• Making EDOs Ready, Willing and Able to Promote Inbound FDI in All Forms
  • August 31, 2009 | Author: William A. Newman
  • Law Firm: Sullivan & Worcester LLP - New York Office
  • Investment bankers, lawyers and other professionals often overlook the importance of other third parties in facilitating inbound FDI transactions. A prime example is the increasingly critical role that the economic development community may be able to play in bringing inbound mergers and acquisitions to the United States to stimulate recovery.

    Worldwide, there are over 7,000 economic development organizations (EDOs) and investment promotion agencies (IPAs) operating on behalf of cities, towns, regions and countries. There are over 4,500 members of the International Economic Development Council (IEDC) in the U.S. Since the economic turndown has resulted in significant businesses closures and job losses, U.S.-based agencies now may be looking to continued foreign investment to restart their economies.  Their search for inbound investment leads to rivalry and competition because demand for investment greatly exceeds supply.

    Economic development efforts are at an inflection point. Until 2008 or this year, EDOs have been seeking “greenfield investment”— the startup of a new business or the relocation of a existing business to their area. The worldwide economic crisis has, however, led to business consolidation.

    In a business consolidation phase, expansion is unlikely to take place. Instead, business combinations — mergers, consolidations or takeovers — occur. The aim is to spread greater business activity over lower expenses.

    Lower expenses, however, often mean job losses, reduced requirements from vendors and fewer outflows in general. These effects are not the effects that EDOs desire to create. EDOs advocate for more jobs, more business for local vendors and increased outflows from new business into their community. So it becomes challenging for EDOs to advocate mergers, takeovers or other business combinations when the result may be to exacerbate conditions that already are bad.

    But, in a downturn, if businesses already are devastated, business combinations that take advantage of companies already shuttered or whose fate is clear unless repositioned can have salutary effects. It’s a question of public perception. That’s where marketing and education come in.

    So the EDO agenda now has two goals. First, win public support for all forms of inbound investments, including business combinations with inbound buyers. Second, continue convincing inbound buyers of the significant benefits to be gained from owning and operating businesses in the U.S.

    The Strengthening Brand America Project aims to have U.S. EDOs place a higher priority on FDI attraction as a strategy for accelerated economic recovery. Founded by Edward Burghard, the Project is a community of practice targeted to EDO professionals. The Project’s goal is to facilitate the transfer of private sector product and corporate branding principles to the public sector.

    The Project has succeeded in making publicly available data for inbound capital investment on a state-by-state basis for 2003 through 2008. fDi Intelligence, a specialist division of Financial Times, harvested and analyzed the data. The data gives an excellent perspective on the comparative successes of state-level EDO campaigns. For the five-year period:

    • the top 10 states picked up more than 45% of the inbound investment
    • the results vary considerably from $57,320 million for top-rated Texas to $287 million for bottom-rated Vermont
    • among the bottom 80% of states, no state received more than 2.9% of the incoming funds

    Results for 2009 are likely to differ significantly because the total incoming amount will be significantly less.

    The overall challenge looms large—to replace these meaningful amounts of inbound capital investment with inbound M&A. With the support of the Strengthening Brand America Project and the data it provides, states and localities have superior tools to take on the task ahead.