Coronavirus has shone a spotlight on the inequities and frailties of modern societies across the globe. The World Bank has estimated that the pandemic will push an estimated 71 to 100 million people into poverty, marking the first increase in global poverty since 1998.
At the same time, people from poorer communities are set to be worst affected, with both their health and their livelihoods most at risk from the effects of coronavirus. Economic development will play a crucial role in reversing the negative impacts of the global pandemic. Yet its ability to do so will be constrained, as FDI flows are projected to fall by as much as 40% this year, according to the UN Conference on Trade and Development (Unctad).
Decades of an uneven distribution of investment have left many communities needing a leg up, now more than ever.
Research by greenfield investment monitor fDi Markets found half of the world’s top 100 FDI recipient countries had 40% or more of total inbound projects concentrated in just one city.
In the UAE, for example, Dubai has taken 75.5% of the total announced greenfield FDI projects since 2003. In Lebanon, capital city Beirut accounted for 72% of total greenfield FDI projects, while Côte d’Ivoire’s capital, Abidjan, attracted 64.2% of projects. Such uneven distribution is also evident in major economies. In Japan, the world’s third largest economy, more than half (53.6%) of the FDI projects announced since 2003 went to its capital, Tokyo.
A high concentration of investment results in regions of a country being left behind, and thus in inequitable economic development outcomes. Against this backdrop, Unctad is urging economic development agencies to attract investment that promotes the sustainable development goals, including the reduction of inequality.
As social justice movements have spread across the globe, and inequality is high on the political agenda, how can a more balanced spread of investment and subsequent benefits be achieved?
Laying the foundations
Investments into poorer regions and communities tend to have greater benefits than in major economic hubs, says Timothy Bartik, a senior economist specialised on state and local economic development. “The effect of job growth on employment-to-population ratios will be higher, so national or state employment rates will be boosted more if we target distressed areas,” he explains.
However, governments first need to develop areas through investment in infrastructure and workforce training programmes, to make these areas attractive to investors. “We often hear government officials asking for investment into areas that do not offer anything, in the hope of development. It is the job of government to develop these regions and then investors will follow,” says Hamed El-Kady, a sustainable investment policy advisor at Unctad.
Rodrick Miller, CEO of Invest Puerto Rico, agrees that governments often fail to make initial investments but adds that a region can never have optimal competitiveness without the participation of its underdeveloped communities. “Governments should be very active in their own procurement policies to ensure there is a commitment to procuring goods from local firms and from firms run by people of colour,” he says.
Commissioning major infrastructure projects is one way to draw investment into less developed regions. In the UK, where the south-east region attracted half of all greenfield FDI projects in 2019, the government has implemented a “levelling up” agenda aimed at increasing investment outside the dominant capital region.
Its flagship project, a major rail project, HS2, which will connect the UK capital London to Birmingham in its first phase, has piqued the interest of investors. “To activate and stimulate the market at a regional level, we need investments in gear shift projects [like HS2], because if you can create something attractive, clearly companies will want to be part of that,” says Neil Rami, CEO of the West Midlands Growth Company, the economic development organisation of the West Midlands region.
Infrastructure is also a primary consideration of site selectors when advising companies where to invest in capital-intensive projects, says Didi Caldwell, president and founding principal of Global Location Strategies.
In Kenya, where more than 70% of FDI goes into capital city Nairobi, spreading investment more broadly is a key governmental goal. Infrastructure development, engaging with local authorities and providing more attractive incentives has been the most effective method of attracting investment to underinvested regions, according to Moses Ikiara, who heads Kenya’s investment promotion agency (IPA).
“We have been encouraging county governments to help express opportunities in terms of investment units, and are working with them at the devolved county level,” he says.
One problem is that investments made into underinvested communities may not trickle down and help the local population, though some countries are taking measures to counter this. In Guinea, which has the world’s largest reserves of bauxite, the government changed its mining code in 2010, allocating part of inbound foreign investment to stay in the remote regions, says Namory Camara, the head of the west African nation’s IPA. “We have had a percentage of mining revenue that goes straight to development of the local area and not the central government,” he says.
