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Main | International Trade | 6/24/2015

Redefining Foreign Direct Investment

While traditionally bilateral commercial relations between the US and Israel have focused on trade, the interest by US state governments in foreign direct investment from Israel to the US is increasing. Traditionally this has meant seeking “greenfield” opportunities.  

That is, overseas companies who are prepared to invest funds in the US to operate manufacturing plants, distribution facilities, US headquarters operations, etc. 
  
 But, in fact, the definition of FDI has broadened dramatically over the past few years and government economic development agencies have been relatively slow to adapt to the new models of FDI.  Today, FDI has grown to include additional models that lead to new job creation to include: 

  • Mergers and Acquisitions which have, for a long time, been included in the UN’s Conference on Trade & Development (UNCTAD) statistics but which generally have not been recognized by government agencies as FDI.  In today’s economy, emerging market investors from China and India, for example, are often characterized by purchasing US firms and then growing them both in sales volume and the number of jobs created. 
  • Investment in extractive sectors such as mining and energy, where both the US and Canada have recently seen a lot of foreign investor activity. 
  • Funding of infrastructure projects by foreign entities that act as a catalyst for job growth both in each project as well as in peripheral company activities that support the prime investment. 
  • Joint ventures between companies in two countries where, for example the R&D is handled abroad, while the increased manufacturing resulting from the R&D is done at home with resultant job creation there (as is the case often in JV’s between US and Israeli firms). 
  • Development of technology hubs and clusters to support startups, largely revolving around the creation of intellectual property.  In a similar vein, licensing and tech transfer promote collaboration between the academic and business communities, while incubator and accelerator programs assist young companies to grow and expand.
  • Research partnerships between universities in two countries which, while not generating any cash investment, holds the potential for future job growth. 
  • Reciprocal distribution agreements which, if successful, also create jobs in both locations, in the US and abroad.  

Local investment promotion agencies (IPAs) need to alter the way they define and measure FDI so that they can respond most effectively to changes in the marketplace and remain competitive with other locations who have internalized these changes.  In addition, they need to upgrade the capacity of their staffs to be able to work with this new reality so as to capitalize on all of the opportunities which exist in today’s world. 
  
By reorienting their organizations to address the new market realities and international business models, IPAs can strive to remain viable in today’s increasingly complex and competitive economic environment. 
  
This is particularly true of the relationship with Israel, where the incidence of Israeli companies opening large scale operations abroad is limited.  The 11 US states who have representative offices here (i.e. Delaware, Florida, Georgia, Illinois, Indiana, Maryland, New Mexico, New York, Ohio, Oklahoma and Pennsylvania) are more often approached by Israeli companies that fit into one of the categories above other than traditional “greenfield” projects.  Ideally, state governments should consider sponsoring visits of companies in their locations who are potential business partners with Israeli firms, and such visits could be easily facilitated both by the Federation of Israeli Chamber of Commerce, the American State Offices Association, as well as the individual state representatives resident in Israel. 
  
The end result could only be an increase in commercial activity between the two countries.

 Sherwin Pomerantz, Chairman of the American State Offices Association is also President of Atid EDI Ltd., a Jerusalem-based economic development consulting firm as well as a past national president of the Association of Americans and Canadians in Israel
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