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Who cares who owns America?

Who Cares Who Owns America?

Foreign investors' penetration in certain industries and areas and America's new status as a debtor nation have led many to call for limits on foreign direct investment in the United States. However, foreign investment is still just a small part of the U.S. economy. Direct investment is one of the few areas of international transactions where the U.S. runs a surplus. Further, the benefits of investment - jobs, capital, and management innovations - outweigh any risks from the investment. The threats of foreign investment often are overstated and based more on emotion than on economics.

FOREIGN BUYING of American real estate and American business has been grabbing headlines, many asking, "Who Owns America?" Nearly every major news weekly magazine or newspaper has had at least one cover story on foreign investment. And books on the subject have made the best seller list. At the same time, many states have established offices overseas to attract foreign investment to their state. And the U.S. Treasury eagerly seeks foreign buyers for government securities.

Should more caution be exercised in attracting foreign investors? Are additional controls on foreign investment in the U.S. necessary? The purpose of this paper is to answer these questions by investigating the benefits and perceived threats of foreign investment.

FACTS ON FOREIGN DIRECT INVESTMENT

First, what does foreign ownership in the U.S. really mean? What is owned? Exactly to what extent have foreign assets penetrated the U.S. economy?

It is ironic that the statistics used to track investment began to be collected during the last panic over foreign buying - in the late 1970s, when Americans feared that Middle Eastern countries were using the dollars we gave them for oil to buy our land out from under us. When the statistics collected under the Foreign Investment Study Act of 1974, Executive Order 11858, and the International Investment Survey Act of 1976 were collected and analyzed, however, it became apparent that foreign land purchases and other assets remained minuscule.

Components of Foreign Assets in the U.S.

Current statistics tell a different story, however. At year end 1987, foreign assets in the U.S. totalled $1.5 trillion(1), five times the amount just ten years ago. (Figure 1.)

Banking activities, either foreign deposits in U.S. banks or commercial lending by foreign banks, make up one-third of total foreign assets. Banking is followed by portfolio investment - bond and stock holdings representing less than a management share. Foreign holdings of U.S. Treasury securities, including both foreign government and private holdings, is the third largest component of foreign assets.

The fourth component, direct investment, is distinguished from portfolio investment in that direct investment entails a substantial ownership and management share of a U.S. company. In statistics collected by the U.S. government, ownership or control of 10 percent or more of an enterprises' voting securities is sufficient to establish a direct investment. Even with such a low threshold, direct investment is the smallest component of foreign assets, totalling $262 billion.

Data on foreign direct investment position reflect parent equity in and net outstanding loans to their U.S. affiliate. Therefore, these assets are only a part of the total assets of the companies under foreign control. In 1986, the latest year for which complete data are available, foreign parents' investment of $220 billion constituted management control of more than 10,000 U.S. affiliates with total assets of $830 billion, total sales of $667 billion and almost 3 million U.S. employees.(2)

Foreign Investors Penetration of

the U.S. Economy

In spite of these huge numbers, U.S. affiliates of foreign companies are a small part of the U.S. economy. In 1986, U.S. affiliate employment accounted for just 3.5 percent of the 84 million employees of all nonbank U.S. businesses.(3) This small share is not surprising, given the limited foreign direct investment in some industries, such as services, that account for a substantial part of the U.S. economy. In manufacturing, where direct investment is more frequent, U.S. affiliates' share of all U.S. employment was 7.8 percent.

Given the small size of foreign investment relative to the total economy, what has raised America's eyebrows is foreign investors' penetration into certain industries and areas. For example, Honolulu Mayor Frank Fasi, recently declared that continued speculative investment in Hawaiian real estate by the Japanese would spur "a violent reaction" in that state.(4)

Measured by share of assets, U.S. affiliates of foreign companies own 12.1 percent of total manufacturing assets. (See Figure 2.) However, foreign-controlled firms own 32.5 percent of assets in the chemical industry and 15 percent of petroleum refining. In contrast, U.S. affiliates own only 8.1 percent of machinery and electronics, and only 2.9 percent of transportation equipment.

The foreign penetration in chemicals and petroleum refining is due to many factors, including large economies of scale and the need to be near resources. Investment in these industries also reflect the importance of the U.S. market. For example, in chemicals, Britain's ICI, like DuPont, believes the key to its future is in internationalizing its business. But unlike DuPont, which probably could survive with its substantial and profitable U.S. business alone, ICI believes it could not survive in the U.K., making foreign investment a business imperative.(5)

The other area of substantial penetration is in commercial real estate. Although real estate makes up only 8 percent of U.S. affiliate assets, foreign investors now own 1 million acres of agricultural and forestry land and 1.5 million acres of other property. They own 46 percent of the commercial real estate in downtown Los Angeles, 39 percent in downtown Houston, 32 percent in Minneapolis, and 21 percent in Manhattan.(6) These often quoted statistics are also misleading, however. For example, "downtown Los Angeles" is only a seven block square area, hardly a dent in the huge L.A. metropolis.

