King of the hill: competing for foreign direct investment in 'Dixie'.

Borstorff, Patricia C. ; Collum, Taleah H. ; Newton, Stan 等

CASE DESCRIPTION

The primary subject matter of this case concerns foreign direct investment (FDI) in the southern U.S., specifically automobile FDI in Alabama. Secondary issues concern the aggressive competition, using incentives and state-specific features, of southern states in recruiting foreign investment and the employment opportunities that FDI brings. This case has a difficulty level of three. It is suitable for a junior level course and can be taught in a 90 minute class with two hours of preparation by students outside of class. The case could also be used in a senior-level international management class to illustrate the reach of globalization into our corner of the world. This case can be used as a template for professors in other states in illustrating the proximity of FDI in their state and the consequences of that FDI. We propose that there is international activity in the form of FDI here or abroad as well as exporting and importing in virtually all states. A professor can use this case as is or as a template to reflect international activity in his/her local geographical area. Students should relate to the importance of international business as they see its relevance to their lives.

CASE SYNOPSIS

This case is designed to illustrate the concepts of foreign direction investment, job creation, state incentives as a factor in FDI, and the unique features that a foreign investor wants from a state. The case can be used in its entirety or in part as appropriate. For example, one could investigate recruiting methods used by U.S. states in the pursuit of FDI and the results of that pursuit. Or one could investigate the facets of employment, such as a non-union environment, educational development, and tax policies, that are particularly attractive to foreign investors. Or one could compare the incentive packages offered by various southern states and determine the return on their investment.

Countries are faced with numerous challenges as they compete for the same Foreign Direct Investment (FDI) dollars. FDI is increasing as the world evolves into a global marketplace for industry. The U.S. government continually adjusts its policies and tax procedures in order to be a viable player in the world market. The southern U.S. has become more aggressive in recruiting foreign investment by providing incentives to attract industries and communicating the unique advantages they offer to foreign companies interested in a U.S. presence. Many southern states, including Alabama, have been successful in improving their economies and providing new employment opportunities by offering the incentives required to attract FDI and industries to the area.

INTRODUCTION

Colleges and universities have tremendous interest in foreign direct investment today. FDI provides well paying jobs and internship opportunities for students as well as consulting ventures for faculty. Some students are involved in finding out more about how southern states have been so successful in attracting FDI to "Dixie," as the southeastern states are known at home. The students introduced here are MBA students who are hoping that their advanced research will give them a competitive advantage over their peers. Their names are Mary, Tom, Zack, and Sue. Go with them as they unravel the intricacies of FDI. They are assisted by employees from various economic development offices in the south who are enthusiastic about the students' quest.

Neal Wade, head of the Alabama Development office, started the students with a little background information. Let's listen in for what Neal shared with them about FDI, different countries' motives, and the major Southern United States' FDI inflow players.

In today's global marketplace, governments increasingly must compete aggressively to attract multinational companies. Companies engage in foreign direct investment (FDI) for the purpose of actively controlling property, assets, or companies located in a host country. International business competition among multinational companies frequently involves fiscal incentives. Due to the elimination of barriers to capital movements, governments must compete for Foreign Direct Investment (FDI) in global markets. FDI patterns have significantly changed over the past twenty years. Relative to the GDP of all developed countries, in 1980, the amount of inward FDI was 4.7 percent and outward FDI was 6.4 percent. These figures had tripled to 14.5 percent and 19 percent respectively by 1999 (Zitta & Powers, 2003).

Industries have several different motives for expanding their operations abroad. If a firm possesses unique capabilities, they may conduct FDI abroad in order to expand their capabilities to achieve higher returns. Often firms expand abroad in order to obtain capabilities that are not available in their home country. Some fear protectionism and others move close to their customers to reduce costs and better capture what their customers want (Alcacer & Chung, 2002).

Countries vary in the importance of issues that affect their FDI. There are similarities between the U.S. and Japanese investments, even though the two groups of investors vary in their responsiveness to factors such as low wage inflation, labor quality, and corporate tax rates. Japanese investors are more influenced by factors such as infrastructure, wage inflation, elementary school enrollment, and country risk, described as economic and social uncertainty of the host country (Mody & Srinivasan, 1998). The United States is the largest foreign direct investor country with 1,953 foreign direct investment projects since 2002 (www.locomonitor.com 2005). The U.S. also hosts the largest inflow of FDI in the world, which offers foreign multinational companies substantial market opportunity (Cooke, 2001). U.S. FDI net financial inflows were $17.6 billion in the second quarter of 2005 (www.bea.gov.)

