Fdireg1 module 3 by Ceddet

TOWARD THE NEXT GENERATION OF IPAS

1ST EDITION

MODULE 3

IPAâ&#x20AC;&#x2122;S SERVICES CATALOGUE

Toward the Next Generation of IPAs. 1st Edition

Module 3

Course author Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT). Course coordinator Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT), the Institute for the Integration of Latin America and the Caribbean (INTAL) (www.iadb.org/en/intal) and the Inter-American Institute for Economic and Social Development (INDES) (www.indes.org). Module author Dr. Ashraf A. Mahate Pedagogical and editorial coordination The Inter-American Institute for Economic and Social Development (INDES) (www.indes.org) in collaboration with CEDDET Foundation (Economic and Technological Development Distance Learning Centre Foundation) (www.ceddet.org).

1st edition Copyright © 2017 Inter-American Development Bank. This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB’s name for any purpose other than for attribution, and the use of IDB’s logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license. Note that link provided above includes additional terms and conditions of the license. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.

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Table of Contents List of Figures .................................................................................................................. 6 List of Boxes .................................................................................................................... 6 Glossary ........................................................................................................................... 7 Module Introduction ....................................................................................................... 8 General Objectives of the Module................................................................................. 11 Learning-Oriented Questions ........................................................................................ 12 UNIT I. DEVELOPING A PORTFOLIO OF IPA TOOLS AND SERVICES ........................... 13 Learning Objectives ....................................................................................................... 13 I.1. Importance of FDI ..................................................................................................... 13 I.1.1. Employment ..................................................................................................14 I.1.2. Economic Contribution................................................................................. 15 I.1.3. Social Impact................................................................................................. 15 I.1.4. Technology Transfer .................................................................................... 15 I.2. Importance of Technology Transfer....................................................................... 16 I.3. Understanding the Role of an IPA ........................................................................... 17 I.4. Essential Functions of an IPA................................................................................... 21 I.4.1. Image Building ............................................................................................. 24 I.4.2. Investment Generation............................................................................... 24 I.4.3. Investment Facilitation ............................................................................... 25 I.4.4. Aftercare ..................................................................................................... 26 I.4.5. Policy Advocacy .......................................................................................... 26 I.5. IPA Tools and Services ............................................................................................ 27 I.5.1. Research-based Services ............................................................................. 28 3

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I.5.2. Image-building Services .............................................................................. 35 I.5.3. Investment-generation Services ................................................................ 39 I.5.4. Investment Facilitation Services ................................................................ 46 I.5.5. Aftercare Services ....................................................................................... 49 I.5.6. Advocacy Services ...................................................................................... 52 SYNTHESIS OF THE UNIT .............................................................................................. 55 Bibliography .................................................................................................................. 55 UNIT 2. LOCATIONAL AND INSTITUTIONAL EFFICIENCY............................................ 57 Learning Objectives ...................................................................................................... 57 II.1. Location Decision.................................................................................................... 57 II.2. Sector Preferences for Locations .......................................................................... 60 II.3. Investment Location Decision Process ................................................................. 63 II.4. Accessing the Locational Benefits ........................................................................ 64 II.4.1. The Kano Model ......................................................................................... 64 II.4.2. Porterâ&#x20AC;&#x2122;s Diamond Model ........................................................................... 66 II.4.3. SWOT Analysis ........................................................................................... 67 II.5. Developing Streamlined Regulatory Environment............................................... 67 II.6. Organizational and Administrative Efficiency ...................................................... 68 II.7. One-Stop Shop / Window....................................................................................... 69 SYNTHESIS OF THE UNIT .............................................................................................. 70 Bibliography ................................................................................................................... 71 UNIT 3. MARKET SEGMENTATION OF INVESTORS .................................................... 72 Learning Objectives ...................................................................................................... 72 III.1. Market Segmentation ........................................................................................... 72

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III.2. How to Segment Investors ................................................................................... 74 III.3. The Red Carpet Concept for Investors................................................................. 77 SYNTHESIS OF THE UNIT .............................................................................................. 78 Bibliography .................................................................................................................. 78 UNIT 4. INCENTIVES ..................................................................................................... 79 Learning Objectives ...................................................................................................... 79 IV.1. What Are Incentives? ............................................................................................ 79 IV.2. What Type of Incentives Are Provided? .............................................................. 80 IV.3. Awarding Incentives to an Investor ..................................................................... 82 IV.4. Carrying a Cost-Benefit Analysis of the Incentive ............................................... 82 SYNTHESIS OF THE UNIT .............................................................................................. 84 Bibliography .................................................................................................................. 84 UNIT 5. PERFORMANCE MEASUREMENT ................................................................... 85 Learning Objectives ...................................................................................................... 85 V.1. Why Measure the Performance of IPAs? .............................................................. 85 V.2. The Performance of IPAs? ..................................................................................... 86 V.3. Common Metrics Used to Measure the Performance of IPAs? .......................... 88 SYNTHESIS OF THE UNIT .............................................................................................. 89 Bibliography .................................................................................................................. 89

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List of Figures Figure 1. Structure of the module ................................................................................. 10 Figure 1.1. Benefits of inward FDI ..................................................................................14 Figure 1.2. Importance of technology transfer in FDI ................................................... 17 Figure 1.3. Impact of internal and external factors on the nature of IPAs ................. 19 Figure 1.4. A results-oriented IPA ................................................................................. 20 Figure 1.5. Objectives of an IPA.................................................................................... 22 Figure 1.6. Support and core functions of an IPA ........................................................ 23 Figure 1.7. Targeting strategy for IPAs ........................................................................ 25 Figure 1.8. Core functions of IPAs ................................................................................ 27 Figure 1.9. The basic IPA services and tools ................................................................. 28 Figure 2. Impact of change in business models on location decisions ...................... 58 Figure 2.1. Perceived important factors for location decisions .................................. 60 Figure 2.2. Location decision-making process ............................................................. 64 Figure 2.3. Constellations of importance ..................................................................... 66 Figure 2.4. Porterâ&#x20AC;&#x2122;s Diamond Model ............................................................................ 67 Figure 3.1. The STP approach ........................................................................................ 74 Figure 3.2. Strategic choices for segmentation ........................................................... 75

List of Boxes Box 1. Economy and investment profile....................................................................... 29 Box 1.1. Sector studies and reports ............................................................................... 31 Box 1.2. Surveys ............................................................................................................. 33 Box 1.3. Location image-building .................................................................................. 35 6

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Box 1.4. Media visits ...................................................................................................... 37 Box 1.5. Social media ..................................................................................................... 39 Box 1.6. Investment promotion roadshows/missions ................................................. 40 Box 1.7. Building a bank of influencers/advisors .......................................................... 42 Box 1.8. Conferences and investment forums ............................................................. 43 Box 1.9. Investor sight meetings .................................................................................. 44 Box 1.10. Overseas investment promotion office ........................................................ 45 Box 1.11. Business set up facilitation ............................................................................. 47 Box 1.12. One-stop shop/window/center...................................................................... 48 Box 1.13. Post-investment meetings ............................................................................. 49 Box 1.14. Providing support for export ........................................................................ 50 Box 1.15. Connecting to local suppliers / labor / educational institutes ....................... 51 Box 1.16. Stakeholder meetings.................................................................................... 52 Box 1.17. Producing policy papers ................................................................................ 53 Box 2. Location determinants for inward investment projects based on sector ...... 60 Box 5. Common IPA performance-measurement metrics .......................................... 88

Glossary n CBA: Cost Benefit Analysis. n IPA: Investment Promotion Agency. n MNC: Multinational Corporation or Company. n OSS: One-Stop Shop. n OSW: One-Stop Window. n STP: Segmentation, Targeting, Positioning. n SWOT: Strengths, Weaknesses, Opportunities and Threats.

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Module Introduction From modules 1 and 2 it is apparent that inward investment promotion is now a normal and accepted activity for almost all governments. The success of IPAs has meant that it is carried out at various geographical levels such as regional whereby a number of countries can come together and jointly attract FDI; or at the national, state and city level. In fact, in some countries IPAs exist at different levels, i.e. national, state and city. This implies that there is no one-size-fits-all IPA and similarly there is not a magic box of services that all IPAs offer. For instance, some IPAs have hundreds of international offices while others have none whatsoever. Each IPA offers services based on its national (or even state or city level) strategy, level of funding, the needs of investors and, most importantly, to capitalize on its strengths so as to increase its competitiveness in the face of rivalry from regional or international locations. Despite the absence of a definitive list of services one can nevertheless arrive at general areas of activities that all IPAs carry out regardless of their size or geography. These five core blocks of services are as follows: n Image building/country branding: perceptions about a country which em-

body aspects such as its governance regime, products, culture, lifestyle, quality of life, attractiveness from a tourism perspective, perceptions about the population, economic and social conditions etc. play an important role in attracting FDI. Academic evidence shows that even where these perceptions are based on stereotypes they can actually become positive or negative incentives to set up in a particular location. Therefore, a large number of IPAs spend considerable time and effort on building the locational image either by themselves or in association with other departments such as tourism, culture, information etc. n Investment generation: perhaps the most important role for an IPA is to ge-

nerate investment from overseas through various tools which may include

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promotional work, incentives both financial and non-financial, overseas offices, etc. It is not only about identifying investment but also converting it so that it actually takes place. n Investor facilitation and services: investment attraction needs constant

hand-holding so that it takes place despite the challenges a country may face. Therefore, IPAs provide support to investors and in some cases have one-stop centers or fast track offices that assist investors through the maze of establishing an overseas presence. n Aftercare: in marketing it is well known that one existing customer is four

times more profitable than a new one and, more importantly, the cost of acquisition of sale is less than one tenth. Similar evidence supports FDI, whereby it is easier to obtain additional investment from existing investors than new ones. However, for this to take place it is important to have a good aftercare policy which ensures that investors have the continuing support that they so often need. n Policy advocacy: to carry out continuous improvement and develop a better

investment environment an IPA needs to be an advocate for investors, and this is the fifth theme of activities. The five blocks of activities have four forces that greatly impact their development which are as follows: n Finance: new ways and strategies to realize cost savings or at least extract

greater value from the expenditure. Therefore, all IPAs are under pressure to measure their performance and ensure that efficiency is increased over time. This is more so the case where governments are under extreme budgetary constraint yet need to attract inward investment. n Technology: perhaps the greatest impact to services of an IPA has been the

application of new technologies which leads to product development. Also, technology implies that traditional services are no longer required such as the need for basic information which can be obtained from an IPAâ&#x20AC;&#x2122;s website.

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n Cooperation: IPAs are looking for new forms of cooperation, so aspects

such as public-private partnerships are becoming important as are the use of financial and non-financial incentives. n People: all IPAs are looking at using their people, i.e. staff, more effectively

to deliver a better and more engaged investor experience. The core services and the constraints that are placed on IPAs discussed above are illustrated in figure 1. Figure 1. Structure of the module

Source: Adapted from BCI (2014)

In figure 1 two sets of forces are taking place which impact the services catalogue, namely the changing needs of investors which impacts the five core activities. The five core activities themselves are impacted by the internal and external constraints (i.e. finance, technology, need for cooperation and people) which are the outcome of changing global and regional economies. This constant and circular relationship ensures that IPAs are continuously changing and developing their service catalogue or at least making improvements to their existing provision. This module explains the five core areas of an IPAâ&#x20AC;&#x2122;s activities and in doing so covers the services that are typically offered. As such, this module will cover development of an IPAâ&#x20AC;&#x2122;s service cata-

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logue from the perspective of the organization in Unit 1. Then in Unit 2 the perspective of the multinational firm is explored and issues such as locational benefits are discussed. This unit also discusses the needs of investors such as the ease of establishing an overseas presence and obtaining the necessary approvals through a single facility or welcome center. In Unit 3, the module looks at providing a differentiated level of attention based on some form of market segmentation. The process of market segmentation allows IPAs to offer categories of investors into sub-groups or segments based on a common characteristic such as the origin of country, size of investment etc. Market segmentation allows IPAs to offer a red carpet service to the most important investors to ease the process of conversion. Unit 4 looks at the highly controversial area of incentives and explains how an IPA can conduct a cost-benefit analysis so as to understand the overall impact of providing the enticement. Finally, Unit 5 looks at the issue of performance measurement and why as well as how an IPAâ&#x20AC;&#x2122;s activities are evaluated.

