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Background data and analyses Chinese Investment & Manufacturing in the US Midwest

Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

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Page 1: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Background data and analyses

Chinese Investment & Manufacturing in the US Midwest

Page 2: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Contents

Trends in Great Lakes manufacturing

Priorities and drivers of Chinese outbound FDI

Best practices for attracting investment

Appendix – FDI data

2

Page 3: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

The Great Lakes states and provinces rely on manufacturing

SOURCES: US Bureau of Economic Analysis;; Statistics Canada;; Eurostat

§ Manufacturing accounts for 13% of output and 11% of employment in CGLGstates/provinces

§ CGLG manufacturing accounts for 33% of total US & Canadian manufacturing GDP and 38% of manufacturing employment

§ CGLG manufacturing GDP is about 3 times that of the United Kingdom’s manufacturing, and about the same as German manufacturing

3

Page 4: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

-­2.8-­2.1-­1.4-­0.70

0.71.42.12.83.54.24.95.66.37.07.78.4

0.75 1.00 1.25 1.50 1.75 2.000.50

Pharmaceutical and medical equipment

Petroleum and coal

PaperNonmetallic minerals

Motor vehicles

Misc excl medical equipment

Machinery

Leather

Furniture

Food

2012 Great Lakes LQ1, No.

Electrical equipment and appliance

Computer and electronics

Chemical excl pharma

Projected annual GDP growth in GL, 2013-­22Percent

Wood

Transportation excl motor vehicle

Fabricated metal

Textile product millsTextile mills

Printing Primary metals

Plastics and rubber

Beverage and tobaccoApparel

High growth, low concentration of labor

Manufacturing in the Great Lakes spans a broad spectrum

High growth, high concentration of labor

Low growth, high concentration of labor

US GDP

Size of bubble = 2012 GL GDPAssets Selective bets Legacy

GL manuf.

Low growth, low concentration of labor

Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Ontario, Pennsylvania, Quebec, Wisconsin

SOURCE: Moody’s Analytics;; US Bureau of Labor Statistics

1 The location quotient (LQ) describes the specialization of the labor force in the region. It is the percent of workers in an industry in the Great Lakes versus the percent of workers in the industry nationally. A region with an LQ greater than 1 is more specialized than average in that industry.

4

Page 5: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Small and medium-­sized enterprises play an important role in the region’s manufacturing ecosystem

SOURCE: Market Insights database

SMEs in the Great Lakes manufacturing ecosystem

1 SMEs are enterprises with 500 or fewer employees;; the region hosts a total of 9,052.

Manufacturing total 3,26961% 1,94557%

Sales, USD billions Jobs, ThousandsSector

7176%

Petroleum and coal 12190%Other trans. equipment 12396%Plastics and rubber 12970%Pharma and med. devices 13487%Electrical equipment 84% 155

Nonmetallic minerals

Fabricated metals 16787%Primary metals 18993%Computer and electronics 24978%Machinery 30954%Chemicals 33363%Food 46051%Automotive 74277%

Large enterprisesSMEs

30064%12357%

20565%23150%

7059%

1266%5261%

19271%5448%9467%

28377%11272%

19256%

2013

5

Page 6: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Five macro trends will influence manufacturing globally

SOURCE: McKinsey Global Institute;; “Manufacturing the future: The next era of global growth and innovation,” November 2012

Demand shifts

Demand volatility Commodity price volatility Currency fluctuations Supply chain risks Location-­specific risks Capital cost uncertainty

Support for domestic manufacturing

Safety, quality, and sustainability regulation

Intellectual property protection

Corporate tax rates

Global demand shift to emerging markets with West still providing majority

Demand fragmentation and need for customization

Growth of service business models

Shift in relative labor costs Talent shortage Commodity price changes Energy and transport costs

Supply constraints

Risks and uncertainty

Changing policies and regulations

Advanced materials Product design Production processes Digital manufacturing Business models

Technological change and innovation

6

Page 7: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

To capitalize on those trends, companies and governments will need to invest strategically over the next few years

Demand shifts

To meet demand in emerging markets, firms will need capital to scale up production

This will drive investment in capable production at all points in supply chain, including distribution channels

More agile, modular production facilities will help companies meet shifting demand patterns across regions and customize production

Demand for post-­sale services will require investment in service divisions and facilities and expanded networks of service and retail outlets

Market research and analytics will grow to track demand in fragmented world market

Supply constraints Changing policies and regulations

Risks and uncertainty

Technological change and innovation

Detailed look follows in next section

Rising and volatile commodity prices will require investment to make production processes more efficient

Rising wages (especially in today’s “low cost” areas) will require new production processes to improve work flows and labor productivity

Rising wages in low-­cost areas may also spur new production facilities in new geographies

Workforce education will become more important, necessitating investment in training

New regulations may force companies to invest in a broad range of initiatives, from [health and safety to sustainability]

