Should Americans Be Worried About Foreign Investments in the U.S.? (2024)

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720 July 20,1989 SHOULD AM ERICANS BE WORRIED ABOUTFOREIGNINVEXMEN" IN THE US INTRODUCTION American policy makers seem to beincreasingly concerned about the level of foreign investment in theUnited States. Some policy makers fear that foreigners, bypurchasing U.S. physical and f inancial assets, will gain influenceover American foreign and domestic policy. They also believe thatforeign investment somehow harms the American economy. Attentionfocuses especially on relatively recent Japanese direct investment.Legislation has bee n introduced in Congress and in several statelegislatures to require foreign investors to turn over to the U.S.government detailed information concerning their business holdingsand practices in America Are the worries of U.S. policy makerswarranted? Th e evidence says that they are not. To the contrary,the data demonstrate that foreign investment helps the U.S.economy. Official government statistics, unadjusted for inflation,show that total foreign investment in the U.S passive and directreached 1.7 t rillion last year. While this may seem like atowering figure, it is not. For one thing, it is a small share ofU.S. total physical assets, estimated to be 35 trillion. Foranother, American overseas assets are at least $1.3 trillion. Amore relevant figu r e may be foreign direct investment in the U.Slike ownership of factories; this is about $304 billion. Offsettingthis is the 329 billion in such assets owned by Americans in othercountries. In both direct investments in real estate or companiesand such passive holdings as noncontrolling shares of stock in acompany, foreigners own only 5 percent of all U.S. assetsAggressive American Investors. Even these figures do not tell theentire story. American investors continue to invest aggressivelyoffshore I n the first quarter of 1989, U.S. companies spent $8.7billion on foreign acquisitions In addition, most Americaninvestments overseas were made some time ago, according to a studyjust released by KPMG Peat Marwick, and are carried on the books attheir h i storical or book value, unadjusted for inflation andmarket appreciation. U.S. overseas assets thus tend to beundervalued in some cases enormously so. By contrast, foreigninvestments in America are more recent and therefore tend to berepresented in off i cial statistics at closer to their actualmarket value. American direct investments overseas are morevaluable than U.S. government statistics indicate BuildingFactories and Creating Jobs. Foreign direct investment in the U.S.builds factories and create s jobs, particularly in previouslymoribund manufacturing industries. Some three million Americanswork for firms owned by foreign companies. Direct investors oftenbring new technology and management techniques to the U.S. market.Such investments also in crease Americas available capital base andboost the market value of American assets.

Foreign direct investment in the U.S. and American investmentsoverseas are part of the ongoing worldwide economic integration.Businesses bring production closer to cust omers, taking advantageof such economic factors as lower wages, lower material costs, andbetter skilled labor and diversifying risks. The U.S. is aparticularly attractive place to invest because of its politicalstability, lower level of taxes, and les s onerous regulation ofbusiness.

Unparalleled Potential. The U.S once,again, has become a magnetfor foreign investors.This should be a cause for satisfaction evencelebration and not for worry. Said French economist Guy Laigneuxin late 1987: Even though the U.S. is now the worlds most developednation, it resembles in some important respects the developingnation it was in the last century as it shifts from the old heavyindustries to the advanced technologies. Its potential for growthis unparalleled a nywhere else. Adds British economist JockBruce-Gardyne: Everyone wants to invest in the U.S.

To try to stop or impede this investment would damage the U.S.economy.

This indeed would be the result of such U.S.-initiated measuresas attempts by Congress to force foreign direct investors to revealdetailed information about their internal operations THE AMERICANINVESTMENT PICTURE Since the early part of this century, A mericahas been a major investor overseas. Yet prior to this time, theU.S. was dependent on European investors for investment capital,and sometimes, basic liquidity. London bankers actually underwrotebonds to finance much of Americas expansion westward , allowingmillions of people to make this country their home.