General Objectives of the Module At the end of this module learners should be able to carry out the following: n To understand the different types of services offered by a typical IPA. n To appreciate the needs of a MNC or foreign investor. n To be able to develop a streamlined investor-servicing framework including

a one-stop center. n To carry out market segmentation of its investors and offer more dedicated

services such as a red carpet welcome. n To conduct institutional coordination at the national/regional/sub-regional

level. n To be able to conduct cost-benefit analysis for tailor-made incentive pro-

grams. n To develop metrics on performance and benchmarking with regional and

global examples. 11

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n To be aware of best practices, successful stories, innovative approaches.

Learning-Oriented Questions n What is the typical range of services offered by an IPA and do all IPAs need

to offer the same services? n Why is inward FDI important to a country/region? n How effective is Porterâ&#x20AC;&#x2122;s Diamond Model in helping us understand why and

how investors select a particular location? n What is meant by market segmentation and how can it be used to enhance

inward FDI? n What are the typical forms of financial and non-financial incentives that are

offered to investors and are they effective in increasing the level of investment?

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UNIT I DEVELOPING A PORTFOLIO OF IPA TOOLS AND SERVICES

Learning Objectives This unit looks at how an IPA develops its tools and services. At the end of this unit learners should be able to: n Link the benefits of IPA intervention to the services offered. n Understand the role of the IPA and the changing internal and external de-

mands that are made which impact the service catalogue. n To be able to deliver the essential functions of an IPA. n To innovate existing services to meet changing investor demands. n To be aware of a typical portfolio of IPA tools and services.

I.1. Importance of FDI The starting point for developing the service catalogue for an IPA is to appreciate the importance of FDI and the benefits that it brings to the local economy. The benefits of inward investment can be classified into areas, namely employment, the economic

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contribution to the local economy, the social impact they make either directly or indirectly and the technology transfer that takes place. The four areas of benefits from inward investment are illustrated in figure 1.1.

Figure 1.1. Benefits of inward FDI

Source: Adapted from BCI (2014)

I.1.1. Employment One of the most important benefits of inward investment is that it leads to employment either through direct job creation as a result of the FDI or indirectly by suppliers and partners. Academic evidence shows that not all FDI equally creates employment opportunities and some types are more effective than others. For instance, Greenfield projects create more employment than acquisitions or mergers. In fact, acquisitions and mergers tend to be ineffective in creating employment as it changes only the ownership structure of the asset. Having said that, in some cases mergers and acquisitions can encourage the new owners to invest in the asset and thus create new employment opportunities.

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I.1.2. Economic Contribution Inward investment increases the domestic capital formation within an economy and allows for the potential output to increase. Also, inward investment has been shown to, on average, have higher productivity than domestic companies. There are two ways in which productivity increases. First, inward investment into Greenfield projects brings in new machinery. Second, inward investment in both Greenfield projects as well as mergers and acquisitions brings in new processes. This increases overall productivity and therefore competitiveness of the local economy. Also, inward investment is found to be more export-intensive than domestic investment and therefore increasing the overall level of exports from the country. More importantly, the export-oriented nature of inward investment allows domestic firms to ride on their efforts through being suppliers. Another important contribution of inward investment is that it leads to taxation revenue that would not arise in the absence of the FDI. Even if the inward investment is given a tax holiday, as is the case in some countries, the increased employment and business to suppliers as well as partners resulting from the FDI can still lead to increased government revenue.

I.1.3. Social Impact Governments are keen to attract FDI and therefore tend to invest in infrastructure which benefits not only foreign corporations but also domestic companies and residents.

I.1.4. Technology Transfer Anecdotal evidence suggests that inward investment tends to be more research-intensive and carries out a greater level of innovation. These innovations even if not created in the host country and adopted or brought in from overseas can in time spill over into the local economy as domestic firms become exposed to the new management practices and processes. 15

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I.2. Importance of Technology Transfer Innovation can play an important role in the eradication of poverty, achieving gender equality, empowering women, assisting to improve public health and many other social issues. However, many countries do not have access to the technology that can generate innovation. However, through inward investment the local economy can obtain exposure to the technology. There are three channels of technology transfer that take place as discussed below: 1. Imitation: domestic firm becomes exposed to production process and management practices and imitates them. 2. Human capital: employees working for the foreign investor acquire the knowledge and then move to domestic firms. In some cases these employees can start up their own enterprises where innovation can take place that benefits the local population and economy. 3. The export orientation of inward investment implies that local firms also get exposure to the international market and advances in the technology frontier. Technology transfer and innovation is important to all economies as it is the foundation for economic growth. Figure 1.2 illustrates the connectivity between technology and economic prosperity. The starting point are new ideas, research and development and innovation. However, the challenge that many countries are faced with is that they do not have the infrastructure or the financial capacity to carry out research and development. However, this can be substituted by technology that has been developed overseas and becomes available to domestic firms as a result of the inward investment. The foreign technology can, through the channels of technology transfer as discussed above, help the country in terms of increased productivity, creating more successful firms and higher quality jobs as a consequence of acquiring the technology. As a result of this the economy becomes more robust, stronger and diversified which in turn leads to enhancements in the eradication of poverty, increasing public health and so on.

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Figure 1.2. Importance of technology transfer in FDI

Source: Adapted from BCI (2014)

I.3. Understanding the Role of an IPA The fundamental problem facing an IPA is to understand its role. In the simplest sense, an IPA is supposed to attract inward investment and overcome the market failures that exist. However, the question that arises from this is to what extent should an IPA intervene? Academic literature arrives at two general approaches or roles of an IPA. The first argues that the IPAâ&#x20AC;&#x2122;s role is to work to build a good investment environment within the country. The premise is that investors seek out environments that are conducive for FDI. In this case the role of the IPA is limited largely to dealing with the domestic economy to make it more attractive for inward investment. The alternative viewpoint argues that investment promotion attracts inward investment. The basis of investment promotion is to use the principle from commercial marketing which is if a company wishes to acquaint a buyer of a product or service

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it carries out an awareness program. In the first instance, the company tends to develop the image of the brand and product. This is then usually accompanied by activities such as advertising, information leaflets, information, direct mailing and participation in trade exhibitions and so on. IPAs employ similar techniques and also include identification of potential investors, matching future investors with local partners and investor facilitation, assessing and granting incentives. Therefore, the interventionist approach is not only promoting the investment environment of the country but actively encouraging inward investment and seeking to convert it. The precise role of the IPA is largely dependent on its relationship with the government. Even though almost all IPAs are part of the government, either directly as an agency or indirectly through a ministry or department, their degree of independence varies considerably. To make matters worse there is no clear answer as to which is preferred as each has its own advantages and disadvantages. On the one extreme one has IPAs that are so closely tied to the government that they pursue short-term political objectives. The short-term nature of their goals brings about a policy of quick wins and constant change with each successive change in government. Then on the other extreme, one has highly autonomous IPAs. The high level of autonomy implies that they need to build relationships with governments in order to achieve their goals. It is not only the relationship of the IPA with the government that determines its role but also the internal and external factors. Figure 1.3 illustrates the six broad groups of factors impacting on the nature and role of an IPA. The first of these is the government factor which places constraints such as the level of funding provided, the need to derive greater efficiency, changing priorities of the country such as a move away from a manufacturing center to a knowledge-based economy, broader national strategies and economic development plans and so on. Then one has the external relationships at global, regional, national and city levels. These relationships are developed through collaboration or even from signing international agreements such as bilateral investment treaties or free trade agreements. Such relationships are extremely important for market-seeking investment which seeks to establish a foreign 18

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presence not only to target the local market but also that of neighboring or partner countries. Then one has the impact of new entrants which not only increases the level of competition but also leads to development of new tools and services. This is also linked to technology and the impact it makes to not only the IPA but also the private sector. Perhaps one of the most important factors impacting the role of an IPA is the changing business trends. Finally, one has internal change in direction and leadership of the IPA itself.

Figure 1.3. Impact of internal and external factors on the nature of IPAs

Source: author produced

In addition to the hard aspects of an IPA one also has the soft or human elements which refer to building the capabilities of the staff. Some IPAs consider this to be an equally important role for them as attracting inward investment. The argument is that investment attraction is not an exact science and human interaction is equally if not more important. Prior research clearly shows that human interaction is an important part of converting a potential investor and certainly the key to investor satisfaction. This is true even with advances in modern technology that allow for virtual

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communications. The reason for this is that most investors may obtain initial information and conduct preliminary meetings virtually but they would like to meet with the IPA to obtain advice but also assistance with various different issues. Also, a good human interaction gives comfort to investors that they are dealing with a body that is a supportive organization. Anecdotal evidence suggests that investors would rather invest in a location where they have a good relationship with the IPA even if an alternative destination has slightly better physical attributes. Figure 1.4 illustrates the importance of human- or people-based results in the wider sphere of activities of an IPA. In order to achieve business results (this is discussed in unit 5) the IPA needs to conduct an internal assessment or focus which involves building its people. The people make the difference and lead change and finally create the purpose.

Figure 1.4. A results-oriented IPA

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I.4. Essential Functions of an IPA One conclusion that becomes apparent from the discussion above is that there is no one-size-fits-all to an IPA and each one is different. However, almost all IPAs perform certain functions which are considered to be essential. The essential functions are derived from the primary objectives of an IPA. In other words, what is it that all IPAs are trying to do? The answer to this question is illustrated in figure 1.5 where the primary objectives and the corresponding targets and outcomes are highlighted. The most important reason for inward investment is to generate employment opportunities. Although initially this may be simply the number of jobs created, however with time, as the economy develops, it seeks higher quality and more sustainable employment opportunities. In some cases the employment may be directed at a particular demographic such as young people or women. Countries like to have diversity of employment opportunities so as to create balanced economic growth for all its people. Usually a country may develop a cluster or areas of niche activity in order to attract the high quality and sustainable employment opportunities. Second, economies prefer Greenfield projects because it adds to the domestic capital formation and increases the potential output of the nation. More importantly, Greenfield investment is associated with modern and more efficient capital which adds to the technology transfer in the country as well as raising the productivity within the economy. Greenfield investment is attracted by the facilities and to a certain extent the incentives offered. IPAs also need to meet national/state/city level strategy goals and hence the services offered need to be consistent with the broader objectives of the economy. Finally, inward investment is good, but simply having a presence is not sufficient and IPAs prefer establishments that add value and are linked to the global value chain.

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Figure 1.5. Objectives of an IPA

Source: Adapted from GDP Global (2015)

The functions of any IPA can be categorized into two broad groups, namely support and core as illustrated in figure 1.6. The support functions are aspects such as human resources, finance, IT etc. Without these functions the core activities cannot exist. This does not however imply that the IPA should perform the support functions internally. Some IPAs which are part of larger ministries or departments have centralized support functions. On the other hand, IPAs with considerable autonomy have both support and core functions. Another option is that IPAs may outsource the support functions to a third-party provider.

