On the third floor of a nondescript office building in a busy commercial strip in College Park, Maryland, foreign-owned start-ups can get a boost at the Maryland International Incubator, a first-of-its-kind incubator focused exclusively on foreign companies settling in the United States.
Since its start in 2009, the incubator – a partnership between the University of Maryland and Maryland state officials – has helped launch more than 30 foreign-owned ventures in the state. It’s also currently working with 18 companies from 9 different countries, including China, Japan, India, Israel and Romania.
Many of these firms are part of larger concerns, such as Glodon, Inc., a Chinese-based company that develops construction project management software. While Glodon is a major company in China – where its stock is publicly traded and it employs 3,000 employees – it had no American presence until it opened a U.S. subsidiary with the incubator’s help. Other companies are much smaller, such as VitaScientific, a biomedical supply company that sells specialized laboratory testing kits assembled in the incubator building’s basement.
What all of these firms have in common, says Kai Duh, an energetic man with salt-and-pepper hair who has been the incubator’s director since its launch in 2009, is their potential to bring foreign investment to Maryland. Because so many of the incubator’s tenants are offshoots of established foreign firms, he says, they also come to America with capital. “They typically come with $1 million in cash,” he said. “That’s cash into the economy, and they spend when they first come.”
This potential for investment is why the State of Maryland’s Department of Business and Economic Development is a founding partner of this incubator, along with the University of Maryland’s Technology Enterprise Institute.
Like many states, Maryland is looking far beyond its borders to help grow its economy by wooing foreign investment.
According to the Organization for International Investment (OFII), investment by foreign firms in the United States (“foreign direct investment” or “FDI”) totaled $353 billion in 2015. Cumulatively, says OFII, foreign firms have invested $2.8 trillion in the U.S. economy, with the biggest amounts of money coming from Japan, the United Kingdom, Canada, Ireland, and the Netherlands.
The U.S. Commerce Department reports that net U.S. assets of foreign companies totaled $4.6 trillion in 2013, and in 2011, foreign affiliates accounted for 15.9 percent of U.S. investment in private sector research and development. These companies also employ 6.4 million Americans, says the Commerce Department, and pay them, on average, 33 percent more than their U.S.-based counterparts.
It’s perhaps no wonder, then, that attracting foreign direct investment (FDI) is a significant piece of Maryland’s economic development strategy. “We aim to be the premier global gateway to the American market,” says Signe Pringle, Director of Maryland’s Office of International Investment and Trade.
Foreign firms have invested $2.8 trillion in the U.S. economy and employ 6.4 million Americans.
In addition to efforts like the international incubator, the State of Maryland also operates 11 foreign offices, including an outpost in Shanghai, China, that opened in 1996. The state plans to open another two to four 4 offices over the next year. According to Pringle, roughly 900 foreign-owned firms currently operate in Maryland, and another 10 to 15 new companies settle in the state each year.
Pringle says many of these jobs tend to pay higher salaries because they are clustered in high-tech industries – including advanced manufacturing – that demand skilled workers. Moreover, she says, “We have also found that foreign companies tend to invest more in research and development and worker training and strengthen the state’s export growth.”
While the term “incubator” may conjure up visions of sleek Silicon Valley facilities with glass-enclosed spaces, lots of exposed brick, Foosball tables and gallons of free Red Bull, the Maryland International Incubator is strictly functional – standard-issue cubicles, a row of private offices and blue-gray industrial carpeting throughout.
What the incubator focuses on instead is offering companies the basic and practical array of services they need to get their start in a foreign country – such as registering the company with the State of Maryland and opening a bank account. “It’s not easy for a foreign entity to open a bank account,” says incubator director Duh. “If you take $10 million to Citibank, they won’t just open an account for you. They need to know where the money comes from.” A firm’s affiliation with the incubator, says Duh, helps reassure bank officials that the company is legitimate and serious about doing business in the state.
Each company recruited to the incubator has been thoroughly vetted, says Duh, not just for its legitimacy but for its potential strategic value to the state. “The mission of our incubator is to help foreign high-tech companies come to Maryland,” he said. “But we’re also careful not to develop competitors to Maryland’s existing corporate citizens.”
Another service the incubator provides to its tenants is a pool of potential workers – a chance to hire paid interns from the University of Maryland. The vast majority of these interns, says Duh, are foreign students whose visas don’t allow them to take on other job opportunities while they are here. But they may also speak the language of the foreign company’s executives. “One of our companies wanted Russian-speaking interns,” said Duh. “We contacted the engineering school and got 24 resumes, and we contacted the business school and got 12 resumes. Out of 36 candidates, they hired four.”
“It’s an opportunity the students value,” Duh continues. “They want to demonstrate their skills for a company, and some of them end up working for the company and being sponsored for a visa.” One of these students was Duh’s own assistant, who was hired away by one of the incubator’s firms.
The incubator charges its tenants a fee that is roughly equivalent to the going rate for commercial office space. It’s not enough to cover the cost of the additional services the incubator provides, but Duh says the operation covers these expenses by offering online executive education seminars for budding entrepreneurs, both foreign and in the United States. As a result, the incubator is financially self-sustaining, says Duh, and receives no direct subsidies from the State.
Sean Yu, the founder of the lab supply firm VitaScientific, said the incubator offers other perks, such as access to surplus university equipment, connections within the University of Maryland and the camaraderie of being around other start-up firms. “You need fertile ground to grow a company,” he said. “Without a set up like this, it’s very hard to start.”
Competing for Capital
Maryland’s wholehearted embrace of foreign markets and foreign capital is mirrored by similar efforts from the U.S. Commerce Department, which launched its own initiative to attract foreign investment – called SelectUSA – in 2011. SelectUSA’s website makes no bones about its aggressive sales pitch of America as an attractive destination for investment. In addition to touting America’s skilled workforce, its competitive and business climate, its consumer base and its ability to protect intellectual property, the site also features a map where prospective investors can browse the various tax incentives and subsidies by state, as well as a list of available federal resources and programs.
According to a Commerce Department report on the program’s efforts, SelectUSA helped facilitate more than $18 billion in new foreign investment in the two years since its launch.
But while the United States remains the world’s number-one investment draw – for now – other countries that see the benefits of foreign investment are becoming increasingly aggressive in competing for capital. In their book Innovation Economics, authors Stephen Ezell and Robert Atkinson chronicle such tactics as South Korea’s giveaways of free land to investing companies, and India’s offers to allow companies to operate tax-free for as long as 10 years.
“We’re not just competing with neighboring states, we’re competing against other countries,” said Maryland’s Pringle. This is why incubator director Duh sees his work as both important and unique: “We want to create a complete economic ecosystem for start-ups to survive.”
Anne is Vice President of Domestic Policy at the Progressive Policy Institute and a contributing editor at the Washington Monthly.