Investment Overseas by U.S. Firms Rising

With all the clamor about foreign investors buying up America, a gradual and steady rise in U.S. investment overseas is passing almost unnoticed.

But economists say U.S. companies are increasing their foreign investments, particularly in Europe where the growth opportunities look too good to miss.

“Europe is a dynamic growth area,” said Conference Board consultant James Greene. He said European investments are especially attractive in light of the European Community’s plan to establish a single market by 1992.

Ford Motor Co.’s acquisition of Britain’s Jaguar PLC and General Motors’ purchase of a 50% stake in Saab-Scania of Sweden are just “the tip of the iceberg,” said Stephen Cooney, an international investment director at the National Assn. of Manufacturers.

Economists say the accelerated rise of U.S. investment abroad should calm some concerns about increasing foreign ownership of American assets. Those concerns rose to a fever-pitch recently when the Mitsubishi Estate Co. acquired a controlling stake in New York’s landmark Rockefeller Center.

So far this year, American companies have worked out plans to establish 220 manufacturing projects overseas, up from 180 projects in 1988, Greene said. He added that he expects the rising trend to continue for four to five years.

U.S. direct investment abroad rose by $25.01 billion in the first nine months of 1988 to $351.91 billion, after rising by $18.9 billion in all of 1988, according to Commerce Department estimates.

In the same period, foreign direct investment in the United States grew faster, as it has for most of the decade. Foreign investment rose by $22.65 billion to $350.15 billion after surging $58.44 billion last year.

Economists attribute the heavy investment flows both in and out of the United States to the globalization of manufacturing and other industries.

Commerce Department economists said U.S. companies plan to spend $48.9 billion for plant and equipment at their overseas affiliates, up from $42.6 billion last year. Their outlays are expected to rise further in the new year, to $49.9 billion.

“The underlying trend is definitely up,” although the data is volatile, reflecting fluctuating exchange rates and accounting factors, said Cooney at the National Assn. of Manufacturers.

In the past, the driving force behind U.S. investment abroad was the cheap foreign labor, said William Archey, an international economist at the U.S. Chamber of Commerce. But that is no longer the case. “The cost of labor is no longer a factor for overseas investment,” he said.

The main reason American companies want to invest overseas today is to manufacture goods for foreign markets at a competitive cost, even if the start-up expenses are high.

“American companies will allocate more dollars abroad,” as some 200 American manufacturers have enough cash to make the expensive overseas investment, Greene said.

The rise in foreign investment, however, could spell trouble for the weak domestic manufacturing sector. Economists worry that there could be a repeat of the damage caused in the 1960s and 1970s when the domestic sector was hurt by the surge of U.S. investment overseas.

“That is quite true, especially in the chemical and electronics industries,” Greene said.

“It is devastating for unions,” he said, but added that “workers will not suffer much, as the service industry will absorb workers (who are pushed out of the manufacturing sector),” he added.

As U.S. firms prepare to increase their presence in big markets in Europe and Asia, Japan’s barriers to foreign investment are coming under renewed criticism.

“Japan is a big market, but we cannot invest there,” Archey said. He pointed to two kinds of obstacles: unique Japanese business practices, such as the multilayered distribution system that discriminates against outsiders, and the exceptionally high cost of conducting business in Japan.

Business practices could change over the years, but the cost of doing business in Japan is expected to stay high because a much stronger dollar would devastate American exporters.