Dean Barber

FDI is Great for US

In Corporate Site Selection and Economic Development on July 20, 2014 at 12:29 am

Last month, I wrote a blog entitled It’s a Scary World. The tragic events of this past week with the shootdown of a passenger airliner in eastern Ukraine and the invasion of the Gaza strip by Israeli forces only reinforces that premise.

It is a dangerous world, at least parts of it certainly are.

One of the points that I was trying to make is that despite all of our problems, the United States remains the preferred place for capital investment. In that sense, we are a port in a storm, a safe harbor.

One CNBC analyst has described the U.S., in terms of investment opportunities, as the cleanest shirt in a bag of dirty laundry. When compared to the rest of the world, I think he is probably right.

And this remains true despite the fact that we have a corporate tax rate that ranks among the highest in the world, aging infrastructure, and a dysfunctional federal government that seems incapable of tackling virtually any issues of major importance.

And yet, people and companies from all over the world still want to come here, which is a testament to who we are, a nation of immigrants, and what we have built here.

Last year, companies invested $1.46 trillion in locations outside their home country, of which $193.4 billion came to the U.S. Now this is a good thing, because foreign direct investment (FDI) is a big job creator in this country.

A recent report by the Brookings Institute on FDI in U.S. metro areas found that 5.6 million U.S. workers—about 5 percent of the entire workforce—are employed in the domestic operations of companies that are majority-owned by a foreign parent. My wife is among those ranks, having recently taken a job with a Japanese-owned company.

What’s more, a majority of foreign-owned firms that have operations in the U.S. pay 22 percent higher averages wages.

Why FDI Happens

Companies invest outside their home countries to either find new markets for their products or services or to take advantage of certain cost differences, which theoretically could mean increased profits.

When a U.S. company does that, we call that “offshoring” and to some degree we will demonize them for that practice, especially when there is accompanying American job loss.

Some of those very same companies have come to the realization that their offshoring plans were not so well thought out and profitable after all. And that’s when to some degree we will celebrate them for “reshoring,” especially when there is accompanying American job gains.

And we also celebrate when a foreign company starts operations in the U.S. that creates jobs. But keep in mind that in most cases, FDI in the U.S. happens via merger and acquisition – that is a foreign company either acquires a U.S. company outright or takes an equity position in it.

About 13 percent of FDI happens via greenfield investment, but those can often be very big projects by which many economic development organizations clamor for.

By either acquisition and merger or greenfield, the U.S. is an attractive playing field by offering the world’s largest economy with high per capita incomes, a stable investment environment, deep capital markets, strong institutions and an environment of innovation.

But foreign companies in turn offer so much to the U.S. economy by investing here in addition to the millions of jobs they create.

More than $80 billion dollars’ worth of FDI — 48 percent of the total in 2012—flowed into our manufacturing sector. And more than 18 percent of people employed in this country in manufacturing work for a foreign company. Now that is huge.

Foreign-owned companies also contribute 18.9 percent of all corporate dollars spent on R&D in the U.S. That amounts to $45 billion dollars annually, which fuels innovation and technological advances, which is the only way we can compete globally.

When foreign companies enter a market, they bring with them new production technologies, knowledge, and management practices. These spillovers spread through supply chains, labor markets, product markets, and to competitors. Economists estimate that such spillovers from FDI alone accounted for 12 percent of U.S. productivity growth between 1987 and 2007.

Foreign firms also exported nearly $304 billion worth of goods from the U.S. in 2011, accounting for one-fifth of all U.S. goods exported that year.

Most FDI in the U.S. comes from developed nations, which makes sense because business leaders in developing countries are typically more focused on growth opportunities that they have at home. England, Japan, Germany, Canada and France are the top contributors to FDI in the U.S.

I have had the benefit of working with Canadian, German, Japanese, British and Korean companies in siting plants in North America, and I can truthfully say working with foreign-based companies has been an educational and a rewarding experience. I feel almost lucky or blessed to have been able to serve them, and I hope to serve more in the future.

Watch China

According to Brookings, Chinese firms accounted for only 11,600 U.S. jobs in 2011. But this modest number masks rapid growth. From 2007 to 2011, employment in the U.S. affiliates of Chinese companies increased by over 800 percent.

Two huge Chinese projects – one in Louisiana and the other in Virginia – have been announced recently that should be history making in terms of size and scope.

From the Greater New Orleans Inc. (nice folks), I learned Yuhuang Chemical Inc. will spend $1.85 billion to build a methanol manufacturing complex on the Mississippi River in St. James Parish. The FDI project is the first major investment by a Chinese company in Louisiana.

Yuhuang Chemical will create 400 new direct jobs, with an average annual salary of $85,000, plus benefits. In addition, Louisiana Economic Development estimates the project will result in 2,365 new indirect jobs. The company says the project will generate 2,100 construction jobs. Construction will begin in 2016, with the first phase of the methanol project beginning operations by 2018.

From the Greater Richmond Partnership, I learned that Shandong Tranlin Paper Co., will invest $2 billion over five years to establish its first U.S. advanced manufacturing operation on an 850-acre site in Chesterfield County.

This FDI announcement is being touted as the single largest Chinese greenfield project in the U.S. to date, with an estimated 2,000 new jobs to be created by 2020.

Tranlin, which has an annual productivity of 400,000 tons of refined pulp, 700,000 tons of machine-made paper, 400,000 tons of organic fertilizers, and 2.4 billion food and medical packaging boxes, has developed a technology to make paper, using agricultural residuals, such as corn and grain byproducts normally left in farm fields after harvest.

The U.S. government has been hesitant to allow China to gain a foothold in certain U.S. industries, citing reasons of national security. China does have a history, after all, of hacking and industrial espionage, patent infringement and counterfeiting. (However, I do not believe that most Chinese companies engage in these illicit practices.)

The Federal Reserve has already approved a number of Chinese-owned banks to establish operations in the U.S. and it’s clear that a growing number of Chinese companies are recognizing that there are greener pastures here.

To that end, they should be welcomed and greeted as valuable investors to this good thing of ours. Welcoming and attracting FDI has become the American way and for good reason — these companies help grow our economy and keep us more competitive.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

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