EconSouth (Second Quarter 1999)
Wooing Foreign Investment
Since the mid-1970s, the South has courted foreign companies and become a favorite
locale for foreign investment. For southern states and these International investors,
the courtship and ongoing relationship appears to be worth the effort.
match made in heaven — that's the dream of state economic development officials as they woo foreign investors to set up housekeeping in their states. Alabama and American Honda Motor Co. recently culminated a successful courtship as Honda announced that it will begin construction of a $400 million sport utility vehicle assembly plant in Lincoln, Ala., next year.
Foreign investors have held a special place in the hearts of Southern policymakers since at least 1974, when Japanese-owned YKK opened a zipper manufacturing plant in Macon, Ga. Two years later, then-Georgia Gov. George Busbee formed the Japan-Southeast U.S. Association with Norishige Hasegawa, chairman of Sumitomo Chemical.
Since then, competition to win the hand of foreign investors has become increasingly intense among regional policymakers, culminating in the estimated $250 million package of tax abatements and incentives the state of Alabama offered Mercedes-Benz in 1993 to build its plant in Tuscaloosa County, Ala. But while the Mercedes deal can hardly be considered typical, the aggressiveness demonstrated by Alabama policymakers — then and today — certainly is.
Foreign investment in the South
By the numbers, however, foreign-owned projects make up only a small percentage of development throughout the South. According to Site Selection magazine, from 1991 to 1998 new facility and expansion announcements by non-U.S. entities accounted for slightly over 8 percent of announcements in Georgia, which led Sixth Federal Reserve District states in its percentage of foreign announcements. (See the sidebar on page 11 for more on how announcements are tallied.)
But attracting investments from foreign-owned companies remains a high priority for policymakers throughout the region. Why?
The most obvious reason is that new investments spur job growth. For much of its history, the South has trailed the nation in just about every measure of economic development. In a recent interview with EconSouth, Busbee spoke about the region's economic condition in the '70s: "We didn't have a lot of capital in the Southeast. There was not much incentive for industries in the United States to move from North to South." For elected officials throughout the region, then, foreign companies were simply one more source of desperately needed capital and employment.
But the first wave of foreign investment in the '70s brought something else that had been in short supply in the South: prestige. If a global manufacturer saw fit to locate a facility in the South, the thinking went, then reluctant U.S. investors outside the region ought to as well. "Foreign investment helped us attract a lot of companies from the Northeast," Busbee said. "It changed their perception."
As the region has experienced explosive job growth and massive in-migration during the past two decades, these initial motivations for attracting foreign companies are no longer as urgent. Now states tend to look for foreign investment that will introduce new industries and the productivity advances these industries may bring. For instance, Alabama attracted the Mercedes plant, which paved the way for Honda and dozens of other auto-related employers that, in an earlier time, would scarcely have considered locating in the region.
Doing business in the South
But apart from the existence of an industrial critical mass — or governments' commitment to creating it with incentives — there must be more fundamental reasons for a firm to invest in an area. For most foreign firms, locating a facility in the United States provides marketing and operational advantages. The United States is the world's biggest economy — larger than the world's second- and third-largest economies, Japan and Germany, combined — so it affords a foreign firm vast marketing opportunities. Locating in the United States can also, for some industries, produce operational advantages such as cost savings for production, tariffs and transportation.
The South offers a number of marketing advantages. Recent migration patterns in the United States generally have been from the Northeast and Midwest to the Southeast and Southwest, and the Southeast has dominated in housing starts and job creation. This economic boom is giving the South a marketing edge over other regions. For example, newly prosperous Southerners have shown a propensity, despite the near total absence of snow in the region, to snap up the latest sport utility vehicles. So it simply makes good sense, from a marketing standpoint, for Mercedes, BMW and Honda to manufacture SUVs in the South.
