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By Bruce Stokes, National Journal
© National Journal Group Inc.
Friday, Jan. 19, 2007

In the United States, more people are working in the automotive industry today -- making parts and assembling vehicles -- than were working in it in 1990, thanks to jobs created in Kentucky by Toyota, in Alabama by Hyundai, and in South Carolina by BMW. At a time when Detroit's Big Three are bleeding jobs, new hires by foreign automakers have been one of the U.S. industry's few bright spots. If auto production in the United States has a future, it may be determined largely by Japanese, European, South Korean, and, maybe one day, Chinese investors.

Foreign direct investment -- defined as a foreign corporation's ownership of factories, facilities, and other hard assets -- creates and preserves U.S. jobs, boosts exports, and helps balance the U.S. international ledger, which is now deeply in the red. The American public increasingly values these benefits, notwithstanding the 2006 blowup that blocked Dubai Ports World's acquisition of some U.S. port facilities. And, in the future, the economy will need even more brick-and-mortar investment from abroad, especially from the Chinese, the Japanese, and others who now hold hundreds of billions of dollars in short-term U.S. securities. But foreign direct investment is no panacea. It has stemmed the hemorrhage of American manufacturing jobs and American indebtedness, but it can never heal the wound.

Foreign investment in U.S. plants and equipment totaled some $2.7 trillion by the end of 2004, the last year for which there is complete data. Those foreign holdings, built up over generations, equaled approximately 10 percent of the total value of all publicly traded firms in the United States that year. And it continues to grow. Foreign direct investment in the United States increased by $135 billion in the first three quarters of 2006, substantially more than the total for all of 2005.

Most of the money comes from Europe, but it's not necessarily all European. Much of it may be Middle Eastern oil money passing through London investment banks. These investments have primarily flowed into the information industry, financial services, and transport equipment manufacturing.

The benefits to the American economy are tangible: More than 65,000 Americans now work for foreign-affiliated auto assemblers and their parts companies; they are among the 5.1 million Americans employed by foreign investors nationwide. And non-U.S. firms are among the leading employers in major areas of the economy, accounting for 28 percent of Americans working in the chemical sector and 24 percent in the auto industry. Such jobs are often concentrated in just a few states. South Carolina has the largest share: 7.9 percent of workers in the private sector in the Palmetto State have foreign bosses. And Connecticut, Delaware, and New Hampshire all owe more than 7 percent of their jobs to foreign-owned firms.

In 2004, these foreign-affiliated companies had $2.3 trillion in sales in the United States and spent $30 billion on research-and-development projects. Europeans notably accounted for three-fifths of those sales and three-quarters of the R&D.

Reflecting their ties to their international parents and the increasingly integrated nature of the global economy, in which trade follows investment, U.S. affiliates of foreign firms accounted for about one-fifth of U.S. exports and one-quarter of U.S. imports in 2004. Most of this activity involved intracompany transactions between affiliates and their foreign parents.

Given the benefits that follow foreign investment, it is hardly surprising that Americans' attitudes toward foreign bosses are improving. More than half of the public thinks that foreign investment in the United States is good for the country, according to a 2006 survey by the Pew Research Center.

But it is not a cure-all for the nation's economic woes. The vast majority of foreign investment -- 90 percent -- is spent acquiring American companies, not creating new ones. So, for the most part, foreign money preserves existing firms and jobs but doesn't add to the workforce. In fact, in recent years, employment in the U.S. affiliates of foreign, nonbanking firms has declined faster than it has in U.S. private industry as a whole, suggesting that rationalization is often the price of staying in business under foreign ownership.

This caveat notwithstanding, the United States has little choice but to look to foreign investment to help balance the nation's books. Restrictions on foreign ownership -- such as limits on foreign investment in airlines -- that America could afford as a creditor make less sense as a debtor. There may be a need for investment incentives to encourage the Chinese and others to make job-creating investments in the United States, rather than to simply hold U.S. securities. And legitimate national security issues remain regarding Chinese and possibly Russian investment in some infrastructure or high-technology enterprises.

In the 19th century, foreign money built the railroads and paid for much of the industrialization of the United States. In the 21st century, America is again increasingly dependent on foreign investment. The challenge is to maximize its benefits and minimize its costs. [an error occurred while processing this directive]

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