Volume 15, Issue 3

Kentucky Cabinet for Economic Development

Foreign Direct Investment: International Companies Run For Kentucky’s Roses




Kentucky has made itself a prime location for foreign direct investment, thanks to efforts by Governor Steve Beshear and his political forebears. This “Bluegrass State,” which has a rich horseracing heritage, isn’t attracting $2 parlay players. International companies bet big money on the “win” ticket and realize substantial payoffs. So does the state, which has maintained – and created - jobs while boosting its economy and integrity. It’s a win/win, with all sharing the generated wealth.

In May 2012, Toyota Motor Manufacturing Kentucky (TMMK) indicated it would increase four-cylinder engine production by 100,000 engines at its Georgetown plant. The uptick represents a $31.9 million investment and creation of 86 new jobs in the “Bluegrass State.”

In the 1980s, Toyota came to Kentucky, a move that boded well for the state’s economic future. Excitement continues with the expansion that strengthens Kentucky’s economy and positively impacts the Commonwealth’s population. Further, increased production – which provides engines for Toyota’s Avalon, Camry and Venza models – will boost North America’s automotive market.

The Georgetown location has helped transform Kentucky into a leading US automotive hub. Indeed, the state boasts more than 400 automotive-related enterprises that employ more than 68,000 people. This makes Kentucky the third highest as far as auto industry employment in US motor vehicle-producing states.

It also underscores how Kentucky has capitalized – and continues capitalizing – on global market opportunities to retain and create new jobs. The state well understands that the economy has globalized and, as such, it fosters foreign direct investment that promotes exportation to spur its economic development (via wealth generation, commerce generation and job creation).

Larry Hayes, secretary for Kentucky’s Cabinet for Economic Development, illustrates with an example: “On a per-capita basis, Kentucky is second only to Hawaii in Japanese foreign direct investment,” he says. “People are surprised when they learn about Kentucky’s position. After all, Hawaii is much closer to Japan. But Japanese investment began in Kentucky in the 1970s, and it moved forward with Toyota’s decision to locate here in the 1980s. Since then, there has been an explosion of Japanese investment.” Operating with current Kentucky Governor Steve Beshear’s administration, the Cabinet is the primary state agency responsible for creating new jobs and investment. It’s a vibrant enterprise. New business investment in 2011 totaled more than $2.6 billion and created over 13,200 new jobs.

Give credit to Beshear for moving the state forward in this direction. Foreign direct investment, or FDI, wasn’t his idea, but he has reinvigorated the concept. Beshear was elected governor in 2007, and by 2011, Kentucky had about 400 foreign-owned facilities (employing about 76,000) throughout the state, making the Commonwealth a leading FDI location. An Area Development online report indicated that in 2011, FDI activity accounted for about 30 percent of all announced new investment in the state. Facility operators attracted to Kentucky include big-name international companies such as Toyota, Hitachi, DHL and Nestle. In recent years, aside from Japan, companies from India, Europe, China and other countries have invested billions of dollars in establishing new operations and expanding existing footprints in North America. Economic maps lead them to Kentucky, a state where the blue moon still shines and Patsy Cline’s voice still rings loud and clear.

A Governor’s Vision
Michael C. Randle, editor of Southern Business & Development magazine (a Birmingham, Ala.-based publication that reports on economic development opportunities in southern states), describes Kentucky as an FDI magnet. Aggressive pursuit of FDI proved a smart move on Kentucky’s part, he observes, as it helped create jobs even during the recent global economic downturn. The South’s share of FDI, he adds, has averaged 43 percent of the entire US share, with the automotive industry as the backbone. In Kentucky, Toyota has positioned its largest North American plant in Georgetown (while establishing its North American headquarters in Erlanger).

“FDI has been an ongoing and increasing focus of Governor Beshear’s administration,” relates Hayes. “He understands that the economy has truly become global.”

Beshear, Kentucky’s 61st governor, is a Democrat who previously served in the Kentucky House of Representatives (1974-1979), and was the state’s attorney general (1980-1983) and its lieutenant governor (1983-1987). His political career was interrupted when he went into private business, but in 2007 he re-entered the fray. He sought and was elected to the office of governor. He took up residence in the Frankfort mansion at a critical period. The globe’s round jaw was about to get walloped by the “Great Recession.” Everyone at every level – town, city, state, country, continent – would be impacted. During his January 14, 2008 state of the state address, Beshear said, “[Kentucky is] facing an unprecedented shortfall. While this is a situation I inherited, it is my job to fix it.”