U.S. as a Debtor Nation

Another reason for the media focus on foreign investment is America's new status as a debtor nation. Since 1985, the value of foreign assets in the U.S. has exceeded the value of U.S. assets abroad. At year end 1987, the net international investment position of the U.S. was $368 billion in the red.

However, the major contributors to this deficit are portfolio investments in stocks and bonds and holdings of U.S. Treasury securities. Claims for U.S. banks and foreign banks are almost identical. In international direct investment, the U.S. continues to run a surplus. U.S. direct investment abroad totaled $309 billion in 1987, leaving an investment position surplus of $47 billion. (See Figure 3.)

THE DEBATE: BENEFITS VS. COSTS

OF FOREIGN INVESTMENT

Is foreign control over 10,000 firms to be welcomed or feared? On the one hand, foreign investment benefits the U.S. economy in several ways. It creates jobs, provides capital for growth, and leads to transfers of management innovations to American companies. On the other hand, negative consequences of foreign investment may exist when it abuses state incentives, represents unfair competition, or threatens national security or national sovereignty.

Benefits of Investment

The first obvious benefit of foreign investment is jobs. As indicated before, foreign-owned firms employ more than 3 million U.S. workers. Admittedly, some of these jobs would exist even without the foreign investor. For example, U.S. affiliate employment in California actually declined from 1985 to 1986, not because workers were laid off or a company closed, but because a West German investor sold its interest in a large agricultural chemical producer, WR Grace.(7)

Nevertheless, the number of jobs created by foreign investment is substantial. In 1986, almost half of the foreign investment transactions recorded by the U.S. Department of Commerce were either new plant and office openings, plant expansion, or joint ventures.(8) Foreign investment can have a positive impact even in the case of acquisitions and mergers, when the investment provides a necessary infusion of capital. The Bridgestone acquisition of the former Firestone plant in LaVergne, Tennessee, is an example of how foreign capital saved an entire region from economic recession.

Without foreign capital, both direct and portfolio investment, to help fuel our six year economic expansion, interest rates would have been significantly higher and the expansion significantly shorter.(9)

The third major benefit of foreign investment is management innovation. The U.S. does not have to become Japanese to remain competitive, but no one can deny the usefulness of management techniques such as "just in time," and the elevation of quality control and operational efficiency.

Foreign investment, particularly in the form of joint ventures, is an effective means of transferring this management philosophy. At the Toyota-General Motors joint venture in Fremont, California called NUMMI (New United Motors Manufacturing Inc.), 2,500 UAW members were put back to work using "just in time" and quality circles. The plant went from being GM's least productive to being the most productive and now has the lowest warranty costs among GM plants. When financial difficulty threatened a closure of a GM facility in Van Nuys, California, the use of those same techniques saved more jobs.

Perceived Threats of Investment

On the other hand, foreign investment may have negative consequences. First, the jobs impact of a foreign-owned firm may not be so great as expected due to higher levels of automation and lower levels of local content in the final product. This factor calls into question the appropriateness of state incentive programs. For example, in 1985 Kentucky spent more than $125 million to persuade Toyota to build an auto plant in Georgetown.(10)

The second threat of foreign investment is in the form of unfair competition for American companies. Unfair competition arises when U.S. companies are not given the same privileges overseas as foreign companies receive in the U.S. For example, Japan prohibits foreign ownership of more than 25 percent of any "technologically innovative company," such as electronics, yet Japanese firms may invest freely here.(11)

Another major concern arising out of the increase in foreign investment is that the U.S., being indiscriminate in whom it accepts money from, may compromise national security. In particular, concern exists that through the acquisition of banks and companies, our adversaries could gain access to strategic technology or classified information. Senator Daniel P. Moynihan once expressed this concern saying, "(Foreign investment) is a new form of industrial espionage. (I)t doesn't involve people stealing blue prints; they own the blueprints."(12)

Martin and Susan Tolchin in their book Buying Into America, illustrate the concern with a "cloak-and-dagger" story of the 1974 Soviet effort to acquire several banks in California's Silicon Valley. The purpose of the acquisition was to learn the financial structure of the electronics industry and thereby obtain access to individuals most vulnerable to financial pressure.(13)

Finally, some fear that foreign investment may the vulnerability of our economy to worldwide forces and cause us to lose control over our own destiny.

ARE THE PERCEIVED THREATS REAL?

