The transitional trend of “great disruption”, as coined by renowned political scientist Francis Fukuyama, led many world regions into economic crisis from the 1980s onwards, as Asia became the world’s factory.
Like much of western Europe, the US rust belt states fell victim to this disruption. While not a clearly defined geographic region, the area is generally understood to include Illinois, Indiana, Michigan, Pennsylvania, Iowa, Wisconsin, Ohio and parts of Missouri and Maryland.
Prior to the 1980s crisis, the region’s cities formed an industrial powerhouse for the US. Pittsburgh, known as ‘the city that built America’, produced more steel than Germany and Japan combined during the Second World War.
However, like many of its peers, Pittsburgh slipped into economic decline as hard industry and manufacturing companies went bankrupt or moved to Asia. As people fled the city to find work elsewhere, it lost more than half its population, which dropped from 600,000 inhabitants in 1980, to 300,000 today.
Not so rusty
Though its population has not returned to its former size, Pittsburgh’s story is also one of rebirth. Now a thriving hub for tech and advanced manufacturing, the city has recreated itself by combining its traditional strengths with modernity. From the talent and research emanating from its world-class Carnegie Mellon University (CMU), the city has become an epicentre for autonomous vehicle testing and robotics.
As a result, Pittsburgh has attracted major foreign investment over the past 15 years, with the likes of Bayer, Siemens, Sony, Bosch and many international companies setting up shop there, creating a total of 4500 jobs since 2003, according to greenfield investment monitor fDi Markets.
Pittsburgh is not the only rust belt city to reinvent itself. The unemployment rate in the region has widely improved in the past 10 years. For example, since 2009, Michigan’s unemployment rate has dropped from 14% to 3.6%, today.
Similarly, FDI into the rust belt region has strongly increased over the past decade-and-a-half, with 2019 witnessing an unprecedented number of projects, according to fDi Markets. Since 2003, 40% of all FDI to the region has been in projects within manufacturing activity, mainly automotives, industrial equipment, metals and chemicals. This period has also seen a marked rise in foreign investment in the software and IT sector, as well as business services.
The state of Illinois, driven by Chicago, has seen the largest number of FDI projects since 2010, followed by Michigan, Ohio, Indiana, Pennsylvania, Wisconsin and Iowa, in that order. Chicago is the leading destination for FDI in the rust belt by some way, with software and IT and business services being main sectors for investors over the past decade, followed to a lesser extent by advanced manufacturing and hard industry.
The next most attractive rust belt cities for FDI – Philadelphia, Detroit, Cincinnati and Indianapolis – have seen a higher proportion of investment in manufacturing activity, especially in automotive components or aerospace.
Foreign investment in the rust belt’s hardtech and software and IT sectors has grown very strongly over the past decade-and-a-half, according to fDi Markets. The tech development in certain cities has been particularly noteworthy, especially in St Louis, Baltimore and Pittsburgh.
One of the main attractions for tech investors in St Louis is the T-Rex incubator, which has attracted more than 200 tech companies since its establishment in 2011. T-Rex has nurtured a new generation of start-ups and young entrepreneurs and created 4457 jobs to date.
T-Rex data shows the growth it has brought to the city’s central population, jumping by 43.5% between 2011 and 2018. Foreign investors have also been attracted to the city’s tech scene. Israeli biotech company Evogene opened up there in 2015, while KPMG established an R&D centre for software and IT services that same year.
Karen Vangyia, managing partner of KPMG St Louis, says: “Our firm recognised the strengths that St Louis offers in terms of a strong talent pool.”
Baltimore’s tech scene has also flourished. The city is what developers and tech entrepreneurs are calling the “East Coast cybersecurity hub”, according to the Wall Street Journal, as shown by global cybersecurity company Data Tribe recently establishing its headquarters there. The $5.5bn redevelopment project of Baltimore’s Port Covington has boosted the economy and the tech scene, laying some of the groundwork that attracted companies such as Data Tribe. The project was the brainchild of Kevin Plank, founder of sports apparel company Under Armour.
Meanwhile, Pittsburgh is a fast-growing tech hotspot, enhanced by CMU’s world-leading AI department. This has led Germany’s Bosch and Portugal’s Unbabel – an AI-powered human translation platform – to open AI labs there in 2018 and 2019, respectively
Companies from Germany, Japan and the UK, in that order, have been the most active investors in the rust belt states since 2003, according to fDi Markets. All three countries have world-class expertise in advanced manufacturing, especially automotives, and hard industry, tapping into the region’s strengths.
Western Europe is the leading source of FDI, accounting for 58% of all investment projects since 2003. Outside of Asia and Europe, Canada has also been a significant source of investment, contributing more than Latin America, Africa and the Middle East combined.
Asia-Pacific has become the belt’s second biggest source of investment, following concerted inflows over the past decade. After Japan, FDI from China is the most prevalent.
However, growing Chinese investment has presented both economic opportunities and cultural challenges, as illustrated by 2020’s Oscar-winning Netflix documentary, ‘American Factory’, which revealed culture clashes based around the investment of China’s Fuyao Glass in Dayton, Ohio. The huge investment in Milwaukee by the world’s largest manufacturer of consumer electronics, Taiwan’s Foxconn, has also created some controversy.
The major economic opportunity the Foxconn investment promised the state of Wisconsin has been overshadowed by numerous issues. In 2017, Foxconn pledged $10bn and the creation of 13,000 jobs in Racine County through a new advanced manufacturing campus for large LCD displays.
Certainty over the success of the deal was beyond doubt, and Wisconsin’s then-governor, Scott Walker, told fDi in 2018: “With an annual revenue of $135bn, Foxconn is ranked 27th on the Fortune Global 500 List of the top companies of the world. So we are indeed confident that Foxconn has the resources to follow through with its commitments to the state of Wisconsin.”
However, the project’s progress was stalled due to environmental concerns and questions surrounding the huge financial incentives granted by Wisconsin to secure Foxconn’s investment. In 2019, the company seemed poised to back out of its commitment, however, a phone call between president Donald Trump and Foxconn’s chief executive seemed to put the deal back on the table, albeit with some significant changes.
Ultimately, Foxconn committed to building a smaller facility than that originally promised, creating fewer jobs. Today, the construction is meant to be ongoing, however it is likely to stall again as a result of the Covid-19 crisis.
As in most countries, coronavirus is now likely to slow down foreign investment to the rust belt, as government lockdowns and restrictions on movement impact site selection and construction timeframes, while foreign exchange markets contract around the world. As countries implement measures to slow down the pandemic, global FDI flows are expected to fall by 30% to 40% in 2020, according to the most recent forecast from Unctad.
With smaller profits being made in 2020, companies across most sectors are focusing resources on crisis mitigation, not foreign expansion. In this regard, manufacturing and hard industries will be hit particularly hard, since working from home is not an option for factory workers.
Moreover, manufacturers and exporters are highly exposed due to their reliance on international supply chains, many of which are being disrupted. It seems likely that the rising investment of the past two decades, especially in blue-collar industries, will go on hiatus for the foreseeable future.
This article first appeared in the April-June edition of fDi Magazine. The full digital version of the magazine is available here.