.

Marketing is central to investment promotion, but is oftena contentious issue. While evidence suggest that effectivemarketing can raise the profile of a location, there are alwaysquestions over the level of resources required, what marketingtechniques should be employed and how much value marketingproduces. Unfortunately, there is not a single answer. Eachlocation is different, and marketing also has different objectives,from putting a location on the map, to developing a differentiatedbrand image or repositioning the existing brand image. Eachlocation&s offer is likely to, and in fact should, be constantlyevolving as its competitive position and the market opportunitieschange, which in turn may require new marketing initiatives.

There are many marketing techniques, each of which canbe used separately or be combined together for investmentpromotion. While evidence suggests that general public relations


(PR) campaigns associated with image building are much weakerin producing investment leads than company-focused sectortargeting (Wells and Wint, 1990), there is a strong argument forPR campaigns when:

• The reality in a country is better than the perceptions heldby the international investment community (IFC, 1997,p. 50).6

• A country has not been a major host for FDI in the past(Wells and Wint, 1990).

• Domestic policies are reformed providing an opportunityfor the agency to change its image.

• There is a change in strategic direction by the IPA, forexample, by focusing on new sectors or activities.

Marketing is therefore particularly effective for locationsthat lack a recognized brand image. However, even if a locationhas a favourable brand image as an investment location, theremay be bias among investors and investment brokers when itcomes to specific sectors or activities. This is likely to be especiallythe case for an IPA that is changing the sectoral focus of itsactivities. Marketing techniques used by agencies to influencetheir brand image and generate leads include:

• General PR campaign, for example, through advertising innewspapers, on bill-boards, on television (such as in businessclass on flights), in business and industry specific journalsand on Web sites. These have generally been found to beless successful than focused marketing techniques (Wellsand Wint, 1990).

• Printing of brochures, newsletters, CD-ROMs and fact-sheets for distribution in conferences, investment missionsand Web sites. Brochures and CD-ROMs are perhaps mosteffective when used in conjunction with other marketingtechniques and when they are sector- or industry-focused(see box 2). Inward investment newsletters can highlightkey changes in the economic environment, policy changesand recent project successes, and can be useful in keepingpotential investors and multipliers up-to-date with the latestinformation on a location. Fact-sheets represent morefocused marketing tailored to specific sectors and individualcompanies, and are often more effective in generatinginterest from companies (no company really wants to read

6 See box 1 for the case of Turkey and UNCTAD (1998a) for IPAs inCentral and Eastern Europe.


an 80 page investment brochure) and make more efficientuse of limited investment promotion budgets (UNCTAD,1999).

• Participating in investment exhibitions, such as the WorldInvestment Conference held in Lisbon in June 2000. This ismore about networking and learning from other IPAs thangenerating interest from investors.

• IPA conferences on investment opportunities to provideinformation, introduce potential investors into the cultureof the location and regional differences and build the area &simage with interested par t ies . The most successfulconferences are sector-based and include presentations bysatisfied investors, as box 2 illustrates for Australia. Thishelps maintain interest in the conference, adds credibility,attracts a private sector audience and demonstrates thebusiness-friendly approach of the IPA. Furthermore, the factthat the IPA has been able to gain private sector buy-in toits sector strategy is a good indication that the strategy isrealistic.

• Business conferences are a relatively straight-forward andeffective method of making contacts and networking withcompanies in target sectors and locations, but they are oftenvery expensive to attend.

• Investment missions in key source countries to generateinterest in the area and start networking with potentialinvestors and the wider investment community. Sectormissions can be successful if guided by firm-specific research(company target ing) and feature customized “sales”presentations that match the presumed needs of the targetinvestors with the alleged ability of the particular hostcountry to meet those needs (Wells and Wint, 1990). Severaltechniques to maximize the effectiveness of investmentmissions are to include a satisfied investor, attend meetingswith as few people as possible, and identify key decisionmakers and influencers as soon as possible and concentratetime and effort on them.

• Trade missions can be a very successful method to developstrategic partnerships (such as joint ventures, technologylicensing, and outsourcing agreements) between domesticand foreign companies . Inter-f i rm partnerships arerecognised as a vital to technology transfer and the businessdevelopment of small and medium-sized enterprises (SMEs),especially in developing countries (UNCTAD, 1998b).


Furthermore, th is non- t radi t ional FDI can of ten be aprecursor to more traditional market entry methods. Themost successful trade missions are sector focused andinvolve the careful selection of a relatively small number ofcomplementary f irms from the domestic and foreigncountries.

• Direct mail campaigns to private and public organizations.This is normally not the most effective method to generateinterest and leads, at least if it is used as the sole marketingtool. Mail campaigns can be used in gaining marketintell igence about companies as part of a longer-termcompany targeting campaign (stage 7).

