This chapter outlines the key global evolutions that have changed the landscape and capacity of regions to attract foreign direct investment in recent years. It presents evidence on what works for investor attractiveness and the role that regional and local actors can play in enhancing these factors to make regions more attractive to prospective investors. In addition, it discusses the role of investment attraction in delivering broader regional development goals such as achieving a green transition, supporting small and medium-sized enterprises (SMEs) and developing key infrastructure. Finally, a roadmap is presented to identify investment targets that contribute to a region’s development goals and outlines steps to co‑ordinate actors and policies to enhance regional attractiveness towards international investors.
Rethinking Regional Attractiveness in the New Global Environment
4. International investment attraction
Abstract
Key messages
Investors prioritise good infrastructure and skills
Across European Union and OECD regions, investments are facilitated in part by quality infrastructure, such as access to and quality of roads, rail and airports.
Digital infrastructure (measured by access and speed) is especially important for firms operating in the services sector, as is the presence of quality universities, which signals to investors the presence of a skilled talent pool.
But infrastructure alone is not sufficient to attract investment, as investors target areas with the skills they need.
Investors operate in an evolving global environment
Regional investment attraction needs to consider the reconfiguration of global value chains (GVCs), talent location preferences and sustainable development to stand out in today’s crowded and complex foreign direct investment (FDI) environment.
For example, the investment in renewable energy as a share of investment in total energy-related FDI went from just under 10% in 2004 to around 90% by 2021 across OECD economies.
Numerous mechanisms exist to promote inward investment across places
National and regional investment promotion agencies (IPAs) have proved effective in winning FDI projects to subnational locations, with a particularly important role in co‑ordinating actors across sectors and across places and investment strategies to avoid domestic competition and promote balanced regional development.
Another tested tool where IPAs are a key actor are Special Economic Zones (SEZs), which, if adequately designed and targeted to the local ecosystem, can be of particular benefit to lagging regions – especially when they benefit from greater land availability, which is essential for attracting FDI in manufacturing – and in boosting nascent and emerging sectors. However, for SEZs to be successful, good internal and external governance is essential to avoid potential negative externalities and displacement effects on the wider regional economy.
Domestic SMEs are linked to FDI through diffusion channels (as collaborators and suppliers to foreign firms) and in doing so they act as drivers of new investment, signalling to prospective firms the potential added value of the regional enterprise ecosystem to their operations.
As firms are increasingly searching for top talent, investments in education and skills development can signal the presence of a talent pipeline, while also boosting the region’s innovation ecosystem.
Investment attraction provides greater benefits when embedded in regional development strategies
Whether the region’s goal is to navigate an industrial transition to net zero or to revitalise a distressed or lagging region, promoting foreign investment can serve these missions.
When FDI attraction is a co‑ordinated effort among actors it can lead to job creation, improve infrastructure networks, generate spillovers for local businesses and support regions through industrial transitions.
The evolving drivers of regional investment attraction
The investment location decisions of today’s multinational enterprises (MNEs) are influenced by a host of factors that are context-driven with important spatial and sectoral differences. Creating a favourable local business environment and overcoming distance to suppliers and clients are important challenges cited by many OECD countries (OECD, 2022[1]). Additionally, the changing preferences of talent, increasingly flexible working arrangements and the overall labour market conditions have provided workers with a more front-seat role in deciding where they would like to work and live (IMF, 2022[2]) This is another dimension to which firms must pay attention: not where talent is today but where they would like to live tomorrow (OECD, 2022[3]).