During the 1990's, the U.S. experienced a sharp growth in FDI generated by the booming economy. During 2004, FDI capital investments reached $13.90 billion U.S. dollars. The United Kingdom, Netherlands, Japan, Germany and Canada provided the largest amounts of direct investment in the U.S., and these countries also received large amounts of investment from the U.S. (Country Profile, 2005). For example, in 2003, there were 589 FDI projects with a capital investment of U.S. $11.61 billion. In 2004, 580 FDI projects resulted in U.S. $14.26 billion. In the first half of 2005, there were 370 projects with a capital investment of U.S. $10.99 billion. The countries investing in the U.S. since 2002 were Japan (328 projects), Germany (258), UK (241), Canada (180), and France (95). (www.locomonitor.com).

The top five multinational companies investing in the U.S. ranked by the number of FDI projects in the U.S. since 2002 are Toyota (16), DHL (15), Honda (12), Daimler Chrysler (9), and Infineon Technologies (7) (http://www.locomonitor.com"; www.locomonitor.com). It is important to note the number of automobile companies.

Mary and Zack were astounded at what they heard from Mr. Wade. They knew that they had seen a lot of television reports about foreign automotive groups visiting in the south. However, they did not realize why they were here, and they were a little unsure about what the various states would deliver to them. Mary did some research and found out about the fierce competition for FDI among local and national governments. She filed her summary on what southern states bring to the table for the foreign companies. Her report is below.

SOUTHERN STATES AND COMPETITION FOR FDI

Many foreign countries choose the southern section of the U.S. as a desirable location for their FDI. Despite the escalating costs of incentives packages, southern states continue to invite large industrial employers in order to continue the evolution from an agricultural economy to a manufacturing economy. In the first quarter of2004, "Relocate America" named the top five places to live in the U.S., and they were all located in the South. In 2005, Policom Corporation ranked their top metros for economic strength, and seven of the top ten were in the South (Randle, 2005).

National and local governments face fierce competition for foreign direct investment as they recognize the impact to their economies of foreign business and industry locating in their area. Attracting multinational companies is no easy task but the state economic results are quite impressive. In today's global economy, companies expect their new facilities to be profitable immediately, and this requires a trained labor pool and cooperation within local governments. The southern U.S. tax policies have changed within recent years to impact FDI decisions. Infrastructure improvements, business incentives, and job training programs are part of the incentives offered to foreign investors as competition among states takes place.

FDI AND SOUTHERN STATES

As states are forced to compete for FDI, large manufacturers reap the benefits of shopping around for prime locations and the best deals or incentives offered by states. The southern U.S. has been very aggressive in recruiting international companies. Economic development is one of the first job priorities of southern politicians. Tennessee, Alabama, Georgia, Kentucky, South Carolina, and Texas have been eager to grow their manufacturing bases and have welcomed foreign automakers with numerous incentives, many industrial sites, a skilled work force and a non-union environment (Krizner, 2005). Each state has adopted a unique strategy to attract FDI because they realize they are competing for the same limited investments. The following section discusses what Texas, South Carolina, Mississippi, and Alabama are willing to offer in their pursuit of international investment.

Our student, Zack, was no slacker and he came up with a short report on FDI in Texas, South Carolina, and Mississippi. Here he was helped by the friendly staff in the respective development offices of these states. The Economic Development Offices' mission is to have every imaginable bit of information at their finger tips for any group looking over their state as possible investment projects. Tom Blackburn and Barry Mintone gave a lot of time to helping Zack learn more about what individual states do to attract FDI.

TEXAS, FDI AND INCENTIVES

Tom Blackburn is an acquaintance of Zack's dad. He previously lived in Alabama where he worked for the Economic Development Partnership of Alabama, so he has a vast knowledge of FDI. He recently retired and moved to the state of Texas. When he first moved to the state, Governor Rick Perry offered him a job, but he did not take it since he was retired. He gets bored now and then, so he has been pondering on how he can get involved with FDI projects in Texas. He would like to contact Governor Rick Perry, but he is not sure if he should. In the middle of his thoughts, his phone rang. When he picked up the phone, Zack was on the other end of the line. Zack asked Tom if he had any information on FDI in Texas. Tom told Zack that he currently did not have that information, but that he would be glad to call the governor and see what he could get. Tom was very relieved that Zack had called because now he had a reason to contact Governor Perry.

