Dan Levine, Practice Leader, Location Strategies and Economic Development, Oxford Economics, Inc. (Aug/Sep 09)
By now it has become clear - the upcoming year will bring fewer and smaller projects, and most of these will be expansions rather than relocated business operations. Weakened labor and real estate markets have eliminated primary motivations for companies to seek new business locations and business leaders are much less inclined to entertain adventurous site selection strategies. Yet even in today's turbulent economy, companies continue to seek locations from which they can effectively attract employees from difficult-to-recruit disciplines - and too often that means opening an overseas facility.
In response, collaborative relationships between companies and universities are slowly gaining in popularity and effectiveness. Moreover, some U.S. states have begun introducing major new incentive programs that target local businesses willing to make investments in areas defined by the states as priorities. This article will highlight a few examples of what some states and Canadian provinces are doing to attract major new investments closer to home, and how your business might take advantage of today's investment climate to initiate new partnerships with economic development officials in your community.
Foreign Direct Investment
There is no doubt that relative to recent years there is a scarcity of new location projects; and while it easy to blame the entire decline on the overall state of the economy, it is important to note that a contributing factor is a change in foreign direct investment (FDI) trends. In its recent report A New Investment Paradigm, OCO Global Ltd. says that the United States remains the number-one source for all FDI - that is, U.S. companies investing overseas. Yet the opposite is not true - not a single U.S. metropolitan region appears as a top 10 global recipient for FDI. Moreover, it is not just manufacturing jobs going overseas. Among the largest categories of U.S. projects going overseas during 2008 were investments by financial service companies, research and development projects, and software and information technology centers.
In large part, U.S. companies continue to scour the globe for best-in-class technical expertise, particularly from difficult-to-recruit disciplines, and businesses remain willing to invest in overseas facilities that will enable them to intercept this talent. However, in some U.S. communities, universities and local businesses hope to pre-empt this trend though innovative and targeted collaboration.
University and Corporate Collaboration
Many universities are actively engaged in economic development initiatives ranging from business incubation to technology transfer. These efforts are typically oriented toward business startups or commercialization of technologies developed on campus and accordingly are viewed with only marginal interest by the region's major employers. This is a missed opportunity for both parties. Businesses and universities operating in the same community often have significantly overlapping areas of interest and expertise that, when properly joined, can promote regional economic growth. In today's challenging economy, businesses are open to new channels of profitability - including outsource opportunities and skill development - and universities have become more entrepreneurial in pursuing corporate relationships that generate revenue needed to offset reductions in state aid and other funding sources.
Two examples of successful partnerships are the Center for Manufacturing Excellence, created jointly by the University of Mississippi and Toyota Motor Corporation; and the State University of New York at Albany's College of Nanoscale Science and Engineering, which is a partnership between that university and a consortium of partners, including IBM, AMD, and SEMATECH. Each of these university-corporate partnerships now directly contributes to the vitality of core business clusters within each community. In the case of Mississippi's program, faculty and staff are trained specifically for the advanced manufacturing skills needed to support auto manufacturing. Albany's program takes a similar approach but targets the semiconductor industry. Each university gains access to industry expertise and state-of-the-art equipment that would not otherwise be available to its faculty and students. Leading local companies have greater confidence that their host communities will be able to provide the specialized skilled work force that they will need to compete in their present geographic location.
What can be learned from these success stories? Most importantly, truly effective business and university partnerships do not simply happen organically. Instead, as a first step, they require a commitment to sustained and active dialogue on the part of both the academic and business communities.
Canada's Provincial Nominee Program
When it comes to attracting foreign labor from difficult to recruit disciplines, Canadian companies have at their disposal a program that U.S. companies can only envy. Under the Provincial Nominee Program, Canada's provinces and territories have the authority to nominate as permanent residents individuals who can help the province address specific labor or economic development needs. Nominees must meet all federal security and health criteria, but the provinces establish guidelines for determining which skill sets are most critically needed in their communities, especially those skills that are most difficult to fill. In 2007, over 17,000 employees from difficult-to-recruit positions were nominated by provinces, and this figure has reportedly grown higher in subsequent years.
In Alberta, for example, the province works closely with its leading employers to select difficult to recruit job categories. Once these categories are established, the province and employer work collaboratively to nominate individuals who are in Canada working under temporary visa programs and are in skill categories selected by the province. Concurrently, Canadian Immigration Services processes citizenship and permanent resident applications from those individuals on a priority basis.
For some provinces, like Alberta, the Provincial Nominee Program has become a critical component of economic development policy in that it helps Alberta-based companies keep and retain workers from difficult to recruit disciplines. Other provinces, like Saskatchewan, have recently introduced "entrepreneur" as a designated skill category. The Provincial Nominee Program is an excellent example of an innovative collaboration between business and the economic development community (federal and provincial) to keep jobs and investment close to home.
Re-energized Incentive Programs
Many U.S. states have responded to the currently anemic pace of out-of-state relocation projects by introducing new or expanded incentive programs. When companies are not inclined to relocate or open new facilities outside of their present communities - as is the case in the overwhelming number of projects today - these programs have limited effect. On the other hand, states that set their sights on a very specific type of investment and design major incentive programs to attract projects to fit that targeted strategic vision will very likely get more bang for their incentive buck than states that rely on programs that disperse minimal awards to a great many projects.
New Jersey's recently expanded urban transit hub tax credit is an example of a state going for broke to land deals of the type deemed central to that state's strategic vision. New Jersey, like many states, has smart-growth economic development objectives that try to encourage companies to move suburban operations to an urban core. Even in much tighter real estate markets than currently exist, suburban-to-urban moves almost never happen (notwithstanding that companies seeking a new location within the same region often do short list the urban location for possible consideration). In most communities, tax credits and abatements offered at the urban location partially offset the higher urban construction costs and rents, but are insufficient to overcome the resistance of a work force accustomed to suburban commuting - and amenities like free parking.
Under its expanded urban transit hub program, New Jersey has now essentially offered to reimburse the full cost of development, including real estate and fit-out, to a business that makes a significant urban investment - currently defined as at least $50 million - near a train station in an urban community and employs at least 250 full-time employees at the project site. The basic formula utilized is that the state will issue sellable tax credits equal to the full investment cost to any qualified company, spread out over 10 years. For example, if a company invests $75 million and meets all other requirements of this program, the state will award that project $7.5 million per year for a 10-year period in sellable tax credits.
Certainly, not every state will want to mimic this particular program; however, the approach is worth emulating. Your company can take advantage of potential incentive programs like this by defining the types of projects that your state finds most desirable; then create a plan to work with economic development officers on reaching a mutually desirable outcome.
Taking Advantage of the Situation
Challenging economic times create an opportunity to rethink economic development strategies. Companies that are reluctant to invest in new facilities but are experiencing difficulty recruiting skilled labor might want to initiate a dialogue with local universities to see if opportunities exist for collaboration. In addition, all of us can learn from our neighbor to the north - Canada has created innovative programs that encourage skilled workers to become permanent residents, rather than continuing policies that inadvertently encourage companies to recruit foreign talent by opening foreign operations. Finally, states need to aggressively pursue specific projects that meet their strategic goals in a very targeted and meaningful way. The hurdle has never been higher for companies considering out-of-the-box location decisions, and states that want these projects in their communities need to step up to the plate to help make them happen.