Following the devastation of the two World Wars, U.S. companiesmade massive loans and direct investments in Europe and Japan. In asense, the capital that had flowed across the oceans for deca desbefore 1910 returned to recapitalize European society 2 Benefits toU.S. While U.S. capital helped to revive industry in Europe andJapan U.S. companies also benefited by establishing overseasmanufacturing facilities, particularly in Europe, thereby avoidingthe substantial tariffs imposed on foreign manufacturers. Today,U.S. offshore investments in European countries constitute a majoradvantage for the U.S. economy.

Likewise, major manufacturing and retailing giants from Europeare long-established factors in the U.S. market passive and directcompanies or real estate for income purposes. Some 80 percent ofthe $1.7 trillion total foreign investment in the U.S. is passive.Individual investors pension funds, and investment retirement plansall fall into this category.

Direct investment consists of a controlling interest in acompany or real estate Understating True Value. As measured byCommerce Department figures unadjusted for inflation or otherdistorting effects, total foreign investment in the U.S passive anddirect reached $1.7 trillion in 1988.The offshore assets of U.S.companies grew to at least $1.3 trillion by the end of 19

88. This latter figure, however, excludes assets of U.S.financial and other institutions and thus understates the value ofAmerican overseas holdings.

The U.S. is the leading recipient of foreign capital in the formof both passive and direct investments. U.S. investors also holdmore physical assets overseas than investors from any othercountry. All foreign investme nt including passive holdings anddirect acquisitions, constitutes roughly 5 percent of Americasestimated $35 trillion in physical, nonfinancial assets.

According to the Commerce Department, as of the end of last yearAmerican direct investment abroad to taled $329 billion, whileforeign direct investment in the U.S. reached $304 billion. Evenbased on unadjusted book value, the U.S. is still the singleleading foreign direct investor in the world.

The value of foreign direct investments in the U.S. 1988 rankedas follows There are essentially two types of investment in allmarket countries Passive or portfolio investment consists ofnoncontrolling shares of stock in 3 INVESTMENT FLOWS IN 1988 Totalnew foreign capital investments brought into the U.S. la s t yearequaled 42.2 billion; total outlays by foreign investors amountedto $65 billion. The difference is accounted for in part bypurchases by foreign investors using their cash deposits inAmerican banks or receipts from sales of other assets that theyhold in the U.S. New investment outlays by companies andindividuals from Japan have generated particulzir media attention.In 1988, new capital inflows by Japanese investors of nearly $15.1billion in new assets edged out British investors, who spent $13 .3billion acquiring new assets in America. Dutch investors rankedthird with $3.8 billion in new outlays last year.

British Giant. As in 1987, foreign direct investment inmanufacturing assets led all other categories, accounting fornearly half or $17.8 billion in foreign direct investments during19

88. A single transaction, British Petroleum Co. p.l.c.s buyoutof the minority shareholders of SOH10 Petroleum Company, accountedfor $8 billion or nearly 45 percent of this amount. The successorcompany, Br itish Petroleum America, is now Americas largestdomestic producer of petroleum and the largest single U.Kinvestment overseas.

