Developing Foreign Direct Investments Metrics, Value Propositions, and More

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1 Developing Foreign Direct Investments Metrics, Value Propositions, and More Feasibility of Developing Close-to-Real Time FDI Metrics Below is an outline of data, data sources and methodologies that can be used to compute the FDI metrics that were identified by Carol in the FDI report. The narrative is organized by FDI type (M&A and Greenfield) and by data source. It is a compilation of information obtained from discussions with the Arizona Commerce Authority research team (Shawn Neidorf and David Ramirez), literature review and discussions with Fikri Kenan of the Brookings Institution s Global Cities Initiative project. Metrics listed can be developed on a quarterly basis. The easiest way to set up the metrics reporting process would be to initiate or schedule a data dump from all data sources into a database (excel file, SQL, etc.), process (clean and transform) the data in the database environment (excel file, SQL, etc.), and then generate metrics and information published as static or dynamic reports. There are two ways the metrics and reports could be generated. One way is to script algorithms/equations in Microsoft Excel using Visual Basics for Applications (VBA) or simple excel equations to develop the measures and then copy and paste tables and graphs into other publishing software as needed. The other way is to write a script to upload data from data sources such as MS Excel files into a database, write algorithms to compute the metrics and publish to an internal or external portal. The second form of reporting allows for publishing on web sites, internal forms, or as PDFs. In addition, it allows the flexibility to change report types and size by merging other information into the data files or data tables. The second reporting method would require a full understanding of the type of report products to be developed, and the type of database required to support the data-driven web application. MEASURING MERGERS AND ACQUISITIONS ACTIVITIES Bloomberg terminal Assume a 5-year target period (2013 to 2018) Goal: Increase FDI transaction value by xx%, or by $xx Metric $ Value % Increase Total transaction value $xx xx% (change since 2013 base) Total related jobs xx new jobs reported xx% (change since 2013 base) Total deals/projects xx xx% (change since 2013 base) Industry XX transaction value $xx xx% (change since 2013 base) Total related jobs xx new jobs reported xx% (change since 2013 base) Total deals/project xx xx% (change since 2013 base) Total transaction value in XX $xx xx% (change since 2013 base) geography Total transaction value in XX xx new jobs reported xx% (change since 2013 base) geography Total deals/projects xx xx% (change since 2013 base) Developing Metrics 1

2 The following information is required prior to developing the metrics. Define base year values: What is the value of M&A transactions as of 2013? This is the cumulative value of M&A activities in the last decade or two, or some other identified period. It would require the use of Bloomberg data to identify total closed deals over that period. For each deal, the number of jobs created would also be identified by assessing change in company size by employment prior to the M&A (or right after the M&A) and in the base year (in this case 2013). The cumulative aggregate would provide an estimate of total transactions and jobs by M&A over the identified period. These measures excludes activities by companies that are not publicly traded. NETS and OneSource isell databases would be used to identify companies in the region that are not publicly traded and were acquired by foreign companies. To identify activities by non-publicly traded companies, recommend starting off with a list of foreign-owned companies from either NETS or OneSource isell and categorize companies as M&A or Greenfield type. This process would be very similar to Brookings Institution Global Cities Initiative s analysis of FDI for 2011 (See Appendix). This process would only be done once in order to develop the base year values. The base year should be the year of the most recently released U.S. Bureau of Economic Analysis data (currently 2013) which would be used as the benchmark and provide control totals. Also recommend using NETS and OneSource isell to identify company employment, location, and headquarter country, and complement that information with direct calls where necessary. The process of defining base year values can be improved on over time. Information should be verified with other data sources that include FDI Markets, Moody s Analytics Inc. and bank information where available. Identify from Bloomberg terminal: Deals pending in base year (existing activities) Deals completed/closed New deals in 2013 base year (not existing in 2012) Other status Identify: Current date. Example September 14, 2015 Deals pending Deals completed since 2013 Other status Metrics: Percentage increase in FDI investment by industry sector between 2013 (base year) and 2015 Number of deals completed/pending since 2013 (check to ensure company still in existence in 2015). Value of deals completed/pending since 2013 Compute percentage change since base year values ($, jobs). Pending deals are an indication of FDI pipeline that can be leveraged through identified tactics, incentives and resources. 2