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Figure 1.6 Support and core functions of an IPA

Source: Adapted from GDP Global (2015)

The necessary functions of an IPA can be categorized into four areas which are research, strategy, planning and performance measurement. We consider these functions necessary because the IPA cannot function adequately in their absence. However, unlike core functions the necessary functions can be carried out by an external agency. For instance, in some countries the IPAâ&#x20AC;&#x2122;s performance is measured by an external government agency. Similarly, research, strategy and planning are all linked and can be provided by a higher authority. This leaves five areas of activity that an IPA needs to perform to be an effective interventionist in order to attract inward investment. The core functions are discussed below.

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I.4.1. Image Building A brand, whether it is for a service or a product, embodies various elements of which the most important is trust. In the case of an IPA this implies building trust among potential investors so that they are convinced that the location is the correct place in which to invest. Therefore, the role of image building is exactly as it states, namely to improve the impression of the location and therefore ease the process of attracting and converting investors. Image building is very important not only for new economies entering the arena of FDI but also more established IPAs. The reason for this is that the investors need to constantly be reassured of the virtues of the location against competitors. This is particularly important following any economic, political or social disturbance in the economy whereby the IPA needs to recreate and reconfirm the location as a respectable investment brand.

I.4.2. Investment Generation Investment generation is the process of attracting multinational firms to the location. However, in reality a location is not suitable for all types of firms and at the same time there are far too many MNCs with very diverse investment requirements. Successful IPAs take a focused approach in that they do not seek to attract all multinational firms. Instead, the approach is to identify firms that the IPA can serve more effectively taking into account the competitive advantages of the location and the overall strategy of the geography. This targeted investment generation approach has become more popular with IPAs as they tend to be under pressure to obtain results and use their resources more efficiently. The targeting can be carried out at different levels such as the country of origin, sectors or even specific companies. Charlton et al (2004) developed a framework for identifying the target group of investors based on two parameters, namely attractability and desirability. The former refers to the cost of attracting firms in the sector into the location. The latter is a measure of the level of benefits obtained from the sector and the externalities that flow into the local

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economy. Therefore, targeting of sectors is seen as a choice between costs of attracting a sector against the benefit that is derived from it. In most cases the final choice of selecting sectors through a balance of the two factors (i.e. desirability and attractability) allows the IPA to meet its short goals of attracting inward investment with the long-term national objectives of developing and building a strong sustainable economy. Figure 1.7 illustrates the Charlton et al (2004) model with its three steps, namely to identify the national strength followed by translating the strategy for the geography (or even the different strategies, e.g. economic strategy, innovation strategy employment strategy etc.) into a list of sectors which are considered â&#x20AC;&#x153;good for the economyâ&#x20AC;?. The third step is to design a road that allows the IPA to move from the current state of quick win industries to the future good industries. Figure 1.7 Targeting strategy for IPAs

I.4.3. Investment Facilitation Attracting investment into a geography is only an initial step and therefore one can see the huge difference between the amount of FDI projects that are announced and the ones that actually take place. Anecdotal evidence suggests that inward investment gets frustrated with the complexities of investing in the location. To limit this 25

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governments have initiated various measures such as services that assist investors navigate the maze of establishing and obtaining approvals. From a technical perspective investment facilitation refers to the entire investment cycle and the process of reducing the obstacles as well as increasing the efficiency of the process. It is important to be aware that investment facilitation has soft and hard aspects. Examples of the former are aspects such as transparency, simplicity, predictability, and dispute resolution and investment protection, while the latter include one-stop centers. Hand-holding services etc. are among its most important principles.

I.4.4. Aftercare The more successful IPAs realize that aftercare is just asâ&#x20AC;&#x201D;if not moreâ&#x20AC;&#x201D;important than investment generation. Technically, aftercare is all the services provided by the IPA after the initial investment has taken place. It is generally agreed that FDI that has taken place and is content with the location is more likely to carry out further investment. Also, content investors are more likely to tell other investors about the location, which increases its brand image as well as generating additional investment. Over time this can have a compounded effect on the economy. IPAs have developed various aftercare tools and services which include assistance with administrative processes, export promotion, expansion, retention, sourcing labor, connecting the investment into the local value chain with suppliers, customers and partners as well as connecting with research centers to assist with innovation.

I.4.5. Policy Advocacy A very important role of IPAs is to be an advocate for inward investment and developing policy to improve the business environment in the location. IPAs are ideally placed between the foreign investor and the government so that they can learn about the practical difficulties experienced by firms and escalate it to the appropriate government authorities. If carried out correctly the advocacy role of an IPA ensures

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that the location continuously improves and maintains its relevance to foreign investors. From an image-building and trust perspective foreign investors positively view IPAs that are effective in resolving investor issues at the heart of government. The five core functions take place as a continuous chain starting with image-building, then investment generation, followed by investment facilitation, aftercare and then advocacy. This in turn makes changes in government and reinforces the image and the chain continues. The continuous chain of core functions is illustrated in figure 1.8. Figure 1.8. Core functions of IPAs

Source: Adapted from BCI (2014)

I.5. IPA Tools and Services The discussion above has shown that there are five core functions of an IPA and three necessary activities. These core and necessary activities make up the basic toolbox of a typical IPA and are illustrated in figure 1.9.

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Figure 1.9. The basic IPA services and tools

Source: Adapted from MiĹĄkinis and Byrka (2014)

I.5.1. Research-based Services Starting with research IPAs tend to produce macro and micro economic reports which seek to make potential investors aware of the location and its benefits. These studies can be supplemented with surveys and sector reports which highlight particular aspects. For instance, the surveys of quality of life are used to reinforce the image-building activities in that the location is a desirable place to live and not only invest. Similarly, the sector reports seek to target the quick win as well as the good for the future industries and encouraging their investment to the location. Below we describe three of the research-based services that are commonly offered by IPAs.

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Box 1. Economy and investment profile Name of service

ECONOMY AND INVESTMENT PROFILE

Target audience

Potential investors, investment influencers, e.g. site location advisors, media.

Description

The economy and investment profiles present economic information and data that describes the locationâ&#x20AC;&#x2122;s economy, infrastructure and quality of life. Such reports are the first taste that a foreign investor receives about a location, therefore it needs to be informative, accurate and highlight the key features. Also, in almost all cases a company will conduct a feasibility study for which they need inputs, and such a report or accompanying database can be a good resource for overseas investors. The economy and investment profiles are normally available on the IPAâ&#x20AC;&#x2122;s website as a PDF document or a webpage. Some IPAs provide printed copies to potential investors but this practice is becoming less common.

Typical layout

There is no golden rule and each IPA may change the format to highlight their strengths. However, a typical layout is as follows: 1.

Key highlights.

2. Geographical layout (map with the major centers of economic activity; connectivity to regional markets by road, air, sea and train; logistics centers, e.g. ports, airports etc. both existing and planned). 3. Macro-economic profile (this can be compared to regional competitors or can focus only on the location).

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ECONOMY AND INVESTMENT PROFILE 4. Major economic sectors (both current and planned). 5. Socio-demographic factors (e.g. population size and structure; availability of high quality labor by university graduates, vocational skills, ability to speak languages etc.). 6. Comparative costs of doing business (financial savings from ease of doing business; competitive operating costs such as labor, land, power; telecommunications; etc.). 7. Free zones (and their benefits). 8. Access to wider markets through Free Trade Agreements (explain the benefits that investors can receive through customs free access). 9. Political and economic stability (how the government is committed to developing a stable and predictable business climate; list of bilateral investment treaties, investment guarantee agreements; double taxation avoidance agreements; multilateral agreements etc.). 10. Infrastructure

development

(existing

and

planned). 11. Financial benefits and incentives (where they are offered but there can also be indirect financial benefits, e.g. tax-free status or exemption from customs duties etc.). 12. Success stories (this can be a list of investors or actual testimonials). How to carry it out

The first step to conducting this exercise is to obtain reliable official data that is produced on a consistent basis.

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ECONOMY AND INVESTMENT PROFILE The most efficient manner of doing this is to contact the official body responsible for overseeing the activity.

Intended outcomes

The economy and investment profile is intended to ensure that potential investors receive accurate data from an official source that is up to date and produced on a consistent basis. There is no economy that that does not experience periods of poor economic performance and this should not stop the IPA from being honest and transparent. The economic and investment profile is intended to highlight the strengths of the economy and the benefits of investing in the location compared to alternatives.

Examples

https://www.rdasydney.org.au/the-sydney-region~1/economic-profile/ http://investsofia.com/wp-content/uploads/2016/11/SOFIA-Investment-profile_ENG-min.pdf http://www.idaireland.com/invest-in-ireland/irelandeconomy/

Box 1.1. Sector studies and reports Name of service

SECTOR STUDIES AND REPORTS

Target audience

Potential investors, industry specialists and industrybased media.

Description

Sector reports come in two types, the first is a single report dealing with all the focus sectors of the region while the second type deals with each industry individually.

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SECTOR STUDIES AND REPORTS Whereas the economic and infrastructure report has general country data, a sector report is more specific. For instance, the cost comparison can be more industry-specific as can the availability of labor etc. The aim of the sector report is to showcase the strengths of the location in particular area(s) of activity and how potential investors can benefit by being located there.

Typical layout

Key highlights.

2. Sector overview (this explains the sector strengths at present. It can also explain the different components of the sector value chain and the role played by the location). 3. Location benefits (how the sector is being supported/promoted by the location currently and future plans. This can also include logistics facilities that can service needs of the sector). 4. Free zones (in some cases there may be sectorfocused free zones or clusters). 5. Socio-demographic factors (this is similar to the economic and infrastructure report but with more sector-specific data). 6. Cost comparisons (the focus is sector-specific inputs compared to regional competitors). 7. Regulation (what rules and regulations apply to the sector in the pre and post-investment stage). 8. Financial benefits (any incentives offered to the sector both direct and indirect). 9. Success stories (list of companies in the sector and/or testimonials).

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Name of service

SECTOR STUDIES AND REPORTS

How to carry it out

The most efficient manner of producing a sector report is to work with the official ministry representing the sector as well as the business group. In most countries there is a business or industry group to represent the interests of the sector which also collects relevant information.

Intended outcomes

The idea behind a sector report is to target potential investors in the industry that are seeking an overseas location. As in the case of the economic and infrastructure report the intended outcome is to build a positive impression of the location and encourage potential investors to seek further information from the IPA.

Examples

http://enterprisegeorgia.gov.ge/en/download-center/sector-studies?v=22 http://www.idaireland.com/business-in-ireland/industrysectors/?type=sectors http://www.dica.gov.mm/en/investment-promotion

Box 1.2. Surveys Name of Service

SURVEYS

Target audience

Potential investors and more specifically their employees; influencers such as location advisors and media.

Description

It is generally understood that a particular location is selected for two very different reasons, namely, from a business function point of view, whereby aspects such as size of regional market, cost of business, financial benefits etc. are very important. The second aspect is the quality of life

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SURVEYS that a particular location offers its residents. This is of particular interest if the investment involves staff from the head office. Some IPAs use the quality of life surveys as a means of promoting the location.