A few minutes later, Tom contacted Governor Perry's office. The Governor was not available, but Tom left a message. When the Governor returned his call, Tom explained his past experience with FDI and that he was helping a student from Alabama with a project about FDI in Texas. Tom asked Governor Perry to explain what the state has done and is currently doing to bring Foreign Direct Investment into the state of Texas. As a response to Tom's inquiry, Governor Rick Perry explained that he has made job creation and economic development a foundation of his administration. With the legislature's help, he established a $295 million dollar Texas Enterprise Fund to allow the state to respond quickly and aggressively to opportunities to bring jobs and employers to Texas (www.governor.state.tx.us). This fund merged all economic development and tourism functions into the governor's office (fDi Magazine, 2005). This provides state's leaders with a "deal-closing fund" that has the flexibility and financial resources to help strengthen the state's economy. The fund may be utilized for a variety of economic development projects, including infrastructure development, business incentives, community development, and job training programs. This enables the governor's office to tailor incentive packages to best meet the needs of local communities and businesses. The fund focuses on ways to attract new business to the state or assist with a substantial expansion of an existing business as part of a competitive recruitment situation (www.governor.state.tx.us). The Governor's and legislature's reform of the state's workers' compensation system is also an example of the state's commitment to successful partnership (www.toyota.co.jp.2003).

An additional economic incentive Texas utilizes to attract FDI is the Texas Industry Development (TID) Loan Program, which provides capital to Texas communities at favorable market rates. Also, the Texas Leverage Fund (TLF) provides an additional source of financing to communities that have adopted an economic development sales tax (www.governor.state.tx.us). Texas ranks forty-eighth within the fifty states in per capita taxes which makes its tax burden one of the lowest in the U.S. (www.fdimagazine.com).

Governor Perry ended his explanation by telling Tom that Texas recently acquired a new Toyota Motor Manufacturing North America (TMMNA) plant in San Antonio and that it involved an additional $50 million dollar investment by Toyota within the state.

Tom was satisfied with Governor Perry's explanation of what Texas is doing to bring FDI into the state, and he told Governor Perry that he was interested in helping with FDI projects for the state of Texas. Tom called Zack and relayed all of the facts that he learned from Governor Perry. Using the information Tom gathered, Zack sat down at his computer and started typing his report on Texas.

SOUTH CAROLINA, FDI AND INCENTIVES

To obtain information on FDI in South Carolina, Zack contacted Barry Mintone, a member of the South Carolina Economic Developers' Association. This organization is devoted to increasing the effectiveness of individuals involved in the practice of economic development in South Carolina by encouraging cooperation, exchange of information, and promotion of professional skills. Barry informed Zack that Carl Tanning from the state's economic development board would be speaking about South Carolina's current and past experience in attracting FDI to the state at the next meeting. He invited Zack to attend the meeting.

At the meeting, Zack attentively listened to what Carl had to say. Carl explained that South Carolina started its modern Foreign Direct Investment (FDI) program in 1988, which resulted in the securing of Fuji-film Medical in Greenwood and the BMW Plant in Greer (1992). Since this program started, South Carolina has continued to reap success in the development of jobs through in-sourcing or FDI. According to the Organization for International Investment, South Carolina ranks first in the nation in the share of its private sector workforce supported by U. S. subsidiaries of companies headquartered abroad. FDI employment accounts for some 127,000 jobs in South Carolina or 8.4 percent of its private industry employment. 10,000 jobs were created in the period of 1999-2004 (9 % increase), with 51 percent being in the manufacturing sector; which has a tendency to produce a greater rate of spin-off employment opportunities. With 604 foreign owned companies operating in South Carolina, 1 in 12 of the state's jobs can be attributed to FDI. South Carolina ranks fifteenth nationwide in its number of in-sourced jobs.

Carl continued his presentation by introducing the state's most current FDI project, the 1992 BMW package. He informed the audience that the BMW project was thought to be the most costly state supported economic initiative ventured at the time. The state offered incentives totaling $155 million in return for the promise of1900 jobs for a ratio of $81,479 per employee (adjusted to 2001 dollars). These dollars came in the form of property tax abatements, labor training, income tax credits, revenue bonds, a 900 acre plant site, road and airport improvements, and a $6 million dollar local county contribution. While raising dire doubts among politicians and some economist concerning government's direct support of foreign owned private business, the economic impact has been beyond even the most aggressive projections.

