VIEWPOINTS : The Specter of Foreign Investment
With foreign acquisitions of U.S. businesses and real estate as common these days as politicians defending the flag, America’s open-door policy toward foreign investment is coming under increasingly critical scrutiny.
As recent polls indicate, up to 80% of the American public wants foreign investment in this country more closely regulated. Yet, exactly how current policy ought to be changed--or whether it ought to be changed--is by no means clear. The long-term economic and political consequences of extensive foreign investment in this country merit careful examination.
But there’s the rub. As a nation accustomed to debating major issues via 20-second sound bites, the illuminating discussion of policy options that we need is likely to be overshadowed by the more entertaining clash of polemics as the free-trade crowd again does battle with its protectionist nemesis.
No Real Guidance
On one side of this rather simple-minded dispute are the zealous acolytes of free trade who believe--almost as revealed truth--that barriers to foreign investment’s free flow violate natural law. On the other side are those who seem absolutely terrified that foreigners will soon be able to foreclose on the national mortgage and toss us all out on the street.
Between these two camps lies a rhetorical free-fire zone. Anyone skeptical about our current laissez-faire policy toward foreign investment risks being labeled a crypto-racist xenophobe. By the same token, those courting overseas investors are often portrayed as shortsighted commercial quislings eager to sell off the nation’s economic patrimony.
Regrettably, neither side provides any real guidance in understanding, let alone resolving, the issue of rising foreign investment here.
Despite the increased internationalization of business, “economic nationalists” steadfastly prefer American ownership of American assets. They attach more significance to the owner’s nationality than to the real benefits that the enterprise yields to the community or the nation.
Perhaps their most conspicuous distortion involves the question of how much of America foreigners really own. By most popular accounts, foreigners--who are invariably depicted as Japanese--will wind up owning America before Donald Trump does. (Interestingly, the British and Dutch continue to own more of our fixed assets than do the Japanese. The Japanese, however, have just emerged as the top overseas investors partly on the strength of their huge purchases of stock portfolios and government securities.)
Experts Troubled
The truth is that foreign investment in the United States, while not trivial, is not particularly awesome either, when viewed in perspective. Total foreign investment here approaches $1.78 trillion. Less than one-fifth of that amount--some $329 billion--is in foreign direct investment, through which foreigners acquire controlling interest in U.S. businesses or real estate. That represents less than 2% of all fixed investment in the United States. It’s also well below a tenth of our gross national product.
The remaining $1.45 trillion is invested in portfolios of stocks, bonds, bank accounts and government securities. Ironically, while economic nationalists are most animated when deploring foreign direct investment, portfolio investments represent a potentially greater threat to U.S. interests. Unlike direct investments in businesses or real estate, portfolio investments are highly liquid. And it is the prospect that foreigners will suddenly dump huge blocks of American stocks and bonds or refuse to buy U.S. Treasury notes that troubles the experts.
Apart from demanding closer monitoring of foreign investors’ activities in this country, economic nationalists offer few practical remedies. Regrettably, earnest concerns about the concentration of foreign ownership in certain key U.S. industries or the excessive degree to which the federal government relies on foreign funds to finance the budget deficit, are usually overshadowed by more frenzied attacks on foreign investment.
But if the economic nationalists’ case is weak, the laissez-faire position, despite its veneer of official acceptance and respectability, is not much more sound.
Like their protectionist foes, the free traders are more absorbed with foreign direct investment than with portfolio investments. Part of the reason for this, one suspects, is that portfolio investment transactions seldom result in flattering newspaper photographs of hard hat-wearing public officials turning soil at new industrial plants.
In general, the laissez-faire position maintains that foreign direct investment creates new jobs, generates new tax revenues, often results in the transfer of valuable new technologies, fosters the introduction of new management techniques, and helps reduce the U.S. trade deficit.
At first glance, these assertions seem eminently reasonable. However, when assessing the overall impact of foreign direct investment, there is much less reason to believe that these claims are valid.
For example, because more than 86% of all such outlays in the United States during the past five years have gone for the acquisition of existing companies or real estate, foreign direct investment plays a surprisingly negligible role in job creation. The attention lavished on new manufacturing facilities or plant expansions obscures a more complex reality in which foreign-owned firms often lay off workers, eliminate jobs and even go out of business. Indeed, recent research indicates that foreign direct investment has created fewer than 20,000 net new jobs annually in the United States during the past decade.
As for generating added tax revenues, that also turns out to be a suspect claim. In some cases, the cost to public agencies and to taxpayers of enticing a major investor to locate in the community frequently exceeds the level of new revenue that the project might reasonably be expected to generate. More routinely, though, because a shift in ownership generally affects a company’s tax liability, such investment may just as easily lead to revenue losses.
Finally, the U.S. affiliates of foreign companies actually may contribute to the U.S. trade deficit. In 1986, for example, foreign-owned firms in the United States imported $124.5 billion in merchandise. At the same time, these firms exported only $50.7 billion, resulting in a $73.8-billion contribution to our trade deficit.
The balanced conclusion must be that foreign investment is neither an unmitigated boon nor a clear and immediate danger. What is needed is a systematic and objective review of the impact of foreign investment on the United States. Lacking such an analysis, policy-makers are more likely to be swayed by the pleadings of the complacent and the anxious than by a pragmatic and accurate grasp of reality.