• Telephone campaigns to private and public organizations.This is only likely to be effective and cost-efficient as partof a company targeting strategy, focusing on key playersand contacts within target sectors.

• Creating an IPA Web site to develop the awareness andbrand image of the IPA, provide information, gain marketintell igence, and reduce costs and time in deliveringmarketing materials and brochures (box 3). The Web site isalso becoming an important vehicle for generating leads,especially from companies in the information technologysector.

Box 2. Sector-based investment promotion in Australia

Australia is trying to position itself as a global financialcentre for the Asian-Pacific market. Its main competitors areSingapore, Hong Kong (China) and Japan. To promote Australia,the Government, in August 1999, established Axiss Australia, anorganization with the aim of making Australia a leading financialservice centre. Axiss has private sector involvement and a wideremit. Axiss is composed of four main units: (i) a promotion unitto implement a focused and imaginative investment promotionstrategy; ( i i ) an information and analysis unit to promoteunderstanding of Austral ia; ( i i i ) a policy unit to influencegovernment policy; ( iv) an education and training unit for thefinancial service industries, and to identify and address potentialskills gaps. Axiss is an industry-focused, single agency with clearobjectives developed in partnership with the Government and theprivate sector , and a specif ic remit that integrates promotion,marketing and product development. In July 2000, Axisscooperated with the national IPA (Invest Austral ia) , regionalgovernments in Australia and the private sector to organize an

/ . . .


Box 2 (concluded)

image-building conference in London. The conference was hostedby the Financial Times, giving Axiss the benefit of the Financial Times&network of business contacts. Axiss coordinated the conferencewith the press and ensured that there was extensive coverage inindustry journals. A Financial Times Survey on Australia wasreleased on the same day as the conference. Key speakerspromoting Australia were not only members from Axiss and theGovernment of Australia, but also major businesses, includingleading banks (AMP, Citibank) and software companies (Oracle).The speakers highlighted Australia &s advantages, using up-to-date,fact-based evidence. One-page, industry-specif ic marketingmaterials were available at the conference. Several investmentleads were generated at the conference.

Sources: Axiss Australia, 2000a, 2000b, 2000c, 2000d, 2000e, 2000f, 2000g,2000h.

The Invest in Britain Bureau (IBB) is a case-in-point of oneof the world’s leading agencies aiming at changing its image andmaking more effective use of the Internet. In June 2000, the IBBchanged its name to Invest.uk in a swift attempt to both break-away from the image of a government “bureau” and to adjust tothe “new economy”. Invest.uk conveys better the image of amarket-focused, commercial organization. The Web si te,www.invest.uk.com, is much more accessible than its predecessorand has been significantly updated and expanded.

Box 3. Benchmarking IPA Web sites: best practices from 10 sites

Almost every IPA has set up its own Web site, some far moresophisticated than others. While accurate data are not available onthe hits leading IPA Web sites are receiving, and on the impact onbrand image and leads, there are three arguments for IPAs to makeeffective use of the Internet. First , the increasing number andquality of IPA sites suggest that they are having a positive impact.Second, the rapidly growing importance of the Internet formarketing and information gathering indicates that it is probablyonly a question of t ime before the Internet becomes crucial forinvestment promotion. Third, there is a growing number of privatesector Web si tes offering a whole range of inward investmentinformation, of which www.techlocate.com a n d www.ipanet.netare among the best, suggesting that there is a growing Internet-based market. Based on 10 IPA Web sites (five for developingcountries and five for developed countries from the four regionsof the world), the key types of information being offered include:

/ . . .


Box 3 (concluded)

• Geographical location and market access (with maps).• Labour costs and availability and labour skills and education.• Property and s i te costs and avai labi l i ty — through

photographs, virtual tour and search functions.• Infrastructure quali ty and costs ( transportat ion, ut i l i t ies ,

telecommunications, Internet).• Technological infrastructure (R&D, patents, university-based

clusters, graduates).• Joint venture partners search function.• Information and links to sub-national regions.• Corporate climate, culture and quality of life.• Support available from the IPA and other agencies and red

tape.• FDI trends, leading investors and testimonials.• Sector-based information, presentat ions, research/annual

reports and marketing brochures, all downloadable.• Information on the wider region, e.g. Baltic region, Iberian

region, Balkan region.• Latest news — sometimes available as e-bulletins.

A best practice IPA Web site should combine the followingfeatures:

• A clear, easy-to-use structure, with a site map and searchfunction.

• Speed, with simple, but effective graphics.• Links to regions, government depar tments and other

important stakeholders, as well as to IPA contacts.• Sector-specific options, with tailored information on target

sectors, industries and activities.• Regularly updated (perhaps weekly) news reports, data etc.• Registration, e.g. to e-bulletins, to gather market intelligence

and deliver tailored marketing to users.• Good quality foreign language options, especially for key

FDI source countries.• A strong sales message with unique and distinctive selling

points .• The use of reliable, up-to-date, comparative data supporting

information and arguments.• A “contact us” feature for potential investors to generate

leads .

