In recent years outward foreign direct investment (FDI) by US corporations to other countries has been increasing rapidly, while inward FDI by foreign corporations into the US has been trending down. Since investment in the US is critical for future economic prosperity, these patterns are troubling and provide evidence of how globalization and flawed policy are encouraging corporations to abandon America. <\/p>\n
Inward FDI is usually good for countries, though there can be legitimate national security and strategic industry caveats. Such investment has foreign investors either building new facilities or taking large ownership stakes in existing businesses. Their willingness to build new facilities expands productive capacity and creates jobs, while making large investments in existing businesses usually signifies an intention to grow them. The net result is that inward FDI benefits countries, especially since foreign investors bear the cost of financing these investments.<\/p>\n
The benefits of outward FDI are less clear-cut. On one hand, it can expand the global reach of companies, thereby potentially increasing exports, and it can also give companies access to profitable foreign market opportunities. On the other hand, outward FDI may simply displace domestic investment and employment, as when corporations create offshore production platforms whose only purpose is to export back to home markets. In this case, outward FDI can be problematic.<\/p>\n
These characteristics suggest that policy should aim to encourage inward FDI and discourage outward FDI that hollows the domestic economy. Yet, the US appears set on the exact opposite course, with inward FDI trending down while outward FDI has trended up.<\/p>\n
Having peaked at 321 billion dollars in 2000, inward FDI fell to 64 billion dollars in 2003 and then recovered somewhat to 110 billion dollars in 2005. Meanwhile, US outward FDI rose from 159 billion dollars in 2000 to 252 billion dollars in 2004.Whereas in 2000 the US had net FDI inflow of 162 billion dollars, by 2004 this had transformed into net FDI outflow of 145 billion dollars.<\/p>\n
The volume and pattern of FDI can be viewed as indicating the degree of confidence business feels about US economic prospects. Part of the decline of inward FDI between 2000 and 2003 can be attributed to the impact of recession. However, the subsequent weak recovery of inward FDI accompanied by the acceleration of outward FDI suggests deeper problems.<\/p>\n
One policy problem is the over-valued dollar that raises the relative cost of producing in America, thereby discouraging investment. A second is policies that give incentives to corporations to offshore production. The net effect is to undermine the relative competitiveness of the US economy, thereby making it a less attractive place to invest, especially in manufacturing.<\/p>\n
With regard to outward FDI, part of the increase is attributable to affirmative improvements in emerging market economy prospects, but part is due to bad policy. The over-valued dollar has encouraged US business to shift productive investments from the US to both developing and other developed economies, while the lack of global labor and environmental standards encourages shifts to developing economies where standards are lower or even absent.<\/p>\n
Another factor is the preferential tax treatment of foreign profits of US corporations, which encourages outward FDI that displaces domestic investment. This speaks to repealing that provision.<\/p>\n
Inward FDI is discouraged by the over-valued dollar and the extent to which US corporation tax is higher than foreign country corporation tax. This connects to the problem of tax competition between economic jurisdictions. Such competition distorts investment decisions, strips the public purse of revenues, and contributes to shifting the tax burden from capital on to worker incomes. This is a global problem, to which the US is also contributing, albeit through tax competition between the fifty states. That suggests need for stricter multilateral agreements on tax competition and the US should also act unilaterally to prevent tax competition between the states.<\/p>\n
Given the decline in inward FDI the US Commerce Department recently launched an initiative to promote such investment, promising to actively court foreign companies. The initiative is welcome since inward FDI is generally beneficial, but it is also incomplete and inadequate. Cheerleading cannot substitute for fundamental policy change, while the exclusive focus on inward FDI is like one-hand clapping and completely misses the problem of investment off-shoring by US corporations.<\/p>\n
Copyright Thomas I. Palley<\/p>\n","protected":false},"excerpt":{"rendered":"
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