Financial Incentives for Foreign Business

Against the backdrop of a stubborn global economic crisis, a thus far anemic recovery, and a wide array of economic stimulus measures undertaken by both the U.S. federal and state governments, there has been renewed interest and activity in foreign direct investment (FDI) in the United States. With this comes renewed interest in the incentives that are being used to attract it. Successful and forward-thinking U.S. economic development agencies (EDAs), still absorbing and applying lessons learned from extremely robust global competition for FDI over the past 15 years — a competition where they generally lost more than they won — are actively reviewing, refreshing, and recreating their incentives programs, particularly those aimed at the foreign investor.
This re-tooling of incentives policy has raised the question of whether incentives are truly important to foreign investors — or is the allure of accessing the lucrative U.S. consumer and commercial market already incentive enough? In our experience, the short answer is yes, but perhaps in ways different than they are for domestic investors, and for reasons that are not fully understood by most EDAs. Therefore, it is important for the foreign investor to both understand which U.S. incentives are most likely to be of enough importance and value to influence your location decisions, and to help U.S. EDAs better understand your unique business and cultural drivers so that they can better develop and match tools to your expectations.

Matching Business Drivers to Incentives
A foreign investor’s location requirements — and, in turn, the types of incentives that will likely be of most value to it — vary widely depending on both the type of industry or business function it is considering locating in the United States, and also its particular and unique experiences in its home country and with its other global expansions. Although many U.S. EDAs have incentives “toolboxes” that are well stocked with incentives/programs designed to meet the needs and expectations of specific targeted domestic industries and corporate functions, these tools may not be correctly calibrated to the specific needs and nuances of the foreign investor.
To determine which U.S. incentive offerings are likely to have value to you as a foreign investor, it is important to first prioritize the business operating drivers of the function you are seeking to deploy in the Unites States. Is the company capital-, labor-, knowledge-, or logistics-intensive? Will it deploy a manufacturing, distribution, or services-oriented function? Is the operation primarily cost- or quality-driven? If it is manufacturing, is it a heavy process (extensive use of raw natural resources, high utility usage, etc.) or a light manufacturing process (basic assembly or electromechanical operations)?
The company should also think ahead as to how its U.S. footprint might evolve over time. What are the drivers of your other products or corporate functions that might someday in the future also deploy in the United States, potentially at this location? Could that product’s or function’s business drivers be met in this location and does the EDA have the tools to help make it successful as well?
Clearly defining the operational and functional business drivers of the operation that your company is seeking to deploy in the United States helps define which incentives and policies are likely to have the greatest value and impact on your location decision process. Naturally, the better the EDA understands your drivers, the more likely it can develop incentive tools and an overall package that is matched to your specific operational requirements.
To illustrate the types of incentives that typically will have the most impact, Figure 1 lists a set of corporate location decision drivers, the type(s) of industry or function(s) that they normally influence, and examples of incentives or assistance that EDAs offer to address them.

Share Your History and Experience
In addition to understanding how incentive tools correlate with your industry and functional decision drivers, foreign investors should also make sure that U.S. EDAs better understand how your operational experiences in your home country, your previous global expansions, and your previous grants and incentives experience in other countries shape your particular needs and expectations. We have found that the company’s experiences with location selection and incentives negotiations elsewhere can have almost as much influence in the U.S. location decision process as its business decision drivers. Sharing with the U.S. EDA your experiences, successes, and failures in these matters can help it better prepare incentive offerings that both match your needs and your global experiences.
For example, relative to the U.S. location you are evaluating, are your company’s current operations located in an area with:
• Lower or higher labor costs?
• Lower or higher taxes?
• Low-cost or subsidized industrial land or high-cost real estate?
• Robust or poor utility and transportation infrastructure?

Has your company recently deployed other global operations in:
• Low operating cost countries? And which are the low costs: labor, real estate, taxes?
• Countries with lucrative incentives? And what type of incentives: cash grants, reduced taxes, real estate, infrastructure, training? Are your existing operations more typically deployed in:
• Highly urbanized, suburban, or more remote environments?
• Industry clusters with close customer and vendor connections?
• In areas with concentrations of specific suppliers and services?
Following are a few examples to help illustrate this point:
• Companies from Europe and Japan often expect that American workers will lack the necessary experience and training in their manufacturing operations and will have less developed skills than workers in their home country or other global operations. And often their home operations have labor costs that are as high or higher than those in the United States. These companies may find that U.S. incentives that seek to lower labor costs by subsidizing wages during the training period are of less value than robust skills recruiting and customized training programs, or subsidized travel expenses to fly the new hires from the United States to the home country for intensive, on-location training at an existing company operation.
• For a company from a country where land is expensive and less abundant, a local incentive that provides low-cost land in the United States with sufficient additional low-cost land for future expansions will likely be an enticing lure, as it both reduces upfront capital costs and provides a form of insurance for future growth.
• Companies that have recently deployed operations in low-cost, but less developed countries with low-quality infrastructure will find that a U.S. EDA providing incentives for free or low-cost utility line extensions, road and rail extensions, or utility capacity upgrades are speaking directly to their unique past global location experiences.
• While corporate tax burdens are being reduced or are already low in much of the industrialized world, foreign companies typically find that the combined federal, state, and local tax burden in the United States is comparatively high. Incentives that reduce the state and local burden — through corporate, property, or sales tax abatements and credits — lessen the impact of high U.S. federal corporate tax rates.