While the location decisions for FDI are not constant, the historical determinants can shed light on what matters most to MNEs in choosing where to invest; however, it is important to balance this analysis with foresight on where current trends are reshaping the global investment landscape. Beginning with the existing drivers as evidenced in the literature, there is a clear indication of the core determinants: i) new market access, as measured by market size and purchasing power; ii) efficiency seeking, as captured by lower costs of doing business; iii) institutional quality and overall political and economic stability; iv) natural – and increasingly renewable – resources; and, finally, v) asset-driven factors, where a labour pool, technological cluster or other form of attractive assets will determine the decision to invest (Frick and Rodríguez-Pose, 2023[4]; ECB, 2018[5]). For regional policy makers, the fifth category – assets – signals an area where subnational policy competencies and the co‑ordination capacity of regional actors can have significant influence. For regions, increasing global connectivity – as relatively independent actors in a complex global economic system – is in line with improving regional resilience. This role is especially pronounced given that the effects of globalisation have tended to favour a spatially hierarchical structure of economic development that has benefitted a few – often metropolitan and capital or natural resource-endowed – regions, within countries, contrary to the spatial convergence that economic theory professed globalisation would entail (Iammarino, Rodríguez-Pose and Storper, 2019[6]; Iammarino, 2018[7]).
In this context, and as illustrated in Chapter 3, the determinants of investor location decisions should be broadened to cover a larger range of policy areas, notably those under which regional actors have the capacity to measure and to improve – through targeted investments, for example in research and innovation and partnerships with local universities, upgrading road and rail and ensuring widespread access to fast Internet.
The reconfiguration of GVCs, through processes from reshoring to nearshoring and offshoring, has opened up new opportunities for regional investment attraction. As places look to recover and navigate the effects of both dwindling and burgeoning crises, the positioning of economies in global supply and value chains is being called into question. The “just-in-time” strategy, where fragmented supply chains are often far away from the home economy and designed to be low-cost and just-enough-stock, is losing ground in light of the shortages and delays that significantly disrupted the delivery of critical goods throughout much of the pandemic (Masters and Edgecliff-Johnson, 2021[8]). By moving production closer to home, economies are finding it possible to be both “just-in-time” and “just-in-case”, paving the way for regions with lower capital costs – regions that have traditionally lagged – to become the new centres of industrial competitiveness and to foster more oversight on the sustainability of their value chains. However, as discussed in Chapter 2, evidence shows that, to date, macro-regionalisation has only occurred in certain sectors. On the whole, trade has tended to increase between macro regions, albeit partially explained by an increased dependency on China.
The premium placed by firms and governments on sustainability puts quality over quantity in terms of FDI attraction. Between 2004 and 2021, the share of renewable energy investment in total energy-related FDI went from just under 10% in 2004 to around 90% by 2020 across OECD economies (OECD, 2022[9]). FDI investments also comprise 30% of all renewable investments globally. To harness the benefits of the surge in FDI renewables investments – to both the benefit of the local climate and economy – regions need to pitch their assets by illustrating both the environmental and policy landscapes that can facilitate green investments. Indeed, as resources from wind, sun and critical minerals become the most essential inputs for energy production, the outlook in terms of production for certain regions with said natural endowments improves (OECD, 2023[10]).
Talent location preferences are increasingly seen as drivers of investor preferences (Becker et al., 2020[11]). Firms are reacting to the demands of talent under the supposition that talent no longer chases jobs alone but also places, and firms must follow in their footsteps. Attracting investment and talent can be seen as synergistic strategies, where thinking of both as members of a regional community can support policy strategies that account for the needs and contributions of both. For example, there has been a recent trend of smart specialisation strategies (S3) across European regions to capitalise on regional comparative advantages and to identify emerging areas of growth. However, S3 strategies tend to exclude mention of how talent attraction and talent development will contribute to growth in emerging sectors. Given the demographic challenges faced by many regions, talent attraction is an essential component of any investment attraction strategy.
What works for investor attractiveness and export development?
