FDI announcements: a potential signal of the benefits of cluster development.

• Author: Zheng, Ping

Clusters--which are a co-location of firms that may share supply chains, modes of transportation or similar talent requirements -provide a network of economic relationships in a region that can create a competitive advantage for related firms (like software firms congregating in Silicon Valley). Industry clusters, it is said, facilitate the exchange of supplies, personnel and information between related firms in a region. (1) Cluster growth, therefore, may be important for the economic well-being of the region as a whole.

These clusters of industries that are growing in a region are aptly named "growth clusters." (2) In earlier issues of the Indiana Business Review, we have also written about the role of cluster-based development. (3)

Clusters grow because those industries in a particular region have a competitive advantage. Differing forces may be at play in that growth. They can grow "metabolically," that is, expand using the resources, labor and know-how in the region, as well as technology from outside the region-combined with increasing demand for the cluster's goods and services outside the region. Clusters can also grow "magnetically," that is, a region can attract firms to take advantage of that region's competitive advantage in resources, supply networks or human talent. An example of magnetic growth is attracting foreign direct investment (FDI).

Michael Porter suggests that clusters may attract FDI by providing easy access to resources, technologies and markets, though other scholars are quick to point out that clusters and FDI can be interdependent phenomena. Clusters may also have an influence on the foreign companies that are doing the investing in the region. (4) The impact of cluster-related FDI on the wider economy also renders the relationship between clusters and investment particularly important. Does FDI stimulate clustering activity and generate positive spillover effects into the wider economy? Some researchers have found that productivity spillovers from FDI actually occur only in preexisting clusters, suggesting that the relationship between clusters and FDI is complex and worth exploring in greater detail. (5)

In this article, we will explore the role that growth clusters may have in attracting FDI, i.e., magnetic cluster growth, in Indiana. We used industry cluster definitions from the U.S. Cluster Mapping Project and employment by industry data from QCEW-complete employment estimates, which the Indiana Business Research Center (IBRC) provides on the Hoosiers by the Numbers website. A proprietary data set, fDiMarkets, is the source for announced or "intended" FDI flows. All of these data are at the county level.

In contrast to other FDI data sources, fDiMarkets data are comprised of press releases from firms and economic development agencies that announce an intended greenfield investment or an expansion of existing facilities. Merger and acquisitions (M&A) are not included. For the purposes of our inquiry, intended greenfield investments signal a company's intention to locate a new facility (or expand an older one), with the emphasis on new. Our contention is that greenfield investment intentions are a stronger signal than M&A activity for the sake of measuring a region's magnetism. M&A flows of FDI change the owner on the masthead, but the effects are not as apparent.

There are contrasting views on this. A foreign firm buying an existing operation may be motivated by the firm wanting to get a piece of a cluster's competitive benefits in a region. The Brookings Institution released a report in the summer of 2014 noting the advantages of M&As in terms of job growth, beneficial spillover effects and regional vitality, and provided some anecdotal evidence. (6) The report also cites several articles...