Still the Land of Opportunity?

The United States continues to offer significant appeal for foreign direct investment, though the opportunities vary greatly depending on the objectives of individual companies. Some foreign investors come in search of low-cost production inputs offered by certain U.S. locations (“resource seekers”), while others are driven by the lure of new markets in which to sell their goods and services (“market seekers”). A third classification aims to tap the knowledge, technological aptitude, and ingenuity of the American work force (“innovation seekers”). The decision criteria of foreign companies considering investments in the United States vary depending on the particular mix of goals the company is seeking. This narrative examines the three primary categories of foreign investor and what each hopes to achieve by investing in the United States, analyzes how each type of operation makes location decisions, and characterizes traits of locations (and representative places) that have successfully attracted the various investment types.

Resource Seekers
Resource seekers aim to minimize operating costs by locating in areas providing low-cost inputs to the product or process. Resources can be broadly characterized into categories such as labor, utilities, natural, material, or even monetary (i.e., venture capital). Any critical input to the product or process may be considered a resource in this context.

Labor: Generally speaking, the United States offers few labor cost arbitrage opportunities for foreign investors (though the recent drop in the U.S. dollar may soon challenge this assumption), as it ranks behind only select Western European countries as having the most expensive labor costs in the world.1 Companies seeking pure labor cost advantages have realized for decades that they are better off locating in other regions of the world such as Asia, Eastern Europe, or Latin America. While labor costs are not the primary driver for most foreign resource seekers to locate in the United States, it should be noted that wages differ (in some cases significantly) throughout the country and still influence the location decision of companies deciding to locate in the United States for other reasons.

Given high U.S. labor costs, is there still an opportunity for the resource-seeking foreign investor? The answer is yes, but the reason depends largely on which other resource cost factors a company is trying to mitigate.

Utilities: Some areas of the United States offer abundant, low-cost utilities (e.g., electric power, natural gas, telecommunications, water, etc.) compared with other regions of the world. Some locations in the U.S. West, with substantial hydroelectric power production capabilities, can offer rates in the $0.03 to $0.04 per kWh range, which can translate into millions of dollars of annual savings for heavy users. Low power rates also exist in the Tennessee Valley territory and in other regions of the United States. In addition to traditional manufacturing operations, data centers are increasingly seeking opportunities to take advantage of low-cost power, along with low natural disaster risk — which may also be considered a form of resource.

Natural resources: Natural resources — such as forestry products in the Northwest, oil and petroleum in the Gulf Coast and Alaska, various crops in the Midwest, and coal in several U.S. regions — have spawned entire industries throughout the country’s rich history. In one sense, the United States was founded by resource seekers, as Columbus and the early explorers were in search of spices and other exotic natural resources of the East Indies when they arrived on our shores over 500 years ago.

While certain natural resource-based industries (e.g., logging) have diminished over time, others (e.g., alternative energy) are playing an increasing role in driving demand for the country’s natural resources. Development of new technology to harness these resources and produce cost-effective, clean energy — through the use of wind farms, solar technology, and ethanol — will likely create a new wave of industry poised to capitalize on the natural resources of the United States.

Opportunities remain for select foreign-invested resource seekers in the United States, based on their specific production inputs. However, the majority of future foreign direct investment to the United States will likely not come from resource seekers, but instead be derived from companies focused on the market- or innovation-seeking objectives described below.

Market Seekers
Market seekers make location decisions based on proximity to current or potential future customers. Usually driven by freight or center-of-market analysis, these companies locate where they can maximize sales of their products while minimizing transportation costs, leading to a relatively focused search area. Corporate strategists who are market seekers typically evaluate the trade-offs between proximity to customers and suppliers and other key operational factors.

Center-of-market analysis: A typical network analysis for a U.S. market-seeking production/distribution operation (assuming shipments are distributed proportionally to the population, as is common for consumer-based products) will generally identify the central United States, edging toward the South, as an optimal facility location. Increasing demand requirements or improvements for customer service (such as time to market) introduce the need for additional facilities, which alter the U.S. network model. Typically, a second facility would be introduced near the West Coast, a third in the Midwest, and a fourth in the Southeast, etc. Each incremental facility impacts the optimal location and service territory of the others.

Savvy companies will also try to project where future demand for their product will occur and include this information in the center-of-market and location analysis. Future market seekers are likely to follow long-term demographic trends, and will be more prone to locating in growing areas of the country such as the Southeast and Southwest.

U.S. market demand remains healthy: Despite the well-documented downturn in U.S. manufacturing (largely attributable to resource seekers leaving for low-cost labor environments), foreign investors remain eager to access U.S. customers. Recently, numerous foreign manufacturers have announced plans to establish or expand U.S. production capabilities to meet growing or expected market demand. In several cases we are familiar with, the project locations were primarily selected for proximity to customers and suppliers, while still attempting to optimize additional location considerations (e.g., operating costs, talent availability, and quality of life) as much as possible. In these cases, the foreign investor focused on a search area no greater than a 250-mile radius from the calculated logistics center-of-market, as the products to be shipped had relatively short lead-times for delivery.

The United States remains the largest consumer economy in the world and will continue to attract investment from foreign market seekers looking to gain (or grow) their share of the U.S. pie. While many products will certainly be produced overseas and imported, the United States will continue to attract considerable levels of FDI from companies that are driven by the need to quickly and economically meet U.S. market demand.