A larger number of smaller projects
As illustrated in Chapter 3, the importance of physical and digital infrastructure points to larger concentrations of FDI projects and expenditure at the regional level. However, as presented, the effects vary when we look at capital expenditure versus the number of projects. The takeaway for regional FDI attraction policy is that more levers may exist to attract a larger number of smaller FDI projects than is required to entice large investments from MNEs that often choose locations either in or near metropolitan or capital regions. For example, Munday and Roberts (2001[12]) show that in Scotland and Wales, United Kingdom, while larger foreign affiliates spend more in absolute terms, smaller firms tend to be more embedded in the local economy with regard to supplier linkages with domestic firms; this embeddedness is an important part of making FDI more inclusive (Figure 4.1).
A role for investment promotion agencies (IPAs) in attracting regional investments
National IPAs play a strategic role as stewards of balanced regional FDI, fostering central-regional co‑ordination to help level the playing field for FDI attraction. The OECD’s survey on investment promotion and regional development finds that 92% of national IPAs have a mandate for regional development and 94% have referenced regional development within their overall strategy (OECD, 2022[1]). For example, in the United States, SelectUSA – housed within the U.S. Department of Commerce – is a federal government programme with a responsibility to promote and facilitate inward business investment. SelectUSA works closely with the U.S. and Foreign Commercial Services and entities across the government to facilitate job-creating business investment in the United States and raise awareness of the critical role that economic development plays across the United States. It provides clients with in-market services and on-the-ground expertise in more than 75 global markets and more than 100 locations throughout the United States. Since its inception in 2011, SelectUSA has facilitated more than USD 146 billion in client-verified investment projects, supporting more than 166 000 US jobs (U.S. Department of Commerce, 2023[13]).
Ireland is another renowned country case for FDI, yet a lesser-known instrument used by IDA Ireland – the national body for foreign inward investment attraction – is its regionalised set of strategies to diversify investments beyond the Dublin area. IDA Ireland works directly with local authorities to outline the needs of prospective firms (e.g. housing, talent, land, natural resources) and identify a strategy to ensure firms can meet and exceed their needs in the select location. For example, IDA Ireland’s regional property programme works with the regions to identify and invest in property solutions that ensure location choice is not constrained by an absence of available, quality infrastructure – a tool critical to developing manufacturing clusters in the regions. The roadmap to create regional investment solutions is further outlined in the nine (Territorial Level 3 – TL3) Regional Enterprise Plans, which are an organising tool with action items assigned for enterprise ecosystem development that outline the roles played by a number of actors, including IDA Ireland but also local authorities, Enterprise Ireland, universities and the regional assembly, in attracting investment. For example, a key action item in the Mid-East Regional Enterprise Plan is to co‑ordinate actors and investment in the screen and film sector to grow the region as a hub for international film production and related investment. This level of local co‑ordination for attracting investment is indeed apparent across the country. The winning FDI strategy in the South-East sub-region shows that there is an argument to have co-existing subnational agencies working on investment attraction (and co‑ordinating with national actors) (fDi Intelligence, 2023[14]). Another example of this is Business France, a national investment promotion agency with a regional policy, Team France Invest, where activities to facilitate regional investment – including actor co‑ordination, territorial promotion, prospection and training – are carried out at the regional level (OECD, 2022[15]).
Across OECD countries, at least 72% of regions have their own subnational IPA while 92% have some form of subnational organisation – either economic development organisations or IPAs – which have investment promotion in their remit (OECD, 2022[1]). Evidence points out that these regional IPAs have a successful track record of attracting FDI, justifying their use as a policy tool. Indeed, less-developed regions across Europe have been shown to capture 71% more FDI – or USD 17 million per year and up to 102 jobs – with the presence of a subnational agency, when compared to those without one in operation (Crescenzi, Di Cataldo and Giua, 2021[16]). The findings suggest that this is particularly salient in knowledge-intensive sectors and for multinational firms that have less international investing experience. The reason for their success can be partially explained by their ability to support firms in overcoming institutional, legal and information barriers. For regional policy makers, this is critical as it offers a lever through which to attract innovative SMEs in emerging industries, in addition to larger firms looking for more cost competitiveness. Importantly, the authors point out that it is not enough to develop a horizontal non-sector specific FDI strategy (Crescenzi, Di Cataldo and Giua, 2021[16]). Instead, regional investment promotion should prioritise specific sectors and should not ignore the more “occasional players” in FDI as they will be more attracted by the regional investment ecosystem over which local and regional policy makers have considerable influence.