Typical layout

One of the models of a quality of life index is the European Quality of Life Survey (EQLS) which is a pan-European study examining the lives of citizens in each of the European Union member countries. The survey focuses on aspects such as employment, income, education, housing, family, health and work-life balance, levels of happiness, how satisfied they are with their lives and their perception of the quality of their societies. The only problem with this survey is that it is carried out every four years and therefore many IPAs replicate their own version of this survey each year. The survey questions for EQLS are publicly available and a score for each area is calculated as well as a combined one for all the aspects. Some IPAs use a variation of the EQLS in that they survey the inward investors to ask them what attracted them to the location. In doing so such a survey focuses purely on the issues that are important to inward investors such as availability of international schools or repatriation of capital and profits. An alternative to conducting a survey is for the IPA to select aspects of quality of life and to highlight the locationâ&#x20AC;&#x2122;s strength in those areas.

How to carry it out

In order to obtain credibility such surveys are outsourced to a third-party reputable company that is well-known for conducting such surveys.

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SURVEYS

Intended outcomes Examples

https://www.eurofound.europa.eu/surveys/europeanquality-of-life-surveys http://www.mida.gov.my/home/quality-of-life/posts/

I.5.2. Image-building Services The image-building services and tools tend to be carrying out marketing and advertising campaigns the size of which depends on the financial budget and strategy of the IPA; carrying out media visits whereby journalists from targeted countries are invited to the location so that they can write about the investment climate; working with other government agencies to develop a coordinated image and public relations campaign; publicizing good news stories and using social media tools. Box 1.3. Location image-building Name of service

LOCATION IMAGE-BUILDING

Target audience

Potential investors and influencers.

Description

In a highly competitive market location branding has been an increasingly important tool to attract inward investment. Place branding is a set of location-based factors that include: logos and slogans, promotional and marketing activities, locational expressions such as buildings and natural environments; perceptions and working of public sector bodies and people. The aim of location branding is to develop a positive attitude in the minds of potential investors.

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Name of service

LOCATION IMAGE-BUILDING

Typical layout

The usual aspects that are important in location branding are as follows: •

What factors appeal to the target investors? Typical aspects include efficiency, educated workforce, aspects of quality of life etc.

•

What factors does the IPA consider as important in their location brand? Typical examples include vibrant culture, ease of business, innovation environment, socio-demographics, etc.

•

What factors do influencers such as site selectors consider as important in the decision-making process? Typical examples include cost, connectivity, availability of social and lifestyle amenities, etc.

•

What are the strengths of the location? Typical examples include geostrategic location, business clusters, connectivity and logistics, etc.

How to carry it out

Normally, location image building is carried out by the body responsible for tourism and then supported by the IPA, trade promotion organization and agencies dealing with culture, entertainment etc. One of the best examples of location branding is New Zealand whereby the strategy is supported by the authorities responsible for tourism, IPA and also the national sports teams. It is not normal for an IPA to have the necessary skills to carry out location image branding and therefore it is usually outsourced to a specialist company. The role of the IPA is to bring together the stakeholders and ensure that all reinforce a coordinated message and image in global markets.

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Name of service

LOCATION IMAGE-BUILDING

Intended Outcomes

To develop a coordinated location strategy that is followed by all stakeholders so that the location becomes a sought-after destination where people wish to visit and businesses want to invest money. https://www.nzte.govt.nz/ http://www.opencopenhagen.dk/ http://www.greatbritaincampaign.com/

Box 1.4. Media visits Name of Service

MEDIA VISITS

Target audience

To reach potential investors and influencers using journalists.

Description

To invite print-, audio- and TV-based journalists so that they can see and write/talk about the opportunities as well as benefits of investing in the location. This is a service offered to a selected group of journalists each year and the IPA needs to cover all expenses. The program, which is typically two to three days, contains information about the location along with visits to free zones and meetings with existing overseas investors.

Typical layout

A typical two to three day media visit consists of the following: Day 1: arrival and dinner with the head of the IPA. Day 2: brief on the economic and political situation, a brief (although the media kit will contain more extensive

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MEDIA VISITS information) on the key sectors, social-demographics, how to establish a business, cost comparisons, taxation and regulatory regime. This is followed by lunch and then a site visit to the free zone. In the evening there is usually a cultural activity. Day 3: tours of the business places of interest, lunch with overseas investors in the location that have expanded or re-invested. Afternoon can either be free time or meetings with representatives from business groups. Depending on the location the afternoon can also include visits to the major shipping port to see how quickly goods are cleared or major infrastructure projects. The media kit will include investment opportunities that are available along with detailed information on the focus sectors. Day 4: free time and departure.

How to carry it out

Typically, media visits are conducted with the support of the tourism authority within the location. Although business journalists are invited, it is important that they also experience the cultural and touristic aspects of the location. Usually, the IPA selects the countries that it wishes to target and the media in those countries. Sometimes the selection process dives deep into identifying the journalists who should be invited.

Intended outcomes

The journalist invited should be well briefed so that they can write a sufficient number of articles or pieces in the case radio and TV media about the location.

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Box 1.5. Social media Name of service

SOCIAL MEDIA

Target audience

The general public, potential investors, influencers and media.

Description

Developing a social media presence has become a business necessity and successful IPAs have a team that are dedicated to this activity. Effectively using social media can help IPAs increase their visibility in a very competitive market. IPAs tend to highlight the benefits of their location indirectly and through successes of the investors.

Typical layout

This depends on the social media platform.

How to carry it out

The most effective strategy is to find out which platforms are used or viewed by potential investors / influencers / media in the target country and then build the social media presence with those outlets in mind so as to achieve predetermined and measurable objectives. Also, it is important to ensure that the social media is in the language of the target country.

Intended outcomes

To connect directly with potential investors so that they are encouraged to contact the IPA.

I.5.3. Investment-generation Services The investment generation is usually carried out based on some target industries and involves building a database of potential investors; participation in investment exhibitions and roadshows; conducting sector-specialist seminars and forums to attract the targeted investor pool; conducting trade missions whereby targeted investors are invited to visit the location and vice versa, whereby the IPA goes to meet foreign 39

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investors in their country; developing a bank of ambassadors, i.e. firms that have invested in the location and are used to generate FDI from their contact pool. In some cases an IPA may have a network of international offices in targeted countries in order to work on attracting investors abroad. These overseas offices also carry out activities that need to be carried out prior and following a visit to the location. Box 1.6. Investment promotion roadshows/missions Name of service

INVESTMENT PROMOTION ROADSHOWS/MISSIONS

Target audience

Potential investors in the target country.

Description

In inward investment mission is an international visit by the IPA usually supported by government officials and includes businesspeople in target countries for the purpose of attracting FDI and making potential investors about the location. Essentially, a roadshow is the same but implies visits to multiple target countries and cities within a single trip.

Typical layout

A typical inward investment mission would look as follows noting that a roadshow would simply repeat the same format in multiple target cities and countries: Day 1: Arrival, meeting embassy staff and key government officials. Day 2: morning and afternoon presentations to members of chambers of commerce and business groups about the benefits of investing and investment opportunities. To the business groups the presentations are more sector-specific depending on the particular industry association. Evening reception for key businesses, high net worth individuals, family offices and investment funds to

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INVESTMENT PROMOTION ROADSHOWS/MISSIONS a seminar with dinner/reception. The seminar usually takes the form of: •

Formal session: welcome address, speech by the ambassador and a keynote address.

•

Business and economic environment.

•

Establishing a business, the cost comparison, market- based advantages and the financial benefits.

•

Building a customer base and regional expansion.

•

Overview of invest areas.

•

Success stories.

The seminar typically lasts for 90 to 110 minutes and is usually followed by one-to-one interaction with staff from the IPA. Day 3: meetings with key government officials and departure. How to carry it out Intended outcomes

To increase the awareness of the location in the target countries/cities and to build a level of confidence through knowledge.

Examples

http://www.investinitaly.com/en/global-roadshow/ http://publications.gov.sk.ca/details.cfm?p=59284

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Box 1.7. Building a bank of influencers/advisors Name of service

BUILDING A BANK OF INFLUENCERS/ADVISERS

Target audience

Influencers such as site selectors, lawyers, accountants, trustee and business-set-up companies.

Description

Investors usually seek the advice of a third-party when selecting an overseas location. The role of the advisor is to carry out initial research on the best locations that meet the medium- to long-term business needs. Therefore, IPAs can gain an advantage through working with such influencers or advisors by ensuring that they have all the correct and up to date information. In some cases IPAs pay influencers an introduction fee for all successful inward investment based on a particular criteria, i.e. its Greenfield, in particular focus sectors, employs a certain number of workers that are unskilled or in particular age groups.

Typical layout

The typical layout for such an initiative is to have advisor information sessions which can either be on a one-to-one basis or a seminar. The purpose of such sessions is to ensure that advisors have the correct information and are encouraged to introduce more and more investors. Usually, an IPA will sign a Memorandum of Understanding or even an Introduction Agreement.

How to carry it out

To identify the advisors that are currently being used by investors into the location and to upgrade their knowledge and incentives to introduce a greater number of investors. Some IPAs have a strategy of recruiting and working with the top law firms, accountants, site selectors and business set up specialists in the target country or sector.

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Name of service

BUILDING A BANK OF INFLUENCERS/ADVISERS

Intended outcomes

To have a bank of advisors or influencers who have direct access to the investors and can be used to encourage them to at least consider the location if not actually make an investment.

Box 1.8. Conferences and investment forums Name of service

CONFERENCES AND INVESTMENT FORUMS

Target audience

Potential investors, high net worth individuals and family offices.

Description

Usually a one-day event that brings together speakers talking about the location, its benefits and the investment opportunities.

Typical layout

A typical layout for a one-day session includes speeches, presentations and panel sessions with the following format: •

Registration & refreshments.

•

Keynote address.

•

Economic, social and political overview.

•

The financial and non-financial benefits of investing in the location.

•

Regulatory and taxation.

•

Investment in focus sectors.

•

Closing summary.

The forum has various breaks, lunch and closing reception to allow attendees to meet and interact with staff from the IPA.

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Name of service

CONFERENCES AND INVESTMENT FORUMS

How to carry it out

These events are usually carried out by a third-party that has an established database of attendees that meet the needs of the IPA.

Intended outcomes

To make potential investors in the target country aware of the location and its investment credentials. To build a data base of potential investors that can be contacted either directly or through in-country advisors/influencers.

Examples

http://rusinvestforum.org/en/ http://www.iiconferences.com/adif/agenda.html http://www.iktissadevents.com/events/EIF/1

Box 1.9. Investor sight meetings Name of service

INVESTOR SIGHT MEETINGS

Target audience

Potential investors, high net worth individuals and family offices.

Description

To invite the most senior decision-makers within companies, family offices and investment funds to visit the location and experience the benefits that it offers. In some ways this is similar to a media visit but on a one-to-one basis and at a higher level.

Typical Layout

This is a very tailor-made approach and seeks to meet the individual needs of each potential investor. A typical two-day trip will include meetings with sector specialists, visits to free zones if appropriate as well as some aspects of cultural highlights and sightseeing.

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Name of service

INVESTOR SIGHT MEETINGS

How to carry it out

The first step is to identify the organizations that should be invited and then the key decision-makers. Some IPAs follow a more generic strategy in that they use either the Forbes list of the top 1,000 companies or the largest companies in the focus sectors. In this way the IPA then seeks to understand the global strategy of the company and rank them by those that are seeking to invest aboard in the short run. Based on this ranking the decision-makers are identified and invited to visit the location. Some IPAs provide an over-the-top experience to high value investors so that they leave with the most favorable experience and impression of the location.

Intended outcomes

To encourage key companies in the sector or even the largest companies to establish in the location. It is assumed that once the largest and well-known companies enter a location others will follow more easily.

Box 1.10. Overseas investment promotion office Name of service

OVERSEAS INVESTMENT PROMOTION OFFICE

Target audience

Potential investors, high net worth individuals and family offices.

