European Microcities, the case of Ventspils and Valmiera

Foreign Direct Investment (FDI) is closely linked to urban areas in most countries. The first point of entry for market-seeking investors into new countries is almost always in or around major cities, which are more effective locations for new businesses as they provide agglomeration benefits, such as access to infrastructure, skills, transportation hubs, support services, training and academia. Moreover, they provide proximity to government and its agencies, which facilitates entry negotiations, lobbying and insights into regulation. What usually investors or new businesses seek and look for in new cities is economic potential, business friendliness, connectivity, human capital and lifestyle, and cost effectiveness. Of particular importance is the presence of a highly skilled talent pool with a good skill set, in tune with the demand for skills in upcoming and promising economic clusters and industries.

As it is true that FDIs are beneficial for a country, it is indeed also true that in most cases the entry point is a major city. So, what chances do smaller, or micro, cities have to attract FDIs? That is the sense of the experiment conducted by Ventspils and Valmiera with the NextGen Microcities project funded by Urban Innovative Actions. Europe is for the majority constituted by smaller cities, so the lessons coming from NextGen have the ambition to inspire other micro cities in Europe to act and, most importantly, to attract FDIs in their corner of the world. But let’s take it one step at the time.

Interest in studying city competitiveness has sky-rocketed in the last few years, although the topic itself is far from new. Mayors and city leaders have long worried about the obstacles to job creation, competitiveness and economic growth that their cities confront.

Recent research has looked into the mechanic of the phenomenon, and what has become clear, is that firms are attracted to a specific set of local conditions. Moreover, what seems attractive varies entirely depending on firm strategies, sectors and the global value chain stage of the investment. It is therefore the matching between firms looking for locations and location characteristics that influence the decisions. And, again, it’s not the industry that matters so much for where firms locate, but it’s the type of activity (for example marketing or R&D) or the firm’s stage of development. In designing investment promotion strategies, it is important for city officials to remember that, when considering location decisions, investors will think through the entire lifecycle
of their prospective investments. In other words, they care not just about entry and start-up, but also the continuing operation of business, linkages with local suppliers and other organizations and, eventually, retention, expansion and diversification depending on the investor’s overall strategic business model.

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