In terms of total holdings of financial assets, 6.2 percent ofU.S. corporate stock was registered to foreign owners last year, upfrom 4.1 percent in 1980 according to the Securities IndustryAssociation. Total foreign ownership of U.S. corporate debt rose to12.9 percent last year. Slightly less than 1 percent of U.S.farmland is owned by foreigners, according to the Agricultur eDepartment. Investors from Japan own a tiny 2 percent of this totalor two hundredths of 1 percent of total U.S. farmland. Europeanand, in particular well-established Canadian interests, such asOlympia and York, account for three-quarters of the total P RESENTVALUE VS. HISTORICAL COST There is a serious problem in estimatingthe value of U.S. overseas assets and of certain older Europeanholdings in the U.S. Real assets such as buildings or factories donot grow in value in official government figures w i th the generalrate of inflation, even though their market value rises, oftendramatically. As a result of accounting conventions, all figurescompiled by the Commerce Department reflect book value, that is,the value of the asset at the time the investme n t was made.Neither the asset figures for affiliates of American manufacturingcompanies nor those for equity investment offshore are adjusted forinflation, let alone for market appreciation, that is, the actualamount of money that American owners would receive today for saleof these assets purchasing power. As a result, figures for Americasconsiderable, older investments abroad and, to a lesser degree,some older European and For example 3.83 in purchasing powertodayis equal to $1.00 in 1950 4 Canadi a n holdings in the US. aresignificantly understated. Some analysts believe, for example, thatreevaluation of the enormous real estate holdings of Canadianinterests would boost the current value of that countrys investmentnear to or above that for Japan . Most foreign direct investmentsin the U.S. are more recent and therefore carried on the books atmore nearly their actual market value. On the other hand, sincethey are undervalued, older American overseas investments wouldsell on the free market for m uch more than book value The reality,therefore, is that Americans could have more invested overseas thanforeign investors have invested in the U.S REASONS FOR OVERSEASINVESTMENT There are a number of reasons why businesses mightinvest in countries oth e r than the one in which they areestablished. There are especially good reasons why individuals andbusinesses from other countries invest in America. another country.Foreigners find the U.S with its low taxes, especially attractivecompared to other cou n tries for certain kinds of investmentsdiversification among different international markets is a reliableand necessary ways to spread out business risks Third, directinvestments in other countries can move production marketing, andservice functions cl o ser to the customer and thereby enhancerelative competitive position. Local personnel and management oftencan deal better with the local market conditions Fourth, certainbusinesses often can gain production advantages by locating incertain countries.T h ey might reduce costs, for example, bylocating in countries with lower labor or raw material costs orwith an undervalued currency A highly skilled work force attractsforeign-owned factories. Avoidance of government interference inbusiness affairs is a n other important consideration Fifth,businesses and individuals typically seek to invest in politicallystable countries. Nations prone to civil unrest or repression areless likely or able to respect the rights of private property. Arecent survey of cor p orate executives byTouche Ross finds thatU.S. political stability is the leading factor in attractingforeign direct investment to the U.S First, an investor might gaina higher rate of return on his investment in Second, increasingnumbers of portfolio s trategists believe that CONCERNS ABOUTFOREIGN INVESTMENTS Since rumors of rich Arabs buying up ranchesand office buildings in Texas began spreading in the mid-l970s,some Americans have become increasingly concerned about thepossible negative effects o f foreign capital on the U.S.To addressthis putative problem, legislation has been introduced 5 inCongress and in at least ten state legislatures to requireadditional reporting by foreign investors. Many critics of foreigninvestment fear that somehow, b ecause of their citizens holdingsin America, foreign governments will gain influence over the U.S.Other critics are concerned over the economic effects of suchinvestments. They fear that, in some unspecified manner, thepresence of too many foreign-bui lt and -owned factories in theU.S. or too many foreign-owned office buildings condominiums,shopping centers, or tracts of farm land will lower U.S. livingstandards.

These concerns are unfounded for a number of reasons. Among them1) Foreign investment i s still tiny in terms of the entire U.S.economy Foreigners own 5 percent of all U.S. assets and 6.2 percentof stock. While this is of economic benefit to the U.S it is stillnot so much that foreigners can call the shots in America. Manyother countries have a much larger share of their assets owned byforeigners without loss of their sovereignty.

Americans, for example own considerable assets in Canada. Andwhile that country and the U.S. have considerable economic andforeign policy interests in common, Canada takes an independentcourse in these areas whenever it thinks it necessary particularlymanufacturing and real estate holdings in Europe Thus, if overseasinvestment truly were to lead to political control, a kind ofbalance of power would exist between foreign investment in the U.S.and U.S investment worldwide 3) Last year, over 85 percent of the$1.7 trillion in foreign investment in America were passiveholdings of stock and bonds, not controlling shares in businesses.Far from threatening U.S. economic freedom, these portfolioinvestments increase the U.S. capital base and provide fundin g forU.S economic expansion 4) Critics of foreign investment ignore thefact that there are two parties in any transaction. When one personsells to another, both benefit. Restrictions on foreign investmentwould be restrictions on the rights of Americans to dispose oftheir private property.They might not be able to sell it, forexample, or perhaps could sell it only for a price far lower thanif foreigners were allowed to buy it 5) Concern about foreigninvestment has focused on the Japanese, even though they hold only15 percent of all direct foreign investment (based on book value)in the U.S. Little concern is expressed about Britain, the largestoverall investor and the eading investor in U.S. manufacturingassets, or about a Dutch threat from the sec ond largest investor,the Netherlands.

