Foreign Capital in U.S. Economy : Digging a Foundation--or a Deeper Hole? : FOREIGN CAPITAL: A TIDAL WAVE

For the past five years, billions of dollars in foreign investment capital has poured into the United States, undergirding the longest peacetime economic expansion in American history. And almost since the influx began, economists have warned darkly that the situation spells inescapable trouble down the road.

If foreign investors pull back, as some feared they would after last month’s stock market crash, then the U.S. economy will falter, the economists warn. Almost as bad, if foreigners continue to pour funds into U.S. securities, banks, real estate, factories and businesses, the United States will sink deeper into debtor-nation status and foreigners will drain off an ever-greater share of this country’s wealth.

Third Possibility

But there may be a third possibility. Here in South Carolina, experience suggests that foreign investors--lured by the world’s best opportunities to make money--may not only continue to invest in the United States but also to reinvest their profits here instead of taking the money home with them.

For 20 years, ever since Hoechst AG of Frankfurt, West Germany, opened a factory for making the polyester fibers used by local plants in making cloth, an infusion of foreign capital--ardently wooed by local officials--has been a major force in revitalizing the region’s decaying, textile-based industrial economy.

In the process, the rebirth of Spartanburg has provided one possible answer to a critical question for this country’s economic future: To what extent has the tidal wave of foreign capital been used, as here, to finance productive investment for the future, and to what extent has it merely allowed Americans to sustain a coast-to-coast shopping binge?

If a substantial portion of the foreign capital has in fact been invested in ways that enhance U.S. productive capacity--as a considerable body of evidence nationwide suggests--then the long-term prognosis may be far brighter than the economists have suggested. The country could be laying the foundations for another historic surge of growth.

Indeed, if the immediate budget and trade deficit problems can be handled without triggering disaster, the massive in-flow of foreign capital may come to be seen as a kind of Marshall Plan in reverse.

The United States could emerge from the present period with much of its industrial might modernized and renewed--courtesy of the toiling workers of Japan and Western Europe, whose employers for so many years shipped their profits off to America instead of investing them at home.

Even under the best of circumstances, major obstacles--as well as serious belt-tightening and even difficult times--stand between this country and such a rosy dawn. But the experience here in Spartanburg does point toward a little-discussed possibility that the pessimists could be overstating their case.

Spartanburg’s Interstate 85, the locus of most of the new foreign-financed manufacturing expansion here, is still known locally as “the Autobahn” in deference to German companies that led the influx. And Hoechst, which now employs 2,300 persons, was only the first of some 60 foreign-owned or foreign-affiliated companies from 10 countries, most of them Western European, that have invested more than $1 billion in the area.

The prosperity shows no signs of abating. Certainly Hoechst Celanese Corp., as Hoechst’s wholly owned subsidiary here is now known, has no intention of cutting back. “Basically there is no change in our planning as a result of the recent activity on Wall Street,” said Paul Foerster, Hoechst’s German-born vice president for operations.

Hoechst does not even send its Spartanburg-generated profits to Frankfurt. Instead, it reinvests its profits right here. “That was how German industry was rebuilt after the war,” Foerster said. “All profits were routinely plowed back into the business.”

Even the Oct. 19 Wall Street debacle apparently did not drive foreign money out of the United States. Markets took the same beating overseas as they did in the United States, and the available evidence suggests that foreigners still recognize this as the one country in the world where the return on investment is greater, more stable and less taxed than anywhere else.

To be sure, almost all economists believe the United States cannot rely indefinitely on foreign capital to finance its own prosperity. Ultimately, it must increase its own rates of savings and investment--in part by reducing the enormous federal budget deficits that have been soaking up funds that would better have been used for more productive investments in the sorts of factories that dot the landscape in Spartanburg.

Filled the Void

But for now, and for at least a while longer, foreign money has nicely filled the void.

The immediate region around this once-typically depressed Southern mill town boasts the largest proportion of foreign manufacturing employment of any comparable area of the nation. Foreign companies now account for more than 16% of Spartanburg County’s 43,200 manufacturing jobs.

