King of the hill: competing for foreign direct investment in 'Dixie'.(Instructor's Note)

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.

This case can be used as a template for professors in other states. We have included a reference page to assist others in modeling a case based on what is done here. The figures for FDI initially are reported for the U.S. The Bureau of Economic Analysis (www.bea.gov) offers information for each geographical area. Each state has a web site as well as a Development Office. Much of our information came from the ones for Alabama.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case helps students appreciate the global reach of business today. In all states, there is foreign direct investment and state development offices to assist in attracting FDI. Allow the students to read the case and then assign the questions. They can use the Internet to find all the answers which are provided below. We also provided an extensive reference section to assist the teacher (and the students if you want to provide it to them). Students are adept at finding information on the Internet and enjoy the success that this case brings.

Discussion Questions

We suggest to first look at Alabama and its participation in trade. The students should answer the following questions:

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

The southeastern states of Alabama, Florida, Georgia, Kentucky, North Carolina, and Virginia occupied 20.3% of the nations FDI in 2003. Alabama made up 7.1% of FDI in 2003. Its increase rate in FDI--gross book value, 75%, was higher than that of the southeast and the U.S., respectively 40% and 65%.

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

Some reasons for the increase in FDI were: multi-modal transportation and distribution infrastructures, a capable workforce at competitive salaries, excellent training system, the lowest electricity costs, a low cost of living, a public-private partnership, and the lowest state income and property taxes and incentive programs. For example, Alabama provided tremendous incentives and tax breaks for inducing the automotive investments.

Alabama gave incentives package to Mercedes-Benz (1993) of $253 million including: training workers, clearing and improving site, upgrading utilities, and buying 2,500 expensive vehicles. They paid Mercedes Benz $150,000 per job created. Compare this to the presumed frontrunner at that time, North Carolina, which offered $100 million.

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

Alabama has statutory tax incentives that are favorable for all companies such as income tax breaks. Corporations pay Alabama income tax based on their net taxable income derived only from business conducted within the state and a fifteen year carry forward of net operating losses. Property taxes are significantly lower than most states with the limit of state mileage rates on both real and personal property at 6.5 mills (www.ado.state.al.us). Business property is taxed on 20% of its fair market value with an exemption of all tangible personal property being warehoused in the state for shipment to a destination outside the state. Alabama has favorable sales and use taxes for raw materials used by manufacturers. A business privilege tax is capped at $15,000 except for financial institutions and insurance companies (www.ado.state.al.us).

For qualifying companies in Alabama, an impressive incentive to locate businesses within the state is the annual income tax capital credit of five percent of the total capital costs of a qualifying project for twenty years. In contrast, other cities and counties may offer abatements for non-educational state, county, and city property taxes for a period of only ten years. For manufacturing use, abatements are approved for non-educational county and city sales and use taxes on construction materials and equipment (www.ado.state.al.us).

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

Human resources (HR) are an important contributor to most firms' decisions regarding FDI. HR includes such areas as wage levels, unionization, labor politics, and skills of the workforce. U.S. and European multinational companies' decisions regarding investment abroad are strongly influenced by comparative location advantages prejudiced by the differences in union penetration, collective bargaining contexts and government workplace regulations. 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. Foreign multinational companies strive to minimize the likelihood of their company being unionized by location decisions regarding where to invest within the U.S. Foreign-owned manufacturers are more negatively influenced by union penetration rates than U.S. manufacturers in making location investment 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

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. Alabama possesses many natural resources that make it attractive to foreign multinational corporations, among these are attractive climate, accessible ports and rivers, excellent infrastructure including a good transportation system, and reserves of natural gas, coal, and marble.

For business relocation purposes, Alabama attracts businesses with benefits by having a pro-business culture and lower resource costs than many other states. Often, it is the work ethic of local citizens that is cited as the key to Alabama's success in attracting global companies and the subsequent growth of these companies (Chemical Market Reporter, 2004). In addition to the booming automotive industry in Alabama, the state is a significant base for the U.S. chemical industry. This industry including the plastics sector accounted for 25,300 Alabama workers in 2003. The chemical industry has prospered in Alabama due to several factors: the low cost of conducting business locally, a bipartisan pro-business environment within the government, a readily available skilled workforce, and low utility costs (Chemical Market Reporter, 2004).

Foreign investors have invested an enormous amount of FDI in the automobile manufacturing business in the southern United States. The following companies have manufacturing plants located in the south: Nissan operates plants in Mississippi and Tennessee, Toyota has operations in Kentucky and Texas, and Hyundai, Honda, and Mercedes have manufacturing plants within Alabama.

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

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, Alabama, 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.

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

Alabama currently has twelve Alabama Technology Network (ATN) Training Centers located throughout the state that works with business and industry to increase the competitiveness of Alabama companies through a network of service providers. This network merged under the umbrella of the Alabama Department of Postsecondary Education in 2005, in order to fully partner with the Alabama College system to enhance workforce-training capabilities. During Training for Business and Industry Network (TBIN) meetings within the state, I observed Alabama Postsecondary Chancellor Roy Johnson reveal his plans to increase the number of ATN center locations in the state within the next two years as part of his workforce development plan 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.

