Foreign money stays home

Investors from abroad not bullish on America

Compounds U.S. economic ills

Loss of faith attributed to scandals, market slide

August 04, 2002|By NEW YORK TIMES NEWS SERVICE

Foreign investors, who once joined with confident Americans in a wave of spectacular acquisitions and business spending that helped power the 1990s economic boom, are turning cautious about the U.S. economy. That is compounding the current weakness and making it harder to achieve a robust recovery from last year's recession.

With fresh acquisitions almost nil, foreign direct investment in the United States - the technical name for acquiring a company or establishing one - plummeted last year to $124 billion and started out this year at an even slower pace, the Commerce Department reports. That is down from a peak of $301 billion in 2000.

Companies from abroad, after a big expansion here in the last two decades, have a large enough presence in the U.S. corporate sector to strengthen or weaken the economy by their behavior. The hope among economists was that they would renew their spending this year, given all the expectations of a rapid recovery and the bargain prices at which many companies, particularly in the high technology sector, could be purchased. But it has not happened.

"Foreigners were on the verge of investing again, until their confidence was upended by the corporate scandals and the slide in the stock market," said Mark M. Zandi, chief economist at Economy.com, a research firm. "And now they cannot get financing, and their own economies back home are weakening."

The steep falloff in foreign direct investment to set up shop in the United States contributed to an even more critical decline in capital investment by foreigners to expand or re-equip their operations here. That spending is off 15 percent to 20 percent, according to estimates by Joseph P. Quinlan, a global economist at Morgan Stanley, from its peak of $136 billion in 1999.

"The Europeans in particular came headlong into the American market with spectacular acquisitions and huge capital outlays for expansions that have not paid off," Quinlan said. "After that experience, they are going to tiptoe back."

Foreign companies did not just seek out U.S. enterprises to take over. They also put up factories and offices and spent constantly to expand their operations here, rapidly increasing their contribution to the nation's economic growth. Europeans led the charge in the 1990s, but the Japanese, despite a long period of stagnation at home, were not far behind.

No aspect of the U.S. economy is more vital for the recovery than capital investment, which is the spending for new factories, machinery, computers, offices, desks and all the other tools of production that contribute to economic expansion. Capital spending generates jobs and income as these tools of production are made and used. Such investments by foreigners have nearly doubled since 1986 as a percentage of total capital spending in the United States.

But now - instead of bucking the tide, as the Japanese often did in the 1980s by outspending their U.S. rivals - most foreign companies are pulling back in step with their hosts. And foreign companies seem even less likely these days to take chances than U.S. companies battered by the collapse of the technology boom and the corporate scandals. "That makes the recovery tentative at best," said Zandi, the economist.

The Random House division of Bertelsmann, the German media giant, is entering a no-investment mode. A new $300 million headquarters building at Broadway and West 56th Street in New York City will be ready for occupancy in the fall, and a warehouse in Crawfordsville, Ind., is being turned into a high-technology distribution center for children's books, at a cost of $100 million.

But once that is done, capital spending plans will be on hold. "We have what we need," said Stuart Applebaum, a Random House spokesman.

Sony lowers volume

Sony Corp., whose acquisitions of Columbia Pictures and CBS Records in the 1980s helped to stir a furor over what some U.S. commentators described as the imperial ambitions of Japan Inc., is far less aggressive today. With its home economy in recession, Sony has slashed capital spending by 40 percent worldwide during the past two years and has closed 15 factories, two of them in the United States.

"We are investing less here," Greg Dvorken, a Sony official, said, adding hopefully, "but more strategically."

To be sure, foreign companies are not simply pulling up stakes in the United States. Many are continuing to look for opportunities to invest in what they see as the most promising industries.

In Kentucky, for example, where the state's economic development officials have been particularly successful in attracting new operations, foreign investment has fallen off less than that of U.S. companies. In 1999, a peak year, 68 companies agreed to put manufacturing operations in Kentucky, 10 of them foreign, mainly Japanese and European. In the past two years, Kentucky has managed to attract fewer than 40 projects annually. But the smaller number still included seven or eight from abroad each year.

Waiting for upturn

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