It makes sense from an operational standpoint too. For one thing, despite its recent economic growth spurt, the South remains among the nation's least expensive regions for doing business. Unions have a much smaller presence here than in the rest of the country, and labor costs are lower although real wages are good. Also, because much of the South remains rural and agricultural, land costs and taxes — especially property taxes — are lower too. But these lower economic costs have not come at the expense of a degraded physical infrastructure. In fact, trucking and rail services are highly competitive throughout the South, and each of the Sixth Federal Reserve District's six states has at least one inland or coastal port.
Let's make a deal
In those few instances when the South hasn't measured up — economically or otherwise — its policymakers have shown a remarkable willingness to do whatever it takes to get the deal done. Exhibit A is Alabama's $250 million incentive package to Mercedes in 1993. And while the state's offer to Honda didn't match the Mercedes package, it simply didn't have to. The Mercedes deal had already succeeded in bringing more of the automobile industry into Alabama, and that industry presence and infrastructure, as much as the government incentive program, surely played a part in Honda considering a presence there in the first place. So Alabama's lower dollar offer to Honda does not signal a drop-off in interest. Indeed, Southern development officials remain as zealous as ever in their courtship of foreign investment.
Worth the effort
Is foreign investment worth the efforts states are making to attract it? For the South, the answer is "yes." But states seeking foreign investors need to be aware of the potential downside. The so-called winner's curse may still afflict states that have overpaid for jobs and investment, whether foreign or domestic. In addition, the arrival of high-tech foreign employers, coinciding as it has with declining employment in traditional industries like apparel, has made for some very uncomfortable choices for congressional leaders in the area of trade policy. From a trade policy perspective, comparative advantage is an all-or-nothing proposition: one cannot welcome the jobs created by foreign investment and at the same time demand that foreign firms not compete with U.S. firms. But many political and business leaders are still trying to have it both ways.
Ultimately, despite these potential drawbacks, the case for foreign direct investment is strong, and the attention given it two decades ago by Gov. Busbee and others now appears prescient. Although foreign firms still account for only a small percentage of businesses in the United States, the cumulative impact of foreign development has far exceeded mere numbers. Foreign investment has transformed the South in the eyes of the world and brought new industries into the region.
The Problem of Scorekeeping
or many Southern economic development officials, attracting foreign investment may seem less like a courtship and more like a contact sport — one that's very difficult to score. State economic development agencies generally count development announcements. While a company is more likely than not to herald a new project or expansion, in some cases plans are not announced, especially if additional real estate investment is required. These unannounced projects, of course, won't be counted, and sometimes even announced projects can be overlooked.
In addition, which announcements are tallied can vary from state to state. New manufacturing announcements are supposed to be counted, but manufacturing expansions may not be, nor may new nonmanufacturing announcements. Also, sometimes announcements that have already been counted are not consummated: as conditions within a company or its home country change, so may the feasibility of a project in the United States. State development agencies rarely retract an announcement when a project falls through.
All of these factors make it difficult to determine with precision how successful states have been in recruiting foreign investment. However, Site Selection magazine's annual state-by-state compilation of new corporate facilities and expansions, which breaks out foreign investment separately for analysis purposes, may serve as a general barometer (see Chart 1). The magazine's totals include nonmanufacturing facilities and other investments not traditionally heralded by development authorities, but the consistency of the data among states makes this information useful.
The Department of Commerce's Bureau of Economic Analysis does not publish foreign direct investment data on a state-by-state basis. But the department does publish information on state-by-state employment by foreign affiliates (see Chart 2).
As the charts reveal, the percentage of total private industry employment accounted for by foreign affiliates in the Sixth Federal Reserve District approximately parallels the percentage of foreign investment announcements. Georgia ranked first in the region in both of these measures, followed by Tennessee. Based on the sheer size of its economy, Florida ranked high in the total number of foreign investment announcements and employees but ranked toward the middle of the pack in percentage levels in each category. And while Alabama has lured some high-profile foreign companies in recent years, it still has some ground to make up to overtake Georgia and Tennessee.