After half a century of economic degeneration, inner city areas may be coming back into fashion as a destination for international business investment. With the help of international investment, some of the most deserted inner-city wastelands in Europe, the US and Asia are changing from no-go areas into must-go areas.

Among the most dramatic economic revivals of the past decade are those in the once-deserted dockland areas of capital cities London in the UK and Dublin in Ireland. Other areas once associated with post-industrial urban decline, for example the city of Bilbao in northern Spain and Rotherham in the north of England, have also managed to present themselves in a new light to international investors. And in China, massive FDI has transformed the urban landscape of mainland coastal cities such as Guangzhou, Shenzhen and Shanghai.

Boost to Bilbao

One of the more unusual approaches to turn around a region suffering from industrial decline has been that of the city of Bilbao, capital of Spain’s Vizcaya province. The city’s economic fortunes have been given a boost following the construction of the $89m Guggenheim Museum, built on a former shipyard. Vizcaya’s former prime minister, Josu Bergara, told fDi last year that following the museum’s construction “we began to have faith in ourselves again”.

Bilbao’s economic revival goes beyond the cultural and tourist sectors. Machine tooling, automotive manufacturing and steel production, among others, have been revived, the region’s transport infrastructure has been improved and the harbour has been relocated outside the city.

The Guggenheim project has been so successful that other areas that are seeking to promote themselves internationally have sponsored similar flagship regeneration projects, ranging from exhibition and conference centres to sports arenas and other leisure facilities.

Cultural angle

In Margate on the east coast of the UK county of Kent, the local authorities are sponsoring the construction of a Ł17m art gallery as the spearhead of their regeneration plan. The gallery, which is due to open in 2007, will commemorate the town’s most famous artist, JMW Turner.

The director of Margate’s Turner Centre, Victoria Pomery, says: “Cultural regeneration has been shown to work across the world, from the Baltics to Barcelona. Regeneration involves raising both the quality of life and education.” She cites other examples in Sydney, Australia, and in Newcastle and Salford in the UK, where local economies have been kick-started as a result of cultural regeneration projects.

“An art gallery brings people into an area and can help a community to reposition itself,” says Ms Pomery. “In Margate, the gallery’s potential for economic regeneration has already been shown even before it has been built, with the opening of restaurants, shops and other businesses in the area.”

Another well-known case study of large-scale urban regeneration involving foreign investors has been the revival of Dublin’s historic dockside. The arrival of the international financial services industry triggered significant property investment in an area that is still subject to large property developments.

In 1987, Dublin’s docklands were largely deserted and the warehouses were in serious disrepair. Brendan Halpin, marketing manager at government agency IDA Ireland, says: “Before the creation of Dublin’s IFSC [International Financial Services Centre], the area was known only for its dilapidated buildings. It was not an area that many people went to because there was nothing to attract people. Now the area is filled with office buildings, restaurants, pubs and shopping malls.”

Vital elements

The three most important elements involved in the regeneration of Dublin’s docks have been a generous low tax environment, a healthy labour market and clear political support during the 15 years or so since it began.

The idea of regenerating Dublin’s dockland area was first mooted in 1986. Meetings between the prime minister’s office, the relevant government agencies and key players in the financial services sector followed. From the beginning, the idea secured political support and a commitment from Ireland’s central bank to deliver the legislation and regulatory environment that has underpinned the remarkable growth of Dublin’s international financial services centre.

The deciding moment for the dockside regeneration came when the European Commission agreed to allow the government to extend to financial institutions the same, low, 10% corporate-tax rate that was then available under Irish law to manufacturing and service industries. Special tax incentives were given to redevelopment projects in the docklands area and these were passed on to occupants of the new buildings.

Last year, international bank assets managed by banks based in Dublin’s financial centre amounted to about E200bn, while international investment funds domiciled in Dublin accounted for about E295bn. People who criticise foreign investment on the grounds that it does not benefit local communities have little to say about Dublin’s international financial services sector – which has created about 12,000 jobs and as many again in related professional services, such as law, accountancy and tax. On the other side of Dublin’s River Liffey, massive residential developments are still under construction to house the international financial services industry’s growing workforce.

Mr Halpin rejects the criticism that is levelled at some regeneration schemes: that poorer residents move out of an area when multinationals move in. “The idea from the start was not to chase out the existing population, which I believe has benefited greatly from the regeneration of the area. There are 12,000 to 13,000 people working directly in the IFSC but it probably supports 50,000 jobs indirectly. The economic spin-off for the area, and for Ireland as a whole, has been huge.”

Jobs myth

Another criticism of foreign investment as a tool for economic regeneration is that jobs created by foreign-controlled companies are less secure. Clark Herron of Rotherham Investment and Development Office in the northern UK county of Yorkshire, says that, in his experience, this is a myth: “I can understand uneasiness at a lack of strategic control over overseas companies but our overall experience in Rotherham has been nothing but positive. Unemployment has fallen from 13.1% eight years ago to 4% today, or in real terms from 13,000 to 4000.” Inward investment from 90 overseas companies has “played a significant role in Rotherham’s economic rebirth following the collapse of the UK’s coal and steel industry in the 1980s”, he says.

