Investment Promotion  has slowly started to become one of the key  activities  which has  been taken up by many states in the country to increase job growth and prosperity .

Investment promotion is a critical strategy employed by states and countries to attract foreign direct investment (FDI) and stimulate economic growth. However , sometimes when we deploy resources to attract investors , the sole objective becomes to only attract investors in all industries irrespective of the deep understanding of the economics of the state and country.

Governments and Agencies which are involved in the figuring out which investors to connect and which industries to follows , need to understand the basics of how businesses  work across the globe.

YOUR STATE CAN’T BE A HUB FOR ALL INDUSTRIES on PLANT EARTH

Governments have to understand that their State and districts are a product that they have to market, that product has features like land , Land , Capital , Infra , Connectivity , Natural resources, Human Capital etc .  Just like a company makes a product and its features and tries to figure out the product market fit , in the same way governments have to find a product market fit for what their states have to offer.

If the governments force their products ( state ) in all markets , the efficiency of the resources deployed for promotion might not  be that good. Below are some areas where every  government needs to think and ponder before venturing out in the market.

Understanding of global Marco – Economic factors : Most of the investment promotion should be connected with the global and Indian macroeconomic indicators. Most of the consulting firms give very little impetus of what’s happening in the macro side of the economy  . If we only focus on the companies and predict whether they have some investment plans or not without understanding the macros , it will be like trying to find out the strategy of  a company by talking to 500 employees rather than one CEO itself. Macros are the CEO of the industry & Sector.

Understanding of unit economics   of industry : Investment promotion requires dedicated resources and expertise to identify potential investors, conduct market research, organize promotional activities, and provide necessary support.

Every Investment promotion agency should have dedicated resources who have  thorough understanding of the industries and sector  which they want to connect with . When I say the industry and sector knowledge , all the professionals should have understanding of the following .

1. Cost  & growth drivers of the industry – Every Industry has different cost structures  .

CASE  1-  TYRE INDUSTRY  :

 Let’s take the example of tyre industry , Manufacturing of tyres have a very high weightage to the cost of bulk raw material structure . if we look at the diagram below .

structures  .

CASE  1-  TYRE INDUSTRY  :

 Let’s take the example of tyre industry , Manufacturing of tyres have a very high weightage to the cost of bulk raw material structure . if we look at the diagram below .

The major raw materials used in the manufacturing of tyres are natural rubber , Synthetic rubber, Carbon black and oil . We all know that Rubber plantations are  in the southern part of India , secondly is the manufacturing of other raw material – Carbon Black . It also has two key components natural gas and crude Oil .

Both Rubber and carbon black and commodities are  found / manufactured in the  southern areas or the western coastal areas where the import  is easily done. So, as per the data above tyre manufacturing should be most done in the coastal area and also in the southern part of the country . The diagram below shows the manufacturing bases of the tyres in India

( Manufacturing bases of tyres in India )

As we can see the majority of manufacturing of tyres happen in the south and coastal areas of the country.

TAKE AWAY : So, if you are a state which is away from the sea, and lacks natural Rubber as raw material , please forget about  approaching  companies in the tyre industries  , unless you can seriously pay them /subsidize  them for many years to run their plant.

Case 2 – PHARMACUTICAL INDUSTRY :

Let’s understand the Dynamics of the Pharma companies , the major cost drivers in the manufacturing of pharma are direct labour , overhead, and other indirect cost  which also includes R&D expenses.

Look at the diagram below , it has the division of the pharma sector cost of production .

Labour costs are around 25% of the total cost , no prizes for guessing where the manufacturing bases should be. If we look at clusters which are pharma based, where ever there Is cheap labour you will see pharma units.

Secondly , pharma companies require a lot of R&D units, which is primarily the reason why States like Andhra Pradesh are very big in Pharma sector.

So, If one needs to attract companies in the pharma sector , they have to look at the following areas first .

1. Create more R&D units in the state, by giving more incentives which are only designed for to promote pharma R&D.

2. Incentives Education in R&D in Pharma in the state.  

Inefficient Resource Allocation/ Comparative advantage of the state  : Economic knowledge helps policymakers assess resource availability and allocation efficiently. Without this knowledge, states and countries may struggle to identify their competitive advantages and allocate resources accordingly. They may pursue investments in sectors that are not suitable for their resource base or fail to capitalize on existing strengths, resulting in suboptimal outcomes.

