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Analysis

What benefits do foreign offices offer to IPAs?

Foreign investment promotion agency offices can be a costly commitment, but in the right location and under the correct management, they play a key role in facilitating FDI.

tokyo-ipa-office
Tokyo is the most popular city for IPAs to establish a foreign office. (Photo by Carl Court/Getty Images)

An investment promotion agency (IPA) has four key roles, according to foreign direct investment (FDI) expert Douglas van den Berghe. They should image-build and market their location as well as target companies for investment. They should also be responsible for facilitating the investment process and provide aftercare services.

Investors use IPAs to gain a better understanding of the location they are considering entering. This may be in the form of gathering data about the location and/or benchmarking against competitor locations. An IPA can also usually help with administration, networking, recruitment of staff and several other tasks that need completing when setting up operations.

Investment Monitor has analysed 92 IPAs worldwide and assessed their office locations. In total, these IPAs operate more than 1,500 offices. Almost 80% of these offices are foreign outposts and the remaining 20% are domestic branches.

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Why do IPAs have multiple domestic offices?

More than half of the IPAs analysed have one sole domestic office – their company headquarters. The remaining 41.7% operate multiple domestic offices.

There are various reasons that may influence an IPA to open more than one national location. For instance, country size can be a key factor. When promoting specific locations to investors, it is important to have an in-depth knowledge of proposed sites in a particular location. By operating multiple domestic offices, a national IPA in a larger country can maintain local, on-the-ground support and offer region-specific solutions that are directly tailored to an investor’s needs.

Operating additional domestic offices also allows agencies to help more local businesses to export and expand globally.

The remit of an IPA to attract investment across the country must also be considered. An agency’s head office is likely to be in the capital or main business centre, which will also likely be its leading FDI destination. By establishing regional offices, an IPA can encourage decentralisation and a more even spread of foreign investment across the country.

Multiple domestic offices may also be necessary when there is a regional difference in FDI specialisation. For example, when the UK’s Department for International Trade (DIT) established its Edinburgh trade hub in September 2020, a renewable export specialist was appointed to maximise support for Scotland’s thriving clean energy sector.

Of all the IPAs examined, Japan External Trade Organization (Jetro) has the most domestic offices by far, with 50 locations across the country. It was followed by Korea Trade-Investment Promotion Agency (Kotra) with 17 branches. DIT from the UK and Business France tied third with 12 branches each.

Almost 40% of IPAs have foreign offices

In order to directly reach out to potential investors, a large number of IPAs have established offices overseas. Domestic offices play a vital role in aiding the investment process, but foreign offices allow IPAs to actively target investors in their home market. Of the 92 IPAs analysed, 36 operate foreign offices. In total, the IPAs considered have more than five times as many foreign offices as domestic.

Overseas locations benefit from being in the same time zone as potential investors and therefore share similar working hours. This can make it easier for local companies to connect and learn about the IPA’s country.

Agency staff in foreign offices will also typically speak the local language and have gained knowledge about the local area. This is invaluable when it comes to building relationships and may give potential investors a better understanding of how they are suited to FDI in an IPA’s country.

UK’s DIT has largest office network worldwide

It must also be noted what type of foreign office has been established. Some agencies establish solely IPA offices, while others open outposts as part of existing ministries or embassies. By using the latter, IPAs can cut down on costs and involve diplomatic staff in their investment promotion activities. There is logic to the move, with embassies often the first point of contact for interested investors.

However, this option also has drawbacks. Embassy or ministry staff are usually not trained in investment promotion and may view it as a lesser priority. Potential investors may question if they are receiving the same level of service as they would through a dedicated IPA office.

Of the 92 IPAs reviewed, DIT, the UK’s national agency, has the most foreign offices with 159 overseas branches. Kotra is second with 128 international offices, and Jetro and Business France are joint third with 76 locations. These are also the top agencies in terms of domestic office creation (although in a slightly different order).

Western European IPAs go big on foreign offices

The number of foreign and domestic offices an IPA has varies greatly depending on the world region. Analysis by Investment Monitor reveals that an IPA based in western Europe typically has ten times the number of foreign offices than it does domestic. Asia-Pacific and South American IPAs also largely favoured foreign offices, with both establishing three times as many overseas locations than domestic on average.

Given that western Europe and Asia-Pacific are historically the largest recipient regions for foreign investment, it proves accurate that IPAs in these zones have developed a wider presence to facilitate higher levels of investment and bolster their attractiveness to prospective companies.

In contrast, IPAs in sub-Saharan Africa, Central America and the Caribbean, CEE and CIS, and the Middle East and North Africa have more domestic branches than foreign on average. These are also regions that historically receive lower levels of FDI.

Of the 13 CEE and CIS agencies examined, Invest in Estonia is the only one that operates overseas offices. Similarly, just two of the 11 Middle East and North African IPAs analysed have foreign branches – EDB Bahrain and Invest in Tunisia. Notably, Morocco’s Investment and Export Development Agency closed its six overseas offices citing their cost inefficiency.

The US is the leading foreign office destination

The most popular country for foreign office creation is the US, with the 92 IPAs analysed opening a combined total of 108 offices there. It should be noted that SelectUSA, the US’s economic development organisation, does not provide details of its office locations so was not included in our research.

Considering the US is also the leading country in terms of outward FDI, it is unsurprising that it is the preferred destination for IPAs’ foreign offices. Figures from GlobalData show that US-based companies invested in one-quarter of all FDI projects in 2019.

China was the second most popular country by number of foreign offices with 96 branches. India came third with 60 locations. Both countries were among the top ten countries by outward FDI projects in 2019.

Tokyo is the most popular city for agencies to establish an overseas office, with 25 IPAs operating branches in Japan’s capital. New York ranks second with 24 locations. Shanghai, Paris and London round out the rest of the top five with 23 offices each.

Capital and major business cities dominate the top locations for IPAs to set up shop. This seemingly contradicts one of the key objectives of an IPA, which is to encourage investment throughout the whole country.

In addition, figures from GlobalData show that the top source markets for FDI are often also the top destination markets. These international locations include Germany, France and Spain, all of which feature in the top 15 foreign office locations.

Larger economies attract more IPAs

Analysis by Investment Monitor shows a strong link between larger economies (by GDP) and the number of foreign offices established by IPAs. This is likely to be because countries with higher levels of GDP normally have a larger pool of successful companies with the capital to invest overseas – therefore making them more attractive to IPAs.

The chart above shows that the US and China recorded the highest levels of GDP in 2020 and are also the top two destinations for IPAs to establish offices overseas. Moreover, seven of the top ten destinations by number of foreign offices also ranked in the top ten by GDP (US, China, Japan, Germany, India, France and Canada).

From our research, it appears that foreign IPA offices play an important role in FDI attraction. Although they can be expensive to operate, agencies can expect a substantial return on their investment provided the branch is correctly managed and its location is carefully considered.

Naomi Davies

Naomi Davies

FDI consultant

Naomi Davies is an FDI consultant at Investment Monitor, with expertise in location benchmarking and cross-border investment.

Glenn Barklie

Glenn Barklie

Chief economist

Glenn Barklie is chief economist at Investment Monitor and head of FDI services at Global Data Media.