Nor are the Canadians, West Germans, or Swiss considered anational menace 2) The U.S. remains the largest single owner ofassets overseas 6 HELPING THE U.S. ECONOMY Foreign directinvestment in America can help the e conomies of both the U.S. andthe foreign investor the same is true for American investmentsoverseas. When foreigners build plants or factories in the U.S theycreate jobs for Americans. It is estimated that three millionAmericans work for enterprises i n which foreigners holdcontrolling shares. This benefit of foreign investment wasrecognized implicitly by American organized labor and others someyears ago when they complained that American businesses investingoverseas were exporting American jobs.Tod ay foreign capital iscreating and preserving American jobs.

Some critics argue that rather than creating jobs, directforeign investment often simply involves the transfer of a companyand its employees from a domestic to a foreign owner.This ignoresthe fact that many investors build new facilities. Europeancompanies, especially the British, have established new plants inAmerica, although in recent years they have been more involved inacquisition of going concerns.

Exporting Jobs to the U.S. Japanese auto makers such as Honda,Nissan and Toyota have committed billions of dollars to new plantsin the U.S.These new factories mean new jobs for Americans. Itshould be Japanese labor and critics complaining about Japanesefirms exporting jobs to the U.S no t Americans complaining aboutJapanese investment in the U.S.

The previous owner, usually American, receives money in returnfor the facility. This contributes to the American capital base,which means the capita1,is freed up for other investments.

U.S.-owned assets. If a foreign principal purchases a shoppingcenter, the value of U.S.-owned office building across the streetis likely to increase.

Foreign investors also often bring new technologies to theirenterprises located in other countries. In his N ovember/December1988 New England Economic Review article, Federal Reserve Bank ofBoston economist Eric Rosengren explains Even when a foreignerpurchases an existing U.S. facility, the U.S. gains Bringing NewTechnology. In addition, foreign purchases r a ise the value ofForeign firms that introduce improved management better production,or new technology produce goods and services more cheaply thanwould otherwise be possible. When Japans second largest steelproducer, Nippon-Kokan, purchasedfifty-percen t - of this countrysfourth largest steel producer, National Steel, Nippon Kokanprovided advanced technology that improved Nationals productivity.The substantial savings from modernization allowed National to bemore competitive in international markets a n d reduced costs tosteel purchasers 7 These facilities compete with domestically ownedenterprises, which in turn often adopt the new techniquesthemselves TOWARD A GLOBAL ECONOMY Investment, direct and passive,by U.S. businesses overseas and by foreigne r s in the U.S. is partof the wider phenomenon of global economic integration. With betterand cheaper means of international transportation of goods and withinstantaneous electronic transfers of funds from one country toanother, national boundaries are losing their economicimportance.

Businesses in different sectors invest in enterprises indifferent countries for as many different reasons as Americanbusinesses might have for locating facilities in various U.S.states. Countries receiving direct foreig n investment gain newjobs and often new technology. The investing foreign businessesreceive income, diversi

business risk, and just as important, put themselves in a morecompetitive position worldwide.

Offshore investments by multinational companies are part of acomplex web of trade and financial flows, which link the economiesof the major industrial nations U.S. firms lead in thisglobalization process with the greatest direct foreign investmentof any single country 328 billion at historical valu e.

