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COMING AND GOING, THE U.S. WINS FROM FOREIGN DIRECT INVESTMENT

COMING AND GOING, THE U.S. WINS FROM FOREIGN DIRECT INVESTMENT

Think of it as strength through diversification

Foreign direct investment (FDI) is a vehicle for gaining entry into growth markets. Companies might decide the best approach is to acquire products and technologies already in the target market, or to secure distribution and retail channels for their existing products, or they might decide to launch greenfield production to serve the local or regional markets, or some combination. Whatever their approach, their goal is to generate additional sales. Investors reward companies that diversify their sales and income. Multinational companies typically look to grow global market share, not just shift market presence.

For the host economy, FDI often brings new well-paying jobs, an expanded tax base (if they don’t offset with too generous a tax holiday), stronger productive capacity, transfer of technological expertise, improvements in infrastructure, and stronger economic growth. In theory and in general, it’s a win-win. In practice and locally, it will depend on each deal.

Companies are not multinational, they are “multi-local”

A.T. Kearney produces an annual Foreign Direct Investment Confidence Index that surveys investor intentions. More than 75 percent of companies say they invest to be close to market, putting them in a better position to cater to local culture and customs, navigate the idiosyncrasies of the local business environment, and embed themselves in the community as a local partner with deeper roots beyond their core business.

Large cities and megacities are the most popular destinations for FDI – nearly two-thirds of the companies surveyed have more than half their FDI in cities, attracted by the concentration of talent, clusters of R&D or related activities, and availability of infrastructure. Fifty-nine percent of respondents said their companies begin their FDI assessments at the regional or city level, rather than take into account national considerations.

Many large cities have built their economic reputations on particular sectors. For example, an information technology investor looking at Asia would identify Hyderabad or Bangalore in India as among their top targets. Companies looking to locate an overseas headquarters in cities with strength in business services might look to Singapore, Hong Kong or Dubai first.

States and cities compete for foreign direct investment – why?

Countries, states and localities compete for capital by offering streamlined administrative procedures, incentives like tax breaks and grants, and by establishing special economic and free trade zones. Many U.S. states have permanent investment promotion offices overseas. South Carolina has offices in Shanghai, Tokyo and Munich. Florida maintains offices in 13 countries.

U.S. states and cities work hard to attract foreign investors because of the benefits they bring to local economies. The U.S. affiliates of majority-foreign owned firms employed more than seven million American workers in 2016, invested $60.1 billion in U.S.-based research and development, and contributed $370 billion to U.S. exports.

According to OFII, the trade association that represents foreign investors in the United States, international companies employ 20 percent of America’s manufacturing workforce and 62 percent of the manufacturing jobs created in the past five years can be attributed to international companies investing in the United States.

foreign direct investment FDI employment revenue

What goes out also comes in – how the U.S. wins with overseas FDI

There are two sides to the FDI coin, and the U.S. economy is positioned to win whether the FDI is coming or going.

A common perception exists that American companies who invest overseas are sell-outs, moving jobs in search of lower wages, and that the host country is the only beneficiary.

Politicians stoke this fear. The rhetoric will only heat up in the run up to the 2020 presidential election, but the data tell a surprising and different story.

In fact, economists Oldenski and Moran, who are leaders in studying FDI, have found that increased offshoring of manufacturing by U.S. multinationals is actually associated with increases in the size and strength of the manufacturing sector in the United States.

More specifically, they found that when a U.S. firm increases employment at its foreign affiliate by 10 percent, employment by that same firm in the United States goes up by an average of four percent, capital expenditures and exports from the United States by that firm also increase by about four percent, and R&D spending increases by 5.4 percent.

The idea that outward FDI is associated with expansion of economic activity at home feels counterintuitive, and critics would rightly point out that the overall result for the U.S. economy doesn’t mean there isn’t labor dislocation of some kind.

Demand for certain types of production occupations might increase (e.g., engineering or sales) at the expense of workers with skills that are less or no longer in demand. Or, some local labor markets might be adversely affected despite overall gains, or some manufacturing subsectors may wane as others rise.

But on balance, across the U.S. economy, Oldenski and Moran conclude that the foreign operations of multinational firms tend to be complements, not substitutes for domestic U.S. operations.

