World Still Sees Value In U.S. Investments
Despite the debt downgrade and recent upheavals in the stock market, foreign investors still consider the United States a good place to put their money for the long haul.
Never mind China, India and Brazil. The U.S. still attracts easily the most foreign direct investment — purchases of companies and property, as opposed to stock holdings or government bonds — of any nation in the world.
"The U.S. is still a $15 trillion economy — the largest market in the world, with a hugely productive labor force," says Adam Hersh, an economist with the Center for American Progress, a progressive think tank in Washington.
The amount of foreign direct investment flowing into any country tends to be highly cyclical, based on economic conditions. The amount coming into the U.S. is still down nearly a third from its peak in 2008.
But economists predict that despite the current spate of fiscal worries, the U.S. will remain an attractive place for foreigners to set up shop and hire workers — often at wages above those paid by purely domestic companies.
"Despite the recession and slow growth, there's still a lot of drive to get into the U.S. market," Hersh says. "The advantage right now is that, with the decline of the value of the dollar, it's a lot cheaper for foreign companies to buy U.S. companies and establish new branches."
Where The Money Goes
As would be expected in a mature economy, American companies invest more money in other countries than comes into the U.S. from foreign concerns. The gap in 2010 was about $150 billion.
"When you have an emerging economy that's really ramping up, like India and China, you're going to have foreign firms setting up shop there," says Mark Doms, chief economist for the Commerce Department. "That's the nature of the evolution of industrial economies."
In fact, 2010 marked the first year when developing countries took in more foreign direct investment than developed countries, according to the United Nations.
"This is the way this is supposed to happen," says Desmond Lachman, a fellow in international economics at the American Enterprise Institute, a conservative think tank. "Capital is supposed to flow from countries that are very mature to countries that don't have the capital but will offer high rates of return."
Last year, about $228 billion came into the U.S. — down considerably from the peak in 2008 of $330 billion. But economists say that reflects the global flight from investment during the Great Recession rather than any comment on the U.S. as an investment haven.
"Foreign direct investment does have a very strong cyclical component," Doms says.
Still A Good Investment
But the U.S. still tops the charts when it comes to receiving foreign direct investment. Last year, roughly 10 times as many dollars came into the U.S. from foreign investors as went to India, for example.
"It's by far the largest amount among all countries, including China and developing countries," says Karl Sauvant, who runs a program on international investment at Columbia University.
There are a number of reasons overseas investors want to do business directly within the U.S. For one thing, it makes it easier to gain access to the vast American marketplace, in terms of both distribution and marketing to customers and getting their feedback.
Direct investment in the U.S. also offers a hedge against protectionist measures such as trade tariffs. "Also, in the case of the U.S., there's the chance to dip into the talent pool of skilled labor here," says Hersh, the economist at the Center for American Progress.
The money comes mainly from other developed nations. According to a recent Commerce Department report, 84 percent of foreign direct investment into the U.S. is made by just eight countries — Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands and Canada.
"If you look at who invests, it's primarily the Europeans and Japan, because they are the countries where the companies are strong enough and competitive enough to invest in a highly competitive market like the U.S.," says Sauvant.
Importance To The Economy
Doms, the Commerce Department economist, says that the type of companies that can afford to invest in the U.S. run enterprises, such as manufacturing companies, that pay top salaries. As a result, workers at foreign-owned companies earn 30 percent more on average than those at domestically owned firms, according to Commerce.
"Foreign firms account for about 15 percent of U.S. research and development spending, while they only account for about 4.5 percent of employment," says Stephen Yeaple, an economist at Penn State University.
Despite the benefits to the U.S. economy, many policymakers remain nervous about foreigners controlling certain American assets. The Commerce Department recently opened a one-stop-shopping website to facilitate foreign investment, while nearly every state's economic development strategy includes means to entice foreign dollars, such as tax incentives.
But as Sauvant points out, every major merger and acquisition deal involving China triggers renewed debate in Congress. "It focuses very much on the fact that the lion's share of outward investment from China is actually being undertaken by state-owned enterprises," he says. "There's a suspicion that this involves not only commercial but political motives."
Lingering Domestic Concerns
A 2007 law requires federal review of any mergers or acquisitions involving state-owned companies or funds. That law was passed in response to a political tempest set off by plans for a Dubai-owned company to take over terminal operations at six U.S. ports. "When you read in the paper that a foreign company may run a terminal at a port near the 9/11 attack, people get afraid," Republican Sen. Lindsey Graham of South Carolina said in 2006.
The irony, Sauvant points out, is that the port leases were already held by a foreign entity. "There was no problem with an English company having control over U.S. ports," he says, "but there was a problem if an Arab country had control over U.S. ports."
Such concerns are now built into the regulatory framework governing foreign purchases of U.S. assets. Hersh says, however, that policymakers still have not thought through the implications of Chinese enterprises investing in strategic assets or core U.S. technologies.
But Hersh and other economists are convinced that China will be increasing its investment in the U.S. Despite Chinese complaints about U.S. fiscal management, China still wants to buy dollar assets, and buying companies is a way to diversity its portfolio. It's also a way for Chinese companies to move beyond production and into more profitable, brand-driven realms of marketing and distribution.
Growing Chinese interest is one reason economists expect foreign direct investment in the U.S. to grow, or at least hold steady.
"If I had to guess, I would predict that there will be no major change in the long-term trends due to the fiscal situation in the United States," says Yeaple, the Penn State economist.
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