Carl concluded his presentation by describing how BMW has effected the state's economic position. He explained that the result of South Carolina's initial investment has been BMW's return investment of $1.9 billion and direct employment of 4300 employees. This foundation supports an additional 16,700 jobs producing $691 million in wages. The total impact associated with BMW's annual economic activities exceeds $4.1 billion. Given the above data, South Carolina's venture capital was obviously put to good use. The prudent use of state monies in the pursuit of FDI continues, as in 2004, the state approved a $103.5 million incentive package for BMW in return for a promised $400 million additional direct investment and the creation of 400 new jobs. After listening to Carl speak, Zack packed up his things, went home, and wrote his report on South Carolina. After finishing the report, he realized that he was almost finished with the project. One more state and he would be finished with his research.

MISSISSIPPI, FDI AND INCENTIVES

Zack was very excited about researching the state of Mississippi because his family is originally from there. He brainstormed about how he would gather the information. His options were to contact the economic development board in Mississippi or to find the information on the board's website. He decided to do the research on the website since it was the quickest way to access the information. Below are the facts that he found while completing his research. FDI by U.S subsidiaries of foreign-based companies in Mississippi play a vital role in the state's economy. They employ almost 3% of the private sector workforce, totaling 25,500 Mississippians, which represents an increase of 29% in the last five years. This increase is largely due to the arrival of Japan's number three automobile manufacturer, Nissan.

Mississippi was slow in realizing the worth of recruiting foreign capital. However, it launched a serious effort the late 1990's, which resulted in a major catch; Nissan came to Canton in 2000. Mississippi held special secessions of the state legislature which resulted in cutting the time frame for incentive decisions from the normal eighteen months to five. The package included $295 million of direct incentives in return for a promise of 4,000 jobs paying an average of $23 per hour. In addition to the state's effort, Mississippi went one step further when its United State's Senator, Trent Lott, sponsored special federal tax reduction legislation for the Canton area. It is ironic, in light of the state's lethargy in getting into the game, that the facility was expanded by forty percent a full year before it was scheduled to open.

The final incentive package totaled $363 million with the corresponding job numbers jumping to 5,300 and a promised direct investment of $1.4 billion. Using what has become a standard measurement of the soundness of the investment for the state, these figures compute to an incentive/job ratio of $68,490. This compares favorably with Mississippi's neighbors of Alabama and South Carolina whose ratios were $82,857 and $81,479, respectively. A state funded economic impact study projected the investment to break even by 2007, in large part because of the economic multiplier effect showing the overall job creation to be 16,212.

As in South Carolina for BMW, many of the dollars in the incentive package were devoted to infrastructure improvements, employee training, and tax credits. Nissan Vice-President, Emil Hassan, reflected in his statement, "The partnership between local firms and Tier 1 automotive suppliers demonstrate a win-win scenario that will be good for the smaller firms, for Nissan, and for Mississippi."

After Zack finished his research on the internet, he took a short break to eat dinner and think about his research a little. After dinner, he began writing his report. Soon he would be finished with his portion of the project.

ALABAMA, FDI, AND INCENTIVES

Mary Jones, Tom Russell, and Sue Hensley focused their research on Alabama's economic incentive plan, particularly its competitive position in the solicitation of Foreign Direct Investment (FDI). On the second day of their internship, they were a little apprehensive as they waited outside the governor's office at the Alabama State Capital in Montgomery. After they all said hello, they headed inside, so they could get started on their research project.

After a brief introduction to the governor and a one-half hour visit with the Chief of Economic Development, they were escorted to their offices, better descried as cubicles, and basically told to "Get on with it". After settling in, getting their personal items arranged, computer pass words approved, and security badges, they all agreed a 1:00 pm "Brain Storming" was an appropriate first step. Tom, who was getting his MBA from Ole Miss, was informally selected as the leader of the team, with equal participation encouraged by all.

All agreed the mission-goal for their project was to evaluate available data on the history and economic impact of FDI in Alabama and competitive states; and give recommendations as how to apply this information in the making of future decisions.

The effort was further categorized into three general areas:

1. A comparison of the tax incentive packages offered by various southern states. Mary's had an undergraduate degree in accounting from Jacksonville State, so the group thought she would be the best equipped to handle this section. Mary was very comfortable assessing how tax incentives would influence the companies to look hard at Alabama.

2. The desired employment environment and infrastructure, particularly as it relates to human resources: i.e., education demographics, state sponsored training programs, and union presence. Given Sue's undergraduate degree in human resources from Auburn, she seemed a natural for this role.

