Foreign direct investment in U.S.: It's surging, and for good reason

The Outlook

July 14, 1996|By Abbe Gluck

THE COMMERCE Department said last week that direct spending by foreigners to acquire or establish U.S. businesses rose 19.2 percent to $54.4 billion in 1995, marking the third straight year foreign direct investment has increased.

German investments topped the list at $14.2 billion, followed by Britain's $9.7 billion. But, while German investments increased fourfold since 1994, the British figures marked a 44 percent decline from a year earlier.

And, although investment increased, 1995's 19.2 percent jump fell far short of the 71 percent rise in 1993 and the 74 percent rise in 1994.

Will foreign direct investment (FDI) continue to rise? What makes the United States attractive? What are the positives and negatives of increasing FDI for American workers and companies?

Bruce Stokes

Senior fellow, Council on Foreign Relations, Washington, D.C.

The dollar has been undervalued. The deutschemark and yen have been higher and as a result foreign investors see their investments will go further in the U.S. than they used to. This is one of the trends that is already changing. In the last year, the yen has depreciated against the dollar by 30 percent. The deutschemark has declined about 10 percent against the dollar.

The Germans have also been very concerned about the future of their economy. The U.S. last year was the world's fastest-growing economy. That's attractive.

The trend likely to have the most staying power is that in manufacturing. It's increasingly accepted that you should produce products as close to the consumer as possible. That's a long-term trend that's likely to continue.

The upside is that it has allowed us to accelerate our competitive adjustment. In certain industries, foreigners have brought in new management techniques, new technologies, and all of this has been useful in improving our competitiveness.

The downsides are that a lot of the industrial plants owned by foreign investors are nonunion jobs, so it contributes to the stagnation of wages. There is a potential downside to the extent that in certain high technology areas you get a plant here but you don't get the technology transfer. They keep their best things at home.

Louis Alexander

Chief economist, U.S. Commerce Department

I think we had a big increase in 1995 that reflected high profit rates on investments already here. More importantly, there is growing recognition that the U.S. is the place to do business. Our labor and capital are more productive than most of our trading partners.

In an environment in which private and government savings are very low; it's very important to have this foreign direct investment. It augments our national savings.

Given that national savings is as low as it is, I'd rather have the foreign investment. Preferable would be to have the investment but to have it financed domestically.

I expect foreign direct investment to continue at a reasonably high level. I'm not sure it will necessarily go up.

Steve H. Hanke

Professor of applied economics, Johns Hopkins University, Baltimore

The main feature is the United States is still one of the most competitive free- market economies in the world. It's enormously flexible and generates a lot of jobs and a lot of output. We're also competitive on the wage front. Our labor market is one of the most flexible in the world.

[FDI] allows for greater levels of investment in America than would otherwise be the case. So we have higher labor productivity, higher wages and a higher standard of living.

It certainly beats the alternative: foreign investors divesting in the U.S., selling their assets and taking their money home.

I don't think there's any particular trend one way or another. The numbers were a little weaker last year, but you have to remember the international economy is weak.

Sven Oehme

Managing director, European-American Chamber of Commerce, New York

I think the main reason is that [the United States] is a very large market. There are a lot of customers here with high income compared to other places in the world.

The value of the dollar may make it easier to invest here. But I don't think that's really the most important thing. The value of European currencies has decreased now. I also tend to say that wages do not play a decisive role. One could argue they could just go to Mexico.

If you want to become a global player you have to be established in the market, and not just export.

Foreign investment creates jobs and the employees are Americans.

Foreign investment shows the world is coming together more and more, and I see no reason why it should not increase. Until now you see the major companies doing it and, increasingly, you'll probably see smaller and midsize companies following.

Pub Date: 7/14/96

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