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United Nations ESCAP Training Workshop on Investment Promotion and Facilitation Module 6 “Developing an Investor Targeting Strategy (ITS)” Session Notes Prepared by Asia Policy Research Co., Ltd., 2003 (derived from an ITS manual prepared by Asia Policy Research for the Pakistan BOI under a project supervised by The Services Group)

1.

Why develop an ITS?

Investor targeting is often (mis)construed as picking opportunities within an industry group. In fact, most basic industrial development consulting firms provide this level of detail, and the ITS often uses such work as a point of departure. The real added value provided by the ITS lies in the allocation of scarce promotion resources to those opportunities which make sense from a foreign direct investment (FDI) perspective. Building on this prioritization of industries for overseas promotion, the ITS then identifies target investor markets: not just likely investor countries, but complete investor profiles based on trends in the international marketplace and in related economic landscapes. The second (and perhaps the most important) output of the ITS is the marketing action plan. This is the framework for implementation of the promotion program, and is an area that is typically not covered by location consulting firms. It provides the approach necessary for the investment promotion agency (IPA) to attract the identified investor countries and firms, as well as accompanying implementation timelines and budgets. It is this marriage between abstract identification and hands-on promotion that sets the ITS apart from traditional targeting work and allows IPAs to develop promotion approached based on a detailed, holistic, and actionable document. 2.

The ITS methodology

The ITS essentially relies on an industry identification and screening process to arrive at target markets for investment promotion, and then develops marketing plans for those targets. This process is illustrated in Figure 1 below: Figure 1: The Investor Targeting Methodology

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The ITS methodology first develops a “long list”, or universe of possible activities, consisting of all industries which could be considered as candidates for international investment promotion efforts by the counterpart IPA. Those industries are then screened through three tests: a comparative analysis that compares each industry’s location requirements with the economy being promoted, a competitive analysis that examines each industry’s supporting and constraining trends (domestically and internationally), and a policy analysis that prioritizes industries deemed suitable based on government policy priorities. Note that the comparative and competitive screens are the first screening hurdle, so that an industry cannot be included based on its consistency with policy objectives if it has not passed the fundamental economic comparative and competitive analyses. Identified targets are then separated into near-term and medium-term candidates, and marketing plans are tailored to immediately promote near-term candidates for promotion. 3.

Basic ITS elements

The ITS methodology is implemented through a series of data collection efforts and analytical elements that feed into each other and culminate in the identification of industry, market, and company targets, marketing action plans, and presentation of findings to key collaboration partners. These elements are: • Preparatory work. This involves defining data collection needs, obtaining relevant economic data, consultation and securing cooperation from concerned government and private sector stakeholders. • A period of research and writing to organize field data, compare and contrast it with international industry research, develop targets and marketing plans, and produce the actual ITS document. • A second period of consultation during which the ITS is presented to and discussed with the concerned government departments and private sector stakeholders. Beyond simply presenting a report, the second consultation is intended to solicit comments and inputs from counterpart agencies and, depending on the depth of further discussion, may result in substantial additions and/or modifications to the ITS document. The ITS is by nature an organic document, and should be adapted over time to incorporate changes in domestic and international industry trends, IPA capacity, and investment promotion resources and technology. The four elements outlined above can be repeated wholesale or in part to reflect such changes and ensure that the ITS accurately and effectively addresses the real challenges and opportunities faced by the IPA. For the analysts, the work carried out to complete an ITS can thus be understood two-dimensionally, along its discrete methodological tasks and along an implementation timeline. Table 1 illustrates how the methodological steps and timeline elements fit together to shape and inform the analyst’s work. Table 1: Overview of ITS Methodology and Timeline METHODOLOGICAL STEPS

TIMELINE ELEMENTS

Universe of activities Preparatory work

Identification of major or priority industries

First consultation

Identification of secondary or niche industries

Research/ writing

Comparative/ competitive

Policy consistency

Target selection

Identification of major policy issues

Factor cost and local industry structure research International industry research and comparison

Consensus on policy objectives Comparison of objectives with FDI flows and attributes

Second consultation

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Industry screening and marketing plan development Presentation of targets and marketing plans