3. Financial Incentives and return on the state's investment. With Tom's undergraduate degree in finance he was deemed the best suited for this category.

When Mary began her research in the area of tax incentives she was somewhat surprised to discover that Alabama offers substantial advantages for companies seeking a business location that will contribute to long-term success. It has a labor pool of more than two million skilled workers, and it offers a work force training system that has been ranked best in the nation. The transportation infrastructure can meet the demands of companies in any sector. It has a competitive overall cost structure that is one of the country's lowest, and it is a prime location in the heart of the fast-growing U.S. South. All these factors have a major impact on a company's bottom line.

As Mary's research developed, she was awed by Alabama's success of being in the forefront of offering incentives packages and deriving a considerable benefit from the industries relocating in the state. For example, Alabama's auto industry has generated 30,180 direct jobs, creating another 53,530 indirect jobs, for a total of 83,710. These job totals translate to $1.4 billion in direct payroll and $1.62 billion for indirect payroll as of the end of 2002. It is estimated that 5 to 6.2 spin off-jobs are associated for every single assembly job. Alabama possesses many natural resources that make it attractive to foreign multinational corporations. Among these natural resources are attractive climate, accessible ports and rivers, excellent infrastructure including a good transportation system, and reserves of natural gas, coal, and marble. Other areas that Alabama emphasized in their quest for automotive FDI were tax incentives, union sentiment, education development activities, and state training programs.

ALABAMA AND TAX INCENTIVES

Due to Alabama's commitment to the promotion and maintenance of a competitive business climate, the state has developed one of the most aggressive tax incentive programs in the nation for new and expanding industry. The Alabama Department of Revenue governs several tax incentives for existing industries, expanding industries, and new industries locating to Alabama. The tax incentives offered by Alabama are created and administered under the Alabama Constitution of1901 and the Code of Alabama 1975. Since the Alabama tax incentives have a statutory basis, industries in the state have a stable framework for long-term investment.

The most substantial tax incentive offered by Alabama is the Capital Investment Tax Credit program. This program allows new and expanding companies up to five percent of their initial capital costs of qualifying projects as a credit. This credit is offered each year, for twenty years, beginning in the year the qualifying project is placed into service. This credit is available to all types of entities, including but not limited to: C corporations, S corporations, limited liability corporations, partnerships, trusts, and sole proprietorships.

In addition to the Capital Investment Tax Credit, it offers the Alabama Enterprise Zone Credit and the Employer Education Credit to companies locating or expanding in Alabama. The Alabama Enterprise Zone Credit was established to stimulate growth in depressed areas of the state. It offers businesses a package of incentives which includes some of the most favorable arrangements in the country. In order for a company to receive this credit, it must locate in one of the twenty seven areas of Alabama that are designated as an "enterprise zone." The credit can be applied against the income tax liability or the business privilege tax liability and cannot exceed $2,500 per new permanent employee each year. In addition to the maximum $2,500 credit, employers may also receive an exemption from Alabama sales and use tax on the purchase of materials used in the construction of a building or any addition or improvement for the zone business or any machinery and equipment used in the business. The Employer Education Credit is available to employers who provide basic skills education programs to Alabama resident employees. The credit is twenty percent of the actual costs and is limited to the employer's income tax liability.

Since Mary was puzzled by Alabama's ability to offer such concessions, she inquired about the topic with Alabama's Chief Revenue Officer, Clyde Romer. Mr. Romer explained that most tax incentives are booked against future anticipated tax liabilities instead of cash outlays; relieving the pressure on current revenues. Mr. Romer also discussed how Alabama is favored for its corporate income tax rate of 6.5%. The state allows corporations to deduct their federal income taxes, which

makes the net effective rate of 4.42% one of the lowest in the nation. Unlike many other states, Alabama does not levy property tax on inventory that is held for sale or materials that are held to be compounded or manufactured and are stocked at plants for manufacturing purposes.

Mary was quite intrigued by the fact that the Alabama legislature took the initiative to pass The Tax Incentive Reform Act 1992. This act gives the cities, counties, industrial development boards, and other public bodies the power to grant property tax exemptions of up to ten years to companies that are engaging in new projects or major additions to existing projects. There is no minimum investment for new projects, but an addition to an existing project must be the lesser of 30% of the cost of the existing facility or $2 million to qualify for the exemption.