Government investments in infrastructure, from schools and parks to roads and power grids, will attract investors, workers and managers

Rising volatility in demand, input prices, currencies, environmental factors, and other risks will require operational investments and hedging, such as dispersing production facilities geographically to reduce risk and traditional financial hedging

Firms will invest in gathering and using data to track and analyze global demand, prices, suppliers, and other metrics to optimize production

7

Page 8: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Advanced materials Nanotech Biologics Lightweight materials

Product design Internet of things Embedded sensors Customization

Production processes Advanced robotics Additive manufacturing Green manufacturing

Digital manufacturing Modeling and simulation Advanced analytics Track and trace

Business models Frugal innovation Circular economy New service models

There are 5 broad categories of technology trends that will disrupt the manufacturing sectorNew technologies that will change manufacturing value chains and processes

To capture the benefits of these changes, companies will invest in three broad areas

Basic R&D

They will conduct basic R&D to develop new technologies and new machines and processes as support

Deployment testing

They will create and test new machines and production processes to support new modes of production and ways of doing business

New plants

They will construct new facilities and retool old ones to produce new products or support new processes

8

Page 9: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Examples in Great Lakes manufacturing industries

Key investment needsAutomotive and machinery New materials promise lighter-­weight, stronger components, and energy efficiencies

Pharmaceuticals Traditional biologics and nanotech are converging, allowing manufacturers to “grow” drugs and devices

Nanoparticles may help doctors precisely target diseases such as cancer

Food, CPG, and chemicals Nanosensors may be used to detect traces of contaminants or toxins

Chemicals Material innovations are revealing new ways to generate chemicals (e.g., breaking down cellulose to generate biologic materials)

Advanced materials – effects on Great Lakes manufacturing

SOURCE: McKinsey Global Institute, “Manufacturing the future: The next era of global growth and innovation,” November 2012;; interviews with industry experts

Advanced materials Nanotech Biologics Lightweight materials

Basic research labs, training centers, and industry research consortia to keep pulse on advanced materials

Commercial R&D into advanced production techniques and materials, finding new compounds or new applications for existing stock

Develop new production processes and machinery

New plants to produce advanced materials, such as lightweight metals and alloys

9

Page 10: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Examples in Great Lakes manufacturing industries

Key investment needs

Innovations in product design – effects on Great Lakes manufacturing

Product design Internet of things Embedded sensors Customization

Basic R&D support for training centers, and industry research consortia to keep pulse on advanced technology and software development

Commercial R&D investment in firms and training to produce next-­generation software and talent

Development of new production processes and machinery to support customization along the supply chain

Medical devices New sources of data and insights will inform consumer analytics and increase consumer transparency

Pharmaceuticals With personalized medicine, doctors will tailor drugs and interventions to specific body types and genomes

Automotive Electric and electronic elements will likely account for more than 80% of all innovations in the automotive industry

Companies are focusing more on the software embedded in the car along with traditional mechanical and electrical components

SOURCE: McKinsey Global Institute, “Manufacturing the future: The next era of global growth and innovation,” November 2012;; interviews with industry experts

10

Page 11: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

New production processes – effects on Great Lakes manufacturing

Examples in Great Lakes manufacturing industries

Key investment needs

Basic research labs, training centers, and industry research consortia to keep pulse on advanced technology and software development

Commercial R&D investment in firms and training to produce next-­generation software and talent

Develop new production processes and machinery, such as continuous manufacturing and new tech (e.g., emission-­control tech)

New plants to produce lightweight metals, alloys, 3D-­printed parts

Production processes Advanced robotics Additive manufacturing Green manufacturing

SOURCE: McKinsey Global Institute, “Manufacturing the future: The next era of global growth and innovation,” November 2012;; interviews with industry experts

Medical devices Advanced robotics in manufacturing can reduce human error and speed production process

Additive manufacturing can help build new exoskeleton braces

Live human cell organs may be “bioprinted” Inkjet printing techniques may layer human stem cells on medical devices

Pharmaceuticals Continuous manufacturing, rather than batch production, speeds production but requires new processes, machines and quality control measures

Installation of modular plants will speed scale-­up, lower costs and increase flexibility

Automotive Additive techniques are already producing cheaper prototypes quickly

Also used in some highly complex partsFood Low-­cost and resource-­efficient “green” packaging;; sterile and cold chain packaging

Dolls/toys manufacturing 8 billion toys are 3D-­printed every year across the world-­-­an $85 billion industry

11

Page 12: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Examples in Great Lakes manufacturing industries

Key investment needs

Digital manufacturing – effects on Great Lakes manufacturing

Digital manufacturing Modeling and simulation

Advanced analytics Track and trace

R&D for new technology and software needed for virtual engineering, track and trace technology, and connectivity

