FDI is closely linked to urban areas in most countries. The first point of entry for market-seeking investors into new countries is almost always in or around major cities, which are more effective locations for new businesses as they provide agglomeration benefits, such as access to infrastructure, skills, transportation hubs, support services, training and academia. Moreover, they provide proximity to government and its agencies, which facilitates entry negotiations, lobbying and insights into regulation. What usually investors or new businesses seek and look for in new cities is economic potential, business friendliness, connectivity, human capital and lifestyle, and cost effectiveness. Of particular importance is the presence of a highly skilled talent pool with a good skill set, in tune with the demand for skills in upcoming and promising economic clusters and industries.
As it is true that FDIs are beneficial for a country, it is indeed also true that in most cases the entry point is a major city. So, what chances do smaller, or micro, cities have to attract FDIs? That is the sense of the experiment conducted by Ventspils and Valmiera with the NextGen Microcities project funded by Urban Innovative Actions. Europe is for the majority constituted by smaller cities, so the lessons coming from NextGen have the ambition to inspire other micro cities in Europe to act and, most importantly, to attract FDIs in their corner of the world. But let’s take it one step at the time.
Interest in studying city competitiveness has sky-rocketed in the last few years, although the topic itself is far from new. Mayors and city leaders have long worried about the obstacles to job creation, competitiveness and economic growth that their cities confront.
Recent research has looked into the mechanic of the phenomenon, and what has become clear, is that firms are attracted to a specific set of local conditions. Moreover, what seems attractive varies entirely depending on firm strategies, sectors and the global value chain stage of the investment. It is therefore the matching between firms looking for locations and location characteristics that influence the decisions. And, again, it’s not the industry that matters so much for where firms locate, but it’s the type of activity (for example marketing or R&D) or the firm’s stage of development. In designing investment promotion strategies, it is important for city officials to remember that, when considering location decisions, investors will think through the entire lifecycle
of their prospective investments. In other words, they care not just about entry and start-up, but also the continuing operation of business, linkages with local suppliers and other organizations and, eventually, retention, expansion and diversification depending on the investor’s overall strategic business model.
But what is true for larger firms is not for SMEs, that actually play an important role in FDI in Europe and are actually a target more in line with the attraction potential of micro cities. SMEs are highly important for the European economy for two main reasons. First, they constitute around 99 per cent of all firms in EU and account for 50 per cent of the total employment. This equals 25 million firms that employ 2 out of 3 employees in Europe.
There were 25,683 FDI projects undertaken by European SMEs over the period 2003- 2015. The EU is the destination for around half of the SME FDI projects during this period, with Germany, France, The Netherlands and UK as top destinations. This is close to 30 per cent of the total 87,087 FDI projects by European enterprises in the same period.12,806 projects by European SMEs are M&A deals, while the remaining 12,877 are greenfield projects. For both types of FDI projects, this is close to 30 per cent of the total number of FDI projects undertaken by all European enterprises.The average deal size for a project by an SME is thus EUR 50 million, while it is EUR 121 million for large firms. This is explained by the size of the firms. Larger firms undertake larger FDI projects. The fact that SMEs, on average, undertake smaller FDI projects than larger firms, implies that they are more sensitive to increases in the fixed costs of undertaking the FDI project.
During the NextGen project (November 2018 – October 2021) both Ventspils and Valmiera planned to elaborate new innovative FDI attraction strategies and implement the resulting FDI attraction campaigns. Ventspils planned to focus on ICT investors, while Valmiera – on industrial investors. The overall goal of both cities was to attract 9 foreign capital investors (4-5 investors per city) during the project implementation period, as well as to test innovative approaches in FDI attraction campaigns.
The development of the FDI strategy in both locations included the following steps and tools:
- a SWOT analysis of the city as a potential investment destination;
- an analysis of the potential target countries of inward investors;
- a sectoral analysis to define the main specialisation subindustries;
- a conceptual investment proposal development to investors, including a survey of potential investors (from United Kingdom, Sweden, Russia and Latvia) to understand the reasons why would foreign capital ICT investors consider starting business in those cities;
- an education development plan for meeting human capital and skill needs of the potential investors.
