EcDev Journal

New Considerations for FDI Attraction: Comparing FDIs of Airbus in Mobile and Netflix in Toronto

Posted on Sunday December 13, 2020

By: James Arteaga (james.arteaga@ryerson.ca); Julie (Eun Jung) Jo (julie.jo@mail.utoronto.ca); Manuela Montelpare (manuelamontelpare@gmail.com); Iana Lanceta (iana.lanceta@gmail.com); William Tiffin (william.tiffin@ryerson.ca).  Ryerson University Local Economic Development Certificate Program graduates.

Abstract

This paper analyzes the return on investment (ROI) for the following North American Foreign Direct Investment (FDI) projects: Airbus in Mobile, Alabama, and Netflix in Toronto, Ontario. Information regarding the grants, abatements, and tax incentives offered by all levels of government in both case studies is presented in addition to the employment growth, job quality, and tax revenues gained from each project. A cost/benefit analysis of each FDI project demonstrates that Airbus had a poor ROI given the immense cost of the government incentives used, while Netflix realized significant gains despite having fewer government incentives available. As a result of these findings, this paper argues that Economic Development Officers (EDOs) should make industry-specific research when planning for FDI attractions and consider the benefits of investing in the creative economy compared to traditional sectors such as manufacturing.

Keywords: foreign direct investment, return on investment, Airbus, Netflix, local economic development 

Introduction

As national, provincial/state, and local economies attempt to compete in a globalizing world where employment opportunities can easily change borders, Economic Development Officers (EDOs) must strategically leverage the limited resources available through the public sector to maximize the return on investment (ROI) for their communities. This paper presents a comparison of two foreign direct investment (FDI) case studies in North America: the first is Airbus’ decision to assemble its A320 series jet in Mobile, Alabama and the second is Netflix’s move to produce content in Toronto, Ontario. Through an analysis of job growth and quality, as well as the tax gains, of each foreign project, this paper demonstrates that the ROI of grants, abatements, and tax incentives is greater in the creative economy. Overall, this paper draws the conclusion that EDOs should make industry-specific considerations when planning for FDI as the highest tax and employment yields may not lie in traditional sectors.

Case Comparison: FDI Incentives and Investments

Airbus

In 2015, Airbus (a European aerospace engineering and manufacturing company) announced it would establish a new facility in Mobile, Alabama to begin the production of its A320 series aircraft (Toner, 2015). Airbus aimed to invest $600 million USD to build its facility and create up to 1,000 direct employment opportunities when it reached its maximum output in five years (Toner, 2015). The company sought offers from multiple communities in the United States before selecting Mobile, Alabama as their location (Toner, 2015).

According to Toner (2015), the collective public investment pledge (i.e., government grants) necessary to attract Airbus totaled approximately $158 million USD. This public investment pledge included all levels of government and consisted of the following: $70 million USD from the State of Alabama, $51.8 million USD from the Alabama Industries Development Training state agency, $14 million USD from Mobile County; and $18 million USD from the City of Mobile (Toner, 2015).

In addition to the public investment pledge of $158 million USD (Toner, 2015), tax incentives were offered (Sharp, 2019). However, the total number of tax incentives is currently unavailable to the public. Research of Airbus’ government incentives have included 10-year tax abatements for their Brookley and A220 facility, so it would be logical to assume a similar offer was made for this facility (Sharp, 2019). 

Netflix

In 2017, Netflix, an American media services provider and production company, announced that it would establish its first permanent multipurpose production center outside the United States, in Toronto, Ontario (“Invest in Canada”, n.d.). In the interim, with many productions eager to shoot in the north, Netflix leased eight sound stages at two of Toronto’s largest film studios (“Invest in Canada”, n.d.). The sound studios were expected to generate up to 1,850 direct jobs (Sprangler, 2019). Netflix’s Toronto move capitalized on a series of pre-existing tax incentives which included: the Ontario Film and Television Tax Credit (OPTSC) of 21.5% (The Canadian Press, 2019), and the Film or Video Production Services Tax Credit which provides a 16% break on Canadian labor expenditures, which can be added to the OPTSC (Sprangler, 2017). Interestingly, unlike Airbus, Netflix had not negotiated tax breaks at the municipal level (i.e., property tax abatements) as part of its move (Sprangler, 2019).

