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Though much still remains uncertain with the COVID-19 pandemic, one thing that is certain is that there isn’t a business or industry that hasn’t been affected in some way by it, whether good or bad. This includes the economic development industry. As with any industry, COVID-19 has posed a unique set of challenges for economic developers. After all, how can you grow the economy when business as usual becomes very unusual?

That’s not to say that everything COVID-19 has been bad news for business. In fact, some businesses, such as PPE manufacturing and e-commerce, are booming in the wake of the pandemic. Still, despite these successes, many communities are struggling to retain businesses and jobs. That’s where economic developers come in.

From rallying together to help small businesses to adjusting how they conduct site visits, economic developers around the country have had to think on their feet to help maintain the elusive “business as usual” under this new normal. We asked economic development leaders what impact COVID-19 has had on the efforts to preserve and grow the economy in their communities. Here’s what they had to say.

Business Retention

Across the country, economic development corporations have been scrambling to minimize the effects of COVID-19 on their communities. One major component of this has been business retention or assisting existing businesses with adapting to the many changes in how they must do business in a post-COVID world. Christina Winn, executive director of the Prince William County Department of Economic Development in Virginia, says at the onset of the pandemic, the county sprung to action, creating an Economic Development Recovery Task Force. The task force was comprised of 42 local business leaders, and it created programs to help businesses navigate the pandemic through initiatives such as grants, microgrants and temporary activity permits for outdoor dining.

Liberal, Kansas, received $132,000 in grant funds to assist businesses with working capital and inventory in case of a shutdown, says Cindy Wallace of the city’s Economic Development Department. Rick Clifton, president and CEO of the Covington County EDC & Business Development Center in Alabama, states that his county quickly established an emergency fund for local businesses.

The Indiana Economic Development Center was able to help Hoosiers secure $3.7 million in funding through the U.S. Small Business Administration and also assist businesses in the state apply for Paycheck Protection Program (PPP) loans, according to Jim Staton, the EDC’s senior vice president and chief business development officer. (Indiana Governor Eric Holcomb recently named Staton to serve as interim secretary of Commerce.)

In total, more than 83,000 Indiana businesses were granted over $9.56 billion in PPP loans. Indiana even launched its own grant program, the Small Business Restart Grant, which has awarded nearly $34 million in funding to nearly 2,000 businesses in the state. Of that, $5 million went to minority and women-owned businesses.

Though these funds and grants have by and large helped businesses remain open and able to pay their workers during forced shutdowns and dwindling customers, they’re not the only way economic developers have rolled up their sleeves to help business owners. In other communities across America, a big focus of economic developers has been getting information to local businesses—especially in the early days of the pandemic.

According to Lance Hedquist, city administrator of South Sioux City, Nebraska, education through the media and the governor’s office has been paramount to keeping local businesses informed. Chief Executive Officer Ronald E. Tolley, CEcD, of the Liberty County Development Authority in Hinesville, Georgia, cited similar measures, stating that maintaining constant contact with business leaders helped keep them abreast of new guidelines and restrictions while allowing his agency to keep close tabs on the local business climate.

However, while Liberty County’s businesses were all deemed essential and allowed to stay open, that has not been a universal experience. In Laredo, Texas, for example, the first two months of the pandemic were the hardest for the border city, due to the shutdown of the automotive industry. As the No. 1 ranked land port in the U.S., Laredo rebounded quickly, but many of the small local businesses that rely on cross-border tourism continue to struggle. According to Gene Lindgren, president and CEO of the Laredo Economic Development Corporation, some businesses had no choice but to permanently close, while others have been surviving on business stimulus.

Other cities which rely heavily on tourism have faced their own unique challenges. In Tunica County, Mississippi, Charles Finkley, Jr., president and CEO of the Tunica County Chamber of Commerce and River Park Museum and Aquarium, says that the initial shutdown negatively affected the county across all sectors. Tunica County, which relies heavily on the gaming and tourism industries, acted swiftly and was one of the first counties to mandate mask-wearing. This helped the county’s key industries rebound quickly, and today they have been able to resume concerts and other entertainment that complements casinos and other tourism-adjacent businesses.

The mask mandate was just the beginning for Tunica County, which was already in the process of diversifying its economy at the onset of the pandemic. However, the shutdown really hit home how important this move could be to the county. According to Finkley, the effects of the pandemic only served to reinforce the county’s plans to diversify.

Incentives

While by and large, the pandemic has not affected the incentives offered to incoming businesses in many communities, some reported marginal increases in offerings, and more willingness on the part of local government to offer incentive packages.

Side Effects

As for how the pandemic has changed the field of economic development, those changes have yet to be fully realized, although many experts we spoke to agreed that virtual site visits and meetings are likely here to stay. Says Wallace of the Liberal, Kansas, Economic Development Department: “More and more site selectors are asking for virtual tours of sites and buildings, and economic developers should be ready to learn how to do these.”