Alabama is ranked nationally among the lowest electricity costs for industrial users. In addition, utilities used in certain types of manufacturing and compounding processes qualify for an exclusion from the utility gross receipts tax and utility service tax for utility services used in Alabama.

Mr. Romer's interview concluded the Alabama portion of her research, so Mary left the meeting confident she had the data to compare Alabama's tax incentives with other southern states.

FDI AND INFRASTRUCTURE

In her effort to evaluate the importance of the employment environment and infrastructure, Sue sought an appointment with the state Human Resources Director, Helen James. Gracious with her time, Mrs. James explained that competition for FDI is influenced by government policies. While offering tax incentives is often effective in attracting foreign investors, improving the quality of a country's infrastructure appears to have a longer lasting impact. Countries must focus on the basics that make them attractive to the foreign investors: de-regulation, simplification of processes, reduced corruption, education of the labor force for long-term benefit, and expanded infrastructure (www.iabd.org/res/publications, 2001).

Sue remembered her courses in international business and began nodding in agreement as Mrs. James further elaborated that human resources (for example, wage levels, unionization, labor politics, and skills of the workforce) are important factors in most firms' decisions regarding FDI. Findings indicate that U.S. and European multinational companies' decisions regarding investment abroad are strongly influenced by comparative location advantages, especially the differences in union penetration, collective bargaining contexts, and government workplace regulations (Cooke, 2001). German-owned DaimlerChrysler Corporation, in its Alabama operations, has been aggressive in its efforts to rid itself of union representation by Bridgestone/Firestone who is Japanese owned. DaimlerChrysler wishes to operate as a union-free enterprise. Studies by Bartik (1985) and Woodward (1992) show that foreign multinational companies strive to minimize the likelihood of their company being unionized by their location decision in the U.S. A study by Shaver (1998) indicates that foreign-owned manufacturers are more negatively influenced by union penetration rates than U.S. manufacturers in making location investment decisions (Cooke, 2001).

When questioned about state sponsored training, Mrs. James responded by saying that Alabama offers several unique first class training programs. Alabama Industrial Development Training (AIDT) is among the most highly rated workforce-training program in the U.S. (Expansion Management, 2003). They provide state-of-the-art industrial training and support services for new and expanding industries. AIDT has several training centers located statewide. For example, the AIDT center in Lincoln continually assists the Honda Manufacturing plant located nearby with employee training and support as they expand their processes. They provide mobile training units, an experienced staff paid by AIDT and on-site production facilities at no cost to the business client. AIDT often works in partnership with the local community colleges in their training center areas to coordinate customized training for their clients.

Sue was pleased to discover, through Mrs. James' orientation, that the state has 12 Alabama Technology Network (ATN) Training Centers located throughout the state that work with businesses and industries to increase the competitiveness of companies through a network of service providers. This network merged under the umbrella of the Department of Postsecondary Education in 2005, in order to fully partner with the College system to enhance workforce-training capabilities. Future plans call for increasing the number of ATN center locations in the state within the next two years in order to meet the increased technology training needs of the future Alabama workforce. ATN's administer the Manufacturing Extension Partnership (MEP), which provides a network of increased services to manufacturers. ATN's assist businesses that have lost jobs or are forced to revamp their processes due to foreign competition. They offer applications for the Federal Incumbent Worker Grants that enable manufacturers to retrain their employees with a fifty percent match of grant funds for training costs.

Wow! With this treasure trove of information Sue began organizing her research data to reflect Alabama's competitive position among the state's peers in the ongoing FDI competition.

FINANCIAL INCENTIVES AND RETURN ON INVESTMENT IN ALABAMA

Having been given the responsibility to perform the financial analysis on the southern FDI phenomena, Tom started his investigation into its cost effectiveness by contacting the state Treasurer's Office. While he visited with the state's Chief Finicial Officer, Gene Downs, Tom learned that more than 300 foreign-based manufacturers from more than 30 nations currently operate in Alabama. Of these foreign-based companies, three are major automobile manufacturers, Honda, Hyundai, and Mercedes. Another foreign-based automobile manufacturer, Isuzu, just announced that it will be expanding its operations into Alabama in the near future. The state is also the home of a Toyota engine plant that produces V6 and V8 engines.