These examples and evidence show that as multiple actors covering overlapping geographies carry responsibility for investment promotion, there is a strong need for co‑ordination mechanisms to ensure strategic alignment and deliver the best results. These processes can sometimes be complex and at times political. For example, when regional and national governments are represented by different political parties or hold divergent views on investment priorities, this makes national-regional co‑ordination a greater challenge and increases the need for dialogue and co‑ordination (Lewis and Whyte, 2022[17]). As discussed in Chapter 7, there exist multiple tools to address the challenges associated with multi-level governance for investment promotion, including establishing a key co‑ordination role for the national IPAs that balances the needs and priorities of regional and local agencies in promoting their strategic priorities and working with MNEs and SMEs to promote balanced regional development.
IPAs are also instrumental actors in bridging cultural gaps between international firms and regional communities. The impact of cultural factors on FDI location decisions has been well documented over the years and across geographies: see, for example, Kapás and Czeglédi (2020[18]) and Lucke and Eichler (2015[19]). While geographic proximity and cultural affinity can ease the process through which FDI flows between regions, IPAs can prove particularly useful in situations where the cultural distance between the investor and the host region is larger (Iammarino, 2018[7]). To foster an inclusive investment environment, agencies can work with industry and civil society organisations to promote the diversity of the regional workforce and opportunities for work-community integration such as language training, cultural events and career fairs.
SME linkages as a beacon of attraction
The role of SMEs as attractiveness drivers themselves is an important asset for regional policy makers to leverage. Local firms can act as strategic partners for FDI firms through several channels, such as supplier linkages, labour mobility, innovation and competition. The economic geography influencing this FDI-SME relationship is indeed supported through clusters, as illustrated, but also on other region characteristics such as: natural resource endowments; the quality of regional infrastructure; regional quality of government; regional labour markets; and other attractiveness assets. Policy makers can support regional FDI-SME ecosystems to strengthen channels that benefit international and local firms alike (Figure 4.1).
Mobilising SMEs to support attractiveness, however, requires their direct involvement in investment attraction policies, for example through local chambers of commerce, public consultation and through their role as stakeholders and advisors to IPAs, and regional and national governments. Furthermore, as SMEs advocate for improvements in regional assets, like those mentioned above, this, in turn, creates a more attractive environment for attracting international investment. While FDI can be productivity-enhancing for domestic SMEs, there are also channels through which domestic firms can support the upgrading of FDI firms. One example of this is support for cluster policies that can formalise networks of indigenous firms in one or multiple sectors to both boost productivity and entrepreneurship and enhance attractiveness to investors in said sectors (OECD, 2022[20]).
Further work on SME density and investment attraction could explore the linkages through which firms are actors in the process of engaging foreign entities to locate in a region and if/how this improves positive spillovers. There is a prominent role for public actors to play in achieving this, as is already illustrated in many country cases. The Portuguese programme Startups Connecting Links aims to connect domestic start-ups in specific sectors or activities with foreign MNEs with a twofold objective: promoting collaboration between foreign and domestic businesses and favouring the entry of MNEs into the Portuguese market through mergers and acquisitions (M&A). The Spanish Investor Network, implemented through the Spanish Institute for Foreign Trade (ICEX) network of Economic and Commercial Offices abroad, aims to connect international investors with the domestic business fabric and facilitate contact between Spanish companies looking for capital and foreign investors (OECD, 2023[21]).
