Attracting large businesses to economically deprived regions is a key priority for government. Yet developing the necessary infrastructure to do so, at a time of escalating public sector debt, presents significant challenges. New research by Dr. Atif Ansar of the BT Centre of Major Programme Management at Said Business School, calls for a more flexible approach to the provision of infrastructure which will better cater to the needs of large firms and avoid wasteful and potentially obsolete infrastructure investments.
Economists, politicians and business leaders routinely call for the building of infrastructure assets – such as roads, railways or ports – to attract firms to the local economy creating jobs and economic growth. The economic reality makes it difficult to find the funds for such investment, and the return is far from guaranteed. In a new paper, Dr. Ansar argues that the traditional infrastructure view of ‘build it and they will come’ is no longer valid and that increasingly large firms want tailored infrastructure services rather than off-the-shelf standard solutions. The search for such tailored infrastructure services is now a key part of the location decision-making of large companies.
“Mainstream theory suffers from a poor understanding of the process by which large end-users procure infrastructure. Traditionally, economists have argued that large organizations have little bargaining power over infrastructure services and costs. My work studying the decision-making of some of the largest firms, such as ThyssenKrupp AG (TK), a top 20 global steel giant, presents a very different picture. In choosing a U.S. location for a new plant, TK demonstrated its bargaining might, built upon thorough research of alternative sites and the trade-offs involved with each; utilized a tightly defined business plan which weighted site factors in importance; and deployed a strategy of withholding its commitment to any one site until the last possible moment. A key factor in its final decision was the local authority’s willingness to work collaboratively with the firm to develop customized infrastructure to meet TK’s particular needs. It placed relatively little importance upon the existing infrastructure already in place.”
The low weighting firms like TK give to existing infrastructure highlights the risk of regions investing heavily in infrastructure ahead of potential firms moving to the area. Increasingly, firms want to co-develop tailored infrastructure services around their investment. “Blanketing a country with “one size fits all” infrastructure is likely to lead to misallocation of investment,” says Dr. Ansar. “Instead of embarking on infrastructure megaprojects and central plans, governments are better off focusing on co-developing smaller scaled infrastructure with large firms, financed from user-fees rather than from the general tax revenue. This will benefit not only the public purse, but will appeal to large firms which are increasingly recasting megaprojects as smaller scaled increments which can be scaled up flexibly and tailored to their infrastructure requirements.”
“Planners routinely over-estimate demand for infrastructure projects. However, when infrastructure projects are built in a specialized manner for one or few lead users, the demand forecasts are easier to estimate and resource misallocation reduced. Infrastructure tailored for one anchor tenant such as a large manufacturing firm can support a wider ecosystem of various sized enterprises and is more likely to lead to the economic regeneration sought.”