Who’s Afraid of Foreign Investment? : It Brings Prosperity--Jobs, Capital, Taxes and Productivity

<i> Cynthia Day Wallace is a senior fellow in the international business and economics program at the Center for Strategic and International Studies in Washington</i>

Virtually all of the world’s nations are pulling out the stops to attract foreign direct investment.

The United States, in contrast, has been exhibiting disquieting signs of resistance to foreign direct investment for the first time in its economic history. This was reinforced last week when the House approved legislation calling for new requirements on incoming direct investment. Only this past summer, this amendment had been cut from the omnibus trade bill under threat of a presidential veto.

Widespread publicity--"The Buying-Up of America,” “The Selling of America,” “The Japanese Are Coming,” “The Japanese Challenge"--has brought the American public squarely into the policy debate.

Before allowing visceral reactions to translate into policy prescriptions, let’s look at the record.


The most dramatic shift from protection to promotion in the area of foreign direct investment has been that of our southern neighbors. In the 1960s and ‘70s, South American nations feared economic colonialism and loss of political sovereignty as an anticipated consequence of foreign direct investment. The official manifestation of these fears emerged in Decision 24 of the Cartagena Agreement, putting foreign direct investors at a severe disadvantage and effectively shutting out U.S. enterprises from the Andean Common Market. Last year Decision 24, officially acknowledged as not in the national interests of the respective member states, was repealed to woo back valuable foreign investors, now well-established in a more receptive Europe and Asia.

A less blatant but perhaps even more compelling policy reversal in an industrialized economy involves our other closest neighbor and largest trading partner, Canada. The Canadians similarly succumbed to instinctive protectionism against foreign direct investment in the 1970s. Under its 1974-75 Foreign Investment Review Act, the Canadian government initiated systematic screening of foreign enterprises seeking entry or corporate acquisitions in Canada. Screening has reduced foreign direct investment in Canada by nearly 50% in four years, to the detriment of the Canadian economy. Consequently, after a dozen or so years of experience with the screening mechanism, the Foreign Investment Review Act’s virtual demise is the currently pending U.S.-Canada Free Trade Agreement. Under this pact, screening will be phased out by 1992 for all but the largest investments (direct acquisitions over $150 million Canadian).

The countries now prospering are those that have avoided erecting barriers to foreign direct investment. The Pacific Rim continued to accept foreign investment, producing a core of newly industrialized nations--South Korea, Taiwan, Singapore, Hong Kong, Malaysia--some of which now rival the most economically sophisticated nations in the world. In the industrialized world, West Germany has the most liberal open-door policy in Europe; at the same time, it has one of the most prosperous economies.

What about the American experience with foreign direct investment? This country’s investment climate has traditionally been the most open of any nation in the world. America’s earliest beginnings were nurtured on foreign capital. Since World War II no other nation has invested as heavily abroad or imposed fewer restrictions on incoming investments. Any change now to a restrictive posture would be perceived abroad as totally inconsistent--not only with our past policies, but with our present multilateral initiatives as well.


In the context of the General Agreement on Tariffs and Trade, for example, we are trying to negotiate away certain residual investment restrictions imposed on foreign investors by Third World nations. We are also seeking to promote cooperation among the industrialized countries to liberalize and coordinate international investment policies.

If we seek to protect ourselves against this latest investment influx with restrictions unprecedented in our postwar history, we risk not only eroding our economic leadership but also seriously compromising our credibility in an area where we hold one of our few remaining global economic advantages.

The fact is that foreign investments often bring technological innovations, new management techniques and other forward-looking business practices that help make American businesses competitive. They create jobs; they substitute U.S.-made products for imports; they expand exports; they raise productivity, and they provide needed foreign capital. Foreign investors also pay taxes to American local, state and federal governments.

Restrictions against incoming direct investment have been counterproductiveat every level of economic development in the free world. We need to closely consider the evidence before prematurely reacting with new restrictions of our own.