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Implementation timeline. While there are no hard and fast rules regarding how long an ITS takes to complete, and ITS implementation in fact varies with resources, access to information, and competing time commitments, the process can generally be completed by two full-time analysts working for about eight weeks. However, the preparation of an ITS is not a one-time process but a continuous exercise of adapting and refining. The preparatory data needs-identification and information collection phase should be initiated at least two weeks before the first consultation begins. This timeframe leaves the IPA enough time to request information from other organizations and to begin developing a schedule for the first consultation exercise. Frequent liaison with collaborating agencies in the public and private sector will help to ensure that IPA staff understand the purpose of the ITS and the role their data collection duties play in completing the ITS successfully. The first consultation is generally three weeks in duration. Of this time, two weeks should be devoted entirely to meeting with local industry, with another week dedicated to interacting within the IPA, meeting government departments and agencies, and scheduling any other visits necessary to build support for the ITS. The research and writing portion of the ITS should be completed in about four weeks. While this period is the beginning of the international market research, it is also important to plan sufficient writing time to ensure that the information and analysis presented in the ITS is presented in a clear, concise, and logical fashion. The second consultation exercise can be quite brief, and depends largely on the level of involvement on the part of the IPA. If IPA staff and management have taken an active interest in the fieldwork and have remained in touch during the writing process, the second consultation exercise can largely focus on taking on board comments and trying to secure a feeling of ownership amongst the concerned government departments and private sector stakeholders. Provided a broad measure of support has been won, the task of winning approval from the IPA governing body will be eased. While all of these elements can be drawn out with additional resources of other demands on analyst’s time, going substantially beyond the eight-week time horizon usually yields diminishing returns as research begins to delve into unnecessarily levels of detail. Likewise, drawing out the ITS process by diluting the analysts’ attention with competing work may have negative effects on the ITS’ focus. And while a single analyst may well complete an excellent ITS if given enough time, coordination issues generally prevent an ITS from being completed in under eight weeks, even if resources are increased substantially. 4.

Identifying data needs and sources

Ideally, an ITS would begin with a complete review of all available economic data and industry information before undertaking the first phase of field research to generate new primary data. In reality, even the most thorough pre-consultation preparation will miss resources that are difficult to obtain, proprietary, or unknown. Nonetheless, the ITS analysts should seek to identify as thoroughly as possible their anticipated data needs, available data sources, and preliminary data collection tasks to be performed by IPA colleagues. •

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Data needs. Broadly speaking, initial ITS data needs include a general profile of the economy under examination, sectoral analyses of industries likely to be considered for promotion, trade flow data, and quantitative data and anecdotal evidence of existing FDI flows and trends in the economy, and factor data. Depending on the economy under consideration, these sources may be easier to obtain locally, nationally, or even overseas. General economic profiles represent a necessary overview of the economy, but generally have little information that is directly applicable to the ITS process. These profiles, usually found in the form of economic yearbooks, commercial guides, or public relations materials, tend to provide general data and sector discussions divided in broad categories such as “mining,” “agriculture,” and “manufacturing,” and contain little industry-specific information. They do, however, provide a general order-of-magnitude understanding of the economy, as well as a

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broad overview of the general growth trends and development challenges that the economy faces. Donor-funded reports on economic conditions usually focus on specific economic constraints, policy issues, and reform processes. This category can include good sectoral analysis, but usually with a strong focus on specific policy interventions or changes. These are valuable, but must be read with a critical eye cognizant of the report’s scope. Other sector and industry reports may be available from industry associations, consulting firms, firms’ in-house research departments, government departments, banks, newspapers and magazines, academic journals, or monographs. Much of this information is not officially catalogued, and proprietary reports are often difficult to obtain. These materials do generally, however, represent the most focused discussion of industry-specific structures, trends, and opportunities. Newspaper clippings can be an excellent source of anecdotal investment information in the economy. These reports should not, however, be considered comprehensive of even representative, given newspapers’ geographic biases and selective coverage. Furthermore, general reporting on investment projects, factory expansions, or acquisitions tend to be heavily focused on personalities involved and optimistic growth and employment projections, and often omit or only allude to investment and financing sources, precise ownership structures, or motivating factors behind the investment in question. Statistical information is generally available in some detail from relevant government departments for trade flows, but reliable FDI figures are often unavailable or incomplete. Available data should then be combined with anecdotal evidence to paint a (albeit imperfect) picture of the role of FDI in the sector under examination. The level of available data thus drives the data collection tasks to be performed by the ITS team. Usually, the preparatory work phase entails IPA staff obtaining statistical information, factor data, local industry profiles, newspaper clippings, academic studies and donor reports. IPAs, where they do not already have the necessary data, are usually well-connected with government ministries and thus in a good position to access government data. On the other hand, if outside consultants are hired, they may be able to obtain some proprietary information from industry or consulting firms as a professional courtesy.

Selecting industries for promotion: The screening process

The ITS methodology is designed specifically to identify only those industries in which foreign direct investments can be motivated through proactive promotion efforts. The ITS then ranks industries with high FDI potential to maximise the impact of scarce promotional resources. The methodology neither identifies all industries that may be economically viable in the economy, nor does it identify all industries whose location in the economy would be desirable. The ITS thus is not a general economic planning document, but rather a focused, realistic, and candid implementation strategy that emphasises resultsoriented promotional activities. The screening process is thus based on evaluation criteria used to select industries and uses those criteria to rank each industry according to its comparative, competitive, and policy attributes. A narrative description of this process is summarized below in tables that illustrate the ranking and selection process. Evaluation Criteria. The comparative, competitive, and policy-screening processes are based on the industry information detailed in the industry analyses, and on location attributes identified in the location audit. In each discrete screen, industry scores are based on the following qualitative scoring categories:

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Industry Scoring Categories Score

Industry Attributes

A

Economy has distinct advantages over competitor provinces and/or countries in examined industry criterion.