Myth busting on foreign direct investment

Global FDI flows are waning

Globally, companies are engaging in less FDI. For the third year in a row, global FDI flows have fallen. In 2018, FDI flows dropped 19 percent from to $1.47 trillion to $1.2 trillion.

Developed country recipients saw the biggest hit with a 37 percent decline. Part of the explanation is fewer megadeals and corporate restructurings – the large value of those in previous years inflated the overall value of FDI flows.

Tax reform in the United States has also set in motion a shift in FDI flows. Most outward FDI from U.S. companies is in the form of more than $3.2 trillion in retained earnings held overseas. Changes to the U.S. corporate tax regime prompted a 78 percent increase at the end of 2017 in companies reinvesting overseas earnings in the United States. The inward investment took the biggest bite from FDI into the European Union.

Another major factor was China’s FDI outflows which reversed for the first time since 2003, declining 36 percent largely in response to the government’s restrictions on capital outflows directed to investments in assets such as real estate, hotels and entertainment facilities.

Wait and see?

According to A.T. Kearney’s annual Foreign Direct Investment Confidence Index, 77 percent of responding companies said FDI will be more important for corporate profitability in coming years and 79 percent said they intend to increase FDI over the next three years, pending their assessments of the availability of quality targets, the macroeconomic environment, and their availability of funds.

But in reality, multinationals may be taking a wait and watch stance as trade tensions between the United States and China escalate. At the same time, a number of countries have implemented tighter screening of proposed investments, citing national security concerns associated with foreign ownership of strategic technologies and other assets. Overall, the investment policy climate is becoming less, not more, favorable with greater restrictions and regulations than liberalization.

Investor confidence in the United States is still strong

On A.T. Kearney’s index, developed markets dominate 22 of the top 25 spots on the list of countries considered the top targets by corporate investors. Despite trade tensions and risks of economic downturn, these economies offer relatively stable regulatory environments, legal protections, skilled workers and the availability of technological and innovation capabilities, all qualities multinational companies seek in FDI targets. Size and market potential matter too. China, India and Mexico are emerging markets where multinationals must be players to be globally competitive.

For the seventh year running, the United States tops the index as the most attractive target for FDI. FDI inflows to the United States fell 18 percent in 2018, part of a broader decline in FDI flows to developed markets and fewer large mergers and acquisitions, but the United States still receives more FDI than any other country.

China, which held the top spot from 2002 to 2012, dropped to seventh. European countries hold 14 of the top 25 spots. The only emerging markets on this year’s list were China, India, Taiwan and Mexico. Singapore holds the 10th position and South Korea the 17th spot. Notably, the United Kingdom is holding steady in fourth place, despite the uncertainties surrounding Brexit.

The transition from physical to digital

FDI accounts for 39 percent of capital flows for developing countries as a group and around one-quarter for the least developed countries. FDI is less volatile than liquid financial assets and more resilient during global economic and financial downturns.

Unfortunately for developing countries particularly outside Asia, there’s not only less foreign direct investment to go around, the type of FDI is slowing changing too. As digital technologies become more diffuse, companies are shifting to “asset light” forms of international production. In more cases, companies no longer need the same level of physical production assets or employees overseas to achieve growth. The drop in the value of announced greenfield investments may be a sign that growth in global value chains is stagnating.

A more nuanced conversation in U.S. politics

Global FDI flows are critical for growth in developing and developed markets alike, including the United States. Multinationals are stronger in their home economies when they diversify, and we should seek to have a more nuanced conversation about the role of FDI in the U.S. economy – including its impact on job creation and job shifting – rather than simply demagoguing the companies who invest overseas or the foreign companies who invest here. An evidence-based and comprehensive policy dialogue would better serve American workers in the long run.

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Key resources:

  • To keep track of global FDI flows, consult UNCTAD’s annual reports which include statistics and analysis of investment policy trends. Access the 2018 Global Investment Report here.
  • Economists Theodore Moran and Lindsay Oldenski debunk some prevailing myths about the strength of the U.S. manufacturing base and the role of FDI in an excellent policy brief found here.