Description

To have an office in key target countries to conduct regular meetings with potential investors and carry out followup activities.

Typical layout

There are three types of overseas investment offices of which the first is within an embassy. The second is to have an independent office outside the embassy. The third

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OVERSEAS INVESTMENT PROMOTION OFFICE method is to use an outsource company to manage the overseas office.

How to carry it out

First the IPA needs to understand whether it needs overseas offices and if so what functions they will carry out as well as whether they will be within the embassy, independent office or outsourced. The second step is to identify the countries and roll out a plan. Third, to monitor the performance of the overseas offices to ensure that they are generating sufficient investment flows.

Intended outcomes

To increase the level of investment flows into the country and to ensure that they are targeted into the focus sectors.

Examples

https://www.industry.nsw.gov.au/contact-us/international-network http://www.mida.gov.my/home/mida-worldwide-network/posts/

I.5.4. Investment Facilitation Services The investment facilitation includes servicing investors through the provision of consultancy services; assistance with registrations and permits; assistance with real estate; conducting site visits and developing an incentive package.

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Box 1.11. Business set up facilitation Name of service

BUSINESS SET UP FACILITATION

Target audience

Investors seeking to invest in the location.

Description

To assist inward investors with dealing with all the processes involved in registering a company and obtaining the necessary approvals. Some IPAs have an extensive level of service whereby the investor lodges all the necessary documents and the IPA obtains the necessary approvals and registrations. In some cases the IPA also connects the investor with real estate specialists, HR consultants, accountants and lawyers so that a seamless service between all the third-party agents is provided in the initial stages through the IPA.

Typical layout

The level of service offered by the IPA depends on the resources it has available. In the case of resource-constrained IPAs investments below a certain level are encouraged to use an approved business set up agent that can carry out all the services described above. For larger and more complicated investments the IPA provides the service and connectivity to any government official as may be required.

How to carry it out

The first step is to decide if any type of market segmentation will be used and, if so, to develop the basis. Second, to plan which services will be offered and if market segmentation is used then for each level. The IPA may wish to have a more dedicated and tailor-made service for high value investments.

Intended outcomes

To make it as easy and convenient for the investor to establish their business in the location.

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Box 1.12. One-stop shop/window/center Name of service

ONE-STOP SHOP / WINDOW / CENTER

Target audience

Investors seeking to invest in the location.

Description

There are three common variations of this. The first and perhaps the oldest is the one-stop shop whereby all the necessary government departments from whom approvals and certifications are required are located in one facility. This assists the investor from having to visit each authority individually. The one-stop window is an improvement on the one-stop shop because the investor lodges the necessary documents with one official who coordinates with all the necessary authorities within the facility. The third and most innovative is to lodge all the necessary documents via a website or smartphone and to receive the response (i.e. the business registration certificate and approvals) through the same medium. This avoids the need to visit any office and can be carried out from anywhere in the world.

Typical layout

As stated above there are three main versions, i.e. a onestop shop, window or online/smartphone system.

How to carry it out

For IPAs that do not have a one-stop shop that would be the first step. For IPAs with a one-stop shop the next stage would be to move toward a window or even an online/smartphone version.

Intended outcomes

To ease the process of establishing a business in the location and obtain the necessary approvals. Also, to reduce the time taken to obtain the registration and approvals. Ideally, the changes should allow the location to

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ONE-STOP SHOP / WINDOW / CENTER achieve a higher ranking in the World Bank Ease of Doing Business.

I.5.5. Aftercare Services The aftercare is the provision of post-investment services which include assistance with administrative procedures; assistance with exporting; sourcing labor; providing support for expansion; connecting with local customers, suppliers and partners; ensuring a high level of investor satisfaction through resolving post-investment obstacles and general problem-solving. Box 1.13. Post-investment meetings Name of service

POST-INVESTMENT MEETINGS

Target audience

Investors that have established a business in the location.

Description

To meet the investors that have established in the location and to understand their needs and challenges so as to assist them. The rationale is that it is easier to increase the investment from existing investors than to attract new investment. Therefore, aftercare services are an important tool to retain and grow the investment.

Typical Layout

Typically, an IPA should meet new investors more frequently in the initial post-investment stage and then less so. Some IPAs look at the size and level of complexity of the operation to devise a system as to how many meetings to conduct. Typically, for a complex and large business the meetings should be monthly for the first year

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POST-INVESTMENT MEETINGS moving to quarterly in the second year and then thereafter each six months. For smaller and less complex investments it can be quarterly in the first post-investment year moving to every six months thereafter.

How to carry it out

Typically, IPAs have an Aftercare Section or department that deals with arranging and managing such meetings. In larger IPAs the Aftercare Section is divided either by sector or region and each company is appointed an Aftercare Manager.

Intended Outcomes

To support the retention and growth of the investment.

Examples

http://www.czechinvest.org/en

Box 1.14. Providing support for export Name of service

PROVIDING SUPPORT FOR EXPORT

Target audience

Existing investors.

Description

To assist existing investors to export from the location so as to grow their business and therefore increase the investment. Usually, an IPA will link the investment to a trade promotion organization and support its activities. In some cases the IPA may actually be part of a trade promotion organization in which case the part of the aftercare services is to ensure that export promotion assistance is provided.

Typical layout

The typical format is to refer the investment to the trade promotion organization within the location and encourage it to participate in exhibitions and trade missions.

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Name of service

PROVIDING SUPPORT FOR EXPORT

How to carry it out

Cross referral to the trade promotion organization.

Intended outcomes

To increase the export-related activities of the investment.

Box 1.15. Connecting to local suppliers / labor / educational institutes Name of service

CONNECTING TO LOCAL SUPPLIERS / LABOR / EDUCATIONAL INSTITUTES

Target audience

Existing investors.

Description

To assist the investment as follows: •

Assisting the investment to obtain additional incentives.

•

Linking to local firms so that they can become approved suppliers.

•

Providing support in recruiting staff.

•

Promoting cooperation with local universities and vocational colleges.

•

Assisting with government procurement programs.

•

Assisting to obtain private sector and/or bank financing.

•

Linking the management to government officials so that any issues can be resolved quickly.

Typical layout

IPAs tend to offer these services either on a company-bycompany basis or they have a program for each one of the above initiatives. For instance, linking local firms to

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CONNECTING TO LOCAL SUPPLIERS / LABOR / EDUCATIONAL INSTITUTES investors can be carried out through establishing a database of all firms and their inputs as well as outputs.

How to carry it out

There is no single manner in which these services can be offered but the most common is to develop a program for each of the above initiatives and then to promote it to the local parties and investors.

Intended outcomes

To ensure that the investment becomes integrated into the local economy and community.

Examples

http://www.czechinvest.org/en

I.5.6. Advocacy Services The advocacy services include policy drafting; engaging in lobbying activities with appropriate government authorities; coordinating with parliamentarians to assist in bringing about a more conducive investment environment and carrying out surveys on investorsâ&#x20AC;&#x2122; perceptions. Box 1.16. Stakeholder meetings Name of service

STAKEHOLDER MEETINGS

Target audience

Existing investors, influencers/advisors, government departments responsible for licensing and approvals, trade promotion organization, financiers and other related parties.

Description

The aim of stakeholder meetings which usually take place annually is to inform the investing community of the latest developments while also obtaining their buy in

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STAKEHOLDER MEETINGS to plans and programs developed by the IPA. At the same time the stakeholder meetings seek to understand the investment environment from the perspective of those “on the ground” so that the IPA can develop new programs and initiatives to deal with the challenges. In some cases the challenges can become issues for the IPA to lobby.

Typical layout

Usually stakeholder meetings take place over 90 minutes to 150 minutes followed by a reception. The first part of the session is taken up by updating the participants of recent developments. Then there is usually a process to understand the concerns of the investment community and if possible to discuss an ideal way to resolve the issues.

How to carry it out

Usually IPAs segregate the investors by size so that smaller firms are able to discuss issues in a larger forum while the larger ones tend to have more exclusive round breakfast meetings with senior officials from the IPA.

Intended outcomes

To ensure that the investment community is fully informed of recent developments and to learn about current challenges and obstacles faced by firms “on the ground”.

Box 1.17. Producing policy papers Name of service

PRODUCING POLICY PAPERS

Target audience

Government policy makers.

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Name of service

PRODUCING POLICY PAPERS

Description

To develop policy papers that are circulated to senior government officials and committees. Essentially there are three different routes that an IPA can follow which are as follows: •

Discussion paper: a study that explains the current problem so as to generate feedback and comment.

•

Background paper: discusses the current challenge/problem and provides possible solutions.

•

Policy paper: this is a more comprehensive study with possible solutions along with their cost and benefits.

Typical layout

A typical policy paper will tend to have the following format: •

Executive summary.

•

Explanation of the problem.

•

The impact of the problem and the current situation.

•

Detailed analysis of the problem with cross country comparisons.

How to carry it out

•

Findings.

•

Possible solutions with their costs and benefits.

•

Proposed solution.

•

Action plan and recommendations.

Usually carried out by the research department supported by representatives from other government departments.

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Name of service

PRODUCING POLICY PAPERS

Intended outcomes

To identify current challenges and either to stimulate discussion or arrive at/propose a solution for change.

SYNTHESIS OF THE UNIT This unit has examined the issues that are relevant for an IPA when it is developing its services catalogue. The unit has discussed some of the internal and external demands that are made on the IPA and impact its choice as well as ability to offer certain services and tools. To complicate matters further there is no such thing as a one-size-fits-all and therefore IPAs have different institutional arrangements in that they are tied to a government department while others are autonomous and others somewhere in between. Furthermore, IPAs cover different geographies and need to meet nation, state or city level strategies that are unique. Despite their differences all IPAs offer basic groups of services, namely Brand image, investment generation, investment facilitation, aftercare and being an advocate. Finally, the unit discussed some of the services that are typically offered under these themes.

Bibliography n BCI (2014). Business Plan for Investment Promotion Agencies in the Baltic Sea

Region. Baltic Development Forum. n Ecorys (2009). Exchange of Good Practice in Foreign Direct Investment Pro-

motion. Retrieved from http://www.waipa.org/wp-content/uploads/2016/ 07/ECORYS-exchange-of-good-practice-in-Foreign-Direct-Investment-promotion_en.pdf.

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n Filippov S. and Guimón, J. (2009). “From Quantity to Quality: Challenges for

Investment Promotion Agencies”. United Nations University Working Paper #2009-057. n Harding, T., & Javorcik, T. (2012). “Investment Promotion and FDI Inflows:

Quality Matters”. Economics Series Working Papers, 612. University of Oxford. Department of Economics. n GDP Global (2015). Investment promotion scenarios. How to best prepare

one’s municipality for attracting investors. GDP Global Workshop Notes. n Miškinis A. and Byrka, M. (2014). The Role of Investment Promotion Agencies

in Attracting Foreign Direct Investment, EKONOMIKA, Vol. 93(4) pp. 41-57. n Pérez, Charlton A. and Davis, N. (2004). Does Investment Promotion Work?

Results from Cross-country Analysis at the Industry Level. Oxford Investment Research, Research Paper Series. n UNCTAD (2008). Evaluating Investment Promotion Agencies. United Nations

Conference on Trade and Development. n Wells L. T. and Wint, A. G. (2000). Marketing a country: promotion as a tool

for attracting foreign investment. Washington, D.C.: Foreign Investment Advisory Service occasional paper, no. FIAS 13.

