A significant consequence of the protracted global economic crisis has been that investors have become more risk averse in their investment choices. As businesses get to grips with a tricky economic climate, global investment patterns reveal that worsening market conditions have led more companies to opt for cheaper alternatives to greenfield investments when seeking to grow their businesses. As a consequence, expansions are occupying a larger section of the global FDI market. Perceived to be a lower-risk and a lower-cost FDI strategy to establishing a new presence, expansions are playing a growing role in companies’ investment decisions.
“In the current economic climate, companies are reluctant to commit the capital required for relocation – even with the promise of future run rate savings,” says Alex Ash, director of UK corporate solutions at global real estate services firm Jones Lang LaSalle. “The financial metrics used by companies to assess the value and cost of greenfield investments has become more stringent. Companies are looking for opportunities to stay.”
The fDi Report 2012, published in April, found that expansions as a percentage of total global FDI increased from 11% in 2008 to 23% in 2011. As investors are displaying a much stronger preference for expanding existing operations than at any time since greenfield investment monitor fDi Markets began collating FDI data in 2003, it is now the case that investment promotion agencies (IPAs) with well-articulated aftercare strategies are becoming well placed to keep up with the shifting needs of their clients.
Re-kindling a romance
Although 'aftercare' is a multifaceted concept, the United Nations Conference on Trade and Development defines it as: “The range of activities from post-establishment facilitation services to developmental support, to retain [and] encourage investment... It needs to be driven by the view of what [companies] need, and… this is achieved through the development of a structured service that includes administrative, operational and strategic support.”
The fDi Report 2012 revealed that as companies are increasingly opting to re-invest their capital in existing projects, IPAs seeking to increase their competitive edge should look inward and focus more on nurturing existing relationships with their clients. Some commentators have gone as far as asserting that winning new investments from foreign companies is of limited value if the IPAs cannot keep them.
“It is wise to take care of your existing clients because they are your ambassadors,” says Marcin Faleńczyk, deputy director of Invest in Pomerania. “When [IPAs] take care of their companies, these companies will talk [to others] about their experience. If you focus on only looking for new companies, you will start losing old ones, and that is much worse than not finding new companies.”
Although aftercare strategies differ across agencies, fDi has found a consensus among all the IPAs it interviewed that there are certain best practices that directly enhance an IPA’s chances of winning expansion projects.
According to Fiona Dunne, a manager in the information and communications division at IDA Ireland, a crucial component of an IPA’s aftercare strategy is maintaining consistent contact with client companies. Constant contact enables the IPA to better understand the company’s needs, and this in turn enables it to produce tailor-made solutions that are relevant to its operations. “[IPAs should] stay in touch with what is happening on the ground,” says Ms Dunne. “We have dedicated teams of project managers that are trying to reach the companies that we work with, and we are constantly in touch with these companies. We make sure our work remains relevant, and we identify potential investments. Not staying in touch with what is happening with the company would be a big mistake.”
The fDi Report 2012 found that Ireland led the rankings last year when it came to attracting the highest proportion of expansions. In 2011, 49% of recorded FDI investments in Ireland were in expansions, and Ms Dunne maintains that this was in part due to IDA Ireland’s emphasis on creating a positive investment climate through fostering close ties with its clients.
The importance of this proactive approach was further revealed when PayPal this year announced its expansion in Ireland. Speaking of the company’s decision to expand its operations, which are currently worth $19m, Louise Phelan, vice-president of global operations for PayPal in Europe, Middle East and Africa, highlights the important role IDA Ireland’s proactive approach played in fostering a favourable investment environment. “[This expansion] is a clear recognition of the opportunities that Ireland offers global leaders such as PayPal,” says Ms Phelan. “At a time when the line between the online world and the high street is breaking down, we are re-imagining money to work better for consumers and businesses. Our new [base] will help us create the future of money.”
The US also performed well in attracting expansions, as 30% of FDI recorded in the country last year was in such projects, according to The fDi Report 2012. With regards to expansions as a percentage of FDI, this placed the country third globally, behind Ireland and Hungary, where 39% of FDI was in expansion projects.
“The US and St Louis have been very successful in capturing investments because we have a competitive cost of doing business, and a very skilled labour force,” says Jim Alexander, vice-president of business recruitment for the St Louis Regional Chamber and Growth Association. Possessing a deep knowledge and understanding of a region’s competitive advantages, as well as its client companies, emerged as another essential factor in an effective aftercare strategy. “One of the places IPAs can go wrong is not doing their homework,” says Mr Alexander. “You have to understand what the strengths of your region are and which specific companies can benefit most from these strengths. Many IPAs sometimes do not do a thorough enough job of [this].”
In addition, a hands-on approach to helping a company grow its business, including being a one-stop-shop for all administrative and legal aspects, and even helping a client source potential recruits, is another essential component of an efficient aftercare strategy. “Our motto at Invest in Pomerania is ‘we care more’,” says Mr Faleńczyk. “This means we care about the investors that we actually have. We invest a significant amount of money and time for our companies, to attract workers from other areas. We also work with our country’s officials, and we help the companies solve problems related to red tape. Thus, the companies will not have to waste time and money to resolve these problems.”
After the love has gone
Yet according to some commentators, several IPAs continue to place a disproportionate amount of their efforts on winning new businesses, and this consequently means that their aftercare strategies remain hollow. Indeed, a lack of ongoing support has emerged as one of the main reasons that leads to company closures. Productivity lost, particularly as a consequence of issues related to administrative bureaucracy and a lack of continued IPA support, has emerged as a key factor that causes a decline in investor confidence.
“The business environment can change, through more taxes or more regulations or other types of restrictions on the growth of the business,” says Mr Alexander. “Companies can be discouraged if productivity is lost, and in some cases companies will reduce their commitments because of a poor investment climate.”
Jones Lang LaSalle's Mr Ash says: “Governments remain keen to attract new investment but should not overlook the opportunities to grow relationships with their existing client base. However, quality of aftercare varies greatly from country to country. IPAs could show more care and consideration to companies as they navigate their way through the investment process. Winning the initial investment may make the headlines but retention and expansion are just as valuable, if not more so in the long term.
“IPAs are good at promoting their incentive programmes to prospective new investors. Where they sometimes fall short is articulating what they can do for their existing clients. We [at Jones Lang LaSalle] are often brought on board by clients to make sense of the incentives landscape and help to maximise opportunities to offset investment [or] expansion costs.”
Nonetheless, despite the rapid rise in expansion projects, greenfield projects continue to retain a leading role in driving global FDI. Therefore, rather than adopting a Manichean view on either seeking new investors or nurturing existing client relationships, IPAs should place equal efforts on doing both. Additionally, while there is no silver bullet which guarantees any single approach will be a sure-fire way for an IPA to maintain a competitive edge, having a well-developed aftercare strategy has its merits as it is more cost effective for an IPA to get an existing customer to do more business than to get a new one to start from scratch.
“It is important to offer aftercare facilities because it is much cheaper to stay [with the IPA] than to invest elsewhere abroad,” says Dr Robert Hermann, the managing director of investor consulting at Germany Trade and Invest.
“If you have one happy client, they will refer you to other clients,” says Mr Faleńczyk. “First focus on your own turf, make those companies happy, make them grow, and then after that, find another new client.”