Figure 4.1. FDI spillovers on domestic SMEs: A conceptual framework
Source: OECD (2023[22]), “Enabling FDI diffusion channels to boost SME productivity and innovation in EU countries and regions: Towards a policy toolkit”, Revised Concept Paper, OECD, Paris.
Cluster policies are another feature of the policy mix to promote regional innovation ecosystems that depend on strong ties between domestic firms and foreign investors. For example, Enterprise Ireland’s Regional Technology Cluster Fund offers financial support to increase the number of clustering companies in Ireland and enhance collaboration between firms and regional knowledge providers, such as Ireland’s institutes of technology (IoTs) and technical universities. The Swedish Agency for Economic and Regional Growth also runs a Cluster Programme to support selected cluster organisations that are prioritised in regional smart specialisation or development strategies (OECD, 2023[21]). These programmes illustrate the role of public actors as strategic connectors and knowledge brokers who can enable spillovers to take place by leveraging their local networks and, where possible, providing incentives and investments for domestic and foreign firms to exchange.
Export development
The relationship between FDI attraction and export development is well documented, with evidence across developed and developing countries suggesting a complementary relationship between inward FDI and export promotion (Sultan, 2013[23]; Chaisrisawatsuk and Chaisrisawatsuk, 2007[24]; Harding and Javorcik, 2012[25]). Indeed, already in 2014, the share of global exports of MNE affiliates stood at 31%; in other words, nearly one-third of global exports can be accredited to the foreign activities of MNEs (Crescenzi and Harman, 2022[26]). In the case of Portugal, Andraz and Rodrigues (2010[27]) demonstrate with evidence spanning a nearly 40-year period a univariate causal relationship between inward FDI and exports, with the effect flowing from the former to the latter. Importantly, these relationships are not fully explained by the exports of FDI firms themselves. Productivity spillovers, human capital formation and technology transfer brought about through FDI can lead to greater SME competitiveness and a higher propensity for SMEs to become exporters themselves (as depicted in Figure 4.1). Moreover, SMEs can indirectly contribute to export development through backward linkages, i.e. where the SME provides inputs to the exporting foreign affiliate. At the regional level, these spillovers and linkages manifest in different ways. The firms that benefit tend to be in the nearer vicinity to where the investment took place and the effects may in fact be negative in further-off regions, illustrating the need for national and regional stakeholders to co‑ordinate attractiveness policies (Lembcke and Wildnerova, 2020[28]).
Promoting the exports and GVC integration of domestic firms is often a part of the mission of regional bodies. In Denmark, for example, regional Business Development Centres support SMEs that express a readiness to internationalise (EESC, 2018[29]). Experts from the centres provide free advice to firms on their internationalisation strategy. In Ireland, nine Regional Enterprise Plans at the TL3 level function as the guiding strategies for export-led economic growth with specific action items outlined to deliver sector and place-based outcomes (Government of Ireland, 2020[30]). Each plan is governed by a steering committee of industry and public sector representatives and aligns specifically the region’s FDI targets with broad-based enterprise development at the regional level. As discussed above, this is another example of how SME upgrading and investment promotion can be mutually reinforcing policies that can foster regional ecosystems of entrepreneurship and investment but require significant attention from the regional government to come to fruition.
Aligning investment attractiveness with regional development goals
Attracting investments to drive the green transition
Attracting foreign investment is increasingly being seen as a vehicle to support the industrial transition of regions from traditional sectors with adverse environmental impacts to ones that are conducive to a green transition in regions. For example, the North Sweden Green Deal in the Upper Norrland region is the culmination of two local county governments that have come together to promote investments that enable the region’s transformation into a hub of a sustainable industry that appeals to both investors and talent (Utveckla Norrbotten, 2022[31]). This is described as a “new industrial strategy for Sweden”, which aims to position northernmost counties as hubs of the global green transition and places where young, skilled talent with an environmental focus might want to live and work. To achieve this, municipalities like Luleå frequently engage businesses that have chosen to locate in the region to build a channel of public-private trust and to ensure that these businesses act as ambassadors for further investment in the region (Alm, 2022[32]). In Australia, the recently launched Net Zero Authority is mandated to support transitions across the country including through co‑ordinating “programs and policies across government to support regions and communities to attract and take advantage of new clean energy industries and set those industries up for success” (Government of Australia, 2023[33]). Increasingly, governments are recognising the green transition as a window of opportunity for regions to achieve sustainable economic development and an opportunity to attract new residents and build a new regional brand. This, as evidenced in Australia and Sweden, requires a co‑ordinated effort across levels of government and with the non-government sector to come to fruition.