Develop new production processes and machinery, such as modular production platforming, and new technology, such as mobile device systems integration

Medical devices New technology to trace products through each stage of the value chain can improve supply chain security and assist in recalls

Pharmaceuticals Remote monitoring can improve the health of patients and slow the rise in healthcare costs– Virtual engineering and simulations to

enable more modular and flexible production (i.e., product platforming)

– Batch modeling software to improve data and detection systems, enabling real-­time release and higher quality control

Automotive Connect automobiles to themselves (e.g., tire pressure), to other automobiles, and to outside infrastructure (e.g., autonomous driving)

Connect driver and passengers to automobile (e.g., mobile device systems integration) and track driver behavior

SOURCE: McKinsey Global Institute, “Manufacturing the future: The next era of global growth and innovation,” November 2012;; interviews with industry experts

12

Page 13: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Examples in Great Lakes manufacturing industries

Key investment needs

New business models – effects on Great Lakes manufacturing

Business models Frugal innovation Circular economy New service models

Automotive As scarcity raises input prices, resource-­efficient production systems will become an increasingly important competitive factor

Lithium-­ion batteries and fuel cells are already powering electric and hybrid vehicles;; prices have fallen while performance has risen

Electronics and appliances Most households could afford to lease a high-­end washing machine, saving roughly a third per wash cycle while the manufacturer earned roughly a third more in profits

Machinery Heavy equipment manufacturers are opening remanufacturing plants to encourage re-­use of equipment and extend life-­cycle beyond initial sale

Chemicals Creative chemical leasing arrangements can improve incentives to recycle fluids

Collaborate on basic R&D on low-­cost materials and energy-­efficient means of production

Investment in or purchase remanufacturing plants

SOURCE: McKinsey Global Institute, “Manufacturing the future: The next era of global growth and innovation,” November 2012;; interviews with industry experts

13

Page 14: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Trends in Great Lakes manufacturing

Priorities and drivers of Chinese outbound FDI

Best practices for attracting investment

Appendix – FDI data

Contents

14

Page 15: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Summary

The US is one of the world’s most attractive destinations for FDI, and its manufacturing receives the majority of inward FDI

China is rapidly increasing its outward FDI and the US is a favored destination, but the Great Lakes states have not attracted their share of Chinese investment

Macroeconomic forces in China will mean more FDI, and seven strategic emerging industries (SEIs), part of China’s 12th 5-­year plan, outline the country's investment priorities

15

Page 16: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

The US receives more FDI than any other nation, of which 45% goes to manufacturing – a share that grew by 5pp from 2011 to 2012

SOURCE: United Nations Conference on Trade and Development;; Bureau of Economic Analysis

Other 19

Finance 8

Banking 6

Mining 11

Wholesale11

Manufacturing

45

China US

168

121

Hong Kong

75

Brazil

65

BVI

65

UK

62

Aus-­tralia

57

Sing-­apore

57

Rus-­sia

51

Africa

50

Top 10 recipients of FDI by region, 2012USD billions

FDI inflows to the US by industry, 2010-­12Percent

16

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Chinese FDI has grown tremendously, and the US receives more than any other country

17%

06

36

0%

2005

18

10%

112

2%

10

120

7%

09

95

9%

08

83

8%

07

52

+29% p.a.

2013

135

11%

12

130

10%

11

Chinese outward FDI (OFDI), 2005-­13USD billions

Canada

4Brazil

3 Indonesia

3 Kazakhstan

3 Nigeria2 Britain2 Iran2Russian Federation

59

Rest of world

5

Australia8

US8

Chinese OFDI by country, 2005-­13Percent, total = USD781 billion

SOURCE: Heritage Foundation China Global Investment Tracker

OFDI to rest of world OFDI to US

17

Page 18: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

The Great Lakes region produces almost a third of US manufacturing output, but it has not attracted a third of FDI, especially from China

31 22 16

69 78 84

FDI into US manufacturing

$802 billion

US manufacturing GDP

$16 trillion100% =

Chinese FDI into US manufacturing

$16 billion

Great Lakes statesRest of US

Great Lakes share of manufacturing, sum 2003-­12Percent

SOURCE: Bureau of Economic Analysis;; Dealogic;; FDI Markets 18

Page 19: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Besides New York, the Great Lakes states have not attracted their share of Chinese FDI, especially in manufacturing

SOURCE: FDI markets;; Dealogic

1 Only includes Greenfield investment data, as M&A deals in Canada only available at national level;; 92 deals for USD38 billion across Canada2 Only includes jobs created by Greenfield investmentsNOTE: State-­specific numbers do not capture deals for which location is not known at time of deal. These deals represent 13% of all deals into the US from 2003 to 2013

Michigan 718 19 Nevada 343 21,353 1,000

New York 5,314 44 New York 1,861 111,605 150

Chinese FDI in US by state, 2003-­13 Chinese manufacturing FDI in US by state, 2003-­13

