Cities and states have pursued Chinese investment with tax breaks and other incentives, but officials say that non-monetary strategies can make or break a deal.

When Chinese solar-manufacturer Suntech Power started to look at sites in the United States for a manufacturing facility, they had 28 locations in mind. After an 18 to 20 month process, the company picked Goodyear, Ariz., and opened its plant in the Phoenix suburb in October 2010.

“We were the underdog,” says Rudy Vetter, senior vice president for international business development at the Greater Phoenix Economic Council, a public-private partnership that works to attract investment to the greater Phoenix area from around the world.

Vetter says he believes one interaction between Suntech’s CEO and the mayor of Goodyear helped the city stand out from its dozens of competitors. “She went to him and said, ‘Dr. Shi, if you come back to my little city…I will bake a cake for you,’” Vetter says. “You know, Dr. Shi has told me that story many times and says, ‘Give my regards to the mayor and thank her for the cake.’ I believe that was an emotional tie breaker.”

The federal government is now looking to play a greater role in attracting foreign direct investment (FDI). President Obama announced at the SelectUSA Investment Summit last week that his administration would create the “first-ever, fully coordinated US government effort to recruit businesses to invest and create new jobs” in the United States.

But for years state and local governments have largely been left alone to attract investment. The tools at their disposal vary by state, ranging from subsidies to tax breaks to streamlined permit applications. Nonetheless, economic development officials across borders share similar strategies when selling their cities and states to potential investors.

Prioritizing China

In recent years the Phoenix-based group, like many other state and local economic development organizations, has been particularly focused on China. While overall FDI in the United States dropped in 2012, investment from China grew by 41 percent to $6.5 billion. And Chinese firms had already invested $12.2 billion in the United States by the end of September 2013, according to advisory firm Rhodium Group. Both the slowing Chinese economy and the Chinese government’s push to build global brands have led more Chinese companies to invest abroad.

“Our governor has prioritized China, so we’re not leading trade delegations anywhere else,” says Steve Watson, business and community development director of the South Dakota Governor’s Office of Economic Development. “We’re focusing all of our energy on China. And that’s because we think there’s a lot of opportunity there.”

Watson and his colleagues from South Dakota, along with roughly 1,200 business and government leaders from 60 countries, attended last week’s SelectUSA Investment Summit in Washington, DC. Potential investors browsed booths staffed by state and local economic development officials who outlined the benefits of investing in their states or cities. Watson’s pitch: “We have a very low cost of doing business, a low cost of living. We keep our taxes very low. It’s very predictable. We’ve balanced our state budget every year for 125 years.”

These selling points are important for a state like South Dakota. Though the state’s exports—primarily agricultural products—reached $866 million in 2012, South Dakota has yet to attract a single Chinese investor.

Raising awareness

Arizona’s experience with Suntech did not end the way officials had hoped. The company failed to make good on a $541 million bond payment in March 2013, and closed its plant in Goodyear one month later. Suntech—whose main China assets were purchased this week by another Chinese solar firm—cited higher production costs, US tariffs on solar cells and aluminum frames, and an oversupply of solar cells on the global market. The city and the economic development council blamed the 36 percent tariff the International Trade Commission imposed on imported solar cells and aluminum frames.

But Vetter says his organization’s efforts to attract Suntech helped put Phoenix on Chinese investors’ maps, especially as a destination for the solar industry.

“The race for China is one to gain awareness,” Vetter says. “I don’t think there’s a single solar company in China that doesn’t know about Arizona.”

Raising awareness of what the state offered investors didn’t happen overnight. The group’s efforts to attract Chinese investment have involved multiple trips to China to meet with officials and businesses, as well as attend conferences. This summer the group participated in a new-energy conference in Shanghai. Vetter says more mayors from the Phoenix region have been visiting China, and delegations of business and government leaders from China are visiting more frequently.

Making the pitch

Some states and cities already have name recognition among Chinese investors. Las Vegas, for example, has long been a destination for Chinese high rollers and travelers, but that hasn’t necessarily translated into investment dollars without a push from local officials.