This he started doing immediately, looking to where spending could be cut or when and if taxes should be raised. Being an innovator, he also looked beyond those options (which weren’t perceived as the best resorts anyway), as he believes that keeping and creating jobs is crucial to the state’s economy. To achieve that end, a year into his administration, Beshear reshaped Kentucky’s business incentive programs, which entailed reformation of existing incentives and creation of new ones. This, he reasoned, would encourage existing businesses to expand their operations and attract new companies to the state. The governor’s reasoning was on target. In a couple of years, the incentives generated hundreds of projects and billions of dollars in new investments. Jobs were not only saved but created.

The effect on the economy has been remarkable. During Beshear’s first term as governor, the state ranked high for personal income growth (within the nation’s top five), and Forbes’ ranked it as one of the best places to do business. Also, in 2012, Kentucky ranks as the sixth-lowest tax cost state for new corporate headquarters and seventh most business-friendly state in the country for new firms, according to The Tax Foundation’s 2012 annual State Business Tax Climate Index. Looking at specific industries, Kentucky – as previously mentioned – has become a driving force in the US automotive sector. According to Hayes, it now ranks fifth among states in the number of automobiles and trucks produced. GM, Ford and Toyota assemble products in Kentucky. However, that ranking is expected to bounce up to third now that Ford’s Louisville Assembly Plant is back in production after its recent $600 million retooling investment.

But FDI is not a concept new to Beshear; rather, it is something that he’s enhancing. “People might forget the ‘back story,’” says Hayes. “He was lieutenant governor during former Governor Martha Layne Collins’ administration, and I was secretary in her cabinet. During that period, we negotiated with Japan, Toyota in particular. So, while we can’t take anything away from Governor Collins, as lieutenant governor, Beshear was involved on the front end.”

Reaching Across the Aisles
What’s also remarkable is that, as governor, Beshear has been able to circumvent the partisanship that has placed a vine-like stranglehold on achievement and progress and that made US politics dysfunctional. His approach recalls the days when former Democratic President Lyndon Baines Johnson could cajole Republican politicians into supporting his Great Society initiatives and when former Speaker of the House Tip O’Neill (a liberal Democratic member of Congress) could work cooperatively and collaboratively with Republican President Ronald Reagan.

Kentucky is a state where bi-partisan collaboration needs to come into play. Most voters have been registered Democrats, but the state has often supported Republican candidates for federal offices. The dichotomy must be addressed, but Beshear doesn’t engage in the LBJ style of cajoling. He has been described as a “can do moderate,” not a political ideologue. For the best interests of his state, he rises above party definitions. As Southern Business & Development magazine points out, party affiliation doesn’t matter as much as accomplishment. Beshear has had to work with Senator Mitch McConnell (a staunchly conservative Republican) and Senator Rand Paul (one of the Tea Party movement’s darlings), and the relationships he established have been professional and productive. Beshear couldn’t care less from which point on the political spectrum the best ideas or projects arise. He just wants to know what works.

“He transcends political boundaries and definitions, and this helps him achieve what needs to be done,” says Luther Deaton, chairman, president and chief executive officer of Central Bank and Trust Company and vice chair of the Kentucky Economic Development Partnership Board. “When he left government, he became successful as a managing partner in a law firm. The main reason he decided to run for governor in 2007 is that he wanted to see the state move forward. But when he came back, he was shocked by how things had changed.”

While he was dismayed by a new and bitter brand of partisanship, Beshear sought to remove the barriers that roadblocked effective legislation. “He wanted to make a difference, and he proved he was willing to work with people whose ideals weren’t his own, and he’s not interested in claiming credit,” describes Deaton.

Person of the Year
Cooperation is the key to unlocking the gridlock, and Beshear has managed to pass key legislation with bipartisan support. It’s not about ideology; it’s about inspiration – and about attracting business and creating and maintaining jobs. That’s what drives Beshear’s agenda, and that is what has helped Kentucky become one of the most competitive states as far as investment, manufacturing recruitment and economic development. What Beshear has accomplished in these areas are the main reasons why Southern Business & Development magazine named the governor its 2012 “Person of the Year.”

Considering the pronouncement, the Cabinet for Economic Development’s Business Development Commissioner Erik Dunnigan says, “I think the publication put a bright spotlight on the state’s success, as well as the governor’s accessibility. If he sees a prospect – whether it is a small or large business – he’ll get them through the side door and make himself available on a moment’s notice. He’ll open his door, or fly anywhere, if he recognizes potential investment and job creation. That’s his passion. He’ll make several economic development trips each year. Like other states, we are focused on trade, but we have a strong focus on foreign direct investments, and that’s what he talks about on his trips.”