Sources: United Kingdom (www.invest.uk.com); Sweden(www.investinsweden.com); the Czech Republic(www.czechinvest.com); Ireland (www.idaireland.com);Bulgaria (www.bfia.org); Turkey (www.treasury.gov.tr);Singapore (www.sedb.com); Thailand (www.boi.go.th); Canada(www.investincanada.gc.ca); Costa Rica (www.cinde.or.cr).


Stage 7: Company targeting

Intensified competition for inward investment (Oman,2000; Moran, 1999) makes it crucial to develop clear and distinctivebusiness arguments to demonstrate competitive advantage inpromoting areas for part icular sectors. Leading IPAs areincreasingly using sophisticated proposition-based marketing totarget individual companies with specific business opportunities.This is a complex and long-term process with two main parts:

• Identification of potential investors.• Relationship building with target companies.

The first part involves identifying a manageable numberof potential investors in priority sectors. The traditional companytargeting approach uses business databases and consultants toidentify companies through an evaluation criteria, often based onfactors such as the size and performance of company, R&Dintensity, 7 and exports to the host location. Companies that fitthis criteria in each target sector may number in the thousands,and these can be narrowed down to a hundred or so by focusingon companies that are “active” investors with recent FDI projectsand those with an explicit internationalization or globalizationstrategy. Accurate contact details for each company are neededso that the agency can make initial approaches.

Despite being resource intensive, this is only the startingpoint. It is very unlikely that the companies identified will haveimmediate FDI projects that the host location can compete for.The key to lead generation is relationship building, and atraditional company targeting approach can be useful in providingan initial list of companies from which to begin the process.

As IPAs now target activities as well as sectors, traditionalcompany targeting becomes more difficult. Activities such as callcentres, headquarters or e-business cut-across sectors and do notfit into standard business classification databases. Hence, manyagencies, emulating the success of IDA, are focusing increasingresources on developing long-term relationships with seniorcontacts in existing investors, and are networking in businessorganizations and at conferences and investment and trademissions in order to identify potential investors and projects.

7 Academic research has found that R&D is a key ownershipadvantage of firms and is correlated to FDI (Hennart and Park, 1994; Kogutand Chang, 1991; Grubaugh, 1987).


Whether target companies are identified using a traditionalcompany targeting approach, or through business networking,relationship building is key. When an IPA first approaches apotential investor, the mindset of the project officer is crucial. Ifthe officer believes that it is simply a case of asking a company ifthey have an FDI project and then moving on to the next companythey will not only be unsuccessful, but they will also very quicklyhave their morale and commitment eroded. It is vital to appreciatethat it is not companies that make investment decisions but people.A successful IPA is one that develops a long-term relationshipwith key people in potential investors.

Rather than a hard-sell, in the initial contact the IPA shouldoutline the advantages of the location and the assistance the IPAcan offer. If there is a specific opportunity, such as a new sciencepark, this can be outlined to the company. The project officercontacting the company can offer to send more information bypost. (Often the company will request this anyway.) A one-pagewell-presented, clear and succinct proposition-based summaryfocusing on the unique and distinctive advantages of locating inthe region and tailored to the individual investor is often aneffective approach (Spar, 1998; Christodoulou, 1996).

Approaching companies should not be seen as amethodical exercise; it is not about one-off approaches to a fixednumber of companies each day, but rather a market intelligencegathering and relationship building campaign. For companiesthat appear to have a more immediate interest, suggesting anappointment to meet and discuss with the company in more detailthe opportunities in the host location can be appropriate. If anappointment is made, a relatively senior figure from the IPAshould meet the company, possibly accompanied by a sectorexpert.

It is important to have a sustained approach to companiesand to develop long-term relationships. Techniques to build arelationship with target investors include:

• Drip-feeding the company with regular informationupdates on the location, tailored to the individualcompany &s requirements.

• Organizing networking events that bring together the IPA,key target companies and the wider investmentcommunity. These can revolve around formal sector-specific conferences and more informal events, for examplerelated to important national celebrations and cultural


activities. The use of embassies is one way to attract moreattention and reduce costs. Contacts in the investmentcommunity, e.g. through expatriates, can be leveraged tosupport networking events.

Generating investment is both time consuming and labourintensive, and positive results do not come from one meeting orone investors’ conference. As the IFC (1997, p. 50) notes, someagencies have courted certain investors for years.

