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Economic Forecasts

Foreign Companies Give U.S. Economy a Boost

Investment from overseas is climbing rapidly, but it'll be awhile before it reaches prerecession levels.

The U.S. economy may still be struggling, but that won’t discourage firms based in emerging markets from buying their way in or building on existing American holdings. To the contrary, many such firms aim to expand their stake in the U.S. in years ahead.

The sheer size of the U.S. economy makes it the indispensible target for foreign direct investment (FDI). “Many firms from emerging markets see they need a foothold and need to expand in the most important market in the world, if not the most dynamic,” says Karl P. Sauvant, executive director of the Vale Columbia Center on Sustainable International Investment. The hunger for capital in the U.S., combined with the weakness of the dollar, means such firms can snap up American assets at bargain prices. In addition, by manufacturing in the U.S., such companies limit their vulnerability to trade disputes.

As a result, foreign companies will pour billions of dollars into American manufacturing and create badly needed jobs here in the U.S. Chinese firms are setting the example. Early estimates from the American Chamber of Commerce in Shanghai suggest U.S.-bound Chinese FDI increased to between $3.9 billion and $6.4 billion in 2009, up from $1.2 billion in 2008. That’s likely to rise further going forward, particularly as Beijing seeks to reduce its exposure to the dollar.

“They want to invest more in our plants and in our people rather than our paper,” says Joseph Quinlan, chief market strategist for U.S. Trust at Bank of America Private Wealth Management. Quinlan says that both sides would gain from China putting its dollars into FDI instead of government securities. “When you buy Treasuries, that could be here today, gone tomorrow. FDI makes them more embedded in the [U.S.] economy and gives them more of a stake in our success.” Sectors of interest to the Chinese run the gamut from car manufacturing to video game development.

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One of the largest projects currently under way is a $1-billion investment by Tianjin Pipe (Group) Corp., through its TPCO America subsidiary, to build a plant near Gregory, Texas, that will produce steel pipe for oil and gas extraction. The plant will open for business next year and is expected to create 300 jobs within its first two years of operation.

Chinese firms are far from the only interested parties. Indian conglomerates such as Tata Group and Essar Group aim to expand their investments in IT and business services, pharmaceuticals, industrial chemicals and heavy industry. Brazil’s Embraer will open an aircraft assembly plant in Melbourne, Fla., next year, its first such facility in the U.S. Other Brazilian firms are concentrating on acquisitions in energy (Petrobras), mining (Vale) and food processing (JBS). The big players in Russian industry are natural resources firms -- such as Severstal, Evraz and TMK -- so it’s little surprise that the majority of Russian direct investment in the U.S. has gone into metals and mining operations. But there’s also Yandex, which runs Russia’s largest search engine and now operates a lab in Palo Alto, Calif.

Still, FDI in the U.S. will take years to rebound to prerecession levels. FDI inflows plunged 60% in 2009 to just under $130 billion, from a record $324.5 billion in 2008. For perspective, FDI inflows to Japan over the same period dropped by 51%. Inflows to the four leading emerging markets showed less dramatic declines, with Russia down 49%, Brazil 42%, India 14% and China 12%. Only two major economies fared worse than the U.S. in the FDI collapse. Inflows to Canada imploded 66%. The European Union suffered a 61% drop-off -- albeit spread over two years, from 2007 to 2009.