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UNIT 2 LOCATIONAL AND INSTITUTIONAL EFFICIENCY

Learning Objectives This unit looks at the aspect of locational decision-making from the perspective of the investor. At the end of this unit learners should be able to: n Understand the multinational firmâ&#x20AC;&#x2122;s location decision-making process. n Understand the facilities and services demanded by different sectors. n Be able to conduct a locational benefits assessment. n Become aware of the importance of streamlined administration and regula-

tion to investors.

II.1. Location Decision Selecting a location for an overseas presence is very much based on the multinational firmâ&#x20AC;&#x2122;s strategy. Nevertheless, certain aspects are common which can be classified into three groups, namely cost-saving strategies, use of technology and the need to use people more effectively as illustrated in figure 2. The cost-saving aspects arise from the need to find new efficiencies which could be from outsourcing, moving production to low-cost production locations, etc. The availability of technology allows a

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firm to have multiple locations while ensuring connectivity. In fact, it was the availability of technology such as VOIP that led to the rise of outsourced call centers in many countries. Then one has the need to use people effectively which implies utilizing talent in other countries. Figure 2. Impact of change in business models on location decisions

Source BCI (2014)

Once a company decides to invest abroad, certain key characteristics impact the location decision which are listed below: n Economic stability: companies like to invest in locations with economic

stability, which includes low inflation and interest, exchange rate stability, etc. n Legal framework: investors prefer locations where there is a respect for the

legal system rather than arbitrary decisions or free from the intervention of the government. n Incentives: there is sufficient evidence to show that incentives are impor-

tant and influence the location. n Supportive government departments: investors positively value locations

where the governments are supportive and actively assist investors in the provision of information, advice and generally resolving obstacles and problems. 58

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n Political stability: political stability is very important as certain geographies

have become unstable. n The taxation system: academic evidence shows that there is a close rela-

tionship between the tax levels and FDI. Investors positively value locations that have low taxation but also where avoidance of double taxation treaties have been signed between the parent and host country. n Clusters: investors like to see a critical mass of companies in the same sector

so that they can be connected to suppliers and customers. As such, clusters are important to foreign investors. n Availability of skilled labor: investors look for locations that have a ready and

large supply of skilled labor. n ICT: in the modern business world ICT readiness and availability has become

a pre-requisite. n Logistics and transportation: investors need to be able to transport their

goods across national and international boundaries for which appropriate infrastructure needs to be in place as well as third-party logistics firms. n Quality of life: investors like locations that have a decent quality of life as it

allows them to recruit staff more easily as well as transfer people from the parent office. Although it is not a direct factor it does have a very important indirect impact. Figure 2.1 illustrates the results from A. T. Kearneyâ&#x20AC;&#x2122;s survey (2016) which shows the factors that companies consider to be important in deciding on a location. The most important factors are considered to be the size of the domestic market, cost of labor and an efficient regulatory system free from corruption.

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Figure 2.1 Perceived important factors for location decisions

Source: A. T. Kearney (2016)

II.2. Sector Preferences for Locations Figure 2.1 shows that the domestic market is important however this hides the fact that only market-seeking inward investment is interested in the size of the local market. Resource-seeking investment for example has very different objectives to efficiency-seeking investment. Box 2 illustrates the different sectors along with their key requirements. It is apparent from box 2 that each sector has very different requirements, which makes it difficult for an IPA to target all the industries. Box 2. Location determinants for inward investment projects based on sector GROUPINGS OF

KEY COMMON REQUIREMENTS

ECONOMIC ACTIVITIES 1. Emerging industries:

• High propensity to cluster.

• Media/multi-media.

• Access to leading technologies and an innovative envi-

• Biotechnology.

ronment.

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KEY COMMON REQUIREMENTS

ECONOMIC ACTIVITIES • Nanotechnology.

• Presence of universities, researchers and skilled labor. • Susceptible to catalyst initiatives and government support. • Prestige locations in a quality environment • Excellent infrastructure and accessibility to customers/markets.

2. High tech manufacturing:

• Existing skill base vital.

• Semiconductors.

• Access to large and growing markets and key customers.

•Telecommunications

• Track record in attracting high tech manufacturing.

equipment.

• Sensitive to differences in operating costs and tax/incen-

• Pharmaceuticals and fine tives. chemicals.

• High quality communications.

• Advanced materials.

• Fast track, purpose-built premises with full government

• Aerospace.

support.

3. High level services:

• Appropriate skills availability.

• Information technology • Rapid market access. (IT) services and software.

• Propensity to cluster in IT and software, HQ and R&D.

• Headquarters (HQ) func- • Low operating costs becoming increasingly important. tions.

• Access to advanced technologies and university research

• Research and develop- for R&D. ment (R&D).

• High quality facilities in a prestige location for HQ func-

• Financial and business tions. services.

• Wide variety of countries, but concentration within coun-

• Telecommunications ser- tries. vices. • Publishing. 4. Mainstream manufactur- • Quality market, labor and supplier access. ing:

• Operational cost sensitivity.

• Electronics and office ma- • Increasing requirement for an educated and skilled workchines.

force.

• Plastics and rubber.

• High quality infrastructure and logistics is essential.

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KEY COMMON REQUIREMENTS

ECONOMIC ACTIVITIES • Automotive assembly and • Prefer high quality locations with a good track record in components.

industry.

• Medical devices.

• Favorable regulations, governing labor laws, operations,

• Textiles and food pro- etc. cessing.

• Can be sensitive to grants and other incentives.

• Wood and paper prod- • Shift to high quality emerging markets with large maructs/packaging.

kets.

• Mechanical engineering. 5. Office services:

• Appropriate labor availability vital.

• Call centers and shared • Increasingly cost-sensitive. service centers.

• Multi-lingual language skills often critical.

• Back office.

• Access to customer (internal as well as external) can be

• Government agencies.

important. • Good quality information and communications technology (ICT) and physical infrastructure is also a requirement. • Prestige locations not essential; can be grants-sensitive. • Can be influenced by IPA initiatives to support the sector.

6. General services:

• Market (customer) access critical.

• Transport, logistics and • Infrastructure and logistics also critical for distribution acdistribution.

tivities.

• Printing.

• Skilled labor availability is important.

• Healthcare support ser- • Cost sensitive. vices.

• Purpose-built facilities and large sites is also important.

• Trade centers/building services, etc. 7. Leisure and tourism:

• Market (customer) access and growth potential is critical.

• Hotels.

• Labor availability is also a consideration, including lan-

• Attractions.

guage skills. • Regulations governing construction and operation. • Infrastructure quality and logistics.

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KEY COMMON REQUIREMENTS

ECONOMIC ACTIVITIES • Quality and attractiveness of the environment (rural or urban). 8. Processing industries:

• Accessibility to large growth markets and key customers.

• Paper and pulp.

• Adjacent to natural resources.

• Mineral products (build- • Good quality road, rail and port infrastructure and logising materials), etc.

tics.

• Forestry products.

• Low operating costs.

• Major foodstuffs.

• Appropriate labor force.

• Oils processing.

• Presence of related and supporting industries.

• Extractive industries

• Pro-business regulations.

• Steel and aluminum.

• Substantial and reliable water and power requirement.

Sources: MCI (2009)

II.3. Investment Location Decision Process Although every investment decision case is different based on each company’s strategy one can nevertheless develop a generalized roadmap that companies undertake when deciding on a location as illustrated in figure 2.2. The starting point is the company strategy and what it seeks to achieve from the overseas presence. Then the company can appoint a broker or establish an internal team to develop the project assumptions and a long list of countries. There is no rule as to how long the long list should be and it depends on the sector. The long list is the starting point and the internal team or advisors tend to collect the appropriate data for each location. During the data collection period the internal team/advisors may contact the IPAs to confirm the data and obtain missing information. Thereafter, the internal team or advisors will draw up a short list and rank the locations. This is followed by carrying out negotiations and conducting due diligence. The final stage is to make the investment.

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Figure 2.2. Location decision-making process

II.4. Accessing the Locational Benefits There are a number of ways that an IPA can conduct a locational analysis and three of the most common methods are the Kano model, Porterâ&#x20AC;&#x2122;s model and SWOT analysis, which are discussed below.

II.4.1. The Kano Model The Kano model is a manner of incorporating the product attributes with customer satisfaction leading to four categories, namely: attractive quality, one-dimensional quality, indifferent quality and must-be quality. Attractive quality These aspects are considered to be attractive by the investor and lead to increased satisfaction when present. However, if they are not present it does not lead to any dissatisfaction.

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One-dimensional quality These are perhaps the most important attributes as they result in satisfaction when present and dissatisfaction when absent. Due to their importance these attributes are the ones that locations generally compete for. Indifferent quality These attributes are where the investor is ambivalent and more or less makes no difference to the satisfaction. Must-be quality These attributes are the ones that have to be present to the extent that it is taken for granted that they will be included. The interesting aspect here is that if they are done well they do not increase the satisfaction of the investor however if not carried out properly they lead to considerable dissatisfaction. Sometimes these attributes are referred to as â&#x20AC;&#x153;must-beâ&#x20AC;? features. Figure 2.3 illustrates the attributes for a fictional location taking the Kano model using measures ranging from zero to four. The vertical axis of the graph shows the attributes which are present and the horizontal axis where they are absent. The size of the bubble represents importance score. The attributes can be connected to form constellations in order to understand relationships.

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Figure 2.3. Constellations of importance

II.4.2. Porter’s Diamond Model In understanding how these benefits are leveraged, Porter (1990) explained the effects of the local business environment on competition through four interrelated factors in his “Diamond Model”. The four influences in the Diamond Model as shown in figure 2.4 are: 1. Factor conditions representing the cost and quality of inputs such as natural resources, skilled labor, infrastructure and technology-related advancements on which local firms seek to compete. 2. Demand conditions or the sophistication of local consumers in terms of demand for the industry’s products or services. 3. Firm strategy and rivalry which include the nature and intensity of local competition, which affects the way firms do business with each other, their employees and the government.

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4. Related and supported industries which represent the local extent and sophistication of suppliers and internationally successful competitors that stimulate cooperation and competitive rivalry. Figure 2.4. Porterâ&#x20AC;&#x2122;s Diamond Model

Source Porter (1990)

II.4.3. SWOT Analysis SWOT refers to the strengths, weaknesses, opportunities, and threats both internally and externally. More specifically, strengths are considered to be locational attributes that give it an advantage over others. Weaknesses are locational attributes that are considered to be at a disadvantage relative to others. Opportunities are aspects that can be capitalized and finally threats are factors that may be an issue in the future.

II.5. Developing Streamlined Regulatory Environment Almost all countries have three sets of procedures that apply to foreign investors, namely, establishing a corporate presence, real estate factors and operational matters. In the case of establishing a corporate presence the regulatory procedures relate to entry of the foreign investor into the country, company registration, any specific permits required for certain types of business, tax and sales or value added tax 67

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registration, visas and residence permits for staff, anti-money laundering checks, registration for social security and in some countries foreign exchange registration for foreign investment. Then the real estate procedures include the registration of a real estate purchase or even lease, land or building use permits, environmental permits, site inspections, and utility connections. The operational procedures relate to submitting financial statements for tax purposes, fire, health and safety inspections and labor issues. One cannot argue that these procedures are not important or necessary, however, the problem is the manner and the time taken to obtain the permits and approvals that is negatively viewed by foreign investors. Unnecessary and highly bureaucratic regulatory processes reduce a firmâ&#x20AC;&#x2122;s global competitiveness and deter inward investment. The World Bank Ease of Doing Business Report (2016) shows that for the same type of permit or approval the number of steps required and the days taken can vary quite considerably between countries. For instance, to start up a business can be as quick as two days and as long as up to 152 days. This huge difference raises two questions. First, why are all countries not at or close to the two-days level? Second, why is there a difference in the number of steps required to set up a business between countries? Some commentators have argued that part of the problem has to do with the efficiency of the administrative agencies and partly the fact that complex and redundant procedures still exist and result in bottlenecks in the system.