Since end of World War 11, the U.S. has grown immensely wealthyin part because of its overseas investments In recent years,foreign companies especially from Europe and more recently Asia,have made substantial commitments of resources to the Americanmarket.This is not a problem for America. It is simply part of theongoing integration of the world economy.

For example Honda Motor Co., Ltd only a minor player in theJapanese car market with less than 9 percent market share in 1988,has successfully es tablished itself in the U.S. and now exportsUS.-built cars to Japan. Its leadership in terms of design,quality, and market penetration has forced U.S. and foreign carmakers to diversify and invest to improve their own productsSeagrams Company, Ltd one of the worlds three leading beveragecompanies, owns 23 percent of Americas largest chemicalsmariufacturer;DuPont Canada,-Inc three-quarters of its total assetsand shareholders are in the U.S Nissan Motor Co Ltd Japans secondlargest auto maker, recentl y announced plans to double itsproduction of cars in its British plant to 400,000 units by thelate 1990s as well as to increase production in its U.S. facilitiesfrom 260,000 to I 480,000 units by 19

92. Some 75 percent domestic content is targeted for v ehiclesfrom both plants I COMPETITION REQUIRES FLEXIBILITY AND INVESTMENTAmerican companies, small and large, are competing with foreignfirms for customers around the world. The steady integration ofmajor product and service markets forces companies t o act asdynamic players who shift sources of supply, production, andmarketing from one location to another in search of the highestlevel of comparative advantage. A Chicago Tribune article thisApril 23 illustrates this point In South Korea, a factory o wned byDae-Woo uses Japanese parts, Korean workers and German engineers tomake Pontiac Le Mans cars for Americans, many of whom think theyare buying an American made car.

Market Changes. The economic fortunes of companies can changequickly requiring an open world system in which businesses candiversify production and markets across international borders. Infiscal 1985, for example, Toyota Motor Corporation generated nearly three-quarters of its income from export sales. But thefollowing year, sales of these cars in Japan surpassed exportearnings because of the rising value of the yen. Last year, nearly73 percent of Toyota operating income came from domestic sales.

Fle xibility is crucial to survival in free markets -part of thediscipline of free competition. The American steel industry learnedthis lesson the hard way by retaining dated open hearth technologyas foreign manufacturers developed new, more productive tec hniques in the 1970s. Efficient Japanese and German steel millsout-competed many American mills in the past two decades. In turn,the model mills of the 1970s, such as Nippon Steels computerintegrated Komatsu works in Kawasaki, near Tokyo, are today shutdown because of aggressive competition from more efficient mills inKorea and Taiwan WHO IS REALLY FOREIGN One of the least mentionedpoints in the debate over foreign direct investment is just howdifficult it is to discover which companies are truly for eign andwhich are partially or mostly domestic.

At present a foreign investor or company is one with a foreignaddress. In the case of major multinational corporations, theforeign label says nothing about the actual nationality of theowners, the distrib ution of corporate revenues, or employment bysuch firms by country. Examples Volvo AB SWE of Sweden is owned byover 160,000 shareholders in 50 countries, many of them American.It is involved in joint-venture truck 9 manufacturing operations inNorth Am e rica and is a major European producer of trucks and automobiles General Electric Company of the U.S which last yearposted revenues over $47 billion derives more than 40 percent ofits operating profits from outside the U.S. It recently won a $750millio n order to provide eight turbines for Tokyo Electric PowerCompany. Like those of many U.S. blue chip industrial firms, GEsstock and debt obligations are widely held by individuals andcompanies around the world is 25 percent owned by Ford MotorCompany, h as assisted Ford in designing the highly successfulProbe model. Mazda recently agreed to a $250 million enginepurchase from Ford for its new U.S built cars. Mazda expects thatFord will supply 70 percent of Mazdas total U.S. output of 240,000engines by 19