 

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

geopolitical

How to Successfully Conduct Global Business During a Time of Geopolitical Instability

The way organizations approach global commerce is undergoing a radical change. Geopolitical instability is slowing growth in a volatile global economy as organizations are forced to adapt their tactics, making complex decisions that increase operational costs and, if mishandled, make them less competitive in an unforgiving business landscape. So, what can organizations do to navigate this ‘new normal’? As an association whose members deal with small- to medium-sized enterprises (SMEs) at the local level on a regular basis, we at the World Trade Centers Association (WTCA) released our second annual WTCA Trade and Investment Report: Navigating Uncertainty, in partnership with FP Analytics. The report focuses on how cities around the world are optimizing trade and investment opportunities despite challenges, both economic and political, and how SMEs benefit from these strategies

The report shows that the majority (83%) of business leaders interviewed believe that global economic uncertainty will stay at its current elevated levels (30%) or get worse (53%) in the coming year. However, 69% of business leaders polled are cautiously optimistic about the coming year, as the report shows that resilient cities—defined as those that outperform their countries during economic downturns—have Foreign Direct Investment (FDI) as a percentage of GDP twice as high as non-resilient cities.

Despite their differences in location and culture, resilient cities have a set of commonalities that allow trade and investment to thrive. These characteristics include diversified economies and strong service sectors. In fact, resilient cities on average saw the share of services in GDP grow by 3.3% over the last five years; more than double the pace of non-resilient cities. Their populations are largely educated, with many inhabitants having college or other advanced degrees, as well as diverse, with higher rates of foreign citizens. On average, foreign citizens represent 11.6% of resilient cities’ populations, which is one-quarter higher than that of non-resilient cities. These cities also tend to have strong transportation infrastructures, including both airports and public transit options. 

Building Resilience 

The report also identified specific tactics used by resilient cities that organizations, including business and civic leaders looking to improve their own city’s resilience, can mirror. 

In resilient cities, key stakeholders are prioritizing direct diplomacy, meeting face-to-face to navigate obstacles created by regional or national governments. By cutting through political red tape, organizations have been able to create new meaningful relationships with each other and strengthen existing ties. The ability to engage in a direct dialogue creates efficient business interactions that are beneficial to all parties. For example, World Trade Center (WTC) Arkansas has organized multiple diplomatic trade missions with Mexico. As a result, its exports to Mexico are growing 3.6 times faster than to any other country. 

Cities are also proactively building programs to attract and retain skilled foreign citizens. For example, Twente, located in the eastern Netherlands, is evolving from a region focused on machine-building and textiles to one with an economy driven by high-tech systems. To retain young, skilled workers from across the globe, WTC Twente created an Expat Center that offers a range of services, including Dutch language courses, visas and work permits, housing, and support for families, as well as social events with the goal of enticing technically-skilled foreign workers and their families to integrate into the community for the long term.

Turning Obstacles into Opportunity

Economic turmoil affects everyone, but not always in the same way. For some, the current geopolitical reality presents opportunity. City leaders are adapting to these geopolitical changes and establishing themselves as cost-efficient and low-risk trade and investment partners to capitalize on the situation. FDI is being redirected towards these agile cities who have recognized the advantages created by this global uncertainty, and supply chains are shifting and realigning based on new benefits. Competition for FDI is escalating (global FDI slowed 27% over the last year, according to the OECD) and the private and public sectors need to work hand-in-hand to create attractive fiscal and tax environments, and institute policies that will attract business. 

Cities are also increasingly investing in both high-tech industries, and SMEs to ensure they are able to attract FDI at a time when this investment comes at a premium. These high-tech industries will lead to future growth and play a central role in the next industrial revolution. Additionally, partnerships with major research institutions are being used to create new technology and modernize existing tech. For instance, in Delaware, private agriculture technology or “ag-tech” companies have partnered with universities to pioneer better technology in seeding, pest management, antibiotic reduction, and biopharmaceuticals. 

SMEs are well suited to adapt quickly in the face of change and evolving economic realities, which enables them to capitalize on changing conditions. However, their size can prevent them from competing on a global scale. To combat this, programs that help SMEs move forward given limited resources can be critical in encouraging and nurturing growth opportunities. As an example, WTC Toronto created the Trade Accelerator Program (TAP), a six-week program that connects SMEs with export and business experts to train them on developing export plans fit for the global market. This program has now been adopted by several other WTC members in Canada, including Vancouver and Winnipeg. 

