Are foreigners mindlessly buying up the United States? The evidence is at odds with most popular notions of foreign investment in this country and directly
contradicts the more hysterical stuff that seems to sell books.
For the period from 1979 to 1985, manufacturing captured only 33.5 percent of total foreign direct investment in the United States. In contrast, most U.S. direct investment abroad after World War II was in manufacturing and petroleum.Together, Japan, Canada and the European Community accounted for 79 percent of all foreign direct investment in the United States and 80.5 percent of foreign investment in manufacturing. Ten of the 18 largest investments in U.S. manufacturing came from the European Community. The 10 largest Canadian
investments were among the 42 largest.
Rounding out the top 10 Japanese investments requires dipping down to number 111. Perhaps even more surprising, given the current fixation on relations with Japan, is that the share of foreign direct investment by the United States originating in the European Community over those seven years was 44.9 percent, while the shares originating in Canada and Japan were 21.9 percent and 12.2 percent, respectively.
A further, preliminary study of the characteristics of foreign investment in the United States generated some interesting results. First, there is strong evidence that foreigners tend to invest in businesses here that produce the same kinds of things the parent firms produce abroad. Foreigners are not mindlessly buying up America. They are expanding their business interests here through direct investment.
In general, that investment has contributed to the relative growth of the U.S. economy compared to Europe, Canada and Japan. It is directly related to industry growth in the manufacturing sector in the United States. Foreigners are investing in some of the weaker areas, like steel and automobiles, but the general thrust has been to invest in expanding industries that have a great potential for future profits. That is not diabolical. It makes good business sense.
There is some evidence that foreign direct investment in the United States has been timed to take advantage of bargains when the U.S. dollar is relatively cheap internationally, as it is now, rather than when the dollar is high priced, as it was a couple of years ago.
To summarize this point, foreigners appear to have invested in the United States when exchange rates made prices attractive and in response to U.S. relative economic growth. The boom in foreign direct investment in the United States in the early 1980s was related to our economic success. Specific investors abroad acquired product lines they knew and understood. They invested, particularly, in those domestic industries that were expanding most rapidly.
There is no evidence that foreigners have focusing their investments in highly protected industries or in businesses in which the developing countries hope to expand their exports to the United States.
With respect to the first issue, foreign direct investment in the United States is not concentrated in industries that have recently received substantial tariff or non-tariff protection. With respect to the second, there is general agreement that developing countries could compete effectively for sales of manufactured goods in the United States, including textiles, processed foods and light consumer durables. Foreign direct investment in the United States has not been biased in that direction.
Other versions of the argument that trade barriers stimulate investment hold that foreigners anticipate trade restrictions and invest in the United States now to avoid future protectionist barriers to their U.S. sales, or that they work within the United States to prevent future trade restrictions from being implemented.
While some investment may be motivated by such strategic considerations, the overall structure of U.S. protectionism has been stable over the past 50 years, so it would be difficult to anticipate what new direction protectionism might take. And, as already noted, foreign direct investment has been predominantly in fast-growing industries, not the slow-growing or declining sectors usually the subjects of new protectionist measures.
Nor is there evidence that foreigners are taking over markets. The industries in which manufacturing investments have been most prevalent have been skill-intensive. Plants are small and production is highly unconcentrated, involving many competing firms.
The policy implications of all of this seem clear. Absent some new and very different information, we should stop scaring the public with stories of foreigners capturing U.S. markets and manipulating prices and government policy through control of American businesses. The strongest factor in the foreign drive to invest in the United States seems to be the same one that encourages domestic investment in U.S. industry: It makes good business sense.