Everywhere wants to be a biotech hub, but are IPAs that focus on chasing ‘hip’ sectors doing the locations they represent more harm than good? (Photo by Melson Almeida/AFP via Getty Images)

Corporate managers working with investment promotion agencies (IPAs) have probably experienced this already. When approaching an IPA with a planned foreign direct investment (FDI) project, you are occasionally told, more or less directly, that you aren’t one of their target sectors. You are welcome to find information on the website, but other than that…

‘Targeting strategies’ or ‘sector prioritisations’ are among the most widely used approaches of IPAs, essentially denoting a concentration of their attention on a small number of industries and the biggest and most attractive investors. The logic behind prioritising specific sectors (effectively a form of ‘positive discrimination’) is an attempt to increase the IPA’s efficiency and effectiveness by focusing its scarce resources on areas that (presumably) produce the highest returns in terms of investment sums or jobs created, or because these sectors are seen to offer unique benefits to the country (for example, high-tech areas that should further the countries’ technological development).

Is chasing KPIs the right approach?

In economic theory, spending taxpayer money on investment promotion is justified by the argument that IPAs are necessary to help alleviate information asymmetries and other market failures acting as barriers to investment (for example, a lack of transparency). These barriers are, however, arguably biggest for small and medium-sized enterprises (SMEs) and in the more obscure investment sectors. Hence, the targeting strategies employed by IPAs produce precisely the opposite behaviour patterns to those that economic and political theorists use to justify their very existence.

Target sectors are, more often than not, merely a somewhat arbitrary list of ‘hip’ sectors the business press is hyping at the moment.

It has to be stressed that IPAs resort to these measures primarily on account of the key performance indicators (KPIs) and success metrics on which their performance is evaluated by economic ministries or the office of the prime minister, to whom IPAs usually report. Another reason for the widespread use of targeting might be found in academic research. Harding and Javorcik and many others regularly find that countries obtain higher levels of FDI in the sectors that they target. Realistically speaking though, this is a bit like hospitals only admitting healthy patients or schools only accepting children who can already read and write, to boost output KPIs. If overcoming market failure is the objective for IPAs, targeting clearly is a tool that is currently failing most of the potential investors.

At the same time, this form of specialisation is highly rational and occasionally even necessary, given the division of labour in modern economies and the complexities arising thereof. To be able to provide up-to-date, sector-specific market intelligence to investors, and in order to know all the actors in the field, IPAs need a degree of sector specialisation. In some cases, where the prioritised sectors reflect local structures and competences, this might even work as a strategy to create a unique competitive advantage for the region. With a network of dedicated science parks and technological funding schemes, with local universities emphasising a sectoral focus, a sector-specific ecosystem of related companies (suppliers, customers and specialised service providers) and a well-trained workforce, targeting can work for the region and the corporate investor.

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The practical effects of targeting, however, often look very different. IPA frontline staff often do not conceive targeting as emphasising the region’s strengths, but instead as a verdict regarding the type of investment the region wants. Particularly damaging is the inverse interpretation: if you are not on the list, there is no need to bother about you. This is especially dramatic given that target sectors are, more often than not, merely a somewhat arbitrary list of ‘hip’ sectors the business press is hyping at the moment (check out IPA websites: the vast majority of them define their target sectors to be automotive, ICT, healthcare, biotech, nanotech, new materials and energy). In most cases such a collection of target sectors is based on little more than wishful thinking.

However, if targeting is to work, it needs to reflect the strengths of the region, and if it doesn’t – yet – do so, it requires first of all a dedicated and sustained push to establish such an infrastructure of know-how, hardware and workforce.

The thinking behind the targeting?

Speaking to IPA staff about why certain sectors have been defined as targets, the reasons are usually that they ‘have the potential to diversify the local economy’, they ‘have a positive impact on employment’ or they ‘are in some other way seen as crucial for regional development’. Which, looked at from the local government’s perspective, is totally understandable. However, the reason why so many targeting strategies fail in practice is that they forget that it isn’t merely what the region needs that matters for making this a success, but also what managers look for when deciding where to locate their next project. Their decisions are not taken with a view to how to develop a region, but where to find the best business conditions. Ignoring these when contemplating a targeting strategy is done at your own peril.

IPAs should in fact be beholden to focus on non-mainstream areas of the economy and those companies needing the most support.

The first lesson therefore is that not every county or region can afford to pretend to be Switzerland or Singapore. Even if you were to be as attractive as these, targeting should never be an excuse to go slack on helping potential investors or casually ignore them. Instead, it should mean that you strive to truly excel in such a way that investors are beating their way to your door. A sentence such as ‘you are not in one of our target industries’ is thus sacrilegious in an IPA.

A more practical question in the context of targeting is, are you even pursuing the right targets? Countries are, by and large, not particularly good at ‘picking winners’. If we take the argument of the political and economic theorists, justifying the existence of IPAs by alleviating information asymmetries to its logical conclusion, IPAs should in fact be beholden to focus on non-mainstream areas of the economy and those companies needing the most support: i.e. smaller businesses that lack prior internationalisation experience and lack deep pockets to afford buying support, which could arguably even make a lot of business sense.

Large corporations already have a global footprint established, and are currently more concerned with shortening their supply chains. Projects by large multinational corporations might in fact be drying up soon, and the next wave of FDI projects might be SMEs taking their first steps into international markets. As the Detroit area with automotive, or San Francisco with IT, have conclusively proven, excessive monocultures incur the risk of being as detrimental in business as they are in agriculture. Targeting is undoubtedly a useful tool, but as with many tools, it needs to be applied with moderation.

Lastly, targeting is an important idea, but it should be conceived less as a tool on the market side, and more on a conceptual and developmental level. In a knowledge and innovation-driven world, targeting should be your guiding principle for deciding which building blocks to use for your regional development policy. Which skills do people need to possess in a world where a highly skilled workforce is increasingly seen as a key asset? Companies rarely, if ever, exist in a vacuum. Do you understand how the ecosystem of that industry works, and more importantly what do you do about it? Looking into this, you will find that often it is overall business attractiveness that goes a long way. Would any of your IPA or ministerial staff contemplate setting up a company in your own jurisdiction, and if not, why not? That alone might give you plenty to think about.