Facilitation

Stage 8: Project handling

No matter how effectively an agency markets its locationand generates leads, this is unlikely to result in actual projectsunless there is effective project handling. The aim of projecthandling is to convert an investment enquiry into an actualinvestment. Key issues to consider in enquiry and project handlinginclude:

• Ownership. When handling enquiries, most agenciesnominate a key account contact or project manager to everyserious investment enquiry or potential project. This enablesclear leadership and coordination. They act as the centralpoint of contact for the investor. As well as being able todevelop professional respect and personal rapport with theinvestor, the project manager needs good contacts withgovernment bodies and private sector advisers to facilitatethe project.

• Investor requirements. To win a project requires the fulland accurate unders tanding of the investor’s locationrequirements. For example, Costa Rica’s IPA, CINDE (CostaRica Investment and Development Board), adopted a micro-targeted approach to attract Intel, which included the build-up of detai led information on the electronics andsemiconductor sector to understand the company’s needs(Spar, 1998). The more experienced agencies prepare aproject brief, which includes a full description of thecompany, its strategy, expansion plans and exact project-specific requirements particularly relating to the propertyor site. It is important at this stage to win the trust of thecompany, and the project manager should gain confirmationfrom the company on what information should remainconfidential and to whom. Information gathering can also


form part of a due diligence on companies. Quite often anenquiry can be from a small or start-up company which islooking for public finance that it could not get elsewhere,and therefore is unlikely to be a priority for the IPA.Additionally, due diligence can alert an agency to an investorwho is “playing-off” different locations to bid up the “offer”.

• Visit handling. The investor is likely to make one or morevisits to the proposed location, and it is very important thatthe IPA facil i tates this process together with otherstakeholders in the investment. As well as informationprovision, the investor will be aiming at looking at potentialsites for the investment. These may be in several regionswithin the country, and often the investor will have a verytight timetable involving visits to other countries. Theprofessionalism of the agency in preparing an itinerary andcoordinating visits can be crucial in winning the investment,especially because the executive from the investor is likelyto have a senior position in the company, and possibly willbe based in the location where the new investment is made.Furthermore, meeting the IPA will sometimes be the firstcontact that the executive will have with the host country.If the agency makes the right impression, then this can reflecton the locat ion as whole. As with conferences andinvestment missions, the (agreed) presence of a majorexisting investor at one stage during the visit can create acomfort factor.

• Information provis ion. Depending on the size andcomplexity of the investment, the investor may requestinformation ranging from site and property availability, tolocal supplier quality, the number of graduates in certaindisciplines, transport and communications infrastructure,energy resources and price to labour costs , labouravailability and recruitment costs. Accurate informationshould be supplied in a well-presented format as quickly aspossible, which often depends on the quality of l inksbetween the IPA and other stakeholders, especially regionalagencies.

• Package offer. Successful investment locations developready-made packages of incentives and services for rapidresponse to enquiries that also cater for sectoral initiatives(Christodoulou, 1996, pp. 8-10). However, D. Spar (1998)argues that IPAs should refuse to engage in “extraordinary”measures, as it can undermine the professionalism of theagency in the eyes of the investor and it may also act against


the interests of the location if the agency tries to “pickwinners” by offering over-sized subsidies. Often “softer ”forms of support, such training and recruitment services andproperty and site provisions, are central parts of the offer.As with company targeting, the investor should be presentedwith high quality, customized information, effectively andsuccinctly addressing all the information and project-specificrequirements. Any unique or distinctive arguments forinvesting can also be outlined, and the use of high qualityphotographs of sites or buildings and location maps can beprovided.

• Facilitation. Most IPAs offer some kind of “one-stop shop”for facilitating the investment. The range of services offeredcan vary from consult ing, expediting applications andpermit processing, screening or evaluating the project, andproviding incentive negotiation and approval (Young andHood, 1995; Young et al., 1994; Wells and Wint, 1991).According to a study by Wint (1993), the speed and cost ofobtaining post-approval permits, licences, and planningpermissions are often crucial to the investor. Key to fast,efficient facilitation is not only the professionalism of theIPA, but also their links and influence with governmentministries and other stakeholders. The facilitation may takeweeks, months or even years, but throughout the process itis important for the project manager to maintain arelationship with the investor.

Investment services

Stage 9: After-care and product improvement

After-care refers to the post-investment services that anIPA can offer to existing investors, and it is a key area of policyfor many agencies both for generating new investment andupgrading the quality of existing projects over time. In largercountries, after-care is normally administered at the regional level,but it is nationally coordinated. The objectives of after-careinclude:

• Supporting re-investment by existing investors. Most FDIis in the form of re-investment or expansions by existinginvestors, and the knowledge that the IPA will provideeffective support in meeting any difficulties that arise canbe a critical factor in winning an investment, especially forareas with weaknesses in their “offer ”.


