Foreign Investment Breathing New Life Into U.S. Manufacturing

The death of manufacturing in the United States is being postponed, even reversed, by foreign investment including that coming from China. This shows the United States is bound to the world and vice versa, although some in the political arena may be loath to admit it.

Economic nationalists appear to hold a stronger hand with the election of Donald Trump, but, as was said in the 1990s, it’s a global economy whether the nationalists like it or not.

U.S. manufacturing continues to be the largest recipient of foreign direct investment. Last year the sector took in about one-third of the total inflow of $385 billion. The United States remained at the head of the global class in FDI, consulting firm A.T. Kearney reported. Total stock in U.S. manufacturing from FDI (a measure of foreign companies’ capital footprint) reached $1.2 trillion in 2015, the highest of any sector.

Foreign business leaders “vote with their feet” in setting up U.S. operations, the Washington-based Manufacturing Institute said.

“FDI in America’s manufacturing pays well for investors, employees and government alike,” the institute said. “Rates of return are high because supplier networks, logistics, and the legal environment all contribute to ease of conducting business.”

America’s large trade deficit, also known as the current account deficit, gets a lot of press. But on the flip side, it should be noted that the United States takes in more in FDI than it sends out. U.S. outflows topped more than $300 billion in 2015, making the United States the largest source of FDI worldwide, showing the significant stake our nation has in the global economy.

FDI supports more than 12 million direct and indirect jobs and is responsible for more than one-quarter of all goods exports ($425 billion), the Commerce Department said.

Inflows of foreign direct investment rose 11 percent last year, A.T. Kearney said. Several mergers and acquisitions, including the $38 billion deal in which Israel’s Teva Pharmaceutical Industries bought Allergan’s generic-drugs subsidiary and Ireland-based Shire Pharmaceuticals’ spent $34.7 billion on Illinois-based Baxalta, powered the trend.

Total “greenfield” investment—spending to either establish a new business or expand an existing foreign-owned business—continues to expand. The amount hit $22 billion last year, up from $14.4 billion in 2014, according to Commerce Department data.

The United States has been the world’s largest recipient of global FDI since 2006, the Commerce Department says. By 2014 its inflows were three times larger than the next destination country’s.

Total FDI stock or assets in the United States grew an average of 6 percent a year between 2009 and 2014 and surpassed $3 trillion in 2015. The advanced economies of the UK, Japan, Canada, and Germany are the largest sources of FDI. The UK’s stock of $569 billion in the United States as of 2015 was highest among all nations, according to A.T. Kearney. Up-and-coming powers including China ($21 billion) and India contributed relatively small portions in 2015 but are showing increasing interest.

China-based companies invested $16 billion in the United States in early 2016, making acquisitions in technology, consumer goods, and services and capital-intensive greenfield projects in manufacturing and real estate, A.T. Kearney said.

Despite intense political fights in Washington, foreign investors remain highly interested in the United States. Why? Confidence. Growing confidence.

The United States topped A.T. Kearney’s Foreign Direct Investment Confidence Index this year, making it five years straight at the top of this gauge. Germany moved up to no. 2 this year, China fell to third place, the United Kingdom moved up to fourth, and Canada dropped to fifth.

The U.S. market has an “enduring attractiveness” because of its large size and its “transparent and relatively efficient” legal and regulatory environment, said Paul Laudicina and Erik Peterson, chief authors of the commentary that accompanied the index.

Confidence in the United States is rising, part of a trend in common with other large developed markets — particularly outside Europe, including Canada and Japan — according to A.T. Kearney. On whether, compared with the previous year, investors are feeling more optimistic about the United States over the next three years, 45 percent answered yes in the 2017 survey compared with just 18 percent in the prior year’s survey. The 45 percent figure topped all nations’ figures.

President Trump took inspiration from economic nationalists in winning the White House, talking about steel mills returning to Pittsburgh among other things. Turning a blind eye to the interconnectedness of the global economy could endanger Trump’s goal of growing the economy. So far that’s not happening, as economic optimism is generally up since his election.

Trump’s statements may be prompting new ways of thinking among investors, according to Laudicina and Peterson.

“It is possible that the ‘buy American’ and ‘make in America’ policy commitments of the new Trump administration are motivating investors to gain a toehold in the U.S. market with the aim of being perceived as a local rather than a foreign player,” they wrote.

The prospect of renegotiating NAFTA or establishing new bilateral free-trade agreements is being watched closely by investors and could reduce investment in the short term. But Trump’s stated goals of boosting the economy should bolster FDI over the course of his presidency, the authors said. Increasing infrastructure spending and lowering corporate tax rates will likely keep FDI inflows strong. 

In another sign of the importance of the administration’s plans, the fourth annual SelectUSA Investment Summit reported record attendance. Curiosity about the new administration’s plans for policies impacting FDI was a major reason for the increased attendance, SelectUSA spokesman Steve Meyer said. Those policies include tax and regulatory reforms, immigration, and work visas.

Treasury Secretary Steven Mnuchin was among the June summit’s speakers, which included other cabinet members and leading business executives such as General Electric CEO Jeffrey Immelt and General Motors CEO Mary Barra. Mnuchin said he’s working to make the United States “an even more attractive place to do business.”

“The U.S. has one of the highest levels of labor productivity in the world,” he said. “We believe that more robust investment, strong labor markets, and regulatory relief will drive this even higher in the years ahead.”

Sounds like a bright future, thanks in large part to foreigners’ interest in the United States.