II.6. Organizational and Administrative Efficiency One of the important aspects of figure 2.2 is that a potential investor will make contact with the IPA. Therefore, not only the initial contact but the follow-on interactions provide the investor with either a positive or negative impression of the country, whereby one of the contributory factors is the organizational efficiency of the IPA. Essentially, organizational efficiency is how effective an IPA is at achieving its outcomes. As such organizational efficiency embodies aspects of the leadership, the

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staff, systems and processes, organizational structure etc., achieving organization efficiency is not a one-time activity but a continuous process that seeks to examine the people, processes, and the structure which realigns them through improvements. The realignment takes place in four key areas. First, decision-making so that leaders and managers are able to make decisions faster and more effectively. This also includes delegating responsibility to staff lower down on the organisational structure. Second, efficient organisations also need to change and learn new ways of doing things. Third, organizational effectiveness is the outcome of the manner in which groups work. Finally, the process whereby learnings can be implemented within the organization.

II.7. One-Stop Shop / Window The discussion above argues that certain level of regulation and administrative controls are necessary, however, the question is how can the necessary permits and registrations be obtained efficiently? One solution that some IPAs have adopted is to establish One-Stop Shops (OSS) whereby an investor deals with just one entity in order to obtain all the approvals and permits rather can navigating the maze that typically exists. Of course, this is the ideal state and very few IPAs have been able to implement such an OSS due to resistance and fear from various government agencies and ministries that their authority and power would diminish. The more common example is to have a single location where all the necessary government departments and approval-awarding bodies are based. Governments around the world have adopted various versions of the OSS. The most common are as follows: n One-Stop Shop whereby foreign investors visit the different regulatory and

permit-awarding bodies under one location as explained above. n One-Service Window (OSW) whereby foreign investors apply at a single

point and the application is routed to the appropriate government department and then returned at the same location.

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The aim of the OSS is to serve as a single point for foreign investors in order to obtain all their permits and approvals. In doing so the OSS also increases the speed of transaction and the transparency. In some cases the OSS can also screen the investors as well as the projects so as to provide fast and initial feedback to the investors. The OSS in some cases also has the ability to assist in allocating land for key projects. The benefits of the OSS are as follows: n Countries with an OSS are considered to be investor-friendly. n Allows the IPA to monitor the investment regulatory process and propose

improvements. n Provides investors with predictable timelines for licenses, permits and ap-

provals. n Provides investors with a single point to obtain their permits and approvals.

SYNTHESIS OF THE UNIT This unit has taken the perspective of a multinational firm seeking to establish an overseas presence. As such, the unit has discussed the locational decision-making process that takes place. The unit has also explained that certain sectors have a preference for particular facilities. Therefore, it is important for an IPA to conduct a locational benefits analysis. Three very different methods of conducting a locational benefits analysis have been discussed. The unit has argued that in the modern context investors prefer OSS or OSW. The efficiency and benefits of OSS and OSW outweighs their cost and promotes a more investment-friendly environment.

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Bibliography n Kearney, A. T. (2016). Foreign Investment Confidence Index. n BCI (2014). Business Plan for Investment Promotion Agencies in the Baltic Sea

Region. Baltic Development Forum. n Coy, R. and Cormican, K. (2013). Determinants of Foreign Direct Investment:

An Analysis of Japanese Investment in Ireland Using the Kano Model. IEEE International Technology Management Conference & 19th ICE Conference. The Hague, The Netherlands, 2013-06-24–2013-06-25. n Kano N., Seraku, N., Takahashi, F. and Tsuji, S. (April 1984). "Attractive Qual-

ity and Must-be Quality". Journal of the Japanese Society for Quality Control (in Japanese). 14 (2): pp. 39–48. n MCI (2009). Handbook for Promoting Foreign Direct Investment in Medium-

Size, Low-Budget Cities in Emerging Markets. Millennium Cities Initiative, Vale Columbia Center on Sustainable International Investment. n Porter, M. E. (1990). The Competitive Advantage of Nations. New York: Free

Press. n Porter, M. E. (1998). Clusters and the New Economics of Competition. Harvard

Business Review. November-December, pp. 77-90. n Porter, M. E. (2008). “The Five Competitive Forces That Shape Strategy”.

Special Issue on HBS Centennial. Harvard Business Review 86, no. 1 (January).

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UNIT 3 MARKET SEGMENTATION OF INVESTORS

Learning Objectives IPAs are faced with the decision of serving all investors or to divide and segment their investor pool. This unit explores this question in greater detail, after which learners should be able to: n Appreciate the importance of market segmentation and understand its dis-

advantages. n Be able to develop a basis to segment the investor pool for their own inves-

tors and identify common characteristics. n Develop a market segmentation strategy for their own IPA. n Understand the importance of a red carpet service and how it can be deliv-

ered.

III.1. Market Segmentation In the private sector, companies seeking to increase their market share tend to add value to their consumers through dividing the potential customer base into subgroups which are commonly known as segments. The segments have a common set

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of characteristics such as a common need, demographic attribute, behavior, psychological profile etc. The objective of market segmentation is to identify potential customers with the most profitable and sustainable business proposition and to serve them in a more bespoke manner. This idea is now also used by IPAs that realize that they cannot possibly target the hundreds of thousands of multinational firms that form the potential market. More importantly, the discussion in unit 1 and specifically figure 1.6 argues that not all inward investment is equally beneficial to the host country. Therefore, IPAs need to target the short-term quick wins followed by the path of firms that leads them to the good-for-economy FDI. This process itself is a form of market segmentation as from the possible universe of inward investment the IPA is focusing on sectors that add value to the host economy. Although figure 1.6 in unit 1 explains the principle of targeting good-for-the-economy sectors there nevertheless needs to be a marketing program that attracts this pool of inward investment into the host economy. Therefore, market segmentation is not only limited to identifying the most lucrative segment or at least that group of investors which is aligned to the national strategy of the host economy within the pool of inward investment but also to understand their attributes. This will allow the IPA to enhance its marketing strategy through a process known as Segmentationâ&#x20AC;&#x201C;Targetingâ&#x20AC;&#x201C;Positioning (STP) which is illustrated in figure 3.1. The STP framework starts with developing the market segmentation bases, targeting one or more segments and then positioning the location so that it appeals to each segment but in a different manner. In other words, a location can be positioned to have the leading clusters which target inward investment seeking local connectivity and at the same time it can target FDI looking for skilled and available labor in a different manner. Therefore, the positioning of the location should resonate with the targeted market segment.

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Figure 3.1. The STP approach

Market segmentation is a very useful strategy that IPAs can use to better target their desired inward investment and position their location to potential investors. However, it is not without its critics who point out that its effectiveness is not proven across the IPAs that use such a strategy and is no better than mass marketing at building brands. It is argued that all investors utilize the same essential services and therefore it makes little sense creating narrow groups. Market segmentation can create a dual class of service whereby those in the segment are serviced while others are not. This creates considerable negative feeling among the non-serviced group of investors. Market segments need to be regularly reviewed to make sure that they are relevant. Finally, market segments are not static and structural change takes place leading to segment creeping.

III.2. How to Segment Investors Weinstein (2004) argues that there are essentially four choices for a firm as shown in figure 3.2. The first option is to offer an undifferentiated service and ignore segmentation. Second, the company can identify one segment and follow a niche strategy which implies to ignore the bulk of the market. Third, the company can identify

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two or more segments and offer a differentiated product or service to meet their needs. Finally, the company can develop many segments and offer customized or almost customized products and services. An IPA has similar choices and needs to decide whether it wishes to follow a market segmentation strategy and if so how many segments to target.

Figure 3.2. Strategic choices for segmentation Number of segments

Segmentation strategy

Comments

Zero

Undifferentiated strategy Mass marketing with no segmentation.

One

Focus strategy

To develop a niche marketing strategy focusing on a small and well-defined target market.

Two or more

Differentiated strategy

To develop multiple segments and to focus efforts on meeting their needs.

Many

Hyper-segmentation

To develop a one-to-one customized service.

Source: Weinstein (2004)

Before an IPA can develop a market segmentation strategy it needs to assess the following factors: n The level of resources available and whether they will be better utilized

using a market segmentation strategy or not. n Can the IPAâ&#x20AC;&#x2122;s services be differentiated to meet the needs of each investor

group and if so how.

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n Can the product life cycle of the IPA service be extended through market

segmentation and can new services be tested using the same strategy. n What are the characteristics of the investor pool and does it blend well to

market segmentation. n What are the other IPAs doing and what are the lessons that can be learnt

from their implementation of a segmented strategy. The first step toward developing a market segmentation strategy is to understand the total potential market. The second step is to identify traits of similarity, in other words, a process that allows the IPA to form segments. There are a number of different ways or bases that an IPA can use to develop segments. Some of the most common methods of creating segments are listed below: n Sector: this is a common and convenient method for IPAs. The basis of using

sectors is that IPAs appreciate that they have certain locational benefits which makes them more attractive to particular industries as shown in figure 2.3. n Assessing investor needs: the Kano model in figure 2.5 illustrates factors

that investors need and value. Based on the locationâ&#x20AC;&#x2122;s ability to meet the needs it can segment the investor pool. n Country of origin of investor: some IPAs use the country of origin of invest-

ment to segment because of bilateral investment treaties, double taxation agreements, friendly relations, history of investment from the country etc. n Function or value chain segment: this is based on a particular strategy that

the location is seeking to achieve, such as to focus on logistics or manufacturing, etc. n Diaspora: some IPAs are aware that their nationals or descendants of natio-

nals are spread across the world. As such, the diaspora can be an effective FDI pool and they benefit from understanding the language, culture, norms of doing business etc. In fact, the diaspora are an easy segment to utilize in attracting inward investment.

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n Value of investment: some IPAs target certain size of investments and use

this as a base to develop segments. n Size of company: a strategy used by a few IPAs is to target only the Fortune

100, or 500, or 1,000 companies. Here the IPA is looking for trophy-multinationals.

III.3. The Red Carpet Concept for Investors Investor servicing is an important part for all IPAs. However, the problem is not only to deliver services to investors but to design them so that they embody the best aspects and hence ease the process of conversion. In other words, to develop a red carpet service for investors which not only meets their tangible goals but also the psychological ones. Red carpet services have been used in the private sector most notably in the gaming sector whereby high value gamblers are invited to the casino, given free meals, taken for excursions all to make sure that they stay longer. In the case of inward investment IPAs invite key investors, offer them a VIP service from the airport and throughout their visit. The intention of such a service is to exceed the investorâ&#x20AC;&#x2122;s expectation and make them inclined to favor the location.

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SYNTHESIS OF THE UNIT This unit has discussed the idea that not all investors are alike and that an IPA may wish to carry out some form of market segmentation. That is to divide their potential investor pool into one or more groups based on common characteristics. The characteristic used to segment the investor pool depends on the strategy of the IPA and the national policy. Some IPAs use sector while others the country of origin of investor. There is no golden rule as to which characteristic to use, nevertheless, the unit has listed common examples. Finally, the unit has discussed the red carpet service that some IPAs offer to their premier investor group. Although there may not be any tangible difference in the service between a normal and a red carpet the extra attention provided in the latter is supposed to resonate the psychological aspects and align the investor to establish in the location.