• Increase the value of the investment to the host countrythrough increasing the share of value added sourced fromlocal firms and upgrading the operations of the investorovertime (see Birkinshaw and Hood, 1998, for subsidiaryevolution). Inward investment should form a dynamicrelationships with local SMEs and linkage programmes andaccess to research institutes are important for genuineupgrading (Amin and Tomaney, 1995).

• Helping to “embed” TNCs more strongly in the area andreduce the risk of closure. This is becoming more importantwith ongoing rationalization and reorganization of TNCoperations. Intermediary agencies and governmentprogrammes should create cooperative networks betweenfirms and between firms and support institutions (Pyke,1997).

• Generate new leads by reinforcing the quality of a locationfor a potential investor and by using existing investors as“ambassadors” who will influence other firms to considerthe country as an investment site. Developing good linkswith local managers has been central to investmentpromotion of locations like Oregon and Ireland.

Product development refers to the supply-side policies thatimprove the competit ive advantage of a location and i tsattractiveness for FDI. Product development is integral toachieving many of the objectives of after-care. The increasingemphasis of IPAs on both after-care and product development ismaking the distinction between indigenous and inward investorsincreasingly redundant (Christodoulou, 1996, pp. 11-13). Forexample, box 4 shows that the Northern Development Company(now One North East) spent only one third of its resources onattracting inward investment.

Box 4. After-care and supply chain development in North East England

North East England has been one of the most successfulregions in Europe in attracting inward investment. However, inthe 1990s the Northern Development Company (NDC), the agencycharged with attracting investment into a region, broadened itsobjectives from not just at tracting new investment, but also tomaking sure that inward investors stayed in the region and madea posi t ive contr ibut ion to the region & s economy. The NDCdeveloped a comprehensive after-care policy, with two maindimensions :

/ . . .


Box 4 (concluded)

• The United Kingdom& s f i rs t Investor DevelopmentProgramme , which enables the NDC to remain in contactwith around 400 strategically important companies. TheNDC collaborates with foreign affiliates to help them meettheir competitive needs, such as developing supply chains,cutt ing costs , or preparing business cases to their parentcompanies. The key aims are to guard against the risk ofdis-investment and job loss by committing major investorsto re-invest in the region and by supporting investors in theface of demands for rationalization or closure from the parentcompany.

• Supply Chain Programmes , with a team of businessdevelopment managers (BDMs) interfacing between themajor investors and the SME sector. The aim is to facilitateupgrading the qual i ty of local suppliers to enable localindustry to meet the needs of major investors , with theobjective of increasing local sourcing and embedding TNCsby raising their exit costs. Furthermore, through helping localsuppliers to upgrade and become first- t ier suppliers , theNDC hopes that this will improve the attractiveness of theregion to inward investment. In 1997 and 1998, each BDMwas tasked with developing a thorough understanding ofthe supply chains of 10 final manufacturers or primarysuppliers of sub-assemblies in each of their industries. Theyidentified 20 potential regional suppliers and profiled theircapabil i ty. Each of the eight managers, who haveprocurement and product ion engineer ing backgrounds,worked on 30 supply chains as a result of this activity.

In the mid-1990s, the Investor Development Programme wascredited with creating over 9,000 new jobs. During 1996-1997, theInvestor Development and Supply Chain Programmes helped tocontribute nearly £1 billion to the regional economy — more thaninward FDI. By the end of the 1990s, about half of the NDC& stradit ional inward investment work was focused on exist inginvestors , and less than one third of i ts resources went to theattraction of new FDI.

Source: based on Loewendahl, 2001.

There are four main areas of product development relevantto an IPA:

• Infrastructure and property development. The availabilityof good domestic and international transport l inks isimportant for almost every investment project . Major


projects often involve infrastructure improvements andproperty development as part of the investment package“offer”. Some agencies develop pro-active infrastructure andproperty development programmes (“catalyst” projects)specifically tailored for target sectors and investors.

• Supply chain development in order to increase localsourcing and embed TNCs into the local economy. Severalagencies have established supplier associations focused onlarge inward investors. These are combined with measuresto build up the capacity of the supply base through targetedinvestment, t raining and enterprise development andcooperation between focused suppliers (Cooke and Morgan,1998; Battat et al., 1996; Young et al., 1994; Turok 1993; Aminet al., 1994). Examples include Singapore’s Local IndustryUpgrading Programme, Ireland’s National LinkageProgramme and the Czech Republic ’s National SupplierDevelopment Programme, which was expanded in 2000 withthe launch of a new Web-based service for foreign investorslooking for joint venture partners.