Top 10 statesInvestmentUSD millions

Number of deals Top 10 states

InvestmentUSD millions

Number of deals

Jobs created2

Jobs created2

Great Lakes states/provinces

InvestmentUSD millions

Number of deals

Great Lakes states/provinces

InvestmentUSD millions

Number of deals

Jobs created2

Jobs created2

Virginia 8,751 7 Virginia 7,173 6378 342

California 2,911 88 Texas 1,793 165,652 1,086Missouri 2,735 4 Massachusetts 1,038 11875 72Texas 2,270 24 California 684 412,192 118Oklahoma 1,478 5 North Carolina 563 15540 724Massachusetts 1,082 13 South Carolina 410 7157 625

North Carolina 679 21 Alabama 286 21,550 300New Jersey 601 10 New Jersey 284 5447 0

Illinois 310 10 Illinois 174 6262 68Indiana 139 6 Indiana 138 6352 229Michigan 718 19 Michigan 283 171,353 274Minnesota 163 2 Minnesota 0 00 0New York 5,314 44 New York 1,861 111,605 150Ohio 225 5 Ohio 225 5923 800Pennsylvania 177 5 Pennsylvania 103 441 0

Ontario1 724 18 Ontario1 391 8n/a n/aQuebec1 877 6 Quebec1 59 4n/a n/a

Wisconsin 4 1 Wisconsin 0 00 0

19

Page 20: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

Macroeconomic forces will mean more Chinese investment abroad

SOURCE: Rhodium Group

Greater OFDI

Wages are rising to give greater share of national income to households Property costs are rising, causing a potential property bubble Regulatory compliance costs have increased Capital costs are rising as interest rates increaseIncreasing

input prices at home

“Going out” campaign: Since 2000, local and central officials have encouraged growth of transnational corporations

The 12th 5-­year plan uses policy and financial incentives to encourage OFDI, aiming to gain know-­how abroad to build domestic capabilities

Continued appreciation of RMB has raised purchasing power abroad With over $3 trillion in foreign exchange reserves, OFDI will help balance the current account

Domestic factors encouraging FDI

Overinvestment has made high-­quality, high-­return investments scarcer Higher inflation has increased economic uncertainty Recent purges and the political transformation led by Xi Jinping has increased political uncertainty

Some investors want to live in US with their families to attend American universities and obtain visas.

Concerns about food safety, air quality, etc., encourage some investors to leave China, at least temporarily

Stability abroad and uncertainty at home

20

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Continue to advance technology in aircraft and aerospace Upgrade technological capacity to produce high-­quality equipment for machinery making, high-­speed rail, and urban transportation

Build industrial clusters in biological engineering Develop platforms for research and early application;; support biotech labs

Catch up with global leaders in technology Build capacity and networks for all major new generation IT

Catch up with global leaders in R&D, production, and utilization of sophisticated, high-­quality, non-­substitutable industrial materials

Continue to produce and use hybrid and pure battery powered vehicles

Increase capacity to produce equipment for nuclear energy, solar and wind power, and other new energy

Establish pilot projects to test and improve economically feasible of energy-­efficient technologies

Beijing’s 12th 5-­year plan identifies 7 new strategic targets for industrial advancement

SOURCE: National Development and Reform Commission report (March 5, 2011);; KPMG

Strategic emerging industriesThemes

Moving up the value chain

Advanced equipment manufacturing

Biotech

Next generation IT

New materials

Sustainability

New energy vehicles

New energy

Energy-­efficient & environmental tech.

21

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Trends in Great Lakes manufacturing

Priorities and drivers of Chinese outbound FDI

Best practices for attracting investment

Appendix – FDI data

Contents

22

Page 23: Chinese FDI and Manufacturing in Midwest FINAL · 2.8 2.1 1.4 0.7 0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.4 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Pharmaceutical’and’medical’equipment

FDI attraction efforts vary across the Great Lakes region

SOURCES: State websites and press releases, not necessarily comprehensive

Notable state investment fundsState office in ChinaFDI-­focused website

Indiana Offices in Beijing, Shanghai, and Zhejiang, all under quasi-­public IEDC oversight ü Effort with Elevate Partners, a 501(c)(3) non-­profit

venture fund

Illinois Office in Shanghai for outreach, PR, and marketing Provides information about state funding ü Invest Illinois Venture Fund managed by state’s

DCEO;; proceeds are recycled back into fund

Michigan Office in the Center of American States in Shanghai (1 of 7 participating states)

Pure Michigan Venture Fund Match will consider tech venture investments for supplemental state funding

Minnesota Office in the Center of American States in Shanghai (1 of 7 participating states)

Minnesota Investment Fund supports companies that create new jobs

New York No office in China New York Entrepreneurial fund has $3 million in

public and $19 million private funding

Ohio No office in China “Jobs Ohio” website brochure lists single contact for foreign investors

