Exporting and foreign direct investment (FDI) are often seen as two separate prongs of an international business development strategy—but they are connected in ways that are not widely recognized, says Katy Sinnott, vice president of international business development at the Wisconsin Economic Development Corporation (WEDC).
In her role at WEDC, Sinnott guides efforts to grow Wisconsin’s economy through both increased exports and increased FDI. These two areas of focus are complementary and reinforce one another, Sinnott says.
“Foreign direct investment doesn’t just benefit the company making the investment,” she says. “It also benefits the local company that’s being invested in, as well as that company’s local suppliers, Wisconsin workers and the economy as a whole.”
WEDC is part of a group working to shift perceptions about FDI in Wisconsin, as part of the Global Cities Initiative (GCI), a joint project of the Brookings Institution and JPMorgan Chase. The Milwaukee region is one of 28 metro areas nationwide participating in the GCI Exchange, a prestigious designation that facilitates the exchange of ideas and strategies to boost exports and FDI, with guidance from Brookings.
A “core team” of partners—including WEDC, the Milwaukee 7 (M7), the Wisconsin Manufacturing Extension Partnership, the Metropolitan Milwaukee Commerce Association’s World Trade Association, and the U.S. Export Assistance Center in Milwaukee—is engaging with Brookings to develop export growth and FDI strategies for the Milwaukee region. Where applicable, the strategies developed for the Milwaukee metro area will then be extended to other parts of Wisconsin.
As the core team has worked to craft the export strategy, they have realized that several of the tactics included in the strategy apply equally to FDI—and that exports will grow faster if regional economic development partners also set their sights on increasing FDI.
For example, only 41 percent of Milwaukee-area CEOs see global engagement as crucial to the region’s economy. The core team would like to raise that percentage closer to 100 percent. For most types of companies, it’s no longer practical to think of their customer base as purely domestic, says Pat O’Brien, M7 executive director; today’s economy is fully globalized, and “you’d better be participating in that if you want to survive and grow as a company.”
The benefits of exporting are becoming better understood—companies that export grow faster, have higher average revenue per employee, enjoy higher valuations because their risk is distributed across multiple markets, and can pay higher average wages because of the typically higher margins on exported goods. Creating a strong local export culture will aid in the overall goals of the export strategy set forth for Milwaukee by GCI: grow exports by increasing the number of companies that export, get existing exporters to expand the number of markets they serve and focus on the region’s already strong industry clusters to boost export growth.
Now, the core team is working to increase understanding around the notion that an increase in FDI leads to an increase in exporting. Although the FDI strategy is not yet complete, the core team has already begun incorporating FDI into conversations as they engage with local companies around export growth.
“We found many examples across the country where a foreign parent takes advantage of existing export relationships and/or directs the local operation to export more and to new markets,” Brad McDearman, a nonresident senior fellow at Brookings.
Sinnott, whose prior work experience was in the private sector in Asia, was surprised to learn when she joined WEDC in 2014 that mergers and acquisitions (M&A) by foreign companies are often looked upon with suspicion in the U.S.
While the general public may think of M&A deals as hostile takeovers in which a company buys a competitor with the intention of closing it down, international M&A deals tend to follow a different pattern, she says: one company acquires a related company overseas with the intention of making the location its “beachhead” in North America to accelerate the company’s growth. In these cases, the company’s new owners usually keep existing management and other staff in place, as the parent company seeks to take advantage of its new acquisition’s existing contacts and integration into supply and distribution networks.
The core team designing and implementing Milwaukee’s export and FDI strategies believes M&A deals should be celebrated as economic development “wins” the same way business attraction projects—both domestic and international—are celebrated.
Mergers and acquisitions account for 87 percent of capital inflows due to FDI in the U.S.—a far larger share than the 13 percent associated with “greenfield” projects in which a new office is opened that was not part of an existing company.
“Mergers and acquisitions are happening, regardless of whether we choose to engage with them or not,” says Ryan Donahue, a project analyst with Brookings.
By incorporating these deals into an FDI strategy, rather than treating them as an afterthought, economic development organizations (EDOs) can help guide the foreign companies making these investments toward decisions that further benefit the local economy—for example, helping them connect with local suppliers. A significant portion of FDI growth also comes from expansion of companies that are already here—yet this also has not been sufficiently recognized as an opportunity for EDOs to exert influence and actively encourage such growth, the core team members say.
Research by the financial services firm UBS indicates that more than 40 percent of midmarket companies are actively seeking to be acquired or would be open to it. For companies that have reached a threshold where they aren’t able to grow further without an infusion of capital, FDI can provide the boost they need.
Although the dollar value of FDI in the U.S. is still growing year by year, the U.S. percentage share of global FDI has been falling—from 45 percent in 1984 to 12 percent in 2012.
Since the U.S. is widely perceived as a “safe” market that is politically and economically stable, and can serve as an entry point for other markets with which the U.S. has trade treaties, it should be able to attract a greater share of global FDI, says Sinnott—and with a sound FDI strategy and recognized competitive strengths in many global industries, Wisconsin is well positioned to contribute to this growth and enlarge its own slice of the FDI pie.