Over the years, the foreign presence here has become increasingly integrated into the local economic landscape. After Hoechst, for example, foreign companies came here to assemble, sell and service the advanced German, Swiss, French and Italian textile fabricating machinery that surviving textile companies had to install in order to prosper.

The more recent overseas investors have branched out into newer, higher-technology industries. Within the past two years, Fujikura Ltd. of Tokyo, a fiber-optic company, has launched a joint venture with Alcoa to make a specialized high-performance communications cable for utility companies.

More recently still, Philipp Holzman AG of Frankfurt, one of the largest builders in Western Europe, has acquired Lockwood Green Engineers, a venerable industrial architecture and engineering firm headquartered here. The newly internationalized company is in turn helping other newcomers from abroad adapt their manufacturing operations to American standards.

In stark contrast to Spartanburg’s prosperity, many economists believe the most prominent features of the U.S. economic landscape to be the ominous twin towers of deficits: budget deficits, which have exceeded $200 billion a year, and trade deficits, in the neighborhood of $150 billion each year.

Like a family on a credit-card binge, these analysts say, the United States has been consuming beyond its means. The budget deficit reflects the public’s unwillingness to sacrifice personal consumption in order to pay for the services it demands of its government. Similarly, the trade deficit has mounted as Americans have insisted on consuming more than they can produce.

For now, the nation is paying for its profligacy with foreign capital. A net creditor as recently as 1984, the United States has become the world’s largest debtor nation; its investments abroad at the end of last year were valued at about $263 billion less than foreign investments in the United States. At current growth rates, the mountain of debt will soar to $1 trillion by the early 1990s.

Will End Sooner or Later

The United States cannot maintain this pace indefinitely, many economists warn. Sooner or later the prosperity will end.

Most economists believe it could end almost painlessly if the United States would gradually trim its budget deficit and reduce its reliance on foreign capital.

But there is a more unnerving possibility. Nearly two years ago, Stephen Marris of the Institute for International Economics in Washington warned that the consequence would be a catastrophic economic contraction comparable to the Great Depression as foreigners pulled their money out of the United States.

Lester Thurow, an MIT economist and frequent adviser to Democratic presidential candidates, wrote recently that the U.S. debt has become an economic “black hole.”

“Since 1980,” he said, “the U.S. economy has behaved like an addict hooked on foreign borrowing. Foreign loans have provided a significant chunk of America’s investable funds . . . and have allowed the United States to consume substantially more than it produces.”

The reckoning, Thurow warned, will be Draconian: “Living standards will fall as America is forced to pay back the resources it borrowed to live beyond its means in the 1980s.”

So far, Japanese, European and Canadian investors have shown little sign of pulling their money out of the United States. “My general impression is that there hasn’t been any substantial selling of equities by foreigners,” said Stephen Axilrod, vice chairman of Nikko Securities Co., New York.

Edward Bernstein, an international finance specialist at the Brookings Institution, cited the case of Sir James Goldsmith, the British financier who made an unsuccessful attempt to take over Goodyear Tire & Rubber--and made an estimated $93 million in stock profits in the process.

“When a Goldsmith makes $93 million in his bid to take over Goodyear, he’s not going to be taking the money home,” Bernstein said. “For financial purposes, he’s now an American. A lot of the money coming here is of that kind. They won’t take it out.”

But, with the fall of the dollar, they will probably not keep putting it in at the rates that have prevailed so far this decade, most economists also feel.

Whether balance can be restored without trauma is the question. Most economists think it can if Japan and West Germany stimulate economic growth at home, the U.S. budget deficit gradually declines and the dollar gradually settles into a comfortable level against other currencies.

Then the U.S. trade deficit will decline as other nations buy more American products and sell more of their own products domestically instead of in the United States.

For the time being, though, the United States is likely to continue taking advantage of the fact that it is still seen as the world’s preferred safe haven for investments.

So it is here in once-depressed Spartanburg. Foreign investment translates directly into new factories in an industrial zone that has created more than 7,000 jobs and a 4.1% unemployment rate--well below both the national and the state averages.

Spartanburg’s experience of the past 20 years suggests that the longer foreign capital stays in a community, the more it becomes integrated into the local economy.