ü Ohio Third Frontier, a $2.1 billion investment initiative

Pennsylvania Center for Direct Investment focuses on attracting and facilitating FDI deals

Office in the Center of American Statesü Concierge service aims to find all available state

funding

Wisconsin WEDC contracts trade representatives from Shanghai office ü Department of Administration chose Sun Mountain

Kegonsa to manage $30 million fund-­of-­funds

Ontario Beijing office focusing on advanced manufacturing, clean-­tech, mining, and education

Development funds offered by regions within Ontario

Quebec Beijing office and 3 foreign investment specialists in Quebec office ü Development funds offered by regions within Quebec

23

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To optimize current structure, a systematized and strategic FDI program could appeal directly to Chinese investment motives

Develop and agree on a focused strategy

Communicate value proposition to targeted investors

Design investment vehicles that align with both investor and state needs

Identify strategic capability that aligns directly with Chinese investment priorities, such as:– Medical devices– Automotive– Food safety and packaging– Clean tech for water

Create consistent messages to reinforce value proposition– Promote innovation hubs

Help influential stakeholders to connect with targeted investors in intimate settings– Governor and CEOs prepare

2-­3 deal opportunities, meet select investors at their office

– Promote value proposition to other stakeholders Connect with trade associations and provincial mayors of targeted areas

Appeal to Chinese motives (e.g., access to US innovation engine)– Venture capital– University R&D

Maintain US demands for foreign investment (e.g., IP protection, job creation, access to Chinese consumption engine)– Investment for licensing– R&D in US, deployment in

China

Automotive

Strategy: Chinese auto manufacturers aspire to satisfy consumers in China who want US technology and expertise

Value proposition: The Rust Belt’s automotive companies can share cutting-­edge technologies and manufacturing methods

Investment vehicle: Investment in automotive R&D or access to existing technology can provide mutually beneficial relationships in terms of capital and market access

Examples

Medical devices

Strategy: Burgeoning medical device manufacturing community in Great Lakes region aligns with demands from China’s aging population and fragmented, low-­cost industry

Value proposition: Federal and state support for advanced medical devices, including innovation hubs and a medical device corridor

Investment vehicle: Collaboration on developing upstream manufacturing capabilities for Chinese market

24

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In general, an investment promotion agreement can cover 5 key functions

Policy and advocacy

Investment promotion

5

Destination branding

Productdevelopment

1

Go-­to-­market3

Investment servicing

4

2

Follow country promotion to specific investors

Showcase directed catalogue of projects

Support network development, animation, and mobilization;; e.g.– International

events– Ambassador

program

Set up end-­to-­end support (during investment generation)

Set targets using sector and investor profiles

Tailor incentive packages to investors’ needs

Give investors concrete assistance (e.g., land search, registration, office space, translator services) and total solutions

Help find strategic partnerships

Create financial arm to co-­invest with foreign investors

Monitor implementation process for good execution and follow-­up

Create and disseminate consistent messages

Advertise the country and generate favorable news stories

Hold public relations events

Work to maintain a positive investor environment Advocate for simplified bureaucratic regulations regarding new businesses and investments Gather views from the private sector and communicate them to relevant authorities Facilitate discussion among relevant stakeholders

25

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When designing an investment promotion agency, there are different design options for each of the 5 key functions

Options for role of public sector Potential partners

Destination branding

Require role of public sector: Ensure consistency and match of promotional activities with priority sectors and required attributes– Minimum role: Submit input to agency or ministry in charge of

international communication– Maximum role: Develop branding strategy, aggregate branding

needs and attributes, contract and manage communication agency, and measure effectiveness

Media agency Government officials at various levels in investor locale1

Go-­to-­market

Minimum role: Negotiate incentives and contracts Maximum role: Investor prioritization and outreach, with information-­sharing and negotiation

“Global investment facili-­tator” (for promotion and outreach)

CSA or international data provider (EIU)

3

Servicing

Minimum role: Pure coordination or steering of provider – with full-­fledged private sector facilitator

Maximum role: Full concierge service and “delivery unit” – PMO for implementation of solutions

Consulting firm, third-­party translation and logistics providers4

Advocacy andpolicy

Minimum role: Pure facilitation, providing forum for policymakers Maximum role: Lobbying group or advocate for international investors

Local ethnic community5

Minimum role: Choose from portfolio of sector strategies Maximum role: Develop sector strategies and flagship portfolio

Consulting firmsProduct development2

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Successful agencies and regions tend to have 7 key advantages

They develop clear strategies based on a rigorous understanding of their strengths1

They recognize that productivity transformation takes a long time and requires a competitive and attractive business environment3