• Innovation development recognizes that it is not simply acase of forcing inward investors to contribute more to thelocal economy (Lall, 1997; Dicken et al., 1994). Innovationpolicy has a crucial role to play in fostering the innovationbase of the local economy to ensure that it is in the TNCs’interest to allocate more complex and important functionsto the location (Eisenschitz and Gough, 1993; Deeg et al.,1989). Among the most successful economies in innovationdevelopment include Germany, Taiwan Province of Chinaand Singapore. Each has established insti tutions andfinancial incentives to promote technology transfer betweeninward investors , SMEs and research inst i tutes , andencourage R&D and the progressive upgrading of foreignand domestic firms (Esser, 1988; OECD, 1999, p. 42; Battatet al., 1996). Innovation policy is widening to includesupport for new firm start-ups, university spin-offs, scienceand technology incubators and parks and the promotion ofan innovative, entrepreneurial culture.

• Skills development. The most successful agencies developan integrated inward investment, after-care and productdevelopment strategy, of which skills development is central(see box 5 for the case of Ireland). The effectiveness ofpolicies to attract FDI and encourage links between inwardinvestors, local firms and research institutes depends on the


quality of personnel available. In manufacturing and R&D,scientific and engineering skills are crucial, while in serviceindustr ies , such as f inancial services and software,information technology skills are increasingly vital. Trainingsolutions, such as those provided by Taiwan Province ofChina, China Productivity Centre and Republic of Korea ’sSmall and Medium Industry Promotion Corporation, andan education system that provides high-level technical skillare key components of a skills’ development policy (Lall,1997; Christodoulou, 1996; Amin and Tomaney, 1995).

Box 5. An integrated targeting, after-care and productdevelopment strategy: the case of Ireland

In 1975 Ireland &s per capita income was only 63 per cent ofthe European Union average. Ireland’s industrial policy thatcentred on attracting FDI seemed to be failing. Unemploymentrose to a peak of 18 per cent and the debt/GNP ratio approached130 per cent. A report by the National Economics and SocialCouncil in 1982 argued that Ireland had taken on the characteristicsof an economy dependent on foreign branch plants. The reportidentified several key weaknesses of the dependent economy: (i)low skill content of much of employment; (ii) high cost and shortduration of much of the assisted employment; (iii) low levels ofcommitment to R&D; (iv) the poor performance of the indigenoussector; and (v) limited linkages with the rest of the economy. Inresponse, the Government made radical policy changes that haveled to Ireland becoming one of the world’s biggest economic successstories. Key policies adopted included:

• The National Linkage Programme to foster links betweeninward investors and the domestic industry. The programmecovers market research, matchmaking, monitoring andtroubleshooting, business and organization development andthe creation of a specific arm of IDA to promote indigenousfirms.

• After-care and plant upgrading , which is concentrated onabout 50 key companies in five target industries. The IDAtargets companies that have a high potent ia l for newinvestment, or that can leverage investment from othercompanies. Links are forged with the management, inparticular with committed local managers, in order toimprove plant competitiveness by making sure that the localmanagement is fully informed of Ireland’s advantages and,through working with IDA, on future expansion plans andnew investment opportunities. About 20 senior staff in theIDA are each responsible for some 2-5 target after-care firms.

/ . . .


Box 5 (continued)

• High skil ls policy, which involved the expansion ofeducation so that over 40 per cent of school leavers now goon to third level education, a share set to rise to 50 per cent.The emphasis has been on informat ion technology andscience subjects as part of a pro-active strategy anticipatingfuture needs. Computer provision and training in schoolshas increased dramatically, and IDA officers have visitedevery school and have written to every parent to explain thenature of the training. A wide range of training initiativeshas also been introduced for older people.

• Technology policy, which includes the 2000 TechnologyForesight Fund with a $1 billion expenditure plan to boostR&D in information technology and biotechnology.Telecommunications deregulation and a $65 billion NationalDevelopment Plan, with a focus on e-business andinfrastructure development, are also intended to supporttechnology activities.

• Targeted inward investment strategy, which has become abest-practice model for other IPAs. The IDA & s indus t ry-focused marketing and company targeting has evolved overtime. In parallel , overseas operations were refocused onlocations having a high concentration of target companies innew target industr ies . Sector/ industry special is ts wererecruited to develop the industry-based strategy and meetwith potent ia l investors . United States e lectronics andpharmaceutical industries were targeted in the 1970s,software and internationally-traded services in the late 1980sand 1990s, and in 2000 IDA targeted information technology,multi-media and e-business. In the 1990s, IDA adopted acluster-based targeting approach, where target industries andcompanies were attracted to industrial clusters. From 2000onwards, IDA will focus on attracting companies to moreperipheral regions, which are expected to benefit from theproduct development activities of Ireland&s November 1999National Development Plan. The objective has shifted fromjob creation to the promotion of outsourcing linkages withdomestic f irms and attraction of headquarters and R&Dfunctions.