Bibliography n Armstrong G. and Kotler, Philip (2014). Principles of Marketing, Prentice Hall

International. n Kotler, Philip (1999). Kotler on Marketing: How to create, win and dominate

markets. New York, United States: The Free Press. n Rivas M. (2014). “What Target Groups for the City? Segmentation in Today’s

City Marketing”. Reporting note on the Urbact-Eurocities thematic workshop. Zaragoza, pp. 22-24. October 2014, URBACT CityLogo. n Weinstein, A. (2004). Market Segmentation Handbook: Strategic Targeting

for Business and Technology Firms. Third edition. Haworth Press.

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UNIT 4 INCENTIVES

Learning Objectives It is common for IPAs to offer incentives and therefore this unit discusses this topic along with the criteria that should be adopted and the cost-benefit analysis that is normally carried out. At the end of this unit the learners should be able to: n Understand the various types of financial and non-financial incentives that

are typically offered by IPAs. n Develop a basis for criteria setting for their own IPA when awarding an in-

centive. n Be able to conduct a cost benefit analysis.

IV.1. What Are Incentives? An incentive is any form of inducement either financial or otherwise used in order to attract inward investment. The question is why should incentives be offered to inward investment? The argument is that most inward investment is not reliant on any particular location and can move anyway. Therefore, what differentiates one location from another is the ease of doing business and the relative cost. IPAs offer incentives to readjust the cost so as to make the location competitive in the global or regional arena. From an investorâ&#x20AC;&#x2122;s viewpoint incentives are seen as a compensation for the 79

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costs incurred for the difficulties of doing business in the location, such as the level of infrastructure, insecurity, etc. In the absence of these incentives investors would not normally consider the location. From the governmentâ&#x20AC;&#x2122;s perspective incentives attract inward investment to areas that require employment opportunities and the problems that are associated with this such as education, health, living standards etc. Also, governments consider some types of incentives such as providing training facilities to benefit the economy and not just the investor. Therefore, incentives need not be seen as detrimental and can be considered as a form of government investment that will yield a positive return.

IV.2. What Type of Incentives Are Provided? Vale Columbia Center (2013) lists four broad groups of financial and non-financial incentives which are: 1. Fiscal/tax incentives. These are incentives that lead to a financial payment in the form of the following: n Exemptions: income excluded from the tax base. n Allowances: amounts deducted from gross taxable income. n Credits: amounts deducted from tax liability. n Rate relief: a reduced rate of tax applied to a class of taxpayers or activities. n Tax deferrals: relief that takes the form of delay in paying tax (for example,

accelerated depreciation). n Duty exemptions: duty not collected on imports that in the usual course

would be collected. n VAT exemptions/Zero-rating: VAT not collected either on imports/produc-

tion or value added.

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2. Financing Incentives. These are incentives which although financial in nature relate to the financing aspects of an investor and include the following: n General financing incentives: cash grants on proof of start-up, public sector

equity participation, soft loans, interest subsidies, loan guarantees. n Land and infrastructure incentives: public land or buildings sold to investors

at below market values, infrastructure provision such as roads, railways, harbors, reduced rates on public utilities (e.g. electricity, water) and transportation. n Training and employment incentives: job training subsidies, wage subsidies,

exemptions from social security contributions. n R&D incentives: subsidies supporting R&D and innovation. n Regulatory incentives: exemptions from environmental regulations. n Set-up assistance and aftercare: preferential treatment/streamlined admi-

nistrative processing, administrative and consulting assistance, relocation and expatriation support. 3. Regulatory incentives. These are incentives that allow the inward investor to be exempt from some aspect of the regulatory or other type of requirement. 4. Technical and business support incentives. These incentives relate to the provision of information and investment facilitation so that the most complex of inward investment can be established with the least inconvenience. Source: Vale Columbia Center, 2013

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IV.3. Awarding Incentives to an Investor Every incentive whether financial or otherwise has a monetary value and hence there needs to be a criteria established by the IPA for allocating incentives to investors. There are various ways in which a criteria can be developed but the most common are based on the value of the capital investment and employment opportunities. IPAs prefer these criteria because they are objective and easy to measure. Also, the incentives provided can encourage investors to increase the size of their investment and create more employment opportunities especially if offered as a percentage of the capital investment or a grant is given per full-time job created. The other forms of criteria examine the strategic nature of the inward investment and make it available only to investors in key industries. IPAs have realized that inward investment can establish a representative office in order to obtain the incentives. To overcome this problem they provide incentives based on the type of presence that is established. Similarly, if R&D is carried out then additional incentives may be offered as is the case if the company carries out exporting activities. There is no clear or golden rule that IPAs can use when providing incentives and it depends on what objective the IPA is seeking to achieve.

IV.4. Carrying a Cost-Benefit Analysis of the Incentive IPAs conduct a cost-benefit analysis (CBA) either before awarding the incentives or at the point of evaluation and monitoring when the information required is clearer. In some cases the IPA may conduct an initial CBA and another one at the point of evaluation. Regardless of when a CBA is carried out its purpose is still the sameâ&#x20AC;&#x201D;to estimate the total financial and non-financial costs along with the benefits of awarding an incentive. In doing so the CBA seeks to understand whether the benefits outweigh the costs and if so by how much. The CBA process allows an IPA to compare two or more investments and decide which one is the most preferable one for the economy.

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The process of conducting a CBA can be broken down into four steps which are as follows: Step 1. Estimate the costs: n Make a list of all monetary costs that will be incurred from the incentive

being awarded to the end of its contractual obligation. n Make a list of all the non-financial costs incurred by the IPA, the society and

stakeholders. This includes environmental, social etc. Step 2. Estimate the benefits: n Make a list of all monetary benefits that will be obtained from the project

during its entire life. n Make a list of all the non-financial benefits received by the IPA, the society

and stakeholders throughout the life of the project and include aspects such as employment, technology transfer, etc. Step 3. Assign monetary values to the costs and benefits: n For financial costs in the short-term the monetary values are obvious and

predictable but in the long run the IPA will need to estimate them. n The non-financial costs need to be estimated both in the short- and long-

run. The problem with estimations is that they are based on the assumptions that are used. Therefore, it is important to carry out research to formulate appropriate assumptions. Step 4. Conduct a comparison of the costs and benefits: n If the costs are greater than the benefits than it may not be advisable to

award the incentive. n If the costs are smaller than the benefits that implies it is worth awarding

the incentive.

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n If the costs and benefits are equal then the wider issues such as the strategic

importance of the project, the need to provide employment, etc. need to be taken into account.

SYNTHESIS OF THE UNIT This unit has examined the issue of an IPA awarding an incentive to an investor. The unit has discussed both financial and non-financial incentives that are commonly offered by IPAs. The unit has also discussed the need for a criteria when awarding an incentive and to review the criteria to ensure that they meet the objectives. Finally, the unit has explained how to conduct a cost-benefit analysis.

Bibliography n Boardman, A., Greenberg, D., Vining, A. and Weimer, D. (2014). Cost-Benefit

Analysis. Fourth Edition. Pearson Publishing. n Vale Columbia Center (2013). â&#x20AC;&#x153;Background Paper for the Eighth Columbia

International Investment Conference on Investment Incentives: The Good, the Bad and the Ugly. Assessing the Costs, Benefits and Options for Policy Reformâ&#x20AC;?. Vale Columbia Center Working Paper.

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UNIT 5 PERFORMANCE MEASUREMENT

Learning Objectives At the end of this unit learners should be able to: n Understand what is meant by performance management and why it is car-

ried out. n Be aware of the common metrics that are used to measure the performance

of IPAs.

V.1. Why Measure the Performance of IPAs? Organizational performance management is an important process which allows for the translation of goals into results. A properly structured performance management system can help the organization understand areas of strength and where it needs to improve so as to develop an effective results-oriented culture. More specifically in the case of IPAs performance measurement helps in the following: a) Allows the IPA to understand which services are generating the outcomes. b) How to allocate resources to different initiatives. c) To understand which investor pool is converted the most. d) Which functions add value to the organization.

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e) What areas are carried out well and which are not. f) What type of interventions to carry out. g) What type of partnerships to establish to increase the efficiency of the organization. The performance measurement process seeks to answer questions which lead to an improvement in the effectiveness and efficiency of the organization.

V.2. The Performance of IPAs? Performance management is usually considered to be an on-going process of increasing the output of organizations through identifying, measuring and developing outcomes by linking each staff memberâ&#x20AC;&#x2122;s tasks to those of the IPAâ&#x20AC;&#x2122;s overall mission and goals. Performance management is considered to be on-going because the process of setting goals and objectives, tracking outcomes and providing feedback takes place each year. Also, performance management needs to ensure that all outcomes are linked to the organizational goals and vision. Having a performance management brings about a number of advantages for an IPA which are as follows: 1. Increased motivation of staff to perform: staff that receive feedback on their performance are likely to be more effective and efficient. 2. Leads to a sense of self-esteem amongst staff: staff that receive feedback regarding their performance feel more valued. 3. Ensure all staff know the organizational goals: if individual performance is linked to organizational goals then everyone is clear about what they have to do and why. 4. Assists organizational change: as the tasks for each employee are linked to the organization goals then if they change so do the former.

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The common disadvantages with a performance management are as follows: 1. Employees may become upset with their feedback: if the performance management is not carried out equitably then employees may become upset and this can negatively impact their future performance. 2. Performance management costs money and takes resources: any management system takes costs and takes up resources in order to establish and maintain. In some cases the benefits may be substantially lower than the costs. 3. Employees can burnout: if the performance management system is ambitious then it can lead to staff burnout. The characteristics of an ideal performance management are as follows: n All tasks and goals for staff need to be aligned with the organizational goals

and vision. n Completeness in that all employees as well as managers up to the CEO need

to be evaluated. Second, functional skills as well as behavioral attitudes need to be included in the analysis. Third, the evaluation should be for the entire period and not for selected weeks or days. Finally, feedback needs to take a SWOT approach whereby the strengths, weaknesses, opportunities for growth and threats to progress are discussed. n A simple and practical system needs to be implemented that has a fine ba-

lance with cost, time and organizational impact. In essence, the benefits of using the system should outweigh the costs. n Reliable data collection: the measures should be fair and free of error so

that two employees with similar performance receive similar scores from two different supervisors.

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V.3. Common Metrics Used to Measure the Performance of IPAs? The most common metrics used by IPAs are the value of FDI inflows, the number of projects, number of jobs created and number of Greenfield projects. The reason for the use of these metrics is that they are widely available by third-party data aggregators. Also, these metrics can be used to compare the performance across IPAs. In addition to this, IPAs can collect a whole host of other metrics based on their strategy and the demands placed by the national policy. Box 5 illustrates the common metrics that are used by IPAs categorized by outcomes, i.e. that they result in something happening or an activity whereby an action or event is counted. Box 5. Common IPA performance measurement metrics Outcome-based Measures

Activity-based Measures

Number of jobs created

Number of investors contacted

Amount of capital invested

Number of aftercare issues resolved

Number of investments facilitated

Visits by potential investors

Impact on economic development

Visits to the website

Technology transfer

Number of publications

National competitiveness

Number of roadshows/exhibitions attended

Number of projects

Investor conversion ratio

Number of Greenfield projects Value of inward investment Source: Adapted from UNCTAD (2008)

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SYNTHESIS OF THE UNIT This final unit in the module has examined the topic of performance management and explained why IPAs carry it out. The unit has also discussed some of the more common metrics that are used by IPAs to measure their performance.

Bibliography n Hatry, H.P. (2007). Performance Measurement: Getting Results. Urban Insti-

tute Press. n UNCTAD (2008). Evaluating Investment Promotion Agencies. United Nations

Committee on Trade and Development.