North America
Knowing their target markets helps northern US states and Canadian provinces compete with the southern US for foreign direct investment.
Ongoing economic recovery, the rapid expansion of shale gas production, infrastructure investments, increased competiveness and business-friendly policies are all helping keep North America on the site selection radar of inward investors.
Since 2006 the United States has been the world’s largest recipient of foreign direct investment, and in 2013 FDI inflows totaled $193 billion—up from $166 billion in 2012. In addition, since 2010, the US has been the recipient of 50% of total FDI inflows into G7 countries, up two-thirds from its typical share previously.
FDI inflows into Canada increased by 45%, from $43 billion to $62 billion in 2013, although intracompany loans accounted for a large portion of this increase, as did large cross-border deals by Chinese investors, such as the $19 billion acquisition of Canadian oil and gas company Nexen by Chinese investors.
But when investors decide where to put their money, they don’t just throw darts at a map. While most of the North American regions defined by research firm fDi markets (Northeast, South, Midwest, West and all of Canada) won between 200 and 500 foreign direct investment projects, worth between $10 billion and $15 billion in total capital, between January and late September 2014, the southern US won 1014 projects, worth $34 billion, according to fDi Markets.
“In terms of the states that are doing really well, we are talking Georgia, South Carolina and Kentucky,” says Chris Steele, COO and president, North America, at Investment Consulting Associates. “They have a strong legacy of being very aggressive economic development states, and they are very strong in terms of marketing, as is Texas, but they also have very strong and diversified economies. They’ve done very well over the past 40 years to present a great place to do business. And aside from their programs, incentives and credits, they’ve got a diversified workforce, a very manageable cost of living, which translates into labor costs [savings].” They are also becoming quite diversified communities, having a good mix of cultures and manual and skilled labor, according to Steele, which means makes recruiting talent easier. “Plus they pride themselves on being fairly transparent and predictable from a regulatory perspective. From an FDI perspective, entering a nation for the first time, you want to know, ‘At what point will I be able to open my door?’ It’s much more predictable in the Southeast.”
Political changes in the upper Midwest, particularly Ohio, Indiana and Michigan, resulting in changes in labor practices, regimes and philosophy about economic development, make them exciting regions to watch, says Steele. “It starts with right to work, but all three of those states, somewhat belatedly, but certainly also to their credit, have realized that being centrally located in the US no longer necessarily means much.”
These states could make, and in some cases are making, more of their location by highlighting and improving infrastructure that links them to major trade and manufacturing corridors. Steele cites the example of Ohio, where Honda is bringing engines up from Mexico to go into cars manufactured in Ohio, which then get shipped out from Norfolk, Virginia. As a result, a whole trade corridor has been created. Steele says: “The auto sector provided the model, and they are looking at how it can be applied more broadly.”
In Canada, Steele singles out Quebec for a similar strategic approach to investment promotion. “They are very aggressive in terms of their outreach efforts, and on top of everything else they have a very good understanding of who they are and who they are not, so they target their activities very effectively and get their people with the right message in front of the right decision-makers and get their message across very efficiently.”
Howard Silverman, president of consulting firm CAI Global, believes Ontario does the best job in Canadian investment promotion. He adds that Quebec, British Columbia and Ontario have the most targeted approach to encourage innovation and high-value investments. “They attract more industrial R&D (not just FDI R&D) than they should based on the size of their economies within Canada, and they focus on industries where R&D is fundamental to competition and success.”
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Charles Sousa, minister of Finance of the province of Ontario, in an interview with Global Finance late last year, noted that Ontario received more FDI than California, Texas and New York and is now the top destination in North America by dollar value. “Companies are looking to us not for the subsidies, but for the competitive tax climate” that Ontario offers, he said.
Unlike the US’s southern states, which are enjoying a revival of manufacturing investments, Canada took in less FDI for manufacturing, while mining and oil investments went up—reflecting an ongoing trend. CAI Global vice president and partner Marc Beauchamp notes that Canada’s share of FDI for manufacturing went from 39% in 1990 to 29% in 2012. “Quebec and Ontario are the two most important provinces in term of manufacturing, so this trend affects their FDI, [especially] their greenfield FDI.”
Canada should be competing with the southern US states only for manufacturing investments that fit with its workforce environment, says Beauchamp. Energy costs are one differentiating factor (they are generally lower in the South), but not the only one. “Electricity rates will only play an important role in a select few projects—such as aluminium foundries—that use a substantial amount [of electricity]. The availability and cost of the workforce, on the other hand, are usually top preoccupations for manufacturers contemplating a new greenfield investment project.”
Although Canada and the US are often grouped together as similar economies, Silverman says there are major differences in the countries’ political and business environments. “Canada’s workforce is better suited for investments requiring a small but highly skilled workforce, compared to an investment project requiring a large number of lower-skilled production workers.”
While FDI levels into North America have not yet returned to pre-crisis levels, it’s clear that confidence in the region is returning. According to the executives questioned for AT Kearney’s 2014 Foreign Direct Investment Confidence Index, Canada ranks third as the location where investors are most likely to direct their foreign investment dollars. The US not only maintains its first-place position from last year but also increases the lead it had in the 2013 study.
The arrival of bilateral free-trade megadeals, such as the Transatlantic Trade and Investment Partnership, will increase competition for North American inward investment, and the states and provinces are advised to carefully position themselves in the marketplace rather than rely on incentives to tempt inward investment. “From the standpoint of companies looking to make an investment decision,” concludes Steele, “they desperately want to be in the right place to be able to support that business long-term. Incentives are purely gravy.”