B

Economy has no advantage or disadvantage over competitor provinces and/or countries in examined industry criterion.

C

Economy is at a distinct disadvantage relative to competitor provinces and/or countries in examined industry criterion.

Given the qualitative nature of these scores, they describe only the relative positioning of an industry to a screening criterion. Because the scores do not express absolute positioning on a quantitative scale, different scores for different criteria may or may not offset each other in determining the final ranking for promotion of that industry. Comparative Screen. The comparative advantage screen juxtaposes factor cost and availability conditions available in the economy with requirements of that industry. Factor cost and availability data is drawn from the location audit, while industry requirements are drawn from the industry analysis, company interviews, and research activities. Significant factors include, among others: •

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•

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Labour costs and availability, including differentiated labour requirements by skill level. Discussions of cost should include assessments of burdened labour costs, labour market flexibility, turnover rates, and available training resources. Labour costs will be one of the main location criteria for labour-intensive industries, while capital-intensive industries will put less emphasis on wage bills (though they may be sensitive to availability of skilled technicians or university graduates). Land and building costs, including construction and rental costs for factory shells, can be significant location criteria for integrated agricultural producers/processors, large manufacturing complexes, industries required to locate in expensive urban areas (to be close to consumer bases, or to supply large industrial customers on a JIT basis), or some tourism investments. Infrastructure requirements, including access to surface, air, and sea transportation, industrial land servicing, and other related facilities, vary widely by industry. Broad determinants of infrastructure needs may include raw material sourcing, customer base, product distribution, supporting services, inventory management, and product characteristics (bulk, perishable, etc.). Utilities, including costs and availability or water, electricity, and telecommunications services, and waste disposal and environmental services, can also be major location determinants in some industries. Attention must be paid not only to existing costs, but to the size and volume of required services which an industry investment would constitute.

After identifying industry factor requirements and location attributes, the scoring process is essentially a subjective evaluation of locational fit. If a required factor is not available or too expensive, the comparative ranking will likely be C. If a number of required factors are available in abundance, the comparative ranking could well be A. Mixed requirement/ attribute juxtapositions, on the other hand, will score B. Competitive screen. The competitive screen represents a similar industry requirements/location attribute juxtaposition, but evaluates industry trends rather than factor conditions. Such competitive trends include: •

Basic supply/demand trends can outweigh location-specific cost profiles. Contracting consumer markets can arrest foreign investment activity in an industry altogether, while projected industry growth can increase an industry’s tolerance for higher location costs if other industry trends support such a location decision.

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Strategic decision-making regarding customer bases, manufacturing integration, and production scales can make or break an industry location. For example, a move by TNCs to supply entire regional markets from central production locations can forestall a location move into a specific national market, no matter how advantageous the factor costs and attributes might be. FDI flows often reflect underlying competitive trends. For example, strong evidence of regionally directed FDI flows may signal positive or negative competitive positioning of a given investment destination. Barriers to entry in the location under examination, such as foreign exchange regimes, limiting investment environments, monopolistic or subsidised local competitors, or other constraining regulations may represent sufficient investment disincentive to neutralise advantageous factor conditions. Backward linkages, such as the presence of intermediary input suppliers, supporting industries, local research and development capacity, or skill training centres may be more important in some industries than minor factor cost disadvantages.

As with the comparative advantage screen, a subjective scoring process evaluates an industry’s perception of the investment destination in light of supporting and constraining competitive industry trends. Policy screen. The last screen evaluates not the ability of a location to attract investors, but the impact realized investments would have on the host economy. The criteria used in the policy screen are formulated by the host economy’s political process, and generally include economic development priorities such as employment generation, export development, skills and technology transfer, decentralization, and downstream processing of raw materials. After these policy criteria are identified, industries can then be evaluated based on the extent to which an industry investment would contribute to those policy objectives, based on a typical investment profile. It is important to remember, however, that the policy screen is a measure only of how desirable certain types of investments are to policymakers – an A policy objective score cannot offset poor comparative or competitive scores, sine the score is based only on the preference of the host economy, not of the location decision makers. Prioritizing industries. After each industry has received an A, B, or C score in each of the three screens, the industries under consideration can be ranked in terms of locational fit. Clearly, industries with scores of A in both the comparative and competitive screens are likely candidates for immediate promotion. Mixed A and B scores indicate a lower ranking, though these industries may still be included among the industries to be promoted. C scores in either the competitive or comparative screen generally indicate that the industry is not suitable for immediate promotion, though in some industries, an A score in one category may outweigh a C score in the other, based on the industry’s location preferences. Again, this ranking exercise is a subjective tasks, and the final ranking should be based on a holistic consideration of comparative and competitive strengths and weaknesses rather than a formulaic application of the A, B, and C attributes. Once the preliminary comparative and competitive ranking is complete, the industries’ policy objective attributes should be used only to prioritize among similarly ranked industries. However, while policy makers may choose to categorically discourage some industries from locating in the economy, positive policy consideration should never be used as a justification for allocating scarce promotion resources to industries that are unlikely to locate in the economy based on underlying comparative and competitive factors. 6.