At the moment the global economy is relatively unpredictable, and increasing risks for businesses have made sound strategic business planning more difficult at a time when it is absolutely vital. Knowledge, preparedness, and agility are key traits cities and businesses need to acquire in order to achieve success and growth. Despite the prevailing conditions, with a strategic approach and tactics proven to increase resilience, organizations can optimize current trade and investment opportunities and set themselves up for success now and in the future.

To review the full 2019 WTCA Trade and Investment Report: Navigating Uncertainty, including commentary from WTCA Members, visit www.WTCAReports.org

U.S.-CHINA FDI GOES COLD WHILE VENTURE CAPITAL HEATS UP

Two-way FDI is plummeting

With trade talks between the United States and China running hot and cold, it’s irresistible to get sucked into daily U.S.-China trade war updates with its unexpected tariff announcements. In the bigger picture, the underlying uncertainty caused by ongoing trade tensions between the United States and China is having a large impact, particularly on two-way foreign direct investment (FDI).

So far this year, combined two-way U.S. and Chinese FDI has totaled just $9.9 billion— its lowest six-month value in five years, according to research firm Rhodium Group. At its peak in 2016, combined FDI totaled over $60 billion a year.

The slow start in 2019 is a continuation of a rough year for FDI in 2018, when flows between the United States and China dropped 60 percent year-over-year. Rhodium Group cites a deteriorating political relationship and regulatory intervention as two big reasons for the sharp decrease in investment.

U.S.-China FDI troubles are part of a bigger trend happening across the world, as global foreign investment flows fell to their lowest levels since the financial crisis in 2018, according to UNCTAD. Global FDI flows totaled $1.2 trillion in 2018 – down 20 percent from 2017.

U.S.-China FDI flows over last 30 years

Invested in each other

With trade tensions rising to a fever pitch, it may be hard to remember that American and Chinese companies have invested a lot in each other’s success over the last 30 years – over $420 billion, to be exact. U.S. FDI in Chinese industries adds up to over $275 billion since 1990. While Chinese investment in the United States is almost half of that at $148 billion, according to Rhodium Group’s U.S.-China investment tracker.

U.S. China FDI totals 420 billion

Beyond the sheer volume of money invested, foreign companies bring much more intangible value to the table. In his book, “Developing China: The Remarkable Impact of Foreign Direct Investment,” Michael Enright used an economic impact analysis to better understand the full impact of FDI in China. Enright estimates that foreign companies have contributed as much as one-third of China’s GDP and 27 percent of China’s employment through the accumulated impact of their investments, operations and supply chains in China. American companies alone contributed 4.2 percent of China’s GDP and nearly three percent of Chinese employment in 2014, according to Enright’s analysis.

Enright also pointed out that foreign companies have helped China develop by creating suppliers and distributors, introducing modern technologies, improving business practices, modernizing management training, improving sustainability performance, and helping to shape China’s legal and regulatory systems.

Chinese companies operating in the United States also bring benefits. As the second-fastest growing source of FDI in the United States in 2016, Chinese-owned firms supported nearly 80,000 U.S. jobs, invested nearly $600 million in innovative R&D, and expanded U.S. exports by $4.7 billion in 2016, according to Select USA.

Growing regulatory hurdles

The ongoing U.S.-China trade war is not entirely to blame for the recent dive in FDI. Both nations have stepped up regulatory oversight of foreign investment in recent years. Following the 2016 peak of global outbound investment by Chinese firms, the Chinese government tightened its grip on outbound capital flows, drastically slowing outbound investment by Chinese firms.

In the United States, the Committee on Foreign Investment in the United States (CFIUS) has stepped up investment screening of Chinese FDI, especially in sectors related to national security like infrastructure and information and communications technologies. Rhodium Group estimates $2.5 billion was left on the table in 2018, as Chinese investors abandoned deals in the United States due to unresolved CFIUS concerns.