Mr. Downs explained that, in 1993, when Mercedes announced that it would be moving the assembly of the M-Class outside of Germany, Alabama was not anywhere near the top of the list of possible locations. However, Alabama ended up being the state of choice because of its generous incentives package. It granted huge subsidies to Mercedes in exchange for Mercedes building its plant in Vance that would employ 1,500 people. The incentives package included $253 million in free acreage, tax abatements, donations, infrastructure, improvements, and work force training. Based on the incentives offered, those 1,500 jobs cost Alabama taxpayers $168,000 per job. The Mercedes plant manufactures the M-Class sport-utility vehicle (SUV), the Grand Sports Tourer, and the GL-Class luxury SUV at the plant in Vance. After its $600 million expansion in 2005, Mercedes' total capital investment in the plant increased to $1 billion with 4,000 employees. The number of vehicles assembled each year rose to 160,000 while the total square footage for the plant increased to $3 million. Mercedes' investment in Alabama has also created thirty five auto suppliers. Although it cost a substantial amount of money to get Mercedes to locate in Alabama, it put Alabama on the automotive map which led to future investments from other foreign auto makers. In light of this scenario, it is Mr. Downs' belief that the assessment of the financial soundness of these FDI endeavors, especially this first one, cannot be made on a strictly financial analysis alone.

Looking further, Tom was able to produce real numbers as to individual incentive packages' total cost in terms of tax incentives and actual cash outlays. And, return on investment can be approximated in terms of economic impact and jobs gained. In 1999, the state was not as generous to Honda as it was to Mercedes in 1993, but Honda still received $102 million in direct incentives that included site preparation grants, preparation for the construction site, free employee training programs, industrial access programs, and the biggest thing of all: enough affordable land to accommodate its 3.25 million square foot manufacturing facility. They also received an additional $55.6 million in tax breaks. Honda expanded its operations in 2004 with the addition of a second assembly line. Along with this expansion came an additional $89.7 million dollars in incentives from the state. This incentives package included: $45.1 million from the state for employee training, and road, sewer and water improvements, $33.1 million from the state and local levels for various tax breaks, and $11.5 million from the city of Talladega and Talladega County for site preparation, and sewer and water improvements. The Honda assembly plant produces the Honda Odyssey Minivans, the Honda Pilot SUVs, and V-6 engines to power the vehicles they assemble. After the expansion in 2004, Honda has a $1.2 billion investment in its plant in Lincoln and employs approximately 4,500 worked. Honda produces more than 300,000 Odyssey minivans, Honda Pilot sport utility vehicles, and V-6 engines each year at its plant in Lincoln. It is Honda's largest light truck production source in the world.

In 2002, Alabama gave Hyundai an incentive package worth $252.8 million to locate in Montgomery. This package included $76.7 million in tax breaks; $61.8 million in training grants; and $34 million in land purchase assistance, road and bridge development, and water and sewer improvements. Hyundai assembles the Santa Fe SUV, the Sonata sedan, and the Lambda 3.3L V6 engine at its plant in Montgomery. It employs 2,500 workers and has an annual production capacity of 300,000 units. Hyundai has invested $1 billion in its 2 million square foot plant and has created an additional 5,500 jobs through its 34 suppliers in Alabama.

As Tom processed this information, he looked forward to meeting with the team to discuss his findings, along with what they found, as to Alabama's competitive position in the solicitation of FDI.

After several weeks of hard and interesting work, they reconvened with the following findings. At the last minute, they heard the announcement from the Economic Development Office about Isuzu coming to Alabama. They also reported on this new bonanza for Alabama.

ISUZU COMES TO ALABAMA

Isuzu Manufacturing Services of America Inc., a subsidiary of Japan-based Isuzu Motors Ltd., purchased a three hundred square foot former Del Monte Corp. distribution center for $7.8 million in Birmingham, AL, according to 2007 public records. Isuzu Manufacturing Services provides research, development, engineering and manufacturing services for Isuzu in North America. It also owns Isuzu Diesel Services of America Inc., an engine development and manufacturing subsidiary. Isuzu plans to invest several million dollars into the distribution center and turn it into a manufacturing facility for its commercial medium and full-size trucks. Isuzu plans to employ approximately 1,000 workers.

The project will qualify for incentives from the city and the state based on the extent of Isuzu's investment and the number of jobs to be created, using a formula spelled out by state law. It is possible additional incentives could be offered. The negotiations with the state of Alabama and Birmingham have been secret and Isuzu has not set a date for production to begin.

Chip Letzgus, a spokesman with Isuzu Motors America Inc. in Cerritos, Calif., declined to confirm recent reports that the company would build a commercial truck plant in the city. He said the company is likely to make an official announcement of its plans for the site within the next two to six months. Isuzu Motors America, headquartered in California, serves as the distribution arm for Isuzu sport-utility vehicles and pickup trucks in the U.S.