Identifying target companies

The process of targeting companies in the industries and countries selected for promotion follows directly from the industry screening process. Identifying these target companies can be accomplished through a series of steps, including: • •

Conducting literature reviews of on-line databases and periodical indexes using company names obtained in target industry identification process and performing keyword searches. Creating initial list of prospective companies meeting evaluation criteria.

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Using initial list and based on information obtained in literature review, contact relevant trade associations for further information about companies and their industry rankings. Re-prioritizing list based on new information and complete analysis of companies through secondary sources. Finalizing company list and verify that companies do not already have operations in the host economy.

Literature Review. The company identification process should begin with a list of companies identified during the target industry identification process. Using these companies as a point of a departure, a literature review of current periodicals should be conducted. This search is best conducted using keyword searches of databases such as the F&S Index, Dialog, Information Access Company (IAC) and/or Lexis Nexis. These databases contain current articles, citations and company profiles from thousands of industry, trade and manufacturing publications, newswires and business journals, but vary greatly in their “user friendliness”, cost and coverage of a given topic. Some databases are available on the world wide web at an hourly rate depending on the database used, others may be accessed via direct modem connection and the F&S index is available in most university libraries in the United States. Parameters for these searches would at minimum include, but are not be limited to: product line, location/region, recent merger & acquisitions or major capital expenditures, company names, SIC numbers, and competitors. More expansive searches may include technology developments, linkages to suppliers, other product areas, foreign affiliates and others. The Standard Industry Classification (SIC) Manual may be used to identify the SIC codes for a given product or service area. The SIC Manual lists all industry sectors and the products and services that fall within their classification, and assigns them a code. These codes may be helpful for keyword searches or searches undertaken later in the identification process in other reference materials. A list of SIC codes can also be found on the World Wide Web at http://www.osha.gov/oshstats/sicser.html. When no companies were identified in initial research or are inappropriate to the search, begin by conducting simple keyword searches based on product area, company location and corporate actions such as recent mergers or acquisition or large capital expenditures. These searches will invariably lead information on a company from which the search may be continued. 7.

Developing an ITS marketing strategy

The marketing strategy acts as the core plan for navigating the IPA management's promotion activities. In general, it outlines the broad approach that IPA management will have to undertake in selling industrial opportunities to prospective investors. The promotion strategy provides the basis for developing industry-specific marketing action plans and budgets. The marketing action plan (MAP) is an outline of the overall program for promoting a particular industry in the host province or country. While the promotion strategy provides the basis for the overall approach to be undertaken the IPA, the MAP outlines this strategy as a basis to develops industry-specific approaches. A typical MAP contains the following elements: •

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Target Investors: the characteristics of the investor groups are described, in order to gain an understanding of who the promotion effort will be targeting. This is done in terms of nationality, type of investor, the motive for potential location in Host province, patterns of local and regional investment, and other information which may be relevant. Principal Selling Themes: the promotional emphasis or principal advantages that Host province can highlight in the customized materials and approaches in a single catching slogan. This is obtained from the benchmarking exercise undertaken earlier.

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Promotion Approach: the specific combination of the various investment promotion techniques as determined by the nature of the investor and the characteristics of the industry. This is a summary of the promotion strategy applied for each industry. Promotion Materials: the optimal promotional materials are described for each sector, in general terms. Apart from the standard printed materials, management may decide to develop materials if the industry is deemed as a major industry for the area. Feature videos and CD-ROMs typically form part of such materials. At the least, an information sheet describing each industry should be developed. Investment Goals: the specific objectives for each sector, in terms of numbers of investments, average size of investment, employment, and other characteristics are noted. Determining investment goals is a difficult if not impossible task as it is akin to forecasting the demand. Management may use historical investment patterns as an indicator for future goals. Alternately, they may use figures from best in class locations as a target to strive for. Locating an investment is ultimately a corporate decision, and the factors involved in this decision may not always be transparent to the economic development professional. The frequency of activities towards generating the investment should be factored in the assessment of goals as well.

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