The U.S. investment landscape may get more complicated for Chinese companies to navigate in the near future, as investors await the implementation of the new Foreign Investment Risk Review Modernization Act (FIRRMA) and Export Control Reform Act (ECRA), both expected to increase U.S. regulatory oversight of foreign investments.

Foreign direct investment by American companies in China has also decreased, but not as drastically as for its Chinese counterparts. Yet, concerns about technology leakage have led to a cooling in U.S. FDI in China’s technology sectors.

FDI cooling, venture capital heating up

At the same time FDI is slowing, venture capital investment is becoming an increasingly bigger piece of the U.S.-China investment puzzle.

Chinese VC investment in the United States has increased dramatically since 2014, with Chinese-owned VC funds contributing an estimated $3.6 billion to U.S. companies over the course of 270 different funding rounds in 2018. This is just a fraction of what U.S.-owned VC firms have spent in China, but an important trend. U.S. VC firms invested a record $19 billion in Chinese start-up companies last year, according to Rhodium Group.

US venture capital firms invested $19 billion in Chinese startups

Firms on both sides of the world have utilized VC investment to invest in companies in sectors where FDI has faced growing regulatory scrutiny. Chinese VC firms have invested in semiconductors, for example, while U.S. VC Firms have invested in sectors limited to foreign firms in China like digital payments and internet start-ups.

Confidence is key

In order for foreign investments to work, companies are dependent on the success and stability of the nations where they choose to invest. Both American and Chinese companies have invested a lot in each other, through decades of foreign direct investment and now growing venture capital investment.

As the U.S.-China trade war rages without an end in sight, it’s worth remembering that ongoing tensions cost more than just tariffs on the products in your shopping cart. They are also a roadblock to long-term investments that bring additional capital, exports and jobs to each other’s economies.

Lauren Kyger

 

Lauren Kyger is Associate Editor for TradeVistas. Prior to joining TradeVistas, she was a Research Associate at the Hinrich Foundation focused on international trade issues. She is a Hinrich Foundation Global Trade Leader Scholar alumna, earning her Master’s degree in Global Business Journalism from Tsinghua University in Beijing. She received her Bachelor’s degree from the Walter Cronkite School of Journalism and Mass Communication at Arizona State University.

This article originally appeared on TradeVistas.org. Republished with permission.

FDI in China Drops to New Low; Anti-Trust Actions Blamed

Los Angeles, CA – China attracted $71.1 billion in foreign direct investment from January to July, down 0.4 percent on the same period in 2013, with FDI in the country reaching $7.8 billion in July alone, the first decline in overseas capital inflow in 17 months.

The slashing of spending in China’s manufacturing sector by companies from the US, Japan and the European Union is being blamed, primarily, on an increase in Beijing’s recent crackdown on foreign companies alleged to be engaging in “anti-competitive” business practices.

Over the past year, China has taken action against a number of ‘big ticket’ foreign companies, accusing them of breaking the country’s anti-trust regulations, which many feel are opaque and in violation of World Trade Organization rules.

Most recently luxury car brand Mercedes-Benz has been accused of manipulating prices for after-sales services in the country, while Beijing has imposed fines on milk powder companies including Mead Johnson Nutrition Co and Danone SA, alleging breach of its anti-monopoly laws.

China has also launched a probe into US-based Microsoft and chip maker Qualcomm over anti-trust claims, while several pharmaceutical companies including GlaxoSmithKline are facing probe in the country over alleged corruption and price fixing.

The probes have raised concerns among foreign investors that the country is targeting foreign firms operating there in an effort to, as one source out it, “flex its muscles.”

According to the Ministry of Commerce in Beijing, though, the anti-trust investigations aren’t responsible for the drop in FDI. Instead, the agency said, the “volatility of FDI” is a natural reaction to the country’s “efforts to balance the economic structure.”

The monthly decline “is not sufficient enough to reflect the general trend. It must not be linked to the anti-monopoly probes into some foreign invested companies or be associated with other baseless speculations,” said Commerce Ministry spokesman Shen Danyang.

“All market players should operate their business according to the law,” he added. “They should be punished according to the law and be subject to appropriate legal penalties if they violate the law.”

Beijing, he said, “expects foreign investment to keep a steady growth in the coming years and total FDI in 2014 to remain at a similar level with last year.”

08/21/2014