Investment Promotion: The road to maturity
Investment promotion agencies and economic development teams are increasingly adept at attracting international companies and growing their locations. We see sector specific segmentation and an understanding that “liveability” and the values behind your place brand are as important as tax incentives. However, relatively few locations have developed the policies, processes and mindsets necessary to help the businesses they have worked so hard to attract actually thrive. This blog discusses the basic principles of Aftercare, and, with a couple of examples, shows the value Aftercare can deliver.
In business, it’s well known that acquiring a new customer is much more expensive than retaining an existing one, “five to 25 times more expensive” according to one study. Moreover, “increasing customer retention rates by 5% increases profits by at least 25% up to 95%.” The same principles apply to Foreign Direct Investment (FDI) - fostering long-term constructive relationships with foreign investors results in a higher ROI for both investors and host locations. Aftercare is the umbrella term for the activities which support a foreign investor after they have made the initial decision to invest in a location, and it should form part of the economic development toolkit of any location. The outputs of well thought out Aftercare programme include more new jobs, further capital investment by investors and faster (local) economic growth.
However, if you don’t offer Aftercare in your region, you’re not alone. My research suggests that only about 30% of locations mention Aftercare on their websites, and only a proportion of these locations offer a comprehensive range of Aftercare services. Moreover, hardly any location has a strategy to use Aftercare as a driver of economic development.
At the same time, there is growing interest in learning about how to work with investors to support further expansion, increase the value of the investment to the host country, reduce the risk of disinvestment, strengthen the local business ecosystem, increase global connectedness with other business hubs and maximise stakeholder value. To deliver towards these ambitions, Aftercare has three main roles: Investor Services, Policy Advocacy and Placemaking. Together, they create a virtuous circle that creates the best conditions for a business to thrive, whilst also building tangible and intangible location assets - including place, brand, and more sustainable societies.
Let’s explore some basic Aftercare principles:
- Neglect at your peril
According to the World Association of International Promotional Agencies (WAIPA) “Aftercare and follow-up service delivery matters just as much as initial investment attraction. More than 50% of new investments come from satisfied investors.” According to UNCTAD, this figure is even higher in developed countries where “investment linked to the existing investment base can peak at up to 70%.” Despite these impressive numbers, too many locations don’t look after their long-term investors. When this is the case, locations should not be surprised if investors leave.
- Create an environment for growth
Further investment by existing investors cannot be forced, it is more about creating the right environment for growth. While some quick wins might be possible, real long-term benefits take time and require the buy-in and support of all (key) stakeholders in an economy. Whether the initial focus on investor services, placemaking or policy advocacy is less important, and anyway depends on the particular features of your location, what matters is making your location more “competitive”. An example of the long-term effects of a supportive environment is Merck, a healthcare multinational that employs 50,000 people worldwide, which started doing business in Uruguay over 60 years ago, but only opened a local office there in 1996. 20 years later, Merck decided to establish a new corporate services centre for the whole of Latin America in Montevideo because “the experience of being settled here has been well perceived by our headquarters which allowed Uruguay to be considered for further opportunities within Merck.” The main drivers for selecting Uruguay were “economic, social, and political stability, availability of first-class professionals and quality of life.” As with Merck, it is rarely only one factor that convinces a company to (re)invest in a location, more typically it’s the combined effect of several favourable factors which together create an environment for growth that is attractive to long-term foreign investors.
- Connect, connect, connect.
The main driver for follow-on investments or expansions is the potential to grow as a business. The role of Aftercare professionals is to help identify and access growth opportunities and to connect relevant parties. An example of this is Invest in Africa, which developed the African Partner Pool programme in Ghana to match investors with local supply chains. Participants received business mentoring to help them become market-ready so that foreign investors could easily buy from them. The programme began in 2015 and by the end of 2016 79 supply chain contracts, totalling $11.7m, had been awarded, of which an estimated 72% ($8.5m) were won by local suppliers.
- Think ecosystem.
“Microsoft estimates that for every 1 person it employs, 30 new jobs are created in the local economy.” Amazon calculates that for every $ 1 invested in Seattle, “it generated an additional $1.40 from other parties.” In other words, any investment made by a foreign investor has a multiplier effect on the local economy. Consequently, in order to maximise the benefit to a location, supporting foreign investors is a job for all stakeholders, not just the IPA. It requires the coordination of several government institutions, businesses, academia, chambers of commerce, foreign embassies, start-ups and NGOs. Paraphrasing the idea that it takes a village to raise a child, it takes a whole ecosystem to grow a [foreign] company.
The wide-ranging nature of Aftercare means that its practitioners need to have broad skill sets, and be able to speak the language of business, politics and place. There is a role for promotional agencies in co-ordinating the views of these three different constituencies in order to facilitate inter-organisational dialogue, help build consensus around regulatory changes and develop a stronger local community.
Supporting (existing) investors is a job that never ends. Moreover, locations that embrace Aftercare also learn how to collaborate better, how to ignite local innovation and how to instil a location-wide drive for growth. Locations that neglect Aftercare not only risk creating fewer jobs because of lower levels of reinvestment, they also risk missing out on the positive externalities foreign investors bring to their locations, such as supply chain contracts, philanthropic giving, upskilling of talent, global connectedness and so much more. As a result, they impoverish the communities they serve. Correcting this oversight should be a priority for the FDI industry.
Carolina Arriagada Peters is the Managing Director of Cities & Collaboration, a consultancy dedicated to creating bridges between the private and the public sector to support international business and economic development.
Carolina is currently writing Aftercare Explained, the first book to map the last step of an investor’s journey. It describes a wide range of approaches used by host economies to retain foreign investors, encourage follow-on expansions and achieve greater local economic benefit. It is also a step-by-step guide to helping locations maximise investment and foreign investors to grow. Aftercare Explained will be published in late 2018. If you would like to know more, please contact her at firstname.lastname@example.org or visit www.aftercareexplained.com.
 Gallo, Amy (2014) The Value of Keeping the Right Customers. Published via Harvard Business Review
 Reichheld, Frederick (2001) Loyalty Rules! How today's leaders build lasting relationships, Harvard Business Press.
 Taken from a 2016 speech in Vienna by WAIPA, CEO Bostjan Skalar, UNIDO Vienna Investment Conference: Quality FDI, Growth and Development.
 UNCTAD (2007) Aftercare a core function in Investment Promotion. Investment Advisory Series (A), No. 1. New York: United Nations.
 Brochure Uruguay Smart Services – Latin America’s # 1 Business Gateway
 See http://www.smartservices.uy/innovaportal/v/27314/8/innova.front/merck-launches-hub-in-uruguay.html
 WAVTEQ (2016), Effective investment facilitation and sustainable development WAIPA and ILO Multinational Enterprises unit https://ecampus.itcilo.org/pluginfile.php/28039/course/section/3842/WAVTEQ%20Training%20Workshop%20WAIPA%20ILO%20(May%204,%202016)%20.pdf