Foreigners Buying U.S. Dynamism
To many observers, the current dramatic rise in foreign investment, along with the emergence of Japan as the world’s foremost financial power, represents an ominous sign of America’s fall from grace. A growing chorus--ranging from authors Susan and Martin Tolchin to investment banker Felix G. Rohatyn--have even suggested that the United States has become hostage to foreign capitalists.
It’s not surprising that many in and around the U.S. financial community are uneasy about the fact that only one U.S.-based bank, Citicorp, ranks among the world’s top 10. And the trade deficit, together with the large federal budget deficit, continues to be unsettling for the economy--witness last week’s stock market plummet at news of a larger-than-expected monthly trade deficit. Yet rather than a sign of basic weakness, the current surge of foreign money--as much as $1.3 trillion since 1974--also reflects some of the U.S. economy’s long-term strengths.
Even as Americans suffer angst over decline, key foreign powers have been showing an almost unseemly enthusiasm for the U.S. economy. A 1984 poll of European executives, taken before devaluation of the dollar made investments more attractive, found 45% preferred the United States as their first choice for expansion, five times both second-place West Germany and all of Asia. Japanese investors, likely soon to pass the United States as the world’s leading owners of overseas assets, follow a similar pattern.
This interest is not irrational. It is based on fundamental long-term advantages much on the minds of foreign investors. Three of the most prominent involve the continuing waves of new immigration, the entrepreneurial quality of U.S. business culture and the nation’s vast continental land mass.
Immigration helps in perhaps the most direct way. The open U.S. economic system, as well as traditions of political liberty, attract large numbers of well-to-do foreigners as immigrants--many of whom then invest in the national economy. Taiwan, for instance, enjoys both a huge trade surplus with the United States and the world’s largest cash reserves, now estimated at more than $70 billion. Yet as more Taiwanese come to the United States, much of that money has started to return as investment. This would account for the more than 22 Taiwan-backed banks now operating in the United States as well as the rapid development of such areas as Monterey Park, east of Los Angeles.
“The government (on Taiwan) might not like it, but the reality is all the money is coming to America,” claims Anthony Chien, a 17-year Citicorp veteran and now president of Cal-Eastern Financial Services, an investment firm set up for wealthy Taiwanese investors. “They come here for education. But the more they are exposed, they see the possibilities in business are almost limitless. You don’t see that horizon in Taiwan.”
Even more impressive to foreign investors, such as those working with Chien, is the vital U.S. entrepreneurial community. At a time when many U.S. banks, such as Continental Illinois, are ignoring smaller business and trying to turn into investment banks, foreign financial institutions have been moving away from Wall Street toward the “middle market” of smaller companies. This is particularly true in California, where Japanese banks account for five of the top 11 banks and roughly one-fifth of all commercial loans, with much of the focus on small and growing firms. Bank of Tokyo’s recent purchase of Union Bank, one of the state’s premier “middle market” financial institutions, underscores this trend.
The Japanese are hardly alone in seeking to cash in on the entrepreneurial economy. In the New York area, London-based National Westminster Bank, Britain’s largest, has established itself as that region’s up-and-coming lender to “middle market” companies. “We see this as the best way to participate in the most dynamic part of the American economy,” explains William T. Knowles, chairman and chief executive of National Westminster’s U.S. subsidiary.
Another crucial and often overlooked lure for foreigners is the U.S. landmass. Prime economic competitors--Japan, the newly industrializing countries (NICs) of Asia and Western Europe--are fundamentally land- and resource-poor. Many of these nations, most notably Japan and West Germany, spent much of the first half of this century attempting to achieve what the Japanese call tairiku , or continental power, ultimately failing at a terrible cost.
America’s tairiku status is particularly impressive to the Japanese. Within its borders, for instance, the United States possess 30 times Japan’s arable land, 1,300 times its oil reserves and 327 times the coal deposits. Such differences in land and resources does much to explain the persistent Japanese perception that the United States is still the best long-term bet for investment.
Anxious to capitalize on America’s relatively low energy and land costs, as well as the world’s largest domestic market, Japanese have been particularly aggressive in rebuilding the U.S. industrial plant. Japanese corporations are spending millions on new automobile plants in Ohio, a textile mill in Fresno and electronic assembly facilities in Oregon. Their purchases of large industrial companies, such as Firestone Tire Co., reflect a desire to take advantage of America’s tairiku eminence, a factor all too frequently overlooked by U.S. managers.
Indeed, so great is this tide of investment that some Japanese financial experts fear it could ultimately threaten their nation’s own economic pre-eminence. Hiroshi Takeuchi, chief economist of Japan’s Long-Term Credit Bank, for example, believes these capital outflows, particularly in the form of new plants and equipment, could in the long-term serve to hand over the keys of future ascendancy to its greatest industrial competitor.
“United States society is very strong, with your immigration from other countries. You have the scale and the resources that we simply will never possess,” says Takeuchi, sitting in his spartan Tokyo office. “The Japanese role will be to assist the United States by exporting money to rebuild your economy. This is evidence that our economy is fundamentally weak while yours is fundamentally strong.”
Takeuchi’s assertion reflects a historical pattern as old as capitalism. Rather than a harbinger of decline, large-scale investment by capital-rich countries, as Karl Marx observed more than a century ago, often provides “the secret foundations” for the emergence of new, more powerful economies.
Starting in the early 19th Century, European, largely British, capital played a major role in U.S. economic development. European capital financed much early U.S. economic growth--accounting for at least one-third of all U.S. rail securities by 1900. Even Andrew Carnegie’s fortune owed much to his role as agent for U.S. firms placing bonds with British and German financiers.
Significantly, the periods of heaviest foreign investment coincided with the periods of the U.S. economy’s most rapid expansion, providing the financing that ultimately helped American industrial firms overcome all European competitors.
Today that process is repeating itself. After several decades of U.S. capital flight, virtually all of our most powerful trading partners have rediscovered the economic lures of the United States. Rather than discouraging this capital influx, Americans should instead start thinking how best to make this windfall work for the nation’s long-term economic well-being.