In response to these perceived threats, proposals have been made to increase reporting and screening of foreign investment, require reciprocity and reprisal in trade agreements, set guidelines for domestic content, and reduce the availability of economic development incentives. However, the facts do not substantiate the concerns that motivate these proposals.

State incentives

Concerning the use of state incentives, some criticism is warranted. States and localities should examine seriously whether the jobs and tax revenue generated from economic development outweigh the cost of incentives. However, this examination applies to offering incentives to both domestic and foreign firms. (Remember the state bidding war over the GM Saturn project.) Further, the decision to offer incentives is a state decision, and a choice that should not be usurped by federal legislation.

Unfair competition

Unfair competition does result when foreign governments deny American companies equal access to their markets through trade and investment. In view of these inequities, many companies and policy makers advocate reciprocity, i.e., demanding investment access in trade talks, GATT and bilateral negotiation, backed up with a threat to withhold access to U.S. markets if there is a failure to comply.

A "carrot and big stick" approach to trade policy may be effective, so that investment should become a legitimate and equal consideration at trade talks. However, demanding investment reciprocity tit for tat is not good economics or good diplomacy. We shouldn't become so obsessed in demanding equal investment access to foreign markets that we fail to recognize when concessions in trade or the reduction of subsidies may have a greater impact on the competitiveness of U.S. industry.

National security

Many measures already exist to safeguard America's national security. Like U.S. investors, foreign investors must comply with all applicable laws, such as Securities and Exchange Commission reporting requirements and the antitrust laws. Unlike U.S. investors, a number of special restrictions exist for activities in certain key sectors. In addition, since 1975 a federal interagency group, the Committee on Foreign Investment in the United States (CFIUS), has been empowered to review foreign investments in this country that, in the judgment of the committee, might jeopardize U.S. national interests.

However, the Tolchins and others contend that the laws remain inadequate to block the kind of takeover attempted by the Soviets. Supporters of this view advocate additional disclosure of the "ultimate beneficial owner" of direct investments and the strengthening the ability of CFIUS or another body to deny investments with a potential negative effect on national security.

The first step was contained in the defeated Bryant Amendment (Section 703) to the 1988 Omnibus Trade Bill and has been reintroduced in the current session as House Resolution 5410. The resolution would require entities with a "significant" or "controlling" interest in a U.S. business to register with DOC and to divulge often confidential and proprietary information. Unlike previous reporting requirements, the resolution would allow public disclosure of this information, not only company name and investment amount, but also information that is usually confidential, such as the compensation for directors and executive officers.

Congressional debate of the Bryant amendment focused on whether the public disclosure requirements would discourage investment and whether such requirements would violate numerous U.S. treaties and trade agreements that require "national treatment".

However, a more basic question is whether the amendment would in fact be effective at deterring or identifying threatening investments. I think it would not. Requiring investors to register to find spies reminds me of using pharmacists registration as a means of identifying drug dealers. Those out to break the law will find a way to do so.

The second step, extending the screening power of CFIUS (or another organization), is equally ill advised. Such a screening agency would become a magnet for protectionist interests and management groups seeking a buffer against unfriendly takeovers.

This situation was demonstrated in one of the few uses of existing CFIUS powers, questioning the proposed sale of Fairchild Semiconductor in Cupertino to Fujitsu of Japan in 1987. Although Fairchild was already a subsidiary of France's Schlumberger, U.S. officials expressed concern over losing control of the semiconductor industry to foreign investors. In fact, the blockage was almost certainly due in part to pressure brought by other domestic semiconductor producers.(14)

National Sovereignty

Finally, foreign direct investment has not made the U.S. economy more vulnerable. Federal Reserve Board Chairman Greenspan remarked on this point to Congress in February 1988. Foreign money that sits in bank accounts and Treasury bills, he noted, can be withdrawn quickly if overseas investors lose confidence in the U.S. economy. Money invested in plant and equipment, on the other hand, can't be withdrawn without difficulty, meaning more, not less, stability for the U.S. economy.(15)

ECONOMIC NATIONALISM AND

FOREIGN INVESTMENT

In spite of these facts, concern over foreign investment and a desire to control it persist. Recent surveys by the Roper Organization for U.S. News and World Report indicate that 70 percent of American voters support additional controls on foreign investors.(16) Clearly foreign investment is no longer an economic issue, it is an emotional one.

Our view of foreign investment is a clue to our view of ourselves as a nation competing in a global economy. Under a phenomena called "economic nationalism," the U.S. public no longer views international business transactions as cooperative arrangements, but as "adversarial trade." They measure U.S. problems by the success of other countries. At least part of economic nationalism comes from latent isolationism, a longing to turn back the clock on the global economy. Such a view is unrealistic. Even before foreign investment was a large factor, the U.S. could not afford to act in a vacuum.