Sam Addy, director of the University of Alabama Center for Business and Economic Research, said news that Isuzu is coming to town is "great, because I think it's saying that we are on the map. We are being recognized as far as manufacturing is concerned." Addy said the new plant would help to diversify Birmingham's economy, which has been limited in the past by Environmental Protection Agency regulations from landing new manufacturing operations. It also would diversify the automotive products that Alabama has to offer, he said. "We've been offering cars, SUVs, sedans, and now we have a truck."

In October, Gov. Bob Riley said he had a "very enthusiastic" meeting in Japan with executives for truck maker Isuzu. The company has not made a formal announcement and Governor Riley declined to elaborate on the details of his meeting with Isuzu executives. He would only say that the meetings went very well and the meeting was very positive. Throughout the year, reports have varied on Isuzu's plans. For example, last month, Automotive News said Isuzu has delayed breaking ground on the project because it is considering the possibility of putting the operation in Mexico instead. In April, Japan's Nikkei newspaper said Isuzu would open a plant in Alabama with a production capacity of 5,000 trucks per year by 2010.

"With the growing and significant Japanese investment in Alabama, it's incredibly important for us to continue our business ties with Japan," says Neal Wade, head of the Alabama Development Office, the state's chief industrial recruiting agency. Wade, Governor Riley and other Alabama officials attended the Southeast U.S./Japan Association conference on how those ties can be expanded throughout the region.

The trip is at a critical time when Alabama is aggressively pursuing foreign investment. With plans unannounced and rumors of Isuzu looking at Mexico for manufacturing opportunities, Alabama officials are reaching out to Isuzu on their trip.

Others traveling to Japan have broader goals. Birmingham City Councilman Steven Hoyt, who heads the panel's economic development committee, says he wants to boost the city's profile. "When international companies think of Alabama, I want them to know about Birmingham, our resources, assets and amenities," he said in a press release last week. "As this message spreads, it will lead to economic expansion, jobs and enhanced prosperity."

Without a doubt, Japanese investment in Alabama during the past few years has helped fuel prosperity--and explains why the state group is making the trip. Carl Ferguson, director emeritus and senior research fellow at the UA center, said Alabama's existing automakers, Mercedes-Benz U.S. International Inc., Honda Manufacturing of Alabama LLC , Hyundai Motor Manufacturing Alabama and Toyota Motor Manufacturing Alabama Inc., "have all demonstrated that they can operate very, very profitably in Alabama." Labor is productive, and Alabama is well-positioned as a transportation hub, enabling raw materials to flow easily into plants and finished products to flow easily out, he said.

The smallest investment dealing with automotive industry is Toyota. The Toyota engine plant started production in Huntsville, Alabama in 2003. It produces V8 and V6 engines and employs 800 workers. The plant produces 270,000 V8 engines and 130,000 V6 engines annually. Toyota's investment in Alabama totals to $490 million.

CONCLUSIONS

Alabama has invested millions of dollars into the automotive industry. As a result, their existing automakers, Mercedes, Honda, Hyundai, and Toyota have demonstrated that they can operate efficiently and profitably in Alabama. With deals like these, its no wonder foreign automakers have stepped up production in the U.S. States continue to offer attractive incentives, hoping that these will solve some of the problems facing them at home. For example, in early 2007, Louisiana and Alabama are in a bidding war for a German steel company. It is reported that the incentive package offered by both has exceeded $1 billion.

QUESTIONS

1. What percent of FDI to the US is in the southern states?

2. What caused this increase in FDI to the southern area?

3. What tax incentives does Alabama offer companies in FDI?

4. What part does unionization sentiment in a state have on FDI decisions?

5. Why do countries engage in foreign direct investment (FDI) in Alabama and other southern states? What unique things does Alabama offer? See www.ado.state.al.us

6. What is the impact of Alabama Investment Development Training (AIDT)?

7. What is the Alabama Technology Network and what is its influence on FDI?

8. What was the incentive package Alabama gave Honda?

9. What was the incentive package Alabama gave Hyundai?

10. What are the aggregate benefits of FDI to Alabama?

11. What makes Alabama and its infrastructure attractive to foreign investors?

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Patricia C. Borstorff, Jacksonville State University

Taleah H. Collum, Jacksonville State University

Stan Newton, Jacksonville State University