“We’ve had many fewer closures of shops and pubs since Rotherham began to attract significant inward investment. The tangible benefits of foreign investment are felt in people’s pay packets, and this filters down into the retail and commercial sectors of the economy and beyond.”

Disadvantaged areas

Like the regeneration of Dublin’s docks, the redevelopment of the urban wasteland surrounding London’s disused docklands from the 1980s onwards has been a forerunner for urban redevelopment programmes in Europe. Bob Colenut, author on European regeneration and head of regeneration at the London Borough of Haringey, says: “Following dockside developments in London, Bristol and Dublin, mainstream financial institutions have begun to show more interest in regeneration schemes.”

Developers of London’s docklands area were granted tax concessions for building in a disadvantaged area, the skyline of which is now unrecognisable from that of the 1980s. As in many regeneration schemes, the entrance of big-ticket foreign investors secured the project’s success. In the late 1990s, Norton Healthcare (now Ivax Pharmaceuticals UK, a

subsidiary of Ivax Corporation, a US company) decided to locate its European headquarters at the far eastern end of the Royal Albert Dock in London’s docklands area.

UK regeneration consultant Michael Beaman says: “In this case, as in many others, the presence of a foreign investor was taken as a valuable indicator of confidence in the area’s regeneration.”

Ivax’s European research and development headquarters opened in January 1999, giving a huge injection of confidence to the docklands’ developers, who went on to back the 65,000msq ExCel Exhibition Centre. “The developer and other investors in the docklands would not have been so confident about the next stage of its development, including the business park. The site on the north side of the docks was an open strip of land for a long time. Norton’s investment gave confidence needed to conclude the ExCel project,” says Mr Beaman, who is also head of the UK Royal Institute of Chartered Surveyors panel on regeneration.

Coastal China

Nowhere is confidence in urban regeneration stronger than in the turn-around of China’s coastal cities, which continue to receive massive inflows of FDI. According to research published by Dong Cao of Canada’s Dalhousie University in Halifax, Nova Scotia, foreign property investment kick-started the massive urban regeneration in the country’s major coastal centres. On the relationship between foreign investment and the development of Chinese cities in the 1990s, he writes: “The proliferation of highly visible commercial projects developed by foreign property investment that were springing up on the old urban cores formerly occupied by low-value use came to symbolise China’s transformation from an enclosed command economy towards an open market economy.”

Dong Cao says foreign property investment represented “an explosion of development for profit by foreign developers” trying to meet surging demand for office space by foreign enterprises. This, he says, played a major role in the economic development and restructuring of China’s urban land use.

European setbacks

Outside fast growing economies such as China, the economic benefits of investing in areas with significant urban problems are less clear cut. Europe’s regional development authorities say that although foreign investment has helped urban regeneration, attracting overseas investors is becoming harder following the European Commission’s crackdown on the use of public sector funding to support private sector enterprises.

Current EU legislation still permits public backing for foreign investors in areas of economic hardship but the rules are complicated. One regeneration consultant says: “Regeneration schemes have been severely limited by EU regulations. An inflexible and bureaucratic regime led to the demise of gap funding and with it FDI as a tool of regeneration.”

Before a 1999 ruling by the European Commission, developers across the UK were able to apply to local authorities for funding to bridge the gap between a development’s cost and its forecast value. Following the European Commission’s decision, grant funding is now available only where it meets guidelines laid down in its regional aid framework.

Jon Ladd, chief executive of the British Urban Regeneration Association, takes an equally dim view: “Changes to EU regulations on gap-funding and state aid have had a hugely negative impact. They are a very big issue for development agencies and have affected large-scale developments in the UK. Finding acceptable ways of encouraging inward investment has become like plotting a course through a minefield.”

McDonald’s fills the gap Many businesses avoid investment in under-developed inner-city areas. But US food retailing giant McDonald’s has proved its ability to prosper in almost all areas and markets, regardless of average income levels. McDonald’s has published figures showing that its restaurants make the same profit in rich areas as they do in poor areas. As a result, from the mid-1990s onwards, golden arches began to appear in poor neighbourhoods around the world as part of the company’s rapid global expansion.

Inner city communities welcomed McDonald’s with open arms. Not only did company’s founder Ray Kroc publicly commit McDonald’s to working with local communities for their development, but also the company has targeted lower income groups. So successful is the company’s business model that in the UK it created 5000 jobs in 2001, through opening 80 restaurants.

Following the UK’s Business in the Community initiative a few years ago, McDonald’s UK chief executive Andrew Taylor toured some of the UK’s most deprived inner-city areas. After meeting local regeneration officials, he suggested some new locations to the company’s property location team. One location was the Thamesmead area of south east London, which has been abandoned by many large companies. Mr Taylor says he felt Thamesmead’s focus on regeneration in the community fitted well with the company’s public commitment to families and education.

Setting up its Thamesmead outlet was not the first time McDonald’s had gone in to markets deserted by other businesses. A few years earlier, it was approached by urban regeneration planners in the Harperhey suburb of the UK city of Manchester which, like Thamesmead, had been deserted by other retailers. The local council was overjoyed when McDonald’s property department team gave an early indication that the company did not view the area as different from any other.

According to McDonald’s, both the Harperhey outlet (opened in 1995) and the Thamesmead outlet (opened 1998) are showing satisfactory performance “in line with national consumer patterns”.