ROI Analysis: Employment Growth / Job Quality and Tax Revenues

Employment: Job Growth and Quality

Airbus’ facility in Mobile had a projected creation of 1,000 direct jobs with an average pay of $78,451 USD/year or $38 USD/hour, which would be higher than the state average of $53,786 USD or $26 USD/hour (ZipRecruiter, 2020). Underwood (2020) states the facility only hit 1,000 jobs in 2020, and that Airbus had been allowed to include jobs from indirect companies (i.e., those that only supplied inputs to Airbus’ production) in this count. In a more detailed breakdown of jobs at the facility in Mobile, ZipRecruiter (2020) reveals that 53% of the workforce makes less than the state average.  

With its leasing of eight sound stages, Netflix is expected to employ 1,850 workers directly (Sprangler, 2019). According to publicly available rates from film unions, the average rate of $28 CAD to $35 CAD/hour (depending on the role) is typical in the Canadian media production sector (“Collective agreement between 'The Union' and 'The Company'”, n.d.). Netflix production pay tables report that Netflix tends to offer wages that are 46% above this average, 43% within this average, and only 11% of jobs below this average (ZipRecruiter, 2020). With Ontario’s hourly rate averaging $27.83 CAD in 2019, Netflix is employing more than 85% of its workforce at above-average wages (Duffin, 2020).

Projected Tax Revenues

The new Airbus facility in Alabama was a negotiated deal that included tax abatements, but Toner (2015) articulated that municipalities may gain $34,000 USD and the State of Alabama may gain $126,000 USD in property taxes. State income taxes are valued between $2,000,000 USD to $2,500,000 USD based on the current Alabama tax levels and ZipRecruiter’s wage summaries for Airbus (2020). Property tax abatements have been granted for similar Airbus facilities previously, but it is unknown if this particular facility received the same relief, which has created speculation on whether or not the property taxes are indeed being paid for and the property tax value is being realized (Sharp, 2019). 

Netflix’s move to Toronto was possible without property tax abatements (Sprangler, 2017), meaning the company is paying the full property taxes of an occupied commercial facility which translates to tens or even hundreds of thousands of new municipal revenues for the City. However, the company did capitalize on a 21.5% tax credit from the Province that can be combined with a 16% federal tax credit, each of which is for production-related expenses (Sprangler, 2019). It should be noted that this is a tax credit allowing the company to claim the amount of the credit against potential taxes owed and not a blanket tax abatement (Sprangler, 2019). With 1,850 direct employees (Sprangler, 2019) and an average of $28 CAD to $35 CAD/hour (“Collective agreement between 'The Union' and 'The Company'”, n.d.), the potential tax revenue would be between $5,800,000 CAD to $8,150,000 CAD for the Province and $11,000,000 CAD to $16,500,000 CAD for the federal government. Tax revenue from the individual productions is not available but Netflix pays no provincial or federal sales taxes on its profits because it is a foreign digital company (The Canadian Press, 2019).  

Cost-Benefit Analysis

For EDOs, net employment growth (i.e., generation of new jobs in addition to existing ones), improved job quality, and increased municipal revenues are desired outcomes of FDI projects. However, EDOs must also consider the cost/benefit calculations associated with seemingly positive employment and revenue gains. Put simply, the cost of incentives expended by the government to attract FDIs should be less than the anticipated total gains in employment, industry development/diversification, and municipal revenue growth. For Airbus, Mobile and Alabama collectively invested $158 million for approximately 1,000 underpaying jobs—of which more than half were paid at below the state average (ZipRecruiter, 2020). Meanwhile, Toronto did not implement any project-specific deals with Netflix and was able to attract the major film and media company with pre-existing tax federal and provincial tax credits (Sprangler, 2017), as well as a strong creative workforce, and embrace of innovation (“Why film in Toronto”, n.d.).  Put this way, it is evident that Toronto’s FDI project had a higher ROI and overall greater benefit to the community. The final section of this paper will discuss how municipalities and EDOs can avoid a poor investment of their tax dollars that Mobile experienced, and instead identify successful project opportunities like Toronto did.