Winn of Virginia’s Prince William County Department of Economic Development believes that real estate will be affected, as businesses transfer their workforce to work-from-home. Office spaces will become increasingly vacant, while workers may reevaluate their home location and move somewhere that isn’t necessarily convenient to commuting to an office. Shane Shepard, Economic Development director with the City of Lancaster, Texas, agrees, noting that the industrial and distribution sector of real estate in Lancaster is growing quickly, with a new Walmart distribution center slated for the city that will create 1,300 jobs, and DSV Logistics Regional Headquarters that will bring approximately 450 jobs.

Brad Reams, the director of the Great Plains Industrial Park in Parsons, Kansas, believes that the pandemic will cause “a restraint on international business for a couple of years” due to a heavily disrupted supply chain. He also believes small business growth will be stalled for at least five years, as many small businesses are bearing the brunt of the economic damage in their communities.

Business Status

As Reams alluded to, despite their best efforts, some businesses were still lost to the pandemic, and among those that remain, tough choices had to be made to stay in business. At Great Plains Industrial Park, as with many other places, some manufacturers were forced to lay off or furlough workers. Further complicating matters, travel restrictions have created challenges to attract new business.

Over in Prince William County, some theaters, malls and retail establishments were forced to close, while Wallace says some oilfields in Liberal, Kansas, shut down due to low oil prices. Still, Liberal has at least one ethanol production facility, Arkalon Energy, that is currently expanding. Furthermore, some businesses in Liberal have shifted focus, including one business that has begun taking steps to manufacture grain neutral spirit, a form of alcohol that can be used in hand sanitizer.

In Elko, Nevada, Sheldon Mudd, executive director of the Northeastern Nevada Regional Development Authority, says that while some small businesses have shuttered, the local mining industry is booming due to extra work they’ve received due to supply chain issues from foreign entities. In fact, the mining industry in Northeastern Nevada has stepped up to the plate to help other businesses. Nevada Gold Mines and the Rural Nevada Development Corporation recently teamed up to create the I-8 Loan Fund, infusing it with $2.5 million to help local businesses by providing them with the opportunity to borrow up to $100,000 at 2 percent interest to assist them during the pandemic. Furthermore, Elko has seen businesses such as sporting goods and firearms retailers increase sales over the past year.

The Impact of Vaccines

While most communities are not yet seeing any movement due to the widening availability of vaccines, many economic development professionals remain optimistic.

Will Williams, president and CEO of the Economic Development Partnership in Aiken, South Carolina, says his biggest challenge right now is the workforce because his region has boasted some of the lowest unemployment rates in the state since July of 2020.

Another community where a shortage of workforce is an issue is South Sioux City where, according to City Administrator Hedquist, hundreds of jobs are available despite the pandemic.

Echoes Ronald E. Tolley of Liberty County: “All of our companies are still in business, and some have increased employment.” These communities may be the exception, not the rule. In the end, only time will tell what vaccines and a hopefully flattening curve will do for economic development.

The Final Word

While each community’s experience with COVID-19 has been as diverse as the communities themselves, there has been an underlying theme of perseverance and grit among economic development professionals, striving to both retain existing businesses and attract new businesses during a major pandemic.

Winn, for her part, feels as though looking ahead, business retention will be a key factor in economic development, and economic developers must work to stay ahead of the trends to help local businesses pivot at a moment’s notice.

Over in Covington County, Rick Clifton believes that the shutdown was a “total disconnect between government and business,” a disconnect that has caused damage that we may never recover from.

In Liberal, Wallace believes economic developers should brace for a new normal. “I keep hearing ‘when things get back to normal.’ Whatever you describe as normal may never be the same again.”

Tunica County, Mississippi’s Finkley has a more optimistic perspective, believing businesses will not only rebound but do so better than before the pandemic, thanks to the Herculean effort of economic developers. “I would like to also commend my fellow economic developers and the hard work they are doing to help businesses in their area recover,” he says.

Ultimately, as these economic development professionals agree, the impact the pandemic has had on the industry will likely be felt for months or even years to come. Whether that impact continues to stumble or begins to soar remains to be seen but in the words of Brad Reams, no matter the community “this pandemic has challenged us.”

A confluence of economic, political, and logistical issues is coming together that is changing the dynamics of doing business internationally for many U.S. companies. The result: China may be falling out of the top spot as a location for American companies looking to establish foreign operations, with several other low-cost countries vying to replace it. But the situation is complicated. American companies that already have operations in China are not leaving, at least not in large numbers.

The complex dynamics that are influencing U.S. companies considering establishing foreign operations include the fact that certain countries are more advantageous than others for certain industries. While the popular perception is that American companies take their manufacturing abroad primarily to save labor costs, in reality, they often establish foreign operations to serve growing foreign markets. If you have a burgeoning customer base in Germany, it may be more cost-effective to manufacture your goods in Poland than in Thailand. And if your company is in the technology space, China still may be a better destination for you than if you manufactured consumer goods.

In other words, there is no one-size-fits-all solution. American companies eyeing foreign operations must do their homework and talk with advisors both at home and abroad to determine the best course. Once they do their homework, most companies will find that four broad trends are driving decisions about establishing foreign operations these days.

