Coming to America

Foreign companies continue to pour money into the U.S. -- a destination they still view as a lucrative long-term play.

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

September 25, 2007

Looking for a vote of confidence in the U.S. economy? Look abroad. Overseas companies display little doubt about the ability of capital invested here to reap handsome rewards, despite the U.S. economy's current sluggishness. Inward foreign direct investment -- that is, the tally of foreign firms' purchases of U.S. business assets and their investments in greenfield projects here -- is on track to reach $238 billion this year, based on joint projections from the Columbia Program on International Investment (CPII) and the Economist Intelligence Unit. Inward FDI will hold at about that level in 2008, up sharply from last year's $175.4 billion. Annual FDI inflows are at their highest since hitting a record $314 billion in 2000 at the peak of the dot-com boom.

The U.S. remains the top destination for cross-border business investment, even though China has taken the lead in greenfield projects. Foreign companies will continue to sink money into the U.S. because it pays off. "Keep in mind, the key determinants for attracting FDI are the size of a market, economic growth, sophistication of consumers and demand," says Karl P. Sauvant, executive director of the CPII. All those are factors that make the U.S. particularly alluring over the long term. Foreign companies also crave access to cutting-edge technologies that American firms still excel in producing. What's more, the weak dollar is allowing firms from abroad to swoop in and buy or build properties here at bargain prices.

A growing share of FDI will come from the developing world. Though multinational corporations in Europe, Japan and other developed countries remain by far the largest source of FDI into the U.S., businesses in developing countries are also making their mark. For example, Taiwanese computer manufacturer Acer made a deal this year to buy Irvine, Calif.-based rival Gateway for $700 million. And Indian information technology services company Wipro Technologies is purchasing U.S. IT infrastructure management firm Infocrossing Inc. -- raising the prospect that, in a reversal of traditional U.S. offshoring fears, Bangalore may wind up farming out jobs to Leonia, N.J.

Developing-world money will also come via sovereign investment funds. These government-run entities have been set up to make better use of their countries' massive foreign exchange holdings -- mainly dollars, which typically have been invested in low-yielding but relatively safe U.S. Treasuries. Three of the richest funds are in Middle Eastern hands -- specifically, Abu Dhabi of the United Arab Emirates ($875 billion), Saudi Arabia ($300 billion) and Kuwait ($167 billion) -- thanks to the large surpluses generated by oil exports. Outside the Mideast, the funds of Singapore and China have $430 billion and $300 billion, respectively, to play with.

Deals involving state-owned foreign firms are also less likely to trigger political tensions in Washington than they were a couple of years ago. Recall the uproars over the abortive bid by Chinese oil company CNOOC to acquire Unocal and Dubai Ports World's purchase of a British company that managed facilities at various U.S. ports. Recent reforms to the Committee on Foreign Investment in the United States (CFIUS), an interagency government body that vets FDI transactions such as these, will make the review process much more transparent for both Congress and investors. That will add to the length of time required for a foreign firm to complete a U.S. acquisition, but it will also reduce the risk of such a deal turning into a political football.

That said, the CFIUS reforms haven't prevented foreign countries from taking revenge on the U.S. for the FDI flaps that occurred before the reforms took effect. For example, China recently adopted new rules that will make it tougher for foreign firms to acquire companies in politically sensitive sectors of the economy. Russia, India and Germany are all considering FDI restrictions of their own.

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