Revitalising regions through investment zones
In Italy’s southern regions (Mezziogiorno), Special Economic Zones (SEZs) focused on the economic revitalisation of distressed areas have been established to attract investment that better balances regional development across the country. These eight zones illustrate the distinct regional advantages of their area. For example, two zones in the region of Sicily attract investment in important sectors like agri-food, nanotechnology and pharmaceuticals while also addressing much-needed infrastructure investments that modernise the island’s logistic network (Regione Siciliana, 2023[34]). Rather than creating nodes of competition within a region, the zones are specialised in unique sectors and projects that cater to the local assets and labour markets and are co‑ordinated by a designated special commissioner. Similarly, SEZs are considered an important investment attraction tool in Poland (Box 4.1).
Box 4.1. Special Economic Zones: The case of Poland
SEZs are an important tool for investment attraction in Poland but their success may depend on their governance
Poland’s regions receive worthy praise for their ability to attract investment and develop clusters in increasingly higher-value-added segments of production. A famous example is the Katowice special economic zone in Poland, which has successfully transformed the voivodeship (region) into an investment attraction leader at the European level. It has regularly been awarded the best Free Zone of the Year in Europe award by fDi Intelligence and was scored as second best in the world in 2019. According to Arbolino, Lantz and Napolitano (2022[35]), out of 51 investment zones across Europe, Katowice has most successfully met its stated and total policy objectives, attracting significant FDI, generating infrastructure overlay and boosting regional gross domestic product (GDP).
However, the intended agglomeration effects of SEZs, whereby the entry of new firms and investment translates into the birth and growth of new and existing enterprises, has not been universally observed in the Polish experience. Analysing down to the local level of poviats (counties), Ambroziak and Hartwell (2017[36]) show that while the SEZs successfully reduced unemployment in the poorest regions, the overall number of business entities did not change between regions with an SEZ and those without. What the authors observe is a firm-based agglomeration effect with a few SEZ-based companies generating employment in the counties. While the effects on regional employment appear positive, the goal of achieving more balanced regional development is not fully met. Importantly, the authors point out that the success of the SEZs depends largely on the local authorities’ propensity to invest in the zone and to facilitate linkages between investors and regional entrepreneurs and markets.
Indeed, research indicates that the governance of Polish SEZs has a limited impact on their propensity to attract investment and create jobs in local areas. While the location of the SEZs remains the most significant determinant of their success, those that refrain from over-centralisation of decision-making and engage local and regional authorities in zone management appear to do better, even if located in a less attractive location (Dorożyński, Świerkocki and Dobrowolska, 2021[37]).
Similarly, evidence from Poland and many other countries shows that tax incentives also have little impact on FDI location decisions; however, they do exhibit some importance at the within-country level when investors have the option to choose among various SEZs (Ciżkowicz et al., 2021[38]; Frick and Rodríguez-Pose, 2023[4]).
Note: These findings were inspired by an OECD webinar hosted on the topic of “Enhancing the attractiveness of non-metropolitan areas: The role of SEZs”. More information can be found at: www.oecd.org/regional/globalisation.htm.