Kurt Zimmerli, president of Kuesters-Zima Corp., a West German firm that assembles and services sophisticated German-designed textile dyeing machinery, said Spartanburg’s foreigners are here to stay.

“When Americans invested in Europe after the war, it was of enormous benefit to Europe,” he observed. So when Americans become concerned that foreigners will send home the profits from their U.S. operations, “they should see how much of it is really staying here.

‘Normal Pattern’

“It’s the normal growth pattern,” Zimmerli said. “First you import to the market and service imports to the market. Then you begin to assemble and build in the market. Then you want to adapt the product to the market. Sometimes the parent resists, but you do it yourself, anyway--and then when it works, then the parent agrees and gives you more independence.”

Erlau Chaintech Corp., a sales and service subsidiary of a West German manufacturer of specialty construction equipment, became part of the Spartanburg industrial landscape only in the past year or two. But it plans to stay.

“When a company management decides to invest here, they don’t just look at the exchange rate or anything like that,” said Guido Suter, Erlau’s president of U.S. operations. “They look at a longer-term commitment if they are going to move an operation to the United States. You put dollar exchange and other such short-term considerations completely to one side.”

Over time, a foreign company’s operations here tend to become more and more Americanized, Suter said.

“Gradually, he would develop an organization to provide service for his product to customers here. Eventually, the organization would move to manufacturing here as well. And in doing so, there has been an across-the-board trend to import fewer Europeans and delegate more and more authority to people locally--to Americans,” Suter said.

Enzo Colonna, a vice president of Lockwood Green International, as the German-owned industrial architecture and engineering firm is now called, sees as part of its mission the integration of foreign operations into the local economy.

“We help foreign investors when they come to this country to select a site, to design a facility, set up, and generally adapt their procedures to the work force and market here,” he said. “We try to Americanize their process. To compete here, there is a need to adapt to an American style, to American equipment, to an American labor force.”

Local and state officials, far from fretting over the implications of their increasing dependence on foreign investment, are scouring the globe for more companies that might want to put down roots in Spartanburg.

J. Mac Holladay, director of the South Carolina State Development Board, noted that foreign investment totaled nearly $500 million in the first half of 1987, creating an estimated 2,900 jobs. “We’re looking at a billion dollars or more this year, the best ever,” he said.

Foreign investment is responsible for 13% of all manufacturing investment in South Carolina, Holladay added. Of some 3,000 manufacturing establishments throughout the state, 226 are foreign-owned or foreign affiliates.

“We’re making a big push now to bring in more Japanese and Korean investment,” Holladay said. Gov. Carroll A. Campbell Jr. spent two weeks in Tokyo, Osaka and Seoul in October in search of investment dollars.

How much of the tidal wave of foreign capital has been used, as in Spartanburg, to finance productive investment and how much has gone to day-to-day consumption? The answer is not easy to establish with certainty.

Productive investment has been impressive--so much so that some analysts lament that America is gradually being sold off to foreigners.

Between 1981 and 1986, according to the Commerce Department, foreign direct investment--not only factory construction but also purchase of U.S. companies and U.S. real estate--totaled $100 billion.

Businesses Acquired

Doubleday, the book publisher, has been bought by a West German company; Brooks Bros., the men’s clothier, is Canadian-owned. Fully 80% of downtown Los Angeles real estate, according to the consulting firm of Landauer Associates, is owned by foreign investors, mostly Japanese.

On top of that, foreigners bought $100 billion worth of shares in American companies during the same five-year period. Total foreign purchases of U.S. stocks was $17 billion in 1986 alone, four times greater than the previous year, and so far this year foreigners have been investing in the American stock market at an annual rate of nearly $40 billion.

Thus a total of $200 billion in foreign money went toward what the Commerce Department defines as investments in the U.S. economy.

To be sure, some of those investments are much more productive than others. Stock and real estate purchases, for example, increase the pool of capital in the United States and thus hold interest rates down.

As Spartanburg demonstrates, however, foreigners are also building factories and related facilities here that generate jobs and productivity even more directly. And Spartanburg is not alone.