• Low corporate tax has been a central pi l lar of Ireland & sattractiveness for inward investment. Corporate tax iscurrently set at 10 per cent and many exemptions areavailable.

/ . . .


Box 5 (concluded)

• Property development was developed as a joint init iat ivebetween the public and private sectors. A key element inthe programme has been catalyst projects, in particular thehigh quality International Financial Services Centre inDublin.

The impact of IDA &s integrated marketing, targeting andproduct development strategy has been impressive:

• During 1980-2000, real GDP growth has averaged almost 7.5per cent per annum — the highest among Organisation forEconomic Co-operation and Development (OECD) members.

• In 1999, per capita income was $24,353 — the twelfth highestin the world — and unemployment was 5.8 per cent.

• During 1980-1987, employment in indigenous industry fellby 27 per cent, but during 1988-1996 it increased by 6.4 percent — opposite to trends in the OECD and European Union.

• In 1999, IDA recorded 17,590 new FDI-related jobs. With9,000 job cuts by foreign firms, the net gain was nearly 9,000.

• Ireland has become the leading location in Europe for highvalue-added industries, such as software, teleservices, sharedservices and pharmaceuticals and health products. Theseare the same sectors IDA has targeted for many years.

• Between 1992 and 1997, IDA attracted over 150,000 new jobsin its target industries.

• In 1999, one quarter of the 17,590 new FDI jobs supportedby IDA were high-skilled, with salaries over £25,000.

Sources: Pitelis, 1997; Barry and Bradley, 1997; Görg and Ruane, 1997;O&Donnell and O&Reardon, 1996; Greer et al., 1995; Battat etal., 1996; Amin et al., 1994.

Several leading agencies are integrating productdevelopment activities (infrastructure, supply chain, innovation,and skills) into catalyst projects and are combining them withsector and company targeting activit ies in order to developadvanced clusters. 8 Ireland, France, Singapore and regions in theUnited States and Canada have each developed a cluster-basedstrategy for target sectors. Key examples include:

8 Porter (1999) defines a cluster as a geographical concentration ina particular country – or region within a country – of a group of related andsupporting firms that create information flows, incentives, spin-offs, newcompanies – an innovative vitality. The OECD (1999, p. 36) defines clustersas “networks of suppliers, customers, and knowledge-creating institutionswhich together create value-added”.


• Ireland&s International Financial Services Centre (IFSC)offers purpose-buil t new offices, reduced 10 per centcorporate tax and other tax benefits, a recruitment serviceand an expatriate support package for headquarters projects.These are combined with an intensive, focused marketingcampaign to target companies and a longer term skillsimprovement programme, particularly targeted atinformation technology in schools.

• The French technopoles offer high quality sites andproperties in specialist industrial parks and locationsoffering a very high quality of life to attract skilled R&Dpeople, training grants and an expatriate support package.The sites are supplied by the private sector. To support high-tech clustering, technopoles have on-site research facilitiesand l inks to research establishments and universi t ies.Technopoles were set up to attract R&D investment inspecific sectors, such as multi-media, food technology andelectronics.

• Singapore & s l i f e sc ience s trategy aims to encouragecompanies to move into higher value-added manufacturing,increase and commercialise R&D and build up value-addingpartners. To achieve these objectives the SEDB has set aside250 acres of land as a “Pharma Zone” — a catalyst initiativeto develop a cluster of local and foreign pharmaceutical andbiotechnology companies — and a Technopreneur Centrehas been developed to support SMEs. These initiatives areintegrated with the activit ies of other governmentdepartments, and there is a wide range of incentives tailoredfor manufacturing, R&D, new start-ups, and for developinglinks with research inst i tutes. To support longer-termproduct development, there are training grants that coverup to 70 per cent of training costs, a new medical schoolestablished to train life science professionals, and severalhundred scholarships for students to study life sciences.

• New York&s “new economy” strategy is designed to attract“new economy” information technology and e-businesscompanies. Integral to this strategy is a cluster-based,catalyst initiative called 55 Broad Street . This initiative hasdeveloped a purpose-built property block to stimulate andattract high value-added, “new economy” activities. Theblock, designed for the new economy, includes dedicatedbroad-band satellite telecommunication facilities. It is nowhome to hundreds of small businesses. The occupants pay


below market rents, and benefit from tax concessions andcheap utility bills. 55 Broad Street was a partnership betweenthe private owners of the property block, New York & sEconomic Development Corporation and various corporateand institutional sponsors.