95. All holders of Ford shares are indirect investors in Mazda,and the stock of both is widely held by institutional investorsaround the world Citicorp, the giant New York bank holding company,has branches and subsidiaries in dozens of countries and conductsretail banking operations in West Germany, Britain, and Japan MazdaMotor Corporation of Japan, which IS LEGISLATION NEEDED H.R.5,known as the Bryant Bill after its sponsor, Representative JohnBryant, the Texas Democrat, would impose additiona l reporting anddisclosure requirements on any foreign person who holds or acquiresa significant or controlling interest in U.S. property orcompanies. New and existing investors would have to disclosespecific financial data on each separate business ent i tycontrolled. This, in effect, would give competitors details ofintercompany transactions, salaries, and other proprietaryinformation. Bryant says he is concerned about the nationalsecurity and asks How much of our petroleum industry isforeign-owned? What are the effects of such ownership on our energydependence?

The Bryant Bill seems unwise for a number of reasons: First, theclaim that the U.S. government needs more information isspurious.The U.S government already has sufficient generalinformati on and legal authority to safeguard the nationalinterest. Indeed, much of the argument against foreign investmentused by supporters of this bill is based on detailed informationfrom the Commerce Department and other sources on the level of such10 inve s tments and examples of specific foreign investors owningspecific enterprises in the U.S Inviting Retaliation. Second, theBryant Bill would demand types of information from foreigninvestors that are not disclosed by public U.S companies. Such adistinct ion, once made, logically would allow for discriminatorytaxes and regulation. Unequal treatment violates basicinternational investment agreements and almost certainly wouldinvite retaliation against large overseas U.S. investors.

Bryant denies this, but then admits that he would use theinformation gathered to guide-foreign investment where it is neededand keep it out where it is not needed. Since many supporters ofH.R.5 seem to believe foreign investment is bad for the U.S. andsee this bill as a way to control such investment, it is likelythat they will seek to limit certain kinds of investment. Moredetailed data are needed only if there is to be direct governmentregulation of foreign direct investment investor confidence willdiscourage investmen t . Ford, for example, changed the site of afuture facility from Scotland to Spain because of labordifficulties If the U.S. or another country restricts foreigndirect investment investors may be persuaded to build plants someplace else Third, the new re g istration law would discourageinvestments in the U.S Any action taken by host countries to raisethe cost of investments or lessen CONCLUSION The benefits offoreign investment flows -jobs, economic growth are apparent inAmerican life. Less apparent, ho w ever, is the enormous stakeAmerican companies and individuals have offshore in other marketsBecause of the leading direct international investment position ofthe U.S self-interest, at least, demands that American leadersencourage free trade and free m a rkets not only protects immediateU.S. interests, but ensures that American industry will continue toimprove its competitive position vis-a-vis other players in Europeand Asia. Industries such as steel and textiles might be protectedin the short run by import quotas, but such legal devicesultimately would sap the incentive for innovation and improvedproductivity.

Even without the enactment of legislation, the environmenttoward foreign investment in the U.S. has grown more hostile.Rather than risk go vernment intervention after the fact, foreigninvestors increasingly are making application to the interagencyCommittee for Foreign Investment in the United States CFIUS) inessence to apply for prior government approval. At least ten stateshave placed r eporting requirements or legal restrictions on thebusiness activities of nonresident investors. These developmentsrepresent a dangerous trend Improving Competitiveness. A commitmentto free trade and capital flows I 11 I Lesson of History. Those whobel i eve that the U.S. is a developed country, which no longerbenefits from or needs foreign ideas, people, and capital, are deadwrong.The history of failure in closed economies such as the SovietUnion, China, Poland, and Mexico illustrates the dangerous de caybrought about by economic isolation.

Attempts to limit the free flow of capital across nationalborders must be seen in the same context as such protectionistpolicy remedies as industrial policy, managed trade, and generalgovernment intervention in t he domestic marketplace. Business andpolitical leaders with an interest in a future strong andcompetitive American economy must oppose calls for limits onforeign investment Prepared for The Heritage Foundation by Christoher Whalen Worldwide Informatio n Resources, Ltd. aWashington-based public policy and media company Senior e icePresident 12