8. What was the incentive package Alabama gave Honda?

Alabama gave Honda $158.3 million, including: buying the land and preparing the site for construction, training the plant's employees, and $55.6 million in tax breaks. Additional incentives in 2002 for $450 million expansion included: $45.1 million from the state for employee training, and road, sewer and water improvements; $33.1 million from the state and local area for various tax breaks, which will be allocated over a 20-year period; and $11.5 million from the city of Talladega and Talladega County for site preparation, and sewer and water improvements.

9. What was the incentive package Alabama gave Hyundai?

The incentive package given by the state of Alabama to Hyundai (2002) included: $252.8 million, including; $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.

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

The benefits of FDI (aggregate automotive industry in Alabama) include: Job creation 44,834 (2005), as compared to 31,197 (2003); 124,190 direct and indirect jobs. Alabama wages are: Motor vehicle manufacturing: $1,274/weekly (~$64,000/annually). All manufacturing industries are: $725/weekly (~$36,000/annually). All industries are: $620/weekly (~31,000/annually). Also there was Employment growth (due in part to other expanding industries such as the aerospace sector) 3.5% unemployment rate (2005); as compared to 5.3% (2004). Additionally, there was State sales taxes (paid by auto industry workers in 2003) of $101 million (state); $46 million (sales). Finally, over 160 Hyundai, Honda, and Mercedes suppliers have located within the state

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

Alabama has a lot to offer foreign investors. The following shows the depth of commitment to attract FDI:

* World-wide connectivity through the statewide multi-modal transportation/distribution infrastructure with an easily accessible interstate and four-lane highway network connects every major city and most other communities throughout the state, motor freight terminals, rail systems, port and barge transportation, and international air service.

* A capable workforce is available at competitive wages.

* Alabama Industrial Development Training recruits, assesses and trains qualified potential employees at no cost to the industry and based on company criteria.

* A variety of advanced engineering, technology, research, and development facilities and programs are located at various universities and colleges throughout the State.

* Ranked nationally among the lowest electricity costs for industrial users (Morgan Quitno's State Rankings 2003) and a net exporter of electricity, Alabama's three major electric utilities provide dependable, low-cost power.

* Water resources are approximately 20 times greater than present usage. One- twelfth of all the ocean-flowing water in the U.S. travels through Alabama.

* Alabama's forestland covers more acres than the size of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire and Rhode Island combined.

* A low cost of living complements an enviable quality of life in areas such as recreation, entertainment and cultural diversity.

* The Alabama Technology Network (ATN), a public/private partnership of the University of Alabama System, Auburn University, the Economic Development Partnership of Alabama and selected two-year technical colleges, provides worker training and technology transfer to industry in Alabama. ATN works to enhance the competitiveness of companies, strengthen the industrial base and improve the effectiveness of the work force through a coordinated network of education, training and technical assistance providers.

* Official U.S. Customs Ports-of-Entry are located at Birmingham, Mobile, and Huntsville International Airports.

* NASA's Marshall Space Flight Center is a regional transfer hub for government/industry teams who travel to industrial sites. In Alabama, an estimated 1,170 jobs were created or saved over an 18-month period through its programs and 41 new products were created.

* Auburn University's Industrial Extension Service helps small and medium-sized manufacturers solve technical and business problems, provides work force training and disseminates advanced technology.

* University of Alabama Birmingham's (UAB) office for the Advancement of Developing Industries is the state's advanced technology business incubator and is nationally recognized as a technology transfer organization.

* The state income and property taxes are among the lowest found anywhere in the United States. In addition, Alabama offers statutory incentive programs such as a corporate income tax credit for qualifying companies. This includes the cost of land, buildings, machinery and equipment. The program provides an annual corporate income tax credit of five percent of the total capital cost of the project for 20 years. Assuming a total cost of $20 million in building and equipment, the abatement provides up to $1 million in credit against Alabama corporate income taxes each year for a term of 20 years.

* Alabama provides industrial site preparation grants to assist new and expanding manufacturers.

* The Alabama Enterprise Zone program provides a package of business development incentives, which offers businesses some of the most favorable arrangements in the country.

* One-half (1/2) of the U.S. population lives within a 500-mile radius and over two-thirds (2/3) lives within 750 miles.

Patricia C. Borstorff, Jacksonville State University

Taleah H. Collum, Jacksonville State University

Stan Newton, Jacksonville State University Table 1: Foreign Direct Investment by Year in U.S. Year FDI Projects Capital Investments in U.S. Dollars 2005 370 $10.99 billion * 2004 580 $14.26 billion 2003 589 $11.61 billion * Data through July 2005 Table 2: Source Country of Multinationals Investing in U.S. Source Country Projects Japan 328 * Germany 258 United Kingdom 241 Canada 180 France 95 * Data through July 2005 Table 3: Top Multinational Companies Investing in United States Company Projects Toyota 16 DHL 15 Honda 12 DaimlerChrysler 9 Infineon Technology 7 Data Through July 2005 www.LOCOmonitor.com