Foreign Direct Investment Attraction and Scaling Domestic Firms: Are They Incompatible?

When Amazon announced in 2018 that it was seeking a home for a second headquarters, governments around the world leapt into action. Municipalities, with support from regional and national governments, prepared elaborate bids to attract the giant corporation. Ten Canadian cities threw their hats in the ring for the promised $5B investment and 50,000 jobs. But many Canadian tech firms were angry and frustrated with governments’ mad scramble to entice a foreign multinational to establish a base in this country. Some CEOs felt humiliated that their own government would invest so much public money and effort into helping a foreign firm instead of supporting its own tech firms that are successful and working hard to scale globally.

Policy makers have long debated the role of foreign multinationals in domestic innovation ecosystems. If the goal is to build a robust cohort of successful global companies headquarters at home, what is the rationale for attracting large foreign companies with financial and other incentives to set up shop here, where they can compete for talent, technology, IP and customers? The traditional calculus that governments use emphasizes jobs. Press releases announcing foreign direct investment (FDI) typically focus on the number of new jobs that the multinational will create. They seldom describe these roles, which might just as easily be call-centre or sales positions rather than highly valued R&D or management roles.

In an interview with RESEARCH MONEY, Daniel Isenberg, CEO of Entrepreneurship Policy Advisors and former Harvard Business School professor, pointed to “failure after failure of business attraction (Foxconn, General Electric, and Amazon HQ2).” He noted: “some research shows that the social and economic returns to business attraction are not worth the public investment. These companies can act like an invasive species, unbalancing labour and real estate markets and upsetting local supply chains.”

For policy makers intent on strengthening regional innovation ecosystems, Isenberg emphasizes the importance of having large firms around: “it is almost impossible to have high-quality startups without grown-up companies nearby.” If it comes to a choice of domestic vs foreign, however, Isenberg is definitive: “Overall, homegrown entrepreneurship is much more advantageous. Governments often overlook the growth potential in existing local firms. The number one priority should be to enable local firms to grow big and strong.”

Should governments stop trying to attract foreign multinationals? Isenberg says “it depends on how the [foreign multinational] arrives…If they come because they are naturally attracted by the local assets like talent, they can be a tremendous boon to entrepreneurship…. They spin off talent as much as they ‘consume’ it. There is an understandable concern that they are like the god Kronos, who ate each of his offspring to prevent them from growing up and killing him. But the reality is that big corporations are just as scared of startups stealing their best people as they grow, as we are of them choking the labour markets.”

There are other advantages to having large firms – domestic and foreign – in your ecosystem, says Isenberg. “Large companies also enrich the overall skill pool by creating experienced managers. They can serve as big levers for market access. They can invest in companies or in product development or joint R&D. And they serve as signals to global markets that there is something special about being where they are.”

The message to policy makers is that they have to be judicious in their FDI attraction programs. The standard rationale of using public money to attract foreign multinational in return for jobs doesn’t wash anymore. The priority goal is to build a dynamic and successful domestic ecosystem. Governments should invest in education, infrastructure, R&D and immigration and tax policies that enhance the overall business environment. They should support the growth of successful domestic firms that aspire to become global players in their chosen business niche. Only in this way can we build a robust ecosystem with successful firms of all sizes. Then foreign firms will want to be part of the action, without the need for public money as an incentive.

Research Money is organizing a series of design thinking workshops to explore this issue. Diverse stakeholders are invited to address the following challenge: “How do we capitalize on foreign direct investment to scale domestic tech firms?” The workshop will take place on 19 October 2020 at the National Arts Centre in Ottawa, as part of the 19th annual R$ conference. Click here to register.