Foreigners--mostly Japanese--are already producing about 550,000 cars and trucks a year in a Nissan plant in Smyrna, Tenn.; a Honda factory in Marysville, Ohio; a joint General Motors-Toyota facility in Fremont, Calif.; a new Mazda plant in Flat Rock, Mich., and a Volkswagen factory in New Stanton, Pa. They plan to boost their capacity to 2 million vehicles by 1990--many of which will replace Japanese imports and some of which may even be exported.

Impressive as the $200-billion growth in foreign investment has been, it pales next to the $500 billion that foreigners deposited in banks and used to buy U.S. government securities and corporate bonds during the same five-year period.

MIT economist Thurow, for one, believes this pool of money is being squandered, largely to finance the federal budget deficit and allow Americans to buy automobiles from Japan and textiles from South Korea at favorable prices. Likewise, the Committee for Economic Development, an organization of 200 top corporate officials, said in a recent report that the United States uses the bulk of the money it borrows from abroad to finance consumption.

“As long as the United States remains a large international borrower for purposes of consumption as distinct from productive investment, it will eventually have to allocate more resources to the sectors producing exportable goods and away from those sectors catering to domestic demand,” the group said. “This shift will mean a decline in the potential living standards of future U.S. generations, a legacy that no previous generation has passed on to its children since the Civil War.”

But is such spending entirely unproductive? Some economists are not so sure.

The largest single component of foreign investment in the United States is in bank deposits--up $280 billion between 1981 and 1986. Banks use these deposits to make loans to all kinds of borrowers, from families buying Jacuzzis to businesses that need cash to expand.

Consumer Demand

Moreover, while loans to consumers buying Jacuzzis may not be as directly productive as loans to build new factories, they do sustain demand for Jacuzzis. And without strong U.S. consumer demand, producers all over the world would be crushed beneath the weight of their unsold output: One reason this country is flooded with imports is that--so far at least--there is no other market big enough to take them.

Another $140 billion in foreign capital has gone into U.S. corporate borrowing. Corporations, too, borrow for a variety of purposes--sometimes to finance operating expenses or engage in questionable merger and takeover fights, but sometimes to expand plant and productive capacity.

Foreign investment in government securities--mostly the Treasury bills, notes and bonds that the federal government must sell to finance its enormous deficit--may be the least productive of all forms of foreign investment. But this also represents the smallest component of the growth in foreign investment--$80 billion during the five-year period.

Nor is it quite right to conclude that this money merely finances unrestrained government consumption. As Alan Reynolds of Polyconomics Inc., a New Jersey consulting firm, points out, a sizable portion of that spending goes to capital equipment, infrastructure improvement, school and hospital construction and research and development--in short, to investment.

The Commerce Department estimates that gross capital investment by federal, state and local government in 1985--the latest year for which figures are available--amounted to $155 billion.

There is also some comfort to be taken from the fact that the United States has been a debtor before in its history, and flourished. The growth that transformed this country’s economy into a world class industrial power in the closing decades of the 19th Century would have been impossible without capital imported from Britain and Germany, the premier industrial and financial powers of that era.

When European investment dried up during the great bloodletting of World War I, the United States for the first time in history became a “creditor” nation--that is, it owned more assets abroad than foreigners owned here. But by then the United States had also become one of the dominant industrial powers in the world.

There was no similar period of growth until after World War II, when the United States stood alone in the world as the only nation whose industrial and financial strength was undamaged. Not surprisingly, the investment capital that fueled postwar growth had to come from within America, since there were no other available resources, and America remained a net creditor.

But now in the 1980s the U.S. economy is once again importing capital, as it did 100 years ago. The crucial issue, which will likely be settled for sure only in retrospect, is whether that capital is being squandered or, as before, setting the pieces in place for another great economic surge.

Spartanburg, at least, is bullish on America.

Gross foreign private investment in the United States at the end of each year. In billions of dollars.

INVESTMENTS 1981 1986 Direct investment 108.7 209.3 Stock ownership 64.4 167.4 Total Investments 173.1 376.7 DEBT INSTRUMENTS U.S. government securities 18.5 96.0 Corporate bonds 10.7 142.1 Bank Deposits 165.4 449.2 Total Debt Instruments 194.6 687.3 Grand total 367.7 1,064.0

Source: Commerce Department