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GLOBALOUTLOOK COVERSTORY


tion of theWest Midlands region. Infrastructure is also a primary


considerationof site selectorswhen advisingcompanieswhere to invest in capital-intensive projects, says Didi Caldwell, president and founding principal of Global Location Strategies. In Kenya, where more than 70%


of FDI goes into capital city Nairobi, spreading investmentmore broadly is a key governmental goal. Infrastructure development, engag- ing with local authorities and pro- viding more attractive incentives has been the most effectivemethod of attracting investment to underin- vested regions, according toMoses Ikiara,who heads Kenya’s invest- ment promotion agency (IPA). “We have been encouraging


county governments to help express opportunities in terms of investment units, and are working with themat the devolved county level,” he says. Oneproblem is that investments


madeinto underinvested communi- tiesmay not trickle downand help the local population, though some countries are taking measures to counter this. In Guinea, which has the world’s largest reserves of bauxite, the government changed its mining code in 2010, allocating part of inbound foreign investment to stay in the remote regions, saysNamory Camara, the head of thewest African nation’s IPA.“We have had a percentage of mining revenue that goes straight to development of the local area and not the central government,” he says.


Devolution ofpower While top-down central govern- ments schemes can lift up underde- veloped regions, a localised approach appears to be more effec- tive by enabling the targeting of sec- tors strategic to each region. A London School of Economics 2019 survey of European national and sub- national IPAs found that regional IPAs in less developed regions increase the probability of attracting foreign capital by up to 14%on aver- age. On an annual basis, this can increase the inflow of investment by 71%and the jobs created by 102%. “In attracting FDI towards less


developed areas, sub-national IPAs act as compensation formalfunc- tioning institutions and inadequate information diffusion mechanisms,” says the LSE report. India, which is aquasi-federal


country and has a fairly equal distribu- tion of FDI across its 28 states, allows


22


local governments tomanage their investments specific to local needs. “Weimplement incentives or policies that are specific to sectors which match the resource strengths of our states so that they are notcompeting withdifferent cities in India,” says Deepak Bagla,CEOof Invest India. Local states are also catching up


by setting up their own IPAs: the northern Indian state of Uttar Pradesh did so in June,while Telangana in the south followed suit a fewweeks later. Meanwhile in the UK, regions


have been calling for more devolved powers fromWestminster to boost their propensity to attract invest- ment. “The only way you can actually ensure that the benefits of FDI spread in localities is to give those localities more control themselves,” says Mr Rami. Guy Currey, the director of Invest


North East England, agrees. He says that to achieve the ‘level up’ agenda there needs to be a “fundamental rethink of howwe share power to the different regions and fund them to be able to catch up with London”.


Establishing incentives Once the necessary infrastructure is in place and powers are devolved to underdeveloped regions, incentives can be used to attract companies. Shannon is one example of how


incentives can help to spread invest- ment outside ofmajor economic hubs. The Irish town of 10,000 peo- ple opened a special economic zone in 1959 and rolled out tax holidays for companies and grants to support research and development. “Ireland was a protectionist economy until the 1960s, but the government used Shannon as a test-bed for policies like the lowtax rate, which helped drive foreign investment into Ireland,” says former CEOof Shannon Development Kevin Thompstone. Its success would become a blueprint for the establish- ment of special economic zones in countries across the world. While incentives have been effec-


tive in some cases, there is debate over their efficacy in spreading equi- table opportunities in marginalised communities. Economic opportunity zones (EOZs) in the US – which ena- ble companies to forgo capital gain taxes when investing in low-income communities – have drawn in at least $10bn of investment for underdevel- oped areas, with mixed results.


A report published by the Urban


Insititute, a US non-profit research institute, found that while EOZs helped raise the visibility of margin- alised communities to investors, they have fallen short of their prom- ise to create quality jobs and improve the life of low-incomepeople. “Tax credits, cash grants or other


cash incentives can pay off if they target high-multiplier firms. But they currently are overemphasised relative to public services. The most cost-effective ways to pursue eco- nomic development is to enhance various types of services and infra- structure,” says Mr Bartik.


Driving interest Marketing is also key to attracting investment into underdeveloped locations. Anna Mason, a director at Rise of the Rest, a venture capital fund that invests outside of the main US tech hubs, says economic develop- ment organisations can be “a real engine in publicising success stories in order to help the region attract more talent and dollars”. One such success story was in


Indianapolis, Indiana whenhome- grown tech company ExactTarget was bought by software giant Salesforce, which then set up a regional headquarters in the city. This put Indianapolis on themap and led other tech companies, such as Infosys, to invest into the city. “When one of your big winners has thatmoment, it can be incredibly impactful,” says MsMason. More distressedcommunities


oftenrequire marketing to take an approachfromthe ground up. “Investment promotionagencies should try to understand boththe real estate and humancapital assets thatmarginalisedcommunities have, and sell their offer to investors from a competitiveness vantage point,” says Invest Puerto Rico’sMrMiller. While there is no single formula


to attract investment into marginal- ised communities, a mix of govern- ment investment into vital infra- structure, support for local workers and promotion of localities can bring about more equitable developmental outcomes. And with the coronavirus pandemic currently affecting under- developed communities dispropor- tionately, it has shownthis is more urgently the case than ever.■


Additional research conducted by Jack Conway


www.fDiIntelligence.com August/September 2020


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