U.S. Is Still a Beacon for Foreign Capital

No need to worry about international investors -- they'll keep turning to the U.S., even with a recession.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

October 24, 2008

Foreign investors can't keep away from the U.S. Even at the center of the global financial crisis, with a recession, America remains the most attractive destination for capital. One of the biggest factors in America's favor right now is that the rest of the world looks, if anything, less safe.

"If justice were to rule in the world, we ought to be punished," says Theodore H. Moran, director of the Landegger Program in International Business Diplomacy at Georgetown University, "but I don't think that's what's going to happen."

The U.S. may be in a recession, but conditions are no better in the euro zone, the United Kingdom, Japan or Canada. Several euro zone economies -- France, the Netherlands and Belgium -- face the added vulnerability of having banks whose market capitalization exceeds their gross domestic products. Iceland, which faced a similar situation, now needs the International Monetary Fund to help avoid bankruptcy. Switzerland, long famed for the stability of its own banking system, likewise had to turn to Qatar's sovereign wealth fund to help bail out its two largest banks.

The situation isn't much more reassuring among the large emerging markets. China remains the world's fastest-growing big economy, even taking into account its somewhat weaker performance in the third quarter. But the country maintains capital controls in order to limit the appreciation of its currency, the yuan. With those controls in place, there's only so much investment it can absorb. India similarly maintains capital controls to keep the rupee from becoming too volatile. By contrast, Brazil's and Russia's markets are open, but stocks there have taken a battering. Both countries rode up the wave of high commodity prices, and both stand to get hurt as those prices continue dropping.

America still has some positive attractions. The U.S. response has been larger and faster than that of most major economies plus it is one of the few regions that has the resources to deal with the crisis. And despite its current straits, the U.S. remains one of the most competitive economies in the world, in critical areas ranging from labor market efficiency to innovation to infrastructure. Foreign investors' trust in the U.S. is reflected in the dollar's sharp rise against the euro, pound, Swiss franc, Canadian dollar, Mexican peso and Brazilian real. Any other country in the U.S.' position could expect to see its currency tank as capital fled for safer climes.

Foreign direct investment in the U.S. will slow but not dry up. With many U.S. companies starved for cash in the wake of the financial crisis, the cost of buying into the U.S. market has become much more reasonable. "There are a lot of U.S. company assets that would not have been for sale six months ago or a year ago that are for sale now," says Charles McMillion, president and chief economist of MBG Information Services, a business information and forecasting firm.

Foreign buyers will remain on the lookout for bargains, either acquiring whole companies or picking off valuable brands or patents. Financial firms will remain major targets, as witnessed by last week's takeover of troubled Wyssoming, Pa.-based Sovereign Bancorp by Spanish banking giant Santander. The auto industry and other big manufacturers will also remain big draws.

But a fresh wave of investment protectionism could cause problems. During the congressional debates over the financial industry's rescue package, the question of whether non-U.S. assets in U.S. financial institutions would be covered was a recurring theme. At the end of the day, Congress did decide to provide such cover. But the fact that such rhetoric came up at all is discouraging to potential foreign investors at a time when U.S. firms need all the capital they can get. "These were companies employing over 200,000 people here," says Nancy McLernon, senior vice president of the Organization for International Investment, a business association that represents the U.S. subsidiaries of foreign-based corporations. "It's up to policymakers to make sure such investments remain attractive."

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