They focus on attracting, retaining, and embedding anchor institutions4

They’re responsive, fast-­moving, and work to overcome bureaucracy5

They make R&D incentives conditional on cooperation among firms or between firms and other institutions6

They differentiate themselves by helping players make connections and build skills and knowledge7

Leadership comes from the top to drive alignment2

SOURCES: Literature review;; press search;; expert interviews;; case studies 27

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China Britain Business Council (CBBC) maintains offices and staff in China to provide a broad suite of services

Scope andapproach

489 corporate members collaborate with British Chamber of Commerce’s 871 members –BritChammembership grants access to CBBC

Regional coverage with offices in Beijing, Changsha, Chengdu, Chongqing, Guangzhou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Xi'an, and Wuhan

Yearly membership fees from £1,000 to £5,000 depending on size of firm and services requested

Programs and policies

Chinese Business Partner application for Chinese companies interested in investing in UK, partnering with UK company or in third country overseas

Sector specialists across 13 regions provide research support and business services for UK companies investing in China

Launchpad provides a simple, cost-­effective, low-­risk and legal means of having a presence in China before setting up an office there;; a dedicated CBBC project manager will help a company take its business forward in China

China Business Opportunities for UK Companies: An online inventory of potential investment or business partners from China (see screenshot on next slide)

Basic IPA services: Trade missions, help with visas, translation and office services, webinars and trainings, regional know-­how, and logistics

Organization and culture

Emphasis on specialized expertise, including sector-­ and region-­specific agents One-­stop shop to handhold investors on both sides;; comprehensive service

SOURCE: CBBC website28

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CBBC has investment inventories in 12 key industries and provides application service for UK companies

Chinese translationMenu of investment options specific to key industries

Registration procedure for interested applicants

Investment details

Screen shot from CBBC website

29

SOURCE: CBBC website

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EDB, a high-­performing, client-­focused agency, delivers significant investment benefits to Singapore

SOURCES: EDB;; expert interviews

Scope andapproach

The Exporter Development Program has about 500 employees and a budget of $410 million (0.3% of GDP) of which it spends $330 million on grants

Helps other government agencies make Singapore the world’s easiest place to do business (World Bank) About 15% of staff based in 19 international offices, who develop contacts mainly with new potential investors

Headquarters staff manages relationships with foreign and domestic companies in a “cluster” Annual strategic reviews of targeted sectors and companies help refocus efforts and identify new opportunities

Organization and culture

EDB recruitment targeted at high potentials: Scholarships for high-­performing high school students to study abroad and then return to work for the EDB

Incentives for EDB employees include 15-­50% of salary and quick promotions The organization is focused around values: Care, integrity, team, imagination, courage, excellence, and nation – losing a deal to another country is seen as shameful

Junior staff manage day-­to-­day client relationships early on;; account directors are empowered to be flexible and meet investor needs to get deals moving while formal processes and approvals are completed

Focus on training programs: EDB employees learn financial and other functional skills, as well as managerial skills in workshops on creativity, teamwork, and risk-­taking

Customized assistance and incentives

Working in Singapore and registering business: Easy access to visas, step-­by-­step guides Business location: Staff provides a list of science parks and will look for suitable land Business setup: Financial incentives and assistance range from manpower development and technological and equipment upgrades to R&D, intellectual property, and industry development

Recruitment and staff: EDB funds on-­the-­job training and overseas training of Singaporeans in MNCs Attractive taxation policy: 17% corporate income tax, capital gains not taxed, GST 7% Conditional grants: Payments against milestones;; if conditions not met, renegotiation or clawback

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The organization is aligned with its key tasks and emphasizes the importance of planning

SOURCES: EDB;; expert interviews

Dedicated support functions, such as administration and HR, account for about 40 employees, but divisions probably have additional support staff

EDB board

International Advisory Council

Includes senior executives from MNCs, such as COO of P&G and CEO of 3M

Cluster development

Development of sector clusters of local firms and foreign investors in Singapore

Independent investment arm created in 1991

Invests in companies in new strategic industries (more than 250 to date)

Business knowledge group Client services Finance and administration Human resources Information systems Legal Marketing communications Organization excellence

Corporate services

Enterprise ecosystem Incubation unit Intellectual property International policies Planning Resource development

Enterprise ecosystem and planning

4 executive directors lead division with area responsibility

19 international offices with about 100 employees

International operations

EDBI

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The IDA helps attract investors to the Republic of Ireland

Scope andapproach

Created in 1949, the agency is funded through a government grant under the National Development Plan Focused on attracting and embedding FDI to the Republic of Ireland (including marketing the Shannon Free Zone abroad)

16 offices in the US, Europe, Asia and Australia, and 10 Irish offices Initially, the IDA was responsible for attracting foreign inward investment and developing indigenous firms;; since 1994 they have pursued FDI activities only

