Washington, DC – For decades, state and local governments have offered packages of tax breaks and other incentives before foreign companies in the hope of luring them to the US to create jobs.
A new study published by the Brookings Institute asserts that strategy is “deeply flawed” and that “mergers and acquisitions are driving foreign investment in the US, not the opening of new establishments.”
Civic leaders, in turn,” would accomplish far more by bolstering industrial amenities to retain overseas companies than by offering rich subsidies designed to attract new ones,” it said.
“Policies that narrowly focus on (new business) openings are probably not going to give you a big bang for your buck,” according to Devashree Saha, a senior policy analyst at Brookings and lead author of the report.
In 2011, only 26 percent of all jobs at US locations of foreign companies were created by the opening of a new factory, office or store, while nearly a third were generated by foreign takeovers of US companies, Saha said, citing data from the Organization for International Investment (OFII) that found that, over the past two decades, 84 percent of foreign companies that came to the US did so through an acquisition.
“Federal, state and local governments should invest more to build strong industry clusters by ensuring an adequate supply of skilled workers, modernizing US infrastructure and increasing investment in research and development, among other initiatives,” the Brookings study said.
According to Nancy McLernon, president of the Washington, DC-based OFII, state and local leaders often ignore foreign companies that come to the US through mergers instead of connecting them with suppliers, customers and skilled workers. “That aftercare is critically important,” she said.
The US share of global foreign direct investment plunged from 37 percent in 2002 to 17 percent in 2012, according to OFII. The US is still the worldwide leader, but emerging markets such as China have grabbed a growing share of foreign dollars.”By recognizing the importance of mergers and acquisitions, we can capture more of that market share,” said McLernon.
Foreign-owned companies employ about 5.6 million workers in the US, or about 5 percent of private payrolls, according to the Brookings paper. Their employment grew steadily from 1991 to 2000, but has stagnated since.
Yet, it said, the firms generate outsize benefits, accounting for a fifth of US goods exports and 15.4 percent of all private research-and-development in 2011 with foreign owners of US operations paying higher wages than US companies — $77,000 vs. $60,000, on average.