Devolution of power
While top-down central governments schemes can lift up underdeveloped regions, a localised approach appears to be more effective by enabling the targeting of sectors strategic to each region. A London School of Economics 2019 survey of European national and subnational IPAs found that regional IPAs in less developed regions increase the probability of attracting foreign capital by up to 14% on average. On an annual basis, this can increase the inflow of investment by 71% and the jobs created by 102%.
“In attracting FDI towards less developed areas, sub-national IPAs act as compensation for malfunctioning institutions and inadequate information diffusion mechanisms,” says the LSE report.
India, which is a quasi-federal country and has a fairly equal distribution of FDI across its 28 states, allows local governments to manage their investments specific to local needs. “We implement incentives or policies that are specific to sectors which match the resource strengths of our states so that they are not competing with different cities in India,” says Deepak Bagla, CEO of Invest India.
Local states are also catching up by setting up their own IPAs: the northern Indian state of Uttar Pradesh did so in June, while Telangana in the south followed suit a few weeks later.
Meanwhile in the UK, regions have been calling for more devolved powers from Westminster to boost their propensity to attract investment. “The only way you can actually ensure that the benefits of FDI spread in localities is to give those localities more control themselves,” says Mr Rami.
Guy Currey, the director of Invest North East England, agrees. He says that to achieve the ‘level up’ agenda there needs to be a “fundamental rethink of how we share power to the different regions and fund them to be able to catch up with London”.
Once the necessary infrastructure is in place and powers are devolved to underdeveloped regions, incentives can be used to attract companies.
Shannon is one example of how incentives can help to spread investment outside of major economic hubs. The Irish town of 10,000 people opened a special economic zone in 1959 and rolled out tax holidays for companies and grants to support research and development. “Ireland was a protectionist economy until the 1960s, but the government used Shannon as a test-bed for policies like the low tax rate, which helped drive foreign investment into Ireland,” says former CEO of Shannon Development Kevin Thompstone. Its success would become a blueprint for the establishment of special economic zones in countries across the world.
While incentives have been effective in some cases, there is debate over their efficacy in spreading equitable opportunities in marginalised communities. Economic opportunity zones (EOZs) in the US – which enable companies to forgo capital gain taxes when investing in low-income communities – have drawn in at least $10bn of investment for underdeveloped areas, with mixed results.
A report published by the Urban Insititute, a US non-profit research institute, found that while EOZs helped raise the visibility of marginalised communities to investors, they have fallen short of their promise to create quality jobs and improve the life of low-income people.
“Tax credits, cash grants or other cash incentives can pay off if they target high-multiplier firms. But they currently are overemphasised relative to public services. The most cost-effective ways to pursue economic development is to enhance various types of services and infrastructure,” says Mr Bartik.
Marketing is also key to attracting investment into underdeveloped locations. Anna Mason, a director at Rise of the Rest, a venture capital fund that invests outside of the main US tech hubs, says economic development organisations can be “a real engine in publicising success stories in order to help the region attract more talent and dollars”.
One such success story was in Indianapolis, Indiana when homegrown tech company ExactTarget was bought by software giant Salesforce, which then set up a regional headquarters in the city. This put Indianapolis on the map and led other tech companies, such as Infosys, to invest into the city. “When one of your big winners has that moment, it can be incredibly impactful,” says Ms Mason.
More distressed communities often require marketing to take an approach from the ground up. “Investment promotion agencies should try to understand both the real estate and human capital assets that marginalised communities have, and sell their offer to investors from a competitiveness vantage point,” says Invest Puerto Rico’s Mr Miller.
While there is no single formula to attract investment into marginalised communities, a mix of government investment into vital infrastructure, support for local workers and promotion of localities can bring about more equitable developmental outcomes. And with the coronavirus pandemic currently affecting underdeveloped communities disproportionately, it has shown this is more urgently the case than ever.
Additional research conducted by Jack Conway
This article first appeared in the August - September edition of fDi Magazine. View a digital edition of the magazine here.