There is a very basic concept of Comparative advantage  in Economics 101.

Comparative advantage is what you do best while also giving up the least. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing.

Oil-producing nations, for example, have a comparative advantage in chemicals. Their locally-produced oil provides a cheap source of material for the chemicals when compared to countries without it. A lot of the raw ingredients are produced in the oil distillery process. As a result, Saudi Arabia, Kuwait, and Mexico became competitive with U.S. chemical production firms in the early 1980s. Their chemicals are inexpensive, making their opportunity cost low.

In the same way we have to analyse the state we are in , check for the comparative advantages that it might have wrt other states in the country .

For example , Consider the Call centre industry , initially the call centres  came to India in the southern states. Why ? Because they could speak English better than their counterparts in the North . Now, As the industry grew the wages all grew and the advantage the south  India had over the US is now diminishing , so If you are a state that’s in the  north and lacks any sort of IT ecosystem , you should target these companies because the speaking English is no longer just a southern thing and wages in the north will be way lesser than down south.

So , If the incentives have to be given  by the local government  they should be primarily focussed on BPO and call centre industries. If the government starts giving  incentives to every industry in the IT sector than it won’t be  effective as the comparative advantage is still with other states.

Value chain analysis of  the Industry :

Understanding the value chain analysis of an industry is crucial for governments to effectively market their states for investment promotion activities. By comprehending the various stages, processes, and value-added activities within the industry, governments can identify key areas where their state holds a competitive advantage. For instance, if a state has a flourishing tourism industry, value chain analysis can help identify potential investments in hospitality infrastructure, transportation services, or eco-tourism ventures. Armed with this knowledge, the government can tailor their marketing efforts to attract investors who are interested in capitalizing on these specific opportunities. This targeted approach enhances the state’s ability to showcase its unique value proposition, attract investment, create jobs, and drive sustainable economic growth within the industry.

TAKE AWAY : Do a thorough value chain analyses of sector , and then go deep figure out the cost and growth drivers of the industry (e.g. Tyre and Pharma industry ) and then find out where does your state stands , what are comparative advantages of your state. After figuring all these can you filter out sectors and industries where you can realistically pitch your state , because of the economic data you have collected in the exercise. I am telling you this because , if you or the government will not think about these areas , the investor or companies will surely do .

How to keep a  track of  your  Industries and sectors for  investment promotion?

Below framework is used to focus on the industries and sectors  which are shortlisted after figuring out  the states’ comparative advantages visa-vi other states in the country. Only after going   through the metrics and areas mentioned above , we can later track the sectors and industries’ which come out of the exercise mentioned earlier .

Parameters	Explanation
Capex Cycle	This metric will help us to understand when the Capital investment will happen in  a sector . For eg in 2020 , IT saw huge capex and similarly for Chemical Industry
Hiring Numbers	There are case where the hiring number might be higher for a sector or industry in spite of being low on capex, this happens in the developed countries where capital is already high
Production Index	This is indicators where the index is available both for Past quarter as well as prediction for next quarter is there.
Inventory Level Index	This indicator will provide us the data of whether the goods in the inventory are finding any buyers or not , it is also used a lead indicator for recession
Capacity Utilization in a industry	Will tell whether capex will make any sense in the future .
Credit Cycle of the sector and  industry both	Credit cycle leads the capex cycle for any sector or industry
Technology	Any Major tech Breakthrough  in the industry or sector

Based on the above mentioned leading indicators , Government can find out what will happen in the industries and sectors which are of their priority , understanding them is more important , than trying to find out individual companies and what’s financial status they have . Do the companies have money to spend on capex etc or not , because until the leading indicators which are basically macros , don’t  favour an  industry , MONEY or NO MONEY with a company makes NO  sense at all.

Written By: Ankur Kushwaha, Sr. Consultant, Invest Punjab | Govt. of Punjab.

DISCLAIMER: Views expressed are personal.