There is an irony to this new climate. By focusing the public policy agenda on foreign investment, the agenda has been diverted from the one thing that could really help U.S. long-run competitiveness, i.e., decreasing the federal budget deficit. The linkage from federal budget deficit to trade deficit to international asset deficit couldn't be clearer or more widely recognized. We fund our budget deficit with foreign money and feed our appetite for possessions with foreign goods. We are having our cake and eating it too. Foreigners are supporting our bad habit by using their wealth to buy U.S. assets rather than increasing the standard of living of their own citizens.

So "Who cares who owns America?" We all do. But so long as reducing the budget deficit is a flag more often saluted than followed, foreign investment will continue to grow. However, the deficit is the issue that should be grabbing headlines and dominating the public policy agenda.

PHOTO : Figure 1 Foreign Assets in the U.S. (Yearend, 1987)

PHOTO : Figure 2 U.S. Affiliates Assets As a Percentage of all U.S. Business Assets

PHOTO : Figure 3 Net International Investment Position of the U.S.

FOOTNOTES

(1)Statistics on foreign assets and foreign direct investment position are from Russell B. Scholl, "The International Investment Position in 1987," Survey of Current Business, June 1988, pp. 76-84.

(2)U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States, Operations of U.S. Affiliates of Foreign Companies, Preliminary 1986 Estimates, June 1988, Table 5.

(3)Statistics on U.S. affiliates share of employment and assets are from Ned Howenstine, "U.S. Affiliates of Foreign Companies: Operations in 1986," Survey of Current Business, May 1988, pp. 59-65.

(4)_____________, "Japanese Speculation in Hawaiian Land Scored," Los Angeles Times, May 11, 1988, Part IV, p. 5.

(5)_____________, "Foreign Investment in U.S. Chemical Industry Continues Steady Climb," C&EN, April 25, 1988, pp. 7-10.

(6)A survey by the Coldwell Banker Real Estate Group, reported in "For Sale: America," Time, September 14, 1987.

(7)_____________, "Grace: A Selloff to Pay for Stock," Business Week Industrial Edition, December 23, 1985, p. 36.

(8)U.S. Department of Commerce, International Trade Administration, Foreign Direct Investments in the U.S., 1986 Transactions, September 1987, p. 25.

(9)S. Marris, Deficits and the Dollar, August 1987, p. 140-41.

(10)____________, "War Between the States," Newsweek, May 30, 1988, pp. 44-45.

(11)Martin and Susan Tolchin, Buying into America, 1988, p. 224.

(12)Quoted in Martin and Susan Tolchin, Buying into America, 1988, p. 149.

(13)Martin and Susan Tolchin, Buying into America, 1988, p. 141-152.

(14)For coverage of the Fujitsu-Fairchild sale see "Bitter Lessons for Fairchild's Donald Brooks," Business Month, November 1987, p. 30 and "Cold Feet Fujitsu Drops its Fairchild Bid," Time, March 30, 1987, p. 52.

(15)Quoted in Alan Murray, "The Outlook, Reagan's Legacy: America for Sale," Wall Street Journal, p. 1.

(16)Survey by the Roper Organization, reported in Donald Baer, "Anxiety in America's Heartland, U.S. News & World Report, April 25, 1988, p. 24. In a survey by Smick-Medley & Associates, Inc., 40% of those surveyed supported a law to prohibit further investment. This survey was reported in "Love and Hate in America," The Economist, March 19, 1988, p. 74. See also Kevin Phillips, "Economic Nationalism: An Emerging 1988 Election Theme," The American Political Report, March 4, 1988. REFERENCES Fry, Earl H. Financial Invasion of the U.S.A.: A Threat

to American Society? (McGraw Hill Co., New

York, 1980). Little, Jane Sneddon. "Locational Decisions of Foreign

Direct Investors in the United States," New England

Economic Review, July/August 1978, p. 43-63. Spencer, Linda M. American Assets: An Examination of

Foreign Investment in the United States.

(Congressional Economic Leadership Institute,

Arlington, Virginia, July 1988). Turner, Janet L. Foreign Direct Investment in California.

(California Department of Commerce, June

1988). U.S. Department of Commerce, International Trade Administration,

International Direct Investment,

Global Trends and the U.S. Role. (Government

Printing Office, Washington D.C., August 1984).

(*)Janet L. Turner is Director, Office of Business Development, California Department of Commerce, Sacramento, CA. The views expressed in this paper are those of the author and do not necessarily represent the official policies of the State of California. This paper was presented at the 30th Annual Meeting of The National Association of Business Economists, September 28, 1988, Pittsburgh, PA.
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Author:Turner, Janet L.
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Date:Apr 1, 1989
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