• Quebec& s “new economy” strategy aims at developinghigher value-added activities in Quebec, and in particularat developing Montreal into a new economy hub. Centralto this strategy is developing high value clusters aroundMontreal&s strong universi t ies and high-technologyindustries and attracting R&D through very generous taxcredits. To support the clustering of “new economy”businesses, a catalyst project was announced in Montrealcalled E-Commerce Place, based on the success of 55 BroadStreet . This is a dedicated 275,000 square meter campus,targeted at e-commerce businesses. It cost almost $500million to build and will become operative in 2001.Companies that decide to locate there will be able to benefitfrom a 25 per cent tax credit on their employees& salaries ofup to $6,500 per person per year available until 2010,provided that at least 75 per cent of their activities aredevoted to e-commerce development or services. NasdaqInternational and CGI have already announced theirdecision to set up shop in E-Commerce Place.

The use of catalyst projects to develop clusters isparticularly powerful for attracting activities from smaller, “neweconomy” companies that do not have the time or resources toconduct a detai led appraisal of new investment locations.Furthermore, these are difficult for investment agencies to target.These catalyst projects generally do not discriminate betweenforeign and domestic firms. The above examples suggest thatcluster-based initiatives depend on several key success factors,including:

• The integrat ion of product development, companytargeting and highly focused marketing.

• Partnership with other government departments ,universities and the private sector.

• Catalyst projects that are carefully developed to meetinvestors & critical requirements.

• Transparent and mandatory incentives available for alimited time period (which has favoured the use of taxincentives tailored for particular activities and which donot discriminate between foreign and domestic firms).


Stage 10: Monitoring and evaluation

There is increasing recognition that monitoring andevaluation is becoming a more important activity for IPAs for threemajor reasons:

• Internal organizat ional e f fect iveness: to promoteknowledge t ransfer and coordinat ion between projectofficers and between offices, make effective use of marketintelligence and increasingly to prioritise discrete resourcesto support companies which will create the most benefitsfor the location. A key method is satisfaction surveys ofinvestors and economic impact studies. As IPAs becomemore commercially orientated and the investment marketbecomes more competitive, organizational effectiveness isvery high on the agenda for many IPAs.

• After-care and product development : monitoring thepurchasing, R&D and training performance of investors hasbeen effective in ensuring that the innovation and skillssupply-s ide infras t ructure meets the needs of inwardinvestors and encourages continuous upgrading of activities(Amin et al., 1994; Amin and Tomaney, 1995). The SEDB isa key example.

• Accountability: investment promotion is resource intensive,and often IPAs recruit people from business and pay highersalaries than other government agencies. However, as IPAsare almost always funded by tax payers, they are underpublic scrutiny, and issues such as financial accountability,efficiency and evaluation are becoming increasinglyimportant (Halkier et al., 1998). IPAs are under increasingpressure to demonstrate impact, efficiency and effectiveness,heightening the role of monitoring and evaluation. Manyagencies produce an annual report outlining jobs createdand capital investment generated from inward investment,as well as a more detailed breakdown of the source andsectoral composit ion of FDI. Even IPAs with weakinvestment promotion, such as Turkey, monitor and makepublicly available statistics on FDI.

However, the level of monitoring varies enormously.Several IPAs require investors to give them a “receipt” withdifferent grades depending on the level of support given todemonstrate that the IPA is facilitating investment, while other


agencies conduct sophisticated monitoring and evaluation of alltheir activities. Among the most advanced is Invest in Quebec,which provides detailed analysis of investment missions, foreignand domestic projects, regional segmentation, a satisfaction surveyof assisted companies and a detailed evaluation — undertakenby an external economist — of the economic impact of its activities,as well full f inancial statements (www.invest-quebec.com).Detailed monitoring and evaluation not only increasesaccountability, but also indicates areas that can be improved andprovides information valuable for strategy formulation.

Conclusion

This article has highlighted the importance of investmentpromotion for attracting inward investment. The frameworkprovides four clear messages for successful investment promotion:

• An investment promotion strategy should be based oncoherent objectives set and agreed by all the majorstakeholders and underpinned by rigorous analysis of alocation& s competitive position. Effective coordinationbetween industrial policy and investment promotion is alsoessential at the central and regional levels.

• Lead generation is most effective when long-termrelationship building with target investors in priority sectorsis combined with focused marketing. The intelligent use ofcatalyst, cluster-based initiatives appears to be particularlyeffective in attracting “new economy” type firms and R&Dactivities.

• Effective facilitation is vital if leads are to be translated intoactual projects. A coordinated and professional approachto project handling at the national and regional levels isessential if a location is to compete successfully for mobileinternational projects.

• To maximize the long-term benefits from inward investmentand maintain and develop the competitive advantage of alocation, after-care and product improvement activitiesshould form a major component of investment promotionactivities.

While the appropriate organizational structure forsuccessful investment promotion will vary depending on the


objectives in attracting FDI, size of the country and role of regionalagencies, the framework suggests that IPAs need to operate alongbusiness lines if they are to achieve results in a competitive,commercial environment. A significant degree of autonomy andsufficient resources are there

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