California's Foreign Offices at a Crossroads

By Jock O'Connell


(This is the author's text of an article that appeared in the Sacramento Bee Sunday Forum section on May 9, 1999. The final version, bearing a needlessly inflammatory headline supplied by copy editors, can be found at:
"State's mini-embassies are out to lunch")

As a consummate professional in his chosen line of work, Willie Sutton knew both the value of money and where much of it was kept. That's why he robbed banks instead of, say, family farms or county governments. What's unclear is why California's nine overseas trade offices have not been as adept as Mr. Sutton in going after other folks' money or, more exactly, foreign investment capital.

This is one of a several critical questions facing the Davis administration as it ponders the future of California's politically popular but perennially troubled foreign trade offices.

Earlier this year the nonpartisan Legislative Analyst's assessment of the proposed 1999-00 budget observed that for "the past several years, the Legislature has been concerned about the cost-effectiveness of the foreign trade offices." Ironically, though, such concern has not stopped the Legislature from authorizing additional overseas offices. Voting funds for a new trade office is perhaps the easiest way for an elected official to demonstrate internationalist credentials at a time of often hyperbolic rhetoric about globalization.

Unfortunately, a more tight-fisted attitude has greeted periodic requests for funds to improve the capabilities of existing offices. The result is an overseas office program that is better suited to the needs of political theater than the realities of international business. In a study just published by the Institute of Governmental Studies at UC Berkeley, Robert Collier observes: "The state's nine mini-embassies have a total budget of only $5.9 million, a small sum that leaves many offices so understaffed and underfunded that they are able to do little more than answer phones and faxes."

It is simply preposterous to think that an office staffed in most cases by no more than three or four individuals can cope with the diverse range of industries that make up California's economy. No private business would dispatch salespeople who were not proficient in describing every aspect of the goods or services they presumed to provide. But for some reason the state assumes that its overseas office personnel can easily shift from aiding an agricultural exporter in the morning to assisting a biotechnology firm at lunch to helping a software company in the afternoon.

Those who take very seriously the task of promoting exports or attracting foreign direct investment devote ample resources to it. Austria, for example, is about one-fifth California's size, but it employs more people in its Los Angeles trade office than the Golden State does on the entire continent of Europe.

For years, private business organizations like the Foreign Trade Association of Southern California and the California Council for International Trade have been urging state officials to expand already existing offices before opening new ones. But lawmakers have denied nearly all requests for more funds on the grounds that neither the Deukmejian nor the Wilson administration could show it was making effective use of these offices.

Although the Legislature has been much too eager to open new offices without fully considering what these offices are actually capable of doing, most of the blame for the current plight of the state's overseas offices rests with the steadfast refusal of the Deukmejian and Wilson administrations to adopt business plans for each of its offices that reflect a reasonable balance between resources and responsibilities.

From the outset, these offices have been run as retail establishments aiming to serve virtually any small or medium-sized firm interested in exporting. Attempts to persuade state trade officials to target their sparse resources on those industries or individual companies which have the brightest prospects in foreign trade have been unsuccessful, victim of the familiar ideological refrain that government should not try to "pick winners." Yet the argument against public agencies attempting to pick winners is largely disingenuous. Having decided that it will furnish services to California exporters, isn't the state under an obligation to insure that those programs make a real difference?

Another hitherto unconsidered policy option would involve adopting a individual business plan for each office suited to its location. Thus, a representative office in the Phillippines (authorized but not yet opened) might concentrate on working closely with the Manila-based Asian Development Bank to identify opportunities for California companies and universities to participate in some of the billions of dollars in contracts the bank lets each year. The state's commercial representative in Sub-Saharan Africa could be re-tasked to look not for new export markets for California companies but for opportunities for California firms to invest in, and perhaps share management expertise with, African-owned companies. Likewise, the Frankfurt office could be restricted to promoting joint ventures between small and medium-sized European and California firms in environmental technology or biosciences.

In some cases, the Davis administration might also wish to ask whether some offices should be in the export promotion business at all.