 Analysis and Recommendations

Comparing the FDI cases of Airbus, Mobile, and Netflix, Toronto not only demonstrates the various mechanisms EDOs use to attract FDIs via tax incentives, but it also shows how ROIs can differ substantially depending on the type of industries municipalities look to attract. With increasingly scarce resources for EDOs, Canada and the United States may generate greater ROI by embracing the shift from traditional manufacturing to the knowledge-based, service, and creative economy. As the world’s export industries are becoming more mobile, Airbus’ attempt to save jobs in the declining manufacturing sector that Alabama traditionally relied on has been unsuccessful. In contrast, Toronto’s diverse and growing population, as well as their image as leaders in innovation and technology (Miele, 2019), created an ideal environment of a “creative class workforce” that ultimately attracted Netflix’s unprecedented overseas FDI. 

Given the current trajectory of Airbus’ ROI, the funds invested by Mobile and Alabama will likely take decades to see results, if at all. Moreover, there is increased instability in the industry in general since manufacturing jobs are at risk of being offshored or automated due to high wages in North America. Meanwhile, with its capable workforce and tax credits, Toronto has drawn Netflix into an FDI worth $500 million USD over the next several years without major project-specific tax breaks (Spangler, 2017). Given the economic resilience and higher job quality of the creative sector compared to the manufacturing sector, it would be wise for EDOs to conduct calculated considerations on potential investments in the creative sector for their community. Although it is not recommended that EDOs completely dismiss foreign manufacturing projects, careful industry-specific considerations should be made as EDOs venture out to attract new or returning businesses.

 References

Collective agreement between 'The Union' and 'The Company'. (n.d.). Retrieved from https://www.iatse873.com/contracts-and-rates-0

Duffin, E. (2020, January 22). Average hourly wage of all employees in 2019. Retrieved from https://www.statista.com/statistics/439904/average-hourly-wage-by-occupation-canada/#:~:text=In 2019, the average hourly, stood at 27.83 Canadian dollars

Frank Miele (2019). Local Economic Development: An Introspective on Theory and Practice. Toronto, ON: The Economic Development Journal of Canada Publishers

Invest in Canada. (n.d.). Retrieved from https://www.investcanada.ca/

Sharp, J. (2019, Jan 15). Airbus in a fierce battle with Boeing gets a boost from Alabama taxpayers.

Al.com. https://www.al.com/business/2019/01/airbus-in-fierce-battle-with-boeing-gets-boost-from-alabama-taxpayers.html

Sharp, J. (2019, Jan 17). Alabama’s incentives for Airbus: ’Public relations donation’ or ‘Investment in future’? Al.com. https://www.al.com/news/2019/01/alabamas-incentives-for-airbus-public-relations-donation-or-investment-in-future.html 

Spangler, T. (2017, September 28). Netflix Commits to Spend At Least $400 Million in Canada

Over Next Five Years. Retrieved from https://variety.com/2017/digital/news/netflix-canada-400-million-content-production-1202575635/

Spangler, T. (2019, February 19). Netflix Establishes Production Hub in Toronto, Leasing Nearly 250,000 Square Feet of Studio Space. Retrieved from Netflix Establishes Production Hub in Toronto at Cinespace, Pinewood

The Canadian Press. (2019, February 19). Netflix expands Canadian footprint with movie production in 2 Toronto studios | CBC News. Retrieved from https://www.cbc.ca/news/entertainment/netflix-toronto-1.5024295

Toner, C. (2015, Sept 13). Big incentives at stake as Airbus’ plant comes online. Al.com. https://www.al.com/news/2015/09/big_incentives_at_stake_as_air.html 

Underwood, J. (2020, Sept 23). Airbus marks 5 years of aircraft production at the Alabama facility. https://www.madeinalabama.com/2020/09/airbus-marks-5-years-of-aircraft-production-at-alabama-facility/ 

Why film in Toronto. (n.d.). Retrieved from https://www.toronto.ca/business-economy/industry-sector-support/film/why-film-in-toronto/

ZipRecruiter. (2020, November 22). Airbus Mobile annual salary in Mobile, AL. Retrieved from https://www.ziprecruiter.com/Salaries/Airbus-Mobile-Salary-in-Mobile,AL