When it comes to foreign investment (FDI), the USA leads the world. Times are changing though and as new economies emerge and our traditionally open economy struggles to balance the needs of consumers and business, we have to fight to maintain that status.
What is FDI? Foreign Direct Investment, as we define it, is when a US-based company is controlled directly by a foreign investor who has at least a 10% ownership stake. This can be an individual, private company or state-owned enterprise (SOE). FDI includes so-called ‘greenfield’ investments, whereby a new company sets up with all its infrastructure and labor demands; company expansions; income from mergers and acquisitions; equity reinvestments and investment in debt instruments. FDI – in particular equity investment – is important for the economy because it brings in money for development and research as well as significant employment opportunities.
FDI is a complex picture with proxy ownership, protected data and different economic pricing models etc. leading to different figures quoted between sources but there is little doubt that up to now, the US holds the bulk of cumulative FDI.
The Historical Context
The USA has always been attractive to foreign firms for a number of reasons including our open economy and a motivated, efficient and well educated workforce. We also have a large consumer market and are geographically close to other large markets.
Nevertheless, FDIUS (Foreign Direct Investment in the US) inflows have been up and down over the last 20 years, breaking the $300 billion mark on three occasions but dropping to as low as $50 billion in some years. 2000 and 2008 were boom years but the $353 billion recorded in 2015 was the largest inward investment yet. So does that mean we can take our foot off the gas?
This would be dangerous. International trade is an ongoing process and the landscape changes regularly, affected by everything from macroeconomics and civil unrest to political shifts and immigration levels (you are most likely to do a deal with a country if a large number of nationals are located there). Even mega deals can make all the difference between a net FDI inflow and deficit (e.g. the the Vodafone Verizon divestment in 2014). We need to remain on the ball to capitalize on these factors, something which President Obama’s ‘Select USA’ program was designed for.
Current Trends in Global FDI
It has always been easier for overseas firms to trade and invest in the US than in other nations but in recent years there has been an overall global drive to promote and liberalize FDI. As trade becomes easier across the world and developing economies grow stronger, the gap between the US and the rest of the world has shrunk. The EU and emerging economies such as China and India have been among the winners. In fact, according to Bloomberg, China and Hong Kong together attracted more FDI in 2016 than the US – a clear warning that our world-leading status is not guaranteed.
However, despite the recent bullish performance of global FDI, the future now looks less certain after 2016 figures showed a decline in foreign investment, with developing economies hit hardest.
The United Nations Conference on Trade and Development (UNCTAD) publishes an annual World Investment Report (WIR) and the 2017 report revealed a fall back in the progress made by developing economies. In contrast, the US continues to look strong and emerging economies were seen to be bouncing back after a lean spell. Increased FDI into developed countries – particularly the US – was driven mainly by increased equity flows from mergers and acquisitions. These went up by 24 per cent in value terms for a total value of $794 billion. The signing of mega-deals between companies in developed countries were a significant feature of 2016 FDI and included the $39 billion purchase of US Allergan’s general drugs unit by Teva Pharmaceuticals of Israel.
On the other hand, geopolitical uncertainty is also rife. In terms of the USA, this has revolved around the change in administration with President Trump looking to renegotiate and shelve some multinational trade treaties while drawing up new bilateral ones. Fear over terrorism, social unrest, cross-border data security and cybercrime are dampening factors while pressure from global interest rate rises might also negatively impact FDI.
Although the prospects for increased FDI in 2017 remains high, the UNCTAD report suggests many investors are likely to hold back until 2018 or 2019 before committing to foreign projects. Companies that are likely to be favored through FDI, according to an IPA survey, are information and communications firms followed by those in the automotive and professional and technical services industries.
Overall, it looks as if the US will retain its place as the most attractive FDI destination for the next few years at least with China close behind.
FDI in the Emerging Economies
The proportion of FDI invested into developing countries, particularly the emerging economies of Mexico, Indonesia, the Philippines and the BRICS nations (Brazil, Russia, India, China and South Africa) increased from 22 per cent to 34 per cent between 2010 and 2015. Over that time, the USA’s piece of the pie shrunk from 37 per cent down to 22 per cent. Far East Asian countries such as China, India and Indonesia are likely to continue to attract considerable FDI with the recent deal between China and Saudi Arabia a prime example, dwarfed as it was by the raft of recent US-Saudi trade agreements.
Elsewhere the prospects are varied. Russia is likely to continue to struggle despite a positive year while prospects for inward investment into the middle east is mixed with oil prices rising but geopolitical uncertainty dampening demand.
For now, the US continues to hold steady in the face of increasing competition for foreign investment but the strong figures of 2016 shouldn’t be allowed to generate complacency. FDI is a more serious commitment to another country than portfolio-based investments which can simply be withdrawn if the investment climate gets stormy. Therefore, political uncertainty is likely to make foreign investors cautious about getting involved in big projects. On the other hand, the opportunity for more tailored bilateral trade agreements rather than the multilateral deals preferred by the previous administration might confer an advantage.
As long as any ‘America First’ policy retains a strong commitment to FDI, there is no reason why the US cannot maintain its position as the world’s most attractive investment location. We just shouldn’t take this for granted.
Whatever the fine detail, with FDI responsible for the direct employment of over 6 million American workers, it is a fundamental pillar of our strong economy and needs prioritizing.
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