Innovation Seekers
Innovation seekers locate where they can access top-quality talent; they strive to find the most knowledgeable, creative, or technologically advanced work force to meet their needs. The United States has long been known as a world leader in measures of work force knowledge and ingenuity, with access to renowned educational resources, and will therefore continue to offer substantial opportunities for foreign direct investors seeking such talent. The 2007 Global Innovation Index (GII) ranks the United States #1 in the world at responding to the challenges of innovation.2 Accordingly, U.S. R&D expenditures are more than double those of any other country.3

Though often associated with companies in knowledge-based industries such as information technology, life sciences, and aerospace, innovation-seeking also maintains a functional delineation. For example, R&D, design, and product engineering — even for relatively commonplace products such as food or household appliances — still require access to top-quality technical talent.

Industry clusters: California’s Silicon Valley is the poster-child for IT and software innovation capabilities in the United States. While domestic giants such as Google and Yahoo reign, foreign investors are tapping into Silicon Valley for the same talent-related reasons as U.S. companies. For example, the U.S. Market Access Center, one of four business incubators at San Jose State University, focuses on advising foreign companies on how to gain a foothold in the U.S. market. Several country-specific incubators are sponsored by foreign government agencies (Japan and Korea, among others) to help budding companies establish a presence in Silicon Valley.

Innovation-seeking FDI is also very pronounced in other industries and U.S. regions. The large pharmaceutical corridor in New Jersey-Eastern Pennsylvania, for example, contains significant investments by foreign companies such as GlaxoSmithKline and Roche.

Innovation seekers are often associated with major urban areas and large research university concentrations, as the innovation seeker’s location requirements are more focused on access to talent and knowledge institutions and are less cost-sensitive than those of other investors. However, small-to-mid-size metropolitan areas with the right building blocks have also emerged as principal FDI destinations for innovation seekers.

For instance, the growth of semiconductors in Austin, Texas, revolves around home-grown Dell and several domestic companies that have chosen Austin for their operations; but the critical mass of talent has also attracted major foreign investors such as Tokyo Electron and Samsung. Smaller cities such as Huntsville, Alabama, and Wichita, Kansas, have become hotbeds for aerospace-related research and corresponding manufacturing functions. While initially emerging through the growth of domestic companies or institutions (e.g., NASA, in the case of Huntsville), momentum in these areas has increased to attract foreign companies as well.

Educational linkages: Innovation seekers typically require strong linkages with higher education at the undergraduate, graduate, and often Ph.D. levels. Locations must demonstrate not only the presence of relevant talent, but also the ability to sustain or even grow the talent pool.

Competitiveness: Research and innovation capabilities continue to grow in several regions of the world, including emerging, lower-cost markets such as India and China. Although the United States has historically been a strong beacon to innovation-seeking companies, it will no doubt need to work hard in the future to maintain its competitive advantage. To the extent that the United States is successful in maintaining its innovation edge, foreign innovation seekers will continue to see opportunity in the U.S. market.

Seeking Utopia
In the past, most companies utilized a linear model to assess deployment objectives, exclusively seeking new resource cost reduction, market penetration, or innovation opportunities with each investment. However, global companies are now evolving from linear to “convergence” deployment models, realizing that improving margins, growing revenues, and winning the talent war are increasingly interdependent objectives.

On a global basis, only a handful of countries can truly claim to optimize all three considerations. China and India, for example, have low-cost talent resources, rapidly growing consumer markets, and large numbers of engineering, IT, and other “innovation” professionals (though arguably also have emerging tradeoffs with productivity, attrition rates, and wage stability).

To successfully attract foreign direct investment in today’s increasingly competitive environment, U.S. locations must either differentiate themselves by demonstrating unique capabilities along a single dimension (e.g., semiconductors, aerospace, biologicals, medical devices, food, etc.) or proactively demonstrate their capability of balancing multiple objectives simultaneously (talent access, market access, incentives, moderate overall costs, etc.).

While it is difficult to find markets that perform favorably across all three categories of seekers in the United States, it is possible to find examples of metropolitan areas that more than adequately support at least two criteria. Driven by the 50,000+ students at the University of Texas, Austin is an example of a location that attracts and produces highly educated, innovative professionals in the areas of computer science and technology support, while also offering relatively low costs in relation to large U.S. metropolitan areas. Another example is the corridor between Nashville and Memphis, Tennessee, which is central to the market, offering highly efficient access to a large percentage of the U.S. population; yet it also has moderate labor and other operating costs (including very low electric power rates in certain service areas).

Opportunities Remain
The United States can remain the “land of opportunity” for foreign direct investors, provided they are considering U.S. investment for the right reasons. While resource-seeking companies chasing low-cost labor will continue to look elsewhere, other foreign companies will continue to locate in the United States in order to access select low-cost resources or factors of production, grow their market share, and tap into a uniquely innovative work force. If these companies correctly prioritize their investment drivers and seek locations that deliver on multiple objectives, they can still use a U.S. location as a value generator and derive maximum opportunity from their direct investment in the United States.

1 UBS, Prices and Earnings, 2006
2 INSEAD/World Business, 2007
3 IMD, World Competitiveness Report, 2007

About the Authors:
Michael Kaiser (Los Angeles) and Joshua Timberlake (Chicago) are location strategists in the Global Expansion Optimization practice of Deloitte Consulting LLP.