Why Are Countries Competing to Attract Foreign Companies?

The Global Business Competition

A major company's choice of where to build a new factory, headquarters, or data center has a significant impact on hundreds of thousands of people. Companies do not choose a location based solely on geography; they must also consider taxes, labor costs, regulations, and infrastructure. As a result, governments around the world are competing to make their countries attractive places for businesses to invest in.

The competition between governments is typically known as foreign direct investment (FDI) and occurs when a company from a certain country invests in and establishes a lasting business presence in another. In 2024, global FDI investment totaled around $1.5 trillion, demonstrating the enormous amount of capital that companies are moving across borders. Even when global investment flows may face uncertainty, international investment remains an important source of economic development.

Being able to attract a foreign company means much more than bringing another business into the country. For example, if a newly built factory were to open up, opportunities and jobs would expand as demand increased based on supplies, revenue, and skills. For workers, this is able to create various opportunities for them, which range from manufacturing and engineering to accounting, marketing, logistics, and management.

As countries compete for investments, governments may end up offering significant incentives, which brings up an important question: How much should a government give up to convince a company to choose its country?

The Price of Attracting a Company

A common way that governments attract foreign businesses is through tax incentives. A government may reduce a company’s taxes for several years, provide tax credits, or offer other financial benefits in exchange for facility or job creation.

Governments are also able to offer direct financial assistance. Companies may possibly receive grants, access to infrastructure funded by the government, or assisted construction. Such incentives are especially important when multiple countries or states are competing for the same investment.

A case in point here is the 2023 situation in which the U.S. government indicated that the Taiwan Semiconductor Manufacturing Company would receive $6.6 billion worth of investment for the development of factories for semiconductors, according to the terms of the CHIPS Act. The main reason behind the signing of the deal was to improve domestic semiconductor production and create a large number of jobs; it was reported by the U.S. Department of Commerce that the deal would create more than 25,000 jobs.

A large investment ends up having an economic ripple effect, with construction workers necessary to build a facility, employees to operate it, and other businesses that may arise to provide transportation, equipment, food, housing, and other services to the new workforce.

The Impact

Foreign investment has an impact far beyond the executives and engineers hired directly by a company. When an international business enters a new market, it can create an entire network of employment opportunities.

A manufacturing facility would require employees to operate machinery and manage production, but it also requires accountants, human resources specialists, cybersecurity professionals, maintenance workers, transportation companies, and managers. Foreign companies can also introduce new skills and technologies into the economies where they operate. Employees are able to gain experience with advanced equipment, international business practices, and specialized production methods. As workers change jobs or start businesses of their own, these skills may spread to other companies, allowing for overall exposure.

Competition for securing foreign firms is more than just the capacity to convince a firm to establish a factory, head office, or data center in the state; states compete for what the arrival of a big firm brings with it. While incentives such as tax breaks and government grants might play an important role in securing investment, they come at a price. The question is whether the long-term gains from the investment, including job creation, tax revenues, infrastructure and skills development, justify the cost incurred in attracting the investment.

For firms, it is seldom the case that the choice of where to invest depends on one variable alone. Besides taxes and labor costs, firms look at other factors such as skilled labor, infrastructure, laws, political stability, and economic stability in addition to access to vital markets. This implies that countries do not automatically succeed by providing the best tax benefits or the lowest labor costs. Ultimately, what could work is creating an atmosphere in which firms choose to invest for the long term.