Programs and policies

Identifies and builds long-­term relationships with firms it wishes to attract. Incentives include:− 12.5% corporation tax rate− 25% R&D tax credit applicable to R&D and buildings where at least 35% of activity is R&D− Grants to R&D (52%), capital (15%), employment (28%), and training (1%) capped per job and per unit capital

Is responsive to the needs of target firms. To seal the deal with Intel, for example, the IDA interviewed 300 Irish engineers in 5 weeks who were living abroad and presented Intel a list of 85 qualified candidates

The rigorous investment evaluation process takes into account cash flows to the state and broader economic benefits. Algorithm updated constantly (e.g., in times of full employment, job creation is less important)

Purchases and develops business and technology parks with, e.g., broadband telecommunications network, on-­site child-­care, new office and production buildings

Lobbies other government organizations to support its mission, such as the maintenance of a low corporation tax

Organization and culture

Entrepreneurial culture gets things done within the overall grants cap rather than adhere to strict processes and rules

Staff are motivated through strong mission and sense of purpose and through recognition of success of IDA

Staff is measured on results rather than fixed targets, giving them more autonomy (no bonuses paid, public sector pay)

SOURCES: Public literature and press review;; expert interviews32

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Trends in Great Lakes manufacturing

Priorities and drivers of Chinese outbound FDI

Best practices for attracting investment

Appendix – FDI data

Contents

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International comparison of overall FDI

0100200300400500600700800900

1,0001,1001,2001,3001,4001,5001,6001,700

2003 04 05 06 07 08 09 10 11 20120123456789101112131415161718

08 09 10 11 20122003 0604 0705

FDI deals, 2003-­13Deals per yearOverall FDI as a percent of GDP, 2003-­12

SOURCE: FDI Markets;; Dealogic;; World Bank;; Bureau of Economic Analysis

CanadaSingapore IrelandUSGreat LakesUK

Great Lakes

Great Lakes

34

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International comparison of Chinese FDI

0

5

10

15

20

25

30

35

40

45

50

55

201211100908070605042003-­0.2

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

201211100908070605042003

Chinese FDI deals, 2003-­13Deals per yearChinese FDI as a percent of GDP, 2003-­12

SOURCE: FDI markets;; Dealogic;; World Bank;; US Bureau of Economic Analysis

GLUK CanadaSingapore IrelandUS

Great Lakes

35

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FDI scorecard by region (BEA definitions)

NOTE: Excludes US territories. State-­specific numbers do not capture deals for which location is not known at time of deal. These deals represent 13% of all deals in the US from 2003 to 2013, so the sum of all states may not add up to aggregate US number, as US number captures all deals

SOURCE: FDI markets;; Dealogic

US1,625,459

RegionFDI (USD millions), sum 2003-­13

Far West220,537

Rocky Mountains31,219 Plains

166,034

Southwest265,451

Southeast278,165

Great Lakes159,972

Mideast318,173

New England161,297

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FDI scorecard (1/3)CGLG states BEA regions

SOURCE: FDI markets;; Dealogic

1 Excludes US territories NOTE: State-­specific numbers do not capture deals for which location is not known at time of deal. These deals represent 13% of all deals into the US

from 2003 to 2013, so the sum of all states may not add up to aggregate US number, which captures all deals.

CGLG 366,756 7,050 4,260 92 1,004 24 37,600,889 0.90%Mideast 318,173 13,222 2,885 73 1,501 62 24,537,675 1.19%Southeast 278,165 11,023 3,442 51 1,840 54 30,277,698 0.87%Southwest 265,451 214 1,675 10 708 26 15,683,543 1.53%California 226,575 2,911 2687 88 957 44 17,865,753 1.17%Far West 220,537 103 3,281 6 202 6 24,927,526 0.81%Texas 200,110 2,270 1,298 24 479 6 11,193,112 1.56%Plains 166,034 1,881 600 29 200 7 8,825,925 1.38%New England 161,297 187 1,095 2 285 8 7,380,229 2.13%Great Lakes 159,972 1,386 2,095 20 576 18 19,340,701 0.80%New York 132,344 5,314 1496 44 552 21 10,472,578 1.09%Massachusetts 120,599 1,082 754 13 272 8 3,512,905 3.37%Missouri 80,515 2,735 132 4 49 3 2,312,746 3.46%New Jersey 80,392 601 488 10 136 4 4,597,859 1.69%Pennsylvania 66,266 177 491 5 164 3 5,248,805 1.19%Illinois 61,096 310 646 10 196 6 6,125,192 0.98%Florida 51,238 145 730 8 274 5 7,090,294 0.76%Kansas 42,857 -­ 99 -­ 33 -­ 1,180,101 0.50%Ohio 40,334 225 465 5 169 3 4,584,395 0.84%Louisiana 38,803 273 138 2 63 1 2,062,492 1.66%Oklahoma 38,435 1,478 86 5 34 1 1,370,074 2.83%

