The United States is by far the world’s leading destination for foreign direct investment – a privilege that should not be taken lightly. Economic openness, political stability, a commitment to the rule of law, and a reasonably manageable business climate are among America’s biggest selling points in the global competition for foreign direct investment. As these attributes become less certain and signs of deglobalization mount, the US economy will suffer while many smaller economies will fare even worse.
In 2020, over 26% of global FDI stock was invested in the United States. In comparison, the second most popular destination, China (including Hong Kong), accounted for just 9.2%. The dividends accruing to the US economy from foreign direct investment are huge, especially in manufacturing. Over 40% ($1.9 trillion on a historical cost basis) of the US stock of foreign direct investment is invested in US manufacturing, most of which take the form of foreign-headquartered companies that form US affiliates and operate. Although these companies account for only about 3% of all companies in the U.S. manufacturing sector, they are performing well above their weight.
According to a new study by the Hinrich Foundation, these US subsidiaries of foreign companies accounted for 17% of US merchandise exports in 2019; 18% of all manufacturing R&D spending; 21% of US manufacturing GDP; 22% of US manufacturing employment; 33% of manufacturing revenues; 37% of the Sector’s share capital; and 50% of all purchases of domestically produced inputs.
These significant contributions are disproportionately large, but they only paint a partial picture of the benefits of FDI to US manufacturing. The whole story must account for the indirect impacts, including the economic activity that is spurred ahead of the subsidiaries – the increased sales, capital investment, employment and compensation of their US input suppliers, as well as the companies that supply their suppliers. It must take into account the additional commercial activity that is generated downstream, such as B. support for local businesses and general US economic activity spurred by increased spending by associates’ employees. It must also include the benefits of domestic competitors’ commercial responses, technology spillovers, the hybridization and evolution of ideas, the acquisition of skills through labor market agglomeration, and other after-effects.
Foreign companies have long been important contributors to the US economy.
In 1982, the first foreign-named automobile ever produced in the United States rolled off the assembly line at Honda’s new manufacturing facility in Marysville, Ohio. Forty years later, Honda is firmly woven into the fabric of US manufacturing. The company has built nearly 30 million automobiles and light trucks at its now 12 US manufacturing facilities, generating business for American companies both up and down the supply chain. According to auto sales website Cars.com, Honda now produces six of the top ten “most American” cars by proportion of US-made parts in the vehicle.
Following Honda’s lead, Japanese auto companies have collectively invested more than $51 billion across 28 states, directly and indirectly providing 1.6 million jobs in the United States, according to CNN.com. Add to that the success of German and Korean automakers, and FDI could be the best thing that’s ever happened to the US auto industry. In fact, some of the world’s best-known foreign-headquartered companies (e.g. Airbus, Garmin, Siemens, Sumitomo, etc.) are key pillars of US manufacturing.
Without the influx of foreign direct investment and the successful operations of these subsidiaries, the US manufacturing sector would have long since deteriorated to a mediocre status. The Hinrich Foundation study estimates that the US manufacturing economy would have been $177 billion to $463 billion (8.4% to 20.9%) smaller than in 2019 if there had been no FDI in manufacturing.
In recent years, the world economy has experienced a multitude of shocks. Pandemic-related shutdowns have caused production delays and abrupt shifts in consumer demand from services to goods, leading to logistics bottlenecks, increased competition for scarce resources, and growing doubts about the wisdom of relying on widely dispersed, cross-border supply chains.
Even before the pandemic, governments were becoming increasingly suspicious of the risks of economic interdependence. The United States imposed tariffs and other protectionist measures to encourage companies to repatriate supply chains and source domestically. Other governments followed suit. Increasing emphasis on the need for technological self-sufficiency for reasons of national security, escalating US-China tensions, and most recently Russia’s invasion of Ukraine have prompted a raft of international economic sanctions and export restrictions.
Manufacturing in the United States is closely linked to the global economy and depends on international trade for both inputs and sales. Manufacturing trade is worth 119% of US manufacturing GDP, up from 87% in 2001. Enabling supply chain repatriation by erecting trade barriers makes the United States a less attractive target for FDI and jeopardizes the benefits they offer.
So, contrary to the populist trope, trade and globalization have not weakened US manufacturing; they were his salvation. For this reason, the looming specter of deglobalization that threatens cross-border trade and investment should worry business leaders, workers, and policymakers in the United States, and particularly in smaller economies. When FDI has such a significant impact on the US economy (the world’s largest) and US manufacturing sector (the world’s second largest), then the risks of deglobalization and falling FDI inflows are much more serious for developing countries, many of which are already suffering from significant underinvestment.
The United States hosts the largest share of the world direct investment stock, but on a per capita FDI basis, it ranks 22nd with US$32,346 in FDI per capita in 2020. The median FDI per capita among 201 economies catered for by the United Nations Comparable Investment data was at $3,429 – about 10% of the US figure. That means the citizens of half the world’s economies are endowed with 0% to 10% of the foreign direct investment available to their Americans.
FDI efficiently channels capital, trade, technology, expertise and best business practices around the world while inspiring innovation and competition. It’s a channel for economies to tap into the resources of bigger, better, stronger, more experienced companies that have had success in other markets and know a thing or two about best business practices.
The problems associated with the relative lack of FDI per capita in many smaller – particularly developing – countries are compounded by the fact that the quality of FDI relative to domestic capital stock (and the expertise and technology of foreign firms relative to domestic companies) stands out significantly, compared to the United States. As noted in the Hinrich Foundation’s report, although smaller in absolute terms, foreign direct investment is more important in many other countries because it accounts for a larger proportion of total domestic investment and tends to be of higher quality relative to the domestic capital stock. A 1% drop in FDI in the United States is likely to be relatively less consequential than a 1% drop in FDI in Kenya, for example.
As noted in another Hinrich Foundation report released earlier this year, the world faces daunting challenges. War, an ongoing pandemic, looming climate crises and precarious macroeconomic trends threaten lives and livelihoods, while deepening geopolitical discord and doubts about the benefits of trade and globalization complicate international cooperation. A disproportionate share of these burdens are borne by people in countries where financial resources are scarce, social safety nets and public infrastructure are weak, and less diversified economies are less resilient to shocks.
While addressing these pressing challenges is imperative, the burdens they entail are no excuse for governments to revert to trade and investment protectionism, which will only make matters worse. These pressures do not erase the well-established empirical relationship between openness and economic growth or between growth and development.
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