“Many of the people we talk to have already been to Vegas,” says Kristopher Sanchez, director of international trade at the Nevada Governors’ Office of Economic Development.

But Nevada has received relatively low levels of investment from China. From 2000 to 2012, Chinese firms made six deals worth $125 million in Nevada, according to the Rhodium Group. Compare that to neighboring California, where Chinese companies made 171 deals worth $1.7 billion during the same time period.

To catch up, Nevada Gov. Brian Sandoval led a trade mission to China and South Korea in September 2012—the first time in more than 20 years that a Nevada governor had traveled outside of North America. “The governor realized that we were behind,” Sanchez says. “When he looks at other states and what they’re doing in China, it was apparent that we had some work to do.”

Nevada’s economic development office has been pitching the state as an attractive manufacturing location. Clark County, where Las Vegas is located, is a Foreign Trade Zone, which allows qualifying firms to assemble “Made in America” products, take advantage of US free trade agreements, and receive duty exemptions for products exported internationally, among other benefits.

Sanchez also noted that Las Vegas is a destination for millions of visitors and tens of thousands of exhibitions and conferences each year, giving manufacturers access to millions of potential customers.

“We find that many of these companies are here 1-2 times a year,” Sanchez says. “With all the trade shows you can attend throughout the year, why not bring some of that R&D to Vegas?”

Face-to-Face Meetings

Trade delegations led by mayors and governors to China have been on this rise—and many focus on introducing business leaders from their respective cities and states to Chinese officials and businesses. So far this year, at least 10 governors have led trade missions to China to help drum up business and investment dollars for their states.

Stew Stone, CEO of the Tri-Cities Investment District in Washington state, will travel to China this month with Washington Gov. Jay Inslee to look for investors in real estate developments within an approved “EB-5 regional center.” Foreign investors who contribute $500,000 to $1 million receive a green card as long as their investment creates or maintains 10 US jobs.

The promise of a green card isn’t always enough to lure potential investors. Many projects are competing for funds from wealthy individuals—US Citizenship and Immigration Services had approved more than 325 regional centers as of October 1. And the Wall Street Journal reported in March that interest in EB-5 investments was waning among Chinese investors after some businesses failed, were accused of fraud, or failed to produce enough jobs for investors to receive visas.

“Those types of trade missions add a lot of credibility to the people involved,” Stone says.

Perhaps the most high-profile proof that face-to-face meetings can have tangible results is this year’s purchase of US pork producer Smithfield by Chinese company Shuanghui International. The deal reportedly started with a 90-minute meeting between the chairmen of the two companies seven years before the purchase was announced, according to a Wall Street Journal report.

Relationships matter

As with the Smithfield deal, building the relationships that lead to an investment or acquisition can take years.

Stone says he expects the trip to China this month will help him make more progress than his previous trip, but he will still be meeting with some of the same people he met with last time. “The biggest challenge for us is recognizing the cultural steps you have to go through to establish relationships,” he says.

Roy Dahlquist, managing director for Asia at the Virginia Economic Development Partnership, emphasizes that attracting investment from China is about fostering long-term relationships. “The very first thing we do to attract a deal would be to establish a strong working relationship with the client—to know them, know their needs, their plans, their goals, what’s important to them.”

Dahlquist’s organization helps Chinese companies navigate US investment laws and regulations and also runs a so-called “after care” program. “We work very hard to make sure they’re successful,” Dahlquist says. “We have a number of activities all year long…that we invite our international companies to participate in and get to know other international executives.”

The after-care program keeps the Virginia Economic Development Partnership in touch with investors, even after they’ve left the country. When a Chinese company comes to Virginia, Dahlquist says, the business owner or executive is generally in the state for 2-3 years and then moves back to China.

“They become our best sales people in some respects,” he says. “You can see it starts with relationships and ends with relationships.”

[author] Christina Nelson ([email protected]) is editor of the China Business Review. [/author]

(Photo by Eric Haynes/Governor Deval Patrick via Flickr)

Posted by Christina Nelson