The fact is that our usual preoccupation with exports, while understandable, obscures how much more there is to international business than the shipment of boxes around the world. As University of South Carolina economist Douglas Woodward observes in his new study, "Foreign Ownership and the Consequences of Direct Investment in the United States," the historic process of global economic integration "is being driven by foreign direct investment."

For any nation or state or municipality, there are ample benefits associated with luring a foreign firm to build a new manufacturing plant or open a research facility or even a regional sales office. The job-creation and revenue-generating gains resulting from these "greenfield" investments are often more permanent and pervasive than the gains resulting from several boatloads of exports. Not only does, foreign investment nourish economic development, it may also bring a spectrum of intangible social and cultural benefits, not the least of which may be a more cosmopolitan ambience.

Most foreign investment, especially from Europe but increasingly also from the Far East, takes the form of an acquisition or a merger. Here the infusion of new capital and new management may reinvigorate a company and save jobs that might otherwise have been lost. Locally, NEC Packard Bell is a prime example of a firm whose future would have been even more clouded had it not been for foreign investment.

According to the state Trade and Commerce Agency, California has consistently led all other states in terms of both the total amount of foreign direct investment and the number of associated jobs. But that's scarcely surprising for a state that boasts to be the world's seventh largest economy. In actuality, California's share of foreign direct investment is generally what one would predict based on the Golden State's share of the national economy. Given this mediocre showing, one would think the state would have been more aggressive in seeking it out.

Queerly enough, the one office that should be most actively engaged in seeking foreign investment has probably been the most neglected over the years. That would be the California Trade and Investment Office in London, which happens to be the home of the world's most important financial center outside of New York City. London was the second overseas office opened (April 1987) and was originally intended to oversee the state's trade promotion efforts throughout Europe. But for the last few years, London has been without its own director, being "administered through the overseas desk -- Germany Office," according to a footnote in the state budget. California's top official is London these days is a staff development specialist.

Could California use even more capital from abroad? Consider the unmet capital needs of the so-called gazelles, those small but swiftly growing businesses thought to be driving the engine of economic growth. A report issued in April 1998 by the California Research Bureau noted that California businesses in early stages of growth have ample unmet capital requirements ranging between $5 and $11 billion, depending on the methodology used to measure those needs. This despite having the world's most highly developed system for matching promising investment opportunities with venture capitalists and high net-worth individuals, the so-called "angel" investors who were profiled in the business pages of the Bee last Monday.

Obtaining access to overseas sources of capital should have greater importance in this era of banking consolidations. In a March 9 speech in Virginia on changes in small business finance, Federal Reserve Bank chairman Alan Greenspan noted that "an often-expressed concern with the ongoing consolidation of the U.S. banking systems is a feared reduction in the supply of credit to small businesses." Foreign investment could be a lifeline for them.

At the same time, communities throughout the state have billions of dollars in needs for funding local economic developments projects ranging from conference centers to shopping malls. Here the ability to lure foreign investment would be especially helpful, particularly with projects in the less internationally familiar regions of the state.

In a review of the latest academic research on foreign investment in the United States, Ohio State University economist Edward Ray has concluded there is "no evidence that state-based business incentive schemes have stimulated foreign direct investment." If such traditional forms of encouragement seem pointless, is there anything a state can do? According to St. Louis Federal Reserve Bank vice president Cletus Coughlin there most certainly is: "States with large promotional efforts have attracted more foreign direct investments."

So it would seem that getting timely information on potentially profitable investment opportunities to potential investors would be well-advised. Without additional spending, the state's London office could be assigned a new role not in the realm of export promotion but as the state's liaison with the huge international financial sector in the City of London. Quite apart from serving the interests of California in an era of global finance, such an office could also provide vital informational and services to the State Treasurer, the State Controller, the Franchise Tax Board as well as the two major state pension funds.

But first the Davis administration and the Legislature must decide that promoting trade and investment is a job that requires more than symbolism and politics, but a real strategy.

Copyright 1999 by J. A. O'Connell