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U.S. shores attract European capital.

Good news waits for American businesses that possess strong skills or dominant market share but lack capital expansion. The European investment community is waiting with open arms. In recent months, many of Europe's lending institutions have warmed considerably toward investment opportunities in the United States. This strong interest should continue for some time, aided by intrinsic American appeal as well as the volatile situation in Europe.

First and foremost, the U.S. economy is clearly on its way to recovery, albeit modest at this point. A variety of indicators, however, from increases in new housing starts to decreases in bankruptcy filings, do point toward a healthier economy and overall growth. At the same time, most European economies continue to struggle as their governments look for workable, non-inflationary fiscal stimuli. These contrasting economic prospects are tilting the flow of capital toward the U.S.

Many observers expect the dollar to gain strength this year relative to the major European currencies. Much of this strengthening will be courtesy of Germany, where interest rates are expected to continue their decline. If the dollar does in fact benefit, so will the yield on dollar denominated investments.

The great size and continued ease of access to the U.S. capital markets also helps attract foreign investment. The liquidity of our financial exchanges provides investors with comfort regarding their ability to "cash-out" at some point in the future. This contrasts sharply with the situation in Europe, where most markets are considered relatively illiquid and inactive.

Other timely factors, less technical and perhaps more profound, enhance the wisdom of investing on American shores. These include the tremendous uncertainty engulfing the European Community. Not only has the evolution of the single European market taken longer than expected, or at least hoped for by Community visionaries, but the fallout from both the breakup of the Soviet Union and the unification of Germany continues to produce negative side effects. These include enormous government deficits, high unemployment, uncertain political leadership, and a reawakening of racial and ethnic conflict.

As the social or political risk of European investment grows, so does the attractiveness of the U.S. as a safe haven for capital.

Long term global economic trends also make the U.S. more attractive to Europeans. Tremors at home will likely restrict new Japanese investment in the U.S. for some time, leaving a wider field for the Europeans. Manufacturers in Europe must also cope with increasingly uncompetitive labor and production costs. In some cases, this will lead to direct investment in the U.S. such as BMW's decision to assemble cars in South Carolina. But in many cases, we will see significant direct capital investment in those U.S. companies with the strongest products, markets, or technology, often as a first step to joint ventures. This is a time for American strengths to surface.

Paradoxically, the U.S. is more likely than Europe itself to attract the necessary capital to mesh the needs of business with our emerging national agenda, the capital needed to both rebuild the American infrastructure and stretch our technological envelope, in order to create and secure jobs of the future.

Charles Rothstein is a principal in Andover Capital, Inc., Farmington Hills, Mich.
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Title Annotation:Credit and Banking; European investments in the US
Author:Rothstein, Charles
Publication:Business Credit
Date:Jun 1, 1993
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