Tennessee 31,551 -­ 288 -­ 114 -­ 2,405,655 1.21%Virginia 35,311 8,751 352 7 100 6 3,861,589 0.75%

US1 1,625,459 42,997 17,973 393 7,411 227 135,703,307 1.09%

State or region

FDI (USD millions), 2003-­13

FDI from China (USD millions), 2003-­13

No. of deals, 2003-­13

No. of deals from China, 2003-­13

No. of deals, 2011-­13

No. of deals from China, 2011-­13

GDP (USD millions) sum, 2003-­12

FDI as share of GDP, 2003-­12

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FDI scorecard (2/3)

SOURCE: FDI markets;; Dealogic

CGLG states BEA regions

Rocky Mt 31,219 960 454 28 102 6 4,610,963 0.61%Alabama 29,692 286 284 2 181 7 1,619,968 1.75%Georgia 29,692 286 284 2 98 2 3,862,308 0.87%Maryland 28,863 111 215 4 72 2 2,712,258 1.03%Michigan 28,017 718 486 19 154 8 3,737,705 0.69%Nevada 24,422 336 155 6 42 3 1,204,200 2.01%Connecticut 22,815 12 183 3 58 1 2,101,432 1.01%North Carolina 21,997 679 587 21 218 14 3,907,340 0.51%Indiana 20,537 139 359 6 142 2 2,568,863 0.73%Arizona 20,241 81 225 3 89 -­ 2,394,444 0.80%Colorado 19,059 24 276 4 83 1 2,374,983 0.69%South Carolina 17,030 419 350 7 143 5 1,538,239 1.01%Nebraska 11,088 7 58 1 15 1 825,307 0.77%Iowa

10,686 26 71 1 21 -­ 1,303,722 0.76%

Wisconsin9,988

4 139 1 43 -­ 2,324,546 0.44%Maine 9,082 -­ 34 -­ 12 -­ 485,077 1.86%North Dakota 9,029 12 36 1 19 1 310,281 2.89%Minnesota 8,174 163 178 2 68 1 2,538,805 0.28%Arkansas 6,946 -­ 58 -­ 20 -­ 960,795 0.70%New Mexico 6,665 -­ 66 1 20 1 725,913 0.86%Delaware 6,620 153 73 6 27 3 579,565 1.11%Mississippi 6,061 175 71 1 27 -­ 893,563 0.60%

Utah 4,913 4 92 1 27 1 1,059,483 0.45%West Virginia 5,743 -­ 63 -­ 19 -­ 574,534 0.98%

State or region

FDI (USD millions), 2003-­13

FDI from China (USD millions), 2003-­13

No. of deals, 2003-­13

No. of deals from China, 2003-­13

No. of deals, 2011-­13

No. of deals from China, 2011-­13

GDP (USD millions) sum, 2003-­12

FDI as percent of GDP, 2003-­12

NOTE: State-­specific numbers do not capture deals for which location is not known at time of deal. These deals represent 13% of all deals into the US from 2003 to 2013, so the sum of all states may not add up to aggregate US number, which captures all deals.

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FDI scorecard (3/3)

SOURCE: FDI markets;; Dealogic

1 Negative figures represent divestitures taken by foreign investorsNOTE: State-­specific numbers do not capture deals for which location is not known at time of deal. These deals represent 13% of all deals into the US

from 2003 to 2013, so the sum of all states may not add up to aggregate US number, which captures all deals.

Kentucky 4,102 10 237 1 89 1 1,500,921 0.20%

District of Columbia 3,690 46 122 2 49 1 926,610 0.36%

South Dakota 3,684 -­ 26 -­ 7 -­ 354,963 1.02%

Idaho 3,498 73 39 1 21 1 517,419 0.64%

New Hampshire 3,497 6 53 1 17 1 574,368 0.56%

Montana 3,132 -­ 24 -­ 8 -­ 337,589 0.92%

Rhode Island 3,043 -­ 43 -­ 12 -­ 465,146 0.64%

Alaska 2,927 -­ 22 -­ 4 -­ 435,313 0.67%

Vermont 2,261 -­ 28 -­ 10 -­ 241,301 0.92%

Hawaii 1,262 106

37 2 15 1 622,818 0.20%

Wyoming 617 -­ 23 -­ 6 -­ 321,489 0.21%

Oregon1 (1,624)506

118 3 47 -­ 1,648,003 -­0.22%

Washington1 (33,025)118

262 5 94 2 3,151,439 -­0.99

State/region

FDI (USD millions), 2003-­13

FDI from China (USD millions), 2003-­13

No. of deals, 2003-­13

No. of deals from China, 2003-­13

No. of deals, 2011-­13

No. of deals from China, 2011-­13

GDP (USD millions) sum, 2003-­12

FDI as percent of GDP, 2003-­12

39