How Beshear Makes it Happen
In attracting business and investment, Governor Beshear continually drives the message that Kentucky is a business friendly state – one that has lower operating costs than other US regions and offers a willing, qualified and ready workforce. Kentucky also offers substantial economic incentives.

“Before Governor Beshear took office, Kentucky provided the typical incentives offered by other states,” says Dunnigan. “But this didn’t allow you to work with existing industries. In response, Kentucky added new elements to its toolbox that allowed us to better work with companies already here, like Toyota.”

As Southern Business & Development reports, in the 2009 legislative session, Beshear championed legislation to dramatically enhance Kentucky’s economic development tax incentive tools. When this INK legislation (Incentives for a New Kentucky) was signed into law, it paved the way for new and existing companies to create new jobs and make significant investments, and for Kentucky to partner with these companies in a more strategic and, in turn, effective fashion. This made a dramatic difference, especially during the darkest period of the recession, says Dunnigan.

The move returned significant dividends, reports Southern Business & Development. INK passage, with its incentive approvals, meant that hundreds of companies are implementing or considering investments totaling over $5 billion. Potentially, this means more than 37,000 new and retained jobs across Kentucky.

Hayes provides an anecdote that underscores how this all came about. “I’ll never forget the conversation we had with Ambrake Corporation, the American version of the Japanese-based Akebono Brake, which supplies brakes to Toyota, GM and several other OEMs,” he recalls. “The chief executive officer reminded us that the plant, which opened in 1986, was almost 25 years old and needed to retool.”

Making a suggestion – that was really a subtle threat – the company said it could consider taking its operation to another state that would welcome it with new incentives that would make its facilities state of the art. “You’re not providing a way to retool, they told us,” continues Hayes. “That’s one of the things that compelled Governor Beshear to draft his incentive program that would enable us to better work with – and thus retain – existing businesses. So that is one of the ways he has done it.”

Further, Kentucky has enhanced its international presence. To foster investment, the state maintains offices in Germany, Japan and Mexico. These offices provide ground-level, in-country support to attract business and development partnerships in foreign markets.

More New Direction: Exportation and Reshoring
Along with FDI, Kentucky also focuses on at least two other areas important to advancement in the brave new global environment: exportation and reshoring. In 2011, Kentucky companies exported more than $20 billion in goods, which contributed $5.3 billion to the state’s GDP (not to mention supported more than 48,000 jobs). As far as reshoring, Kentucky is leading the way in bringing manufacturing and jobs back home. The manufacturing sector tried the offshoring experiment – licking the ice cream cone filled with the flavor of the month. It didn’t taste all that great, and it only lasted about two decades, a time span that really measures only a second on the global manufacturing clock.

What seemed like a good idea already has become outdated, and with startling rapidity – an observation shared by many, including Southern Business & Devel-opment editor Randle. No one should mourn the passing: The negatives far outweighed the positives. (Ask yourself: Did offshoring place American manufacturing in a better global economic position?)

Reshoring is just one more element of Beshear’s – and Kentucky’s – progressive agenda. “No question about it, Kentucky is already seeing reshoring’s positive effects and the new opportunities provided,” says Randle.

When you look at the recent Boston Consulting Group report (see sidebar), the conclusions are inescapable, Randle says.

And this leads into new directions for the state. “There is already a tremendous shift that will double in two years and double again in four, and it doesn’t just involve relocation,” foresees Randle.

Getting It
Southern Business & Development magazine recognizes Beshear as one politician who “gets it.”

Just what does he get? Randle clarifies: “He gets that the state, and the people who run the Commonwealth, have to be open-minded, which means they must be open to new ideas offered by successful businesses that can brainstorm new opportunities. He realizes ‘one size doesn’t fit all’ and that everyone has an idea.”

Some ideas work; many don’t. No matter. Beshear perseveres. “He knows there is no silver bullet. So, he realizes that as he formulates his policies, he has to consider impacts on current and future business, and the state’s ability to grow business.” Sure, it’s interesting and exciting to think about how you are going to recruit new business and companies, Randle adds. “But that has to be tied into indigenous elements – the various locales, the people who create commerce and hire people, and the people that will staff the positions. With all of the pieces in place, large businesses that come into the state will continue to thrive, and smaller businesses will be born in a nurturing, creative environment that will help them become larger, if they wish to grow. That’s what Kentucky fosters.”

With that said, the Kentucky Cabinet for Economic Development shouldn't be surprised if it witnesses more visits to its website and more requests for brochures.


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