Increasing attention is being given to supporting local investment promotion agencies to promote private investment for economic growth and job creation.
While a national investment promotion agency, or IPA, builds on a country’s brand in foreign investment markets, a local agency works from the ground up. Local investment promotion agencies connect outside investors to the local business community and stimulate local economic spillovers.
Investment promotion agencies to attract investment
Governments establish investment promotion agencies to attract investment to a country, state, region, or city. They do this through marketing activities designed to create awareness about a location as an attractive destination for investment.
The well-regarded Wells and Wint definition of an investment promotion agency is: “activities that disseminate information about or attempt to create an image of the investment site and provide investment services for the prospective investors.”
The primary role of an IPA is to address market information failures for a specific location.
The functions of an investment promotion agency
Typically, IPAs have the following functions:
- Investment promotion. Create awareness and generate positive perceptions of a country as an investment destination.
- Investment facilitation. Facilitate the implementation of investment projects, maximise their economic benefits, and generate follow-up investments. This includes using one-stop facilities to help potential investors navigate the legal and regulatory framework.
- Investment generation. Reach out to foreign investors and convince them to locate their investment in the host country.
- Investment climate reform. Monitor foreign investors’ perception of the host country’s investment climate and business environment and propose reforms to improve foreign direct investment attraction policies.
The primary rationale for establishing an IPA is to address information market failures. These failures affect investors’ costs of acquiring information to objectively inform the investment location decision.
The rationale for local investment promotion agencies
National IPAs are well established in most countries. However, the rationale for a subnational investment promotion agency deserves consideration.
Some examples of subnational investment promotion agencies can be found in Australia (New South Wales, Queensland, Western Australia), Spain (see below), Nigeria (Edo and Plateau States), Poland (see below), and South Africa (Gauteng, KwaZulu-Natal and Western Cape Provinces).
The Organisation for Economic Cooperation and Development OECD (2018; 90) describes four main reasons for conducting investment promotion activities at a local level:
- Development objectives. Subnational bodies and the central government may have different economic development objectives and competitive advantages.
- Knowledge of their location. Subnational bodies better understand their area’s strengths and weaknesses and can market them by providing accurate information to investors.
- Facilitation on the ground. As subnational bodies are closer to local decision-makers, they are better positioned to assist investors in their establishment and post-establishment phases.
- Attracting domestic investment. For many regions, attracting investors from the same country can be as crucial as attracting foreign investors. Subnational bodies can apply the same principles and techniques used to promote foreign direct investment and link their operations to the local economy more successfully.
Importantly, local investment promotion agencies provide a mechanism for private investors to connect with local actors and better understand local markets and conditions.
Many local governments include investment or business attraction in their economic development strategies. While this does not typically involve the creation of a specific investment promotion agency, it can include appointing local investment officers.
A Polish study on the role of local governments in attracting foreign direct investment found that local governments can, directly and indirectly, impact the social, economic and territorial conditions of areas by using available legal instruments, administrative procedures and financial resources. Investment promotion is typically undertaken for local job creation, and firms of all sizes are encouraged. This includes micro, small and medium-sized firms.
Synergies in national and subnational investment promotion
Local investment promotion agencies must complement and work hand-in-hand with their national investment promotion counterparts.
When they are well coordinated and complimentary, national and subnational IPAs can avoid downstream problems for investors and the duplication of services.
For example, it is more efficient for the national IPA to dedicate resources to national branding and overall marketing efforts, especially when dealing with investors abroad. On the other hand, day-to-day problem-solving for an established investor can be better dealt with at the local level.
Building a world-class national-subnational investment promotion model
A 2021 case study on subnational IPAs in Spain found that success in building a world-class national-subnational investment promotion model encompasses four elements:
- The enabling legal, regulatory and institutional framework allows the cooperation and mandates key stakeholders.
- Building and maintaining trust among a diverse range of relevant stakeholders.
- Adherence to a set of design and management principles supported by specific tools and instruments (specialised committees, ICT tools, working groups), including governance, people and organisation, administration, plan, design and funding.
- Results-focused execution that puts the principles into practice daily and delivers superior results.
Notably, the same study found that government responsiveness to investment inquiries and their knowledge of subnational offerings to match foreign firms’ due diligence is critical. “An important element of location-choice decisions is the human-interaction dimension during the final stage of investor attraction as well as in the entry stage. The working relationships that investors develop with national and subnational officials are an essential part of providing the necessary verification and assurance that the foreign firm will be able to establish and operate successfully in the location.”
Local investment promotion agencies improve synergies for better outcomes
The above discussion shows how national and local investment promotion agencies can work together. A local investment promotion agency focuses on domestic and foreign investment and supports a ground-up approach to stimulating private investment into the local markets.