Digital Game Essential

First, due to the COVID-19 pandemic, remote work has become a worldwide phenomenon. The more digital and cloud-based your operations are, the more successful you will likely be with your foreign operations. Some general guidance would include:

-Before considering going abroad, evaluate your company’s commitment to technology and determine where upgrades should be made.

-Learn about the technology infrastructure in your target country and make sure it can support your company’s technology profile and needs.

-Don’t forget about workers; you’ll need to ascertain the level of technology skills possessed by your potential new workforce.

Incentives Change with Landscape

Second, every country has a set of incentives in place to attract foreign companies to their shores. Most incentive programs favor certain industries above others.

The Chinese government currently has highly preferential policies to encourage technology businesses to locate in China, especially those related to artificial intelligence and semiconductors. While China is falling out of favor with other manufacturers, if you are operating in one of its favored industries it may still be worth consideration.

While technology companies still find China a viable place to establish or maintain operations, traditional manufacturers in such industries as textiles and apparel are looking elsewhere. Wages in China have doubled in the past 10 years, so labor costs – once the dominant attraction for American companies – no longer provide an advantage.

Consequently, countries like Thailand, Cambodia, Vietnam, India and Mexico are rapidly rising as sites for American companies due to many of the same factors that once made China attractive. Low labor costs, skilled workforces and fewer regulations are attracting American companies.

Moreover, because of the rising costs in China as well as increasing political tensions between China and the U.S., other countries are stepping up their incentives for American companies to locate within their borders.

Each country has unique advantages and disadvantages, and U.S. companies need to weigh the value that these locations would bring depending upon their industries, products and services.

For example, Mexico offers the benefit of being close to American markets, reducing shipping costs and avoiding tariffs. In Southeast Asia, Vietnam makes it easier than China to move goods into and out of the country and offers the most knowledgeable workforce. India is not far behind in terms of workforce. However, India prohibits the export of many goods to protect supplies for its own massive population. Currently, the material used to make surgical masks cannot be exported out of India – a significant disadvantage for American companies with Indian operations that tried to pivot to respond to the worldwide need for protective equipment during the COVID-19 pandemic.

Companies Re-evaluating Supply Chain Strategies

Third, the supply chain and the ease with which goods move in and out of countries must be a part of the evaluation process when establishing operations abroad.

For the most part, U.S. companies moving to the emerging Asian countries and Mexico are those that are establishing foreign operations for the first time. American companies with operations already in China are staying put for now, even though steep tariffs that the U.S. has placed on goods shipped from China are impacting their profitability.

In part, they are staying in China due to supply chain issues. When large companies like Apple went to China, their supply chains went with them. Companies that supply those large manufacturers find it more cost-effective to be where they are. But if a large company decides to pull out of China, its supply chain remains there, and it must deal across borders with suppliers. Hence, companies that are already planted in China – even those much smaller than Apple – can find it very hard to leave.

U.S.-China Trade War

The fourth trend is the ever-increasing tariff war between the U.S. and China, which has significantly impacted American companies looking to establish operations in Asia. Companies already located there are seeing their profitability drop because of the tariffs, and deterioration of the political relationship between the two countries – complicated by COVID-19 – has contributed to China falling out of favor with American companies.

The increasing tensions between the U.S. and China also have started to impact immigration rules, making it difficult for some U.S. companies to get their American employees into China. This is a real-world example of how geopolitical considerations can impact the day-to-day operations of American companies.

Beyond these four trends, U.S. companies considering establishing operations abroad to serve growing global markets should look at several important factors:

Location of customer base

The location of your international customer base is a big driver in determining which country to choose for your foreign operations. You want to minimize transportation and shipping costs, and you also need to consider where your supply chain is concentrated.

Entity structure

Creating a separate entity from your U.S. entity will help keep the domestic and international operations distinct, protecting you from legal and liability issues. A subsidiary structure may be best, depending on the type of operation you are establishing.

Consider the local laws in each country that govern foreign operations, and how they may impact you. For instance, in China and India it’s very difficult for a foreign company to own 100% of a business, depending on the type of company and industry. Those countries, and several others, require foreign businesses to set up entities with at least some minimal local national ownership.

Taxes

Your entity structure will largely determine how tax-efficient your foreign operations are from both the U.S. and local countryside, but it is still advantageous to locate in a country with a low-income tax rate.

Beyond income tax, you need to consider the tax consequences of repatriating cash back to the U.S.

If you select a country with which the U.S. has a tax treaty, you will find a more friendly attitude toward repatriation. When repatriating funds from foreign operations, withholding taxes often can reach 30%, but if there’s a tax treaty in place the repatriation cost can sometimes be reduced to zero.

Taxes can’t always be the driving consideration in deciding where to locate a foreign operation. There are a lot of moving parts, including workforce, overall costs, logistics (can you get a product in and out easily), quality of internet and technology infrastructure, immigration policy for your American workers, and more.

If you are considering establishing a foreign operation for your company, reach out to your Windham Brannon advisor. Even if you expect to wait until after the global COVID-19 pandemic is safely behind us, now is the time to start planning.

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This article was written by International Tax Partner, Nicole Suk

BUSINESS AS UNUSUAL: THE IMPACT OF COVID-19 ON ECONOMIC DEVELOPMENT