The marketing and attraction campaign included the following main tasks:
- overall branding of the campaign and development of marketing materials – promotional videos, presentation, infographics, roadmap for investors, investors letters etc;
- development of communication channels: landing page with GIS function and LinkedIn page;
- sourcing and collecting database of potential investors;
- participation in third party events (e.g. startup events, business conferences);
- organisation of own events;
- staffing of a full-time investment attraction and soft-landing specialist for serving the incoming investors.
The results for both cities include:
- for Ventspils, a total number of investors approached around 5.000, including contacts via LinkedIn (1500), cold e-mail and calls campaign (3100), own and third-party events (400). Overall, 10 investors were attracted, of which 7 IT companies and 3 manufacturing companies. On top of that, 6 unconventional investors were also attracted, such as remote employers (with foreign capital ownership) of ICT training program’s trainees. The most effective communication tool was recognised to be LinkedIn. ICT retraining program proved to be effective in both - as a support for companies hiring digital skills specialists, including investors, and for the trainees.
- for Valmiera, a total number of investors approached around 16.500 including cold e-mail campaign (16.250), warm e-mail campaign (70) and own and third-party events (180). Overall, Communication with 9 potential industrial investors was started. At least one potential investor was attracted via existing local foreign investor.
The innovation in the strategy adopted by the two cities relies on:
The implementation of ICT skills retraining program as part of soft-landing support for inward investors in development of their new team for Ventspils.
Attracting Latvian diaspora (the Latvians living abroad) and local foreign investors as ambassadors of Valmiera. Also, the Valmiera city’s landing page for FDI investors is based on Financial Times GIS-tool for building such landing pages, typically used by large cities only.
So what are the lessons learned through this experimentation that can be useful to other micro cities in Europe that want to attract FDI? Following is a comprehensive list coming from the direct experience of the project owners and my own analysis.
First of all, FDI attraction should be part of a wider economic development strategy of the city and therefore should be a long-term strategy - at least for 10 years period. Building resources for meeting needs of FDI investors takes time.
The “end-users” – i.e. the existing and potential foreign capital investors - should be engaged to help planning the investment strategy and the strategic positioning of the city. The needs of the potential investors should be understood in order to develop a city’s offer in line with the expectations of the investors. Design thinking methodologies can be a good method for the engagement of key stakeholders, both from within and outside the city.
FDI campaigns should have a special-purpose set of marketing tools: information tools (landing pages, GIS tools etc.), communication channels (LinkedIn, other Social Media), set of marketing materials (promotional videos, presentations, infographics, others) and soft-landing support. This set has proven to be useful in the context of Vantspils and Valmiera, and it represents an accessible investment for other micro cities.
The existing foreign capital investors may be engaged as ambassadors of the city in attracting their partners as potential investors. Likewise, representatives of local or national diasporas can be engaged in the same manner. On top of that, engaging with other local and international partners with a direct relationship to the potential investors is recommended, as it builds networks and nurtures direct relationships.
Third-party events and conferences should be used as channels for approaching the potential investors. The city may consider organising its own events targeting foreign capital investors or strategic partners (e.g. investor forums, conferences for national diaspora, hackathons). The use of contemporary, digital media is proving effective also as a global effect of the pandemic.
The presence of a dedicated profile as investment attraction and soft- landing support specialist is of utmost importance. High quality soft-landing support can be crucial for positive investment decisions.
Programs for increasing supply of specialist human capital in the city can be used as tool for attracting investors, because, especially in the ICT sector, one of their key challenges is the availability of a talent pool.
Initiatives to reduce the fixed costs of undertaking FDI projects are likely to benefit SMEs disproportionally. One fundamental component of FDI attraction is the management of a pipeline of business leads.
Last but not least, cities could take advantage of EU funding programs and projects to test and use new innovative methods and approaches in FDI strategy and campaigns. Suitable funding programmes include of course the Urban Innovative Actions initiative, URBACT, Interreg and Horizon Europe.