More than ever before, foreign companies have been making themselves at home in U.S. markets. The rapid growth of foreign direct investment in the United States reflects the emergence of highly competitive firms based abroad and is thus linked to the loss of U.S. international competitiveness in trade. Two-way flows of direct investment have blurred the distinction, at least among industrial nations, between host and source countries. While the United States remains a major source country as well as the strongest voice for international action to regulate national investment policies, it has also become the world's most important host to direct investment, with all the domestic political pressures entailed. A key policy question for the 1990s is whether the United States will continue its leadership role in combating investment policies that achieve nationalistic objectives at the expense of global efficiency, or join other host countries in adopting its own nationalistic policies.
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References
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1. Even when goods are imported, production need not be located in the country where the multinational firm is based. Food products sold in the United States under British brand names are often produced in Canadian subsidiaries, while much Japanese-brand electronic gear comes to the United States from factories elsewhere in Asia or in Mexico.
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2. In the immediate postwar period, European and U.S. analysts had likewise failed to anticipate Europe's resurgence as a major industrial exporter.
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3. U.S.-based auto companies have been losing market share globally since the 1960s, while U.S. multinationals overall have largely held their own, with gains in sales from offshore operations offsetting reduced exports from U.S. plants. This suggests that the competitiveness problems of the automakers are not representative of U.S. manufacturing as a whole.
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4. Even when local production replaces goods previously imported, as has occurred in both autos and electronics, the resulting fall in imports of finished goods is often associated with increased imports of parts. This has been alleged in recent years about Japanese investments in the United States but is also a longstanding complaint of less developed host countries.
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5. In January 1991, with the big three facing the prospect of their worst year in a decade, Chrysler, Ford, and the United Auto Workers were urging further reductions in the level of imports from Japan to compensate for rising Japanese-controlled production in the United States.
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6. Robert E. Lipsey, “Changing Patterns of International Investment by and in the United States,” in The United States in the World Economy, ed. Martin Feldstein (Chicago: University of Chicago Press, 1988), pp. 475-545.
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7. The data in Table 3 show that the British stake in 1989 was nearly twice that of the Japanese. Moreover, these data are based on historical costs and thus tend to understate the relative market value of British holdings in the United States.
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8. The U.S. investments by Japanese firms are a case in point. While this kind of complementary relationship between exporting and direct investment has been documented for U.S. manufacturing investments, it may be even more important in the case of service industries such as banking and insurance.
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9. Another recent argument appeals to a wealth effect on firms facing imperfect capital markets. Other things being equal, a fall in the dollar increases the wealth of foreign firms and thus allows them to bid more for U.S. assets than U.S. companies are able to pay for these assets. Long-range corporate planning of FDI expenditures in terms of the home currency would have a similar effect on observed dollar flows, however.
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10. Given the large swings in key rates during the 1980s from apparent undervaluation to apparent overvaluation and back again, the explanation for recent increases in U.S. investments may lie less in the specific level of the exchange rate at the time of the investment than in the high probability of future large movements. Here global management plays a key role, allowing increased costs in one location to be offset by reduced costs elsewhere and permitting some flexibility in shifting marginal production between locations on different sides of a major rate alignment.
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11. Local policies to attract new investment may also provide important locational advantages. Like market protection, such incentives are typically available to domestic as well as to foreign firms.
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12. The Exon-Florio provision of the 1988 trade act allows the president to block any foreign takeover that threatens U.S. national security. By the end of 1990, only one transaction had actually been stopped, although other potential takeovers may have been deterred. More recent proposals would replace national treatment of inward FDI with a reciprocity standard aimed at Japan. These legislative initiatives parallel the trend in the 1980s in U.S. trade policy.
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13. Despite its own initiatives to curb such practices, the United States has not been immune to their attractions. One study of TRIMs found that nearly half of U.S. state governments offered investment incentives, prompting the authors' observation that although the United States has no local-content legislation, “it would be disingenuous to suggest that the pursuit by certain states of foreign-owned automobile plants has no impact on the country's trade flows.” See Theodore H. Moran and Charles S. Pearson, “Tread Carefully in the Field of TRIP Measures,”World Economy, 11:119-134 (Mar. 1988).