Source: OECD (forthcoming[39]), “Enhancing the attractiveness of non-Metropolitan areas: The role of SEZs”, OECD, Paris: Arbolino, R., T. Lantz and O. Napolitano (2022[35]), “Assessing the impact of special economic zones on regional growth through a comparison among EU countries”, https://doi.org/10.1080/00343404.2022.2069745; Ambroziak, A. and C. Hartwell (2017[36]), “The impact of investments in special economic zones on regional development: The case of Poland”, https://doi.org/10.1080/00343404.2017.1395005; (Dorożyński, Świerkocki and Dobrowolska, 2021[37]); Ciżkowicz, P. et al. (2021[38]). , “Why do some Special Economic Zones attract more firms than others? Panel data analysis of Polish Special Economic Zones”, https://doi.org/10.18267/j.pep.763; Frick, S. and A. Rodríguez-Pose (2023[4]), “What draws investment to special economic zones? Lessons from developing countries”, https://doi.org/10.1080/00343404.2023.2185218.
Paying attention to what matters most for investment attraction
As explored in Chapter 3 (and depicted in Figure 4.2), at the European and OECD level, educational institutions appear relevant as facilitators of FDI in terms of both capital expenditure and the number of projects. Universities act as a talent pipeline for prospective firms but, more importantly, they are central actors in the innovation ecosystem of any region. Industry-academic partnerships can lead to firm creation, patenting and other innovation outcomes at the regional level (OECD, 2022[40]). For instance, OECD evidence shows that, across the United States, the job creation intensity of FDI projects tends to be higher in states where research and development (R&D) spending by businesses is larger, reinforcing the importance of local and regional actors to build and support ecosystems that encourage innovation and collaboration among actors (OECD, 2022[1]).
The quality of Internet infrastructure – as measured by the digital download speed as a percentage deviation from the national average – also matters. Unsurprisingly, regions that invest in this infrastructure attract more greenfield projects. Firms are ever-more relying on quality digital connections for their business operations, with increasing demand coming from their talent who require stable Internet to facilitate hybrid and remote working schemes.
Finally, physical infrastructure in terms of road and rail is significant, especially when counting the number of FDI projects a region attracts. Road and rail allow for the ease of movement of people and goods to and from a region and are especially critical for SMEs that depend on these services to internationalise, moving their products to market.
Figure 4.2. Top universities as drivers of FDI to the regions
Source: Based on fDi Markets database (2017-22); (Round University Ranking, 2022[41]), World University Rankings, https://roundranking.com/ranking/world-university-rankings.html#world-2022 (accessed on 1 December 2022).
A roadmap for investment attraction and export development
The OECD has developed a tool, in the form of a roadmap for investment attraction and export development, to clarify and address the main co‑ordination challenges faced by stakeholders involved in the development and implementation of investment attractiveness policies and to highlight good practice examples to address these challenges (OECD, 2022[15]). The roadmap aims to support the dialogue between stakeholders, including across levels of government, who are involved in enhancing the investment attractiveness of regions, and provides a checklist of five key steps for attracting international investors.
Step 1 – Identify and understand target(s)
Identify sectoral prioritisation, alignment with overall regional development strategy and firm type.
For example, looking to build a hub of green industry in Northern Sweden, the Norrbotten region targets firms active in sustainable industrial and manufacturing activities as a means of contributing to the region’s image and success in sustainability: examples include a growing “green steel” cluster, renewable energy and critical minerals.
To identify sectoral priorities, regions should look closely at the segments of GVCs to which they contribute and potential synergies across sectors within a region. For example, a prominent agricultural region with a growing appetite for investment in information technology (IT) services can market their region as ripe for investments in the rapidly-scaling agri-tech industry. This can support emissions reductions in that sector and create linkages between FDI and SMEs operating in the industry.
Step 2 – Map stakeholders and co‑ordinate
Identify the key players in investment attraction, noting that these are bound to change depending on the sector, region and the type of firm/investment. A successful regional strategy will depend on the attractiveness assets that a region has – from its industrial base to its talent pipeline to the local quality of life – but it also requires co‑ordination, collaboration and policy coherence.