Common Incentives
In addition to aligning the U.S. locations and their incentives offers with your company’s operational drivers, cultural nuances, and historical experiences, it is also important to determine which type(s) of incentives are most likely to have the highest value to your company. Incentives are generally either “one-time” or “ongoing,” and either “hard” or “soft” dollar. Figure 2 summarizes common U.S. incentives along these continuums.
Like most companies, your company is probably most interested in “hard” dollar incentives that lower up-front capital and/or ongoing operating expenditures. Cash grants, subsidized real estate, and tax burden reduction are more easily quantified incentives and translate into bottom-line value.
But foreign companies should not neglect the value and importance of properly targeted “soft” dollar incentives. Services-in-kind and one-time startup assistance, such as the fast-tracking of zoning changes or construction permits, employee recruiting support, or the provision of temporary space during startup can speed up and ease the implementation process, especially for companies that are new to the U.S. market. Ongoing EDA services, such as developing specialized training programs with local vocational and technical schools, or developing relationships with area universities for collaborative R&D and commercial development, can be valuable to the company over the long term.

The Convergence Model
Historically, most foreign companies investing in the United States have been primarily driven by a need to create or enhance access to new markets and customers. Whether activated by a desire to reduce logistics costs, increase speed to market, or improve brand awareness, establishing a physical presence within the United States has been of paramount importance. And then, depending on what factors and issues drive their operations — whether the company is talent-, utility-, or transportation-intensive — a second set of decision drivers, such as access to a specific talent set or plentiful and low-cost electric power, further defines a particular U.S. sub-geography.
Recently, an increasing number of foreign investors are employing a more comprehensive and integrated U.S. location strategy — what we call the “convergence” model (Figure 3) — to ensure a more holistic decision process that creates a flexible platform for long-term success in the U.S. market.
Simply put, the convergence model prescribes that rather than basing the location decision solely on satisfying one set of market or operating objectives — such as proximity to a specific customer(s) or reduced labor costs — a more holistic decision process be utilized that looks at broader and longer-term goals, and seeks to squeeze more out of the foreign company’s capital expenditure. The choice for the new U.S. location will, therefore, seek to optimize multiple factors and objectives, potentially also including functions or products not currently under consideration.
For example, if your company is seeking to establish a presence in the United States primarily to serve a specific set of customers with a specific product or service, the driving location decision factor will likely be optimizing physical access to that market. Normally then, the closer the better; your company may simply identify workable real estate as close to the customer as possible.
However, when employing the convergence model, in addition to finding a location within acceptable proximity to the customer, the decision process requires that the company look more broadly across multiple issues and factors to identify locations that satisfy not only the immediate functional requirements of the operation making the current site decision, but also those of other company products, services, or functions — even though these are not immediate location requirements.
For example, your company may decide that for future functions, it will need a more flexible and innovative talent pool than is required by the initial operations, or an area with variable operating costs that are optimized across a wider spectrum of factors that better meets the future needs of other corporate products and functions. Likewise then, when evaluating and negotiating incentives with the U.S. EDA, the company should consider whether the location has the necessary tools and policies to assist its potential future functional requirements as well as its present ones.
While the convergence model decision process may at first blush appear to be more complex than is necessary for the operation and location decision at hand, it also leads to a more robust and flexible decision with longer “shelf life.” If and when your company expands its U.S. footprint in the future — adding more or different products, services, or functions — it is now more likely be pre-positioned in terms of operations needs as well as incentives assistance to deploy the new investment at the existing location — both faster and cheaper. Had the company made the original decision based solely on the primary determinant of that specific function and that time, it might instead be forced to launch a new location search and new incentives evaluations for yet another single-function or single-operation site decision.

In sum, incentives are no less important to the foreign investor in the United States than they are for investments in any other global geography, though the business drivers are often quite different and, therefore, change the value and importance of those incentives. To ensure that your company understands which incentives will have the greatest impact and value to your planned operation, start by identifying and prioritizing your business drivers, weighing the importance of both the hard/soft and one-time/ongoing incentives. Communicate your company’s past global expansion experience with the U.S. EDAs you are working with so that they are prepared to develop an incentives package that better addresses your specific business history. And finally, make sure that you look deeper, and more broadly, across multiple issues and factors to identify U.S. locations that will best satisfy not only your immediate operational and incentives requirements, but also your longer-term goals and plans across a broader set of products and functions.