3 Identify whether the closed deals are by existing foreign companies or not, and categorized activities by industry sector or cluster (manufacturing, advanced industries, biotech, other), country of FDI origin, and target source markets. Recommendation: Develop a prototype (one industry, one country, one region) to assess level of data reliability and type of data quality control that may be required. MEASURING GREENFIELD FDI ACTIVITIES BEA, OneSource isell, NETS, and Bloomberg terminal data Assume a 5-year target period (2013 to 2018) Define base year values: What is the value ($, jobs) of Greenfield activities as of 2013? The U.S. Bureau of Economic Analysis provides totals for Greenfield and M&A jobs each year at the state level. These measures can be used as controls for regional FDI metrics in the base year. Identify all foreign-owned companies using OneSource isell and NETS. Use Bloomberg terminal, NETS, OneSource isell and FDi markets to determine whether company was a new opening or local company acquired by a foreign company where possible. FDi Markets tracks Greenfield investment. Methodology would be similar to that applied by the Brookings Institution s Global Cities Initiative study on FDI. This would identify % or jobs originating from the opening of a new plant verses M&A in the last decade or two, or identified period. Brookings identified period was 1991 to This information should be updated to the base year. Metric $ Value % Increase Total establishments xx xx% (change since 2013 base) Total related Jobs xx new jobs reported xx increase since 2013 base) Total deals xx xx% (change since 2013 base) Industry-specific establishments xx xx% (change since 2013 base) Total related jobs xx new jobs reported xx increase since 2013 base Total deals xx xx% (change since 2013 base) Establishments in specific xx xx% (change since 2013 base) geography Total jobs in XX geography xx new jobs reported xx increase since 2013 base) Total deals xx xx% (change since 2013 base) 3

4 The metrics developed do not encompass the universe of FDI activities but are a good start to developing a clean and better understood set of data on grass root FDI activities. Sources of Forward Looking Intel on FDI Activities FDi intelligence: global trends and leads by country and industry IBM Plant Location International: insight on global dynamics and changes in announced corporate FDI decisions and trends Bloomberg terminal: information on target companies that have the potential for inbound investments FDI Trends, Organization for International Investment: Close-to-real time data on quarterly FDI trends in the U.S. by country and industry. This could be a leading or lagging indicator of trends. PricewaterhouseCooper: Issues affecting FDI APPENDIX 1 FDI metrics by Brookings (how to duplicate the effort) Bureau of Economic Analysis (BEA) FDI data was used as the benchmark/control total for Arizona, so that total metro areas foreign-owned establishments (FOE) employment data were controlled to total state-level FOE employment data reported by BEA. DnB city level establishment data was applied to identify location and ownership of companies (FOEs or not). NETS data, which is snapshot of DnB data for last 20 years was used to stitch establishment data together to assess growth in FOE and jobs. Either DnB or NETS could have provided industry classifications for FOEs. However, I believe a top-down/or potentially down-up approach whichever worked best - was used to assign state jobs by industry to metro areas or vice versa. Recommend running a test to recreate FOE employment data, by county, for a select industry sector. BEA would not be a timely data source to use on its own since state-level data has a 2-year lag while metro-level data has a 3-year lag. FDi Markets data can provide qualitative information to enhance the metrics. REFERENCE: Dencik J., and R. Spee. (2013) Global Location Trends 2013 Annual Report, IBM Institute for Business Value. Dencik J., and R. Spee. (2014) Global Location Trends 2014 Annual Report, IBM Institute for Business Value. 4

5 EXTRA MATERIAL Developing Investor Value Propositions (Using Metrics to Define Tactics) 1. Understanding a location's value proposition from an investor's point of view, and recognizing that the location's competitive position will vary by; 1) sector and activity and; 2) when compared with other region's attractiveness by operational environment and financial attractiveness, is an artful endeavor that is necessary to develop FDI location solutions and products that meet corporate strategic needs. (2013, IBM). This endeavor has to be led by professional and effective economic development organizations with a clear mandate to plan, coordinate and execute economic development strategies (2014 IBM). Examples of value propositions analysis Identify the quality of locations operational environment (workforce, infrastructure, regulation). Develop cost-quality optimization matrix (trade-off between cost and quality). Centers of excellence options Optimal value proposition Require strategic review Cost optimization Cost Index Assess how region stacks up when compared with peer markets 2. Align talent retention, training, and education policies with business attraction, retention and expansion strategies. This includes: 1) dual education that combines apprenticeship and formal education; 2) retention, creation and attraction of talent at universities and research centers to leveraging R&D activities in strong knowledge clusters, and; 3) aligning programs at technical schools with skill gaps in, and needs by advanced manufacturing sectors. Address the mismatch of skills supply and demand requires the engagement of companies and business representatives. 5

6 3. Apply continues strategic footprint planning to align with rapidly changing global dynamics leveraging and transforming data into insight. 4. World s top destination of FDI by jobs created in 2013 were U.S., China, India and Mexico in that Strategically planning, optimizing and transforming the global operating model and footprint of activities in response to rapidly changing markets, technologies and operating conditions is more important than ever for sustaining competitive advantage. Global Location Trends 2014 Annual Report, IBM respective order. Rising middle-class in China, India and Mexico is behind the marketdriven foreign investment (horizontal FDI) in these countries. 1 What does market-driven FDI mean to the region? What are the opportunities in production-drive FDI (vertical FDI) from countries seeking a larger market presence in the U.S.? 5. Top ranking sectors by estimated jobs in 2013 include transportation equipment, Tourism, Chemicals, and electronics (2014, IBM). How can this annual information be applied to adjust/fine tune FDI strategies and tactics each year? by 1 Source: Amy Glass. World Economy Vertical versus Horizontal FDI. Department of Economics, Texas A&M University. accessed 11/4/2015 6