The conventional actors include local and regional government, IPAs (national and regional, if present) and industry representatives. However, as illustrated above, there is an important role to play for universities and research institutions, SMEs and firm clusters, each of which can entice firms by promoting the talent pipeline and innovation ecosystem that the region hosts.
Step 3 – Map assets and gaps
Use the attractiveness framework to consider the cost and non-cost drivers that matter to foreign affiliates in their location decision. Indicators that monitor land and housing, for example, will be important to firms that are prospecting for greenfield project sites and that require attracting talent to live and locate in the region. Meanwhile, infrastructure performance is critically important for both the movement of goods and people. When performance is lagging in this dimension, regional investments are likely required to facilitate FDI. Special focus should be given to logistics infrastructure – from roads to ports to airports (as illustrated as essential in Chapter 3) – which is fundamental for attracting export-oriented foreign investors. Increasingly, the quality of digital infrastructure is prioritised, especially for firms operating in the service sector (e.g. IT, finance, business services).
Every region has its gaps as far as investment appeal goes: focus on those for which the region can make measurable improvements and those that align with the overall regional development strategy. For example, the South-East (TL3/NUTS-3) region of Ireland’s award-winning FDI strategy focuses on promoting the local entrepreneurial environment, its new university and its relative cost competitiveness compared to metropolitan regions to elevate its brand, despite the challenges in terms of transport infrastructure that the region faces.
Step 4 – Identify policy levers
Several vehicles exist to attract foreign investment and not all require tax incentives or subsidising, despite these tools having their time and place.
Smart specialisation strategies (S3), for example, are an effective way to regionally co‑ordinate actors around a set of comparative advantages that the region either owns today or seeks to develop in the future. However, these should be accompanied by investment and talent attraction strategies that clearly define how the skills and funds required to bring these strategies to fruition will be attracted. Through S3, regions can lead a strategic vision that involves local and central government, industry and civil society in a process designed to develop key sectors, including through investment attraction. In the case of Region Norrbotten, the S3 strategy does just this, outlining key investments needed to create clusters around the region’s sustainable industry and attractive quality of life (Region Norrbotten, 2020[42]).
Special Economic Zones (SEZs) – in their variety of forms – can be instrumentalised, especially in the promotion of investments to regions that have tended to fall behind. Importantly, they need to be co‑ordinated to limit potential crowding-out effects, which can be done by designing them for specific sectors that are either native to the area of the zone or altogether new to the region. They also should be based on attracting investment capable of generating linkages to local firms, thus embedding the investment in the local economic ecosystem. Recall that the best SEZs benefit not only from financial incentives – they focus on co‑ordination and logistics, and foster linkages between foreign investors and local suppliers/markets (Frick and Rodríguez-Pose, 2023[4]).
Step 5 – Monitor and evaluate
Investment attraction strategies require measurable performance indicators – often these are isolated to the amount of investment won and employment creation. While important, these are outcomes and not drivers of investment attraction. Indicators should be aligned with broader regional development strategies that reflect the evolving requirements of firms and talent in today’s global environment. As illustrated in Chapter 3, important variables include but are not limited to: access and quality of flights and rail network; digital infrastructure; education and skills.
As illustrated, broadband access but also download speeds, are of critical importance. So, too, are the quality and innovation of research institutions. Regions can work with universities to monitor the internationalisation of these institutions through, for example, the share of international students. On the digital front, regions should evaluate not only the number of households or localities with Internet access but the quality (e.g. fibre, speed) – of increasing value to firms competing in a digital world.
If the goal is to promote inward investment in the R&D sector or in cultural and creative industries, regions can monitor the employment levels in these sectors as a share of total employment. Yet employment does not paint the fullest picture: to complement this, indicators that monitor output (i.e. patents, new businesses created) can confirm whether investment attraction has translated into investment creation.
References
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