An Analysis on Foreign Direct Investment in U.S.: Industries and Countries

The biggest foreign investor group is European, especially Western European. About 71% of total foreign direct investment (FDI) in U.S., which is about $1,483 billion, comes from Europe up to 2007. But the number could be a little tricky here. Among the European countries which make investment, some are clearly used as the offshore tax havens to structure the investment in U.S., i.e. Luxembourg, which accounts for nearly one-tenth of that $1,483 billion European investment. The top three European countries to invest in U.S. till 2007 are United Kingdom, Netherlands, and Germany.

Asia and Pacific countries’ investment only accounts for 15% of FDI in U.S., which is about $320 billion. Not surprisingly, Japan is the largest Asian investor (the second largest in the world) in 2007. Japanese invested totally about $233 billion in U.S. by the end of 2007. The next tier of East Asian investors includes South Korea and Singapore. Both countries had invested more than $10 billion in U.S. by the end of 2007. The third tier includes regions and countries like Taiwan, Hong Kong, India, and China mainland. All of them had invested between $1 billion and $10 billion in U.S.

Looking at the industries that received FDI in U.S., European had spent the most money on manufacturing in U.S., which is about 38% of their investment ($557 billion). But investors from Asia and Pacific region had only spent 31% on manufacturing ($98 billion). What Asian investors liked most is the wholesale industry, which received about $114 billion from Asia and Pacific region (36% of FDI from Asia and Pacific region).

The differences in investment destinations between Western European and East Asian are so obvious. The Asian investment in distribution channels and marketing is to serve their domestic manufactures and exporters to gain greater access to U.S. market. European invests more in manufacturing probably because they want to avoid exchange risks in addition to gaining access to U.S. market. Furthermore, European investment has been more diversified than Asian investment in recent years. Between 2002 and 2007, manufacturing and wholesale sectors only accounted for about 41% of the total FDI from Europe. Financial industries and other industries accounted for another 50% of the FDI from Europe.* But for Asian investment, manufacturing and wholesale sectors together accounted for 76% of the FDI from Asia and Pacific Region between 2002 and 2007.

At last, let’s take a look at China’s direct investment in U.S. China’s total FDI in U.S. is very small compared to other major foreign investors. Similar to other major Asian exporters, China’s investment is concentrated in manufacturing and wholesale sectors. Till 2007, China had $847 million invested in wholesale industry in U.S., compared to the total investment of $1,091 million. Most of China’s wholesale investment ($501 million) happened in 2005. The manufacturing sector, chemicals ($89 million) and primary and fabricated metals ($126 million) are two largest industries that received a lot of Chinese investors’ attention. Outside manufacturing and wholesale sectors, China has $73 million investment in professional service and $111 million investment in other industries.

Data source: www.bea.gov (All dollar amounts are on historic cost base.)

* other industries is defined as industries other than manufacturing, wholesale, retail, financial services, information, real estate, and professional services.

The production is about to rebound in U.S., at least in short run

Surprised? Yes, today’s ISM manufacturing index on March is 36.3. The number is higher than last month and just a little above the lowest one (which means the manufacturing activities deteriorated A LOT.) in the more than 20 years. However, what the number does not say is that the short-run turnaround is upon us. Let’s look at the historic ISM manufacturing index and inventory numbers. See the following chart:

Chart 1

The “change in private inventories” is the contributions of change in private inventories to the annualized percent change in real GDP of U.S. PMI is the purchase manager index. The graph is from the beginning of PMI publication in 1948 to March 2009. The pattern from the chart is clear and intuitive. Whenever PMI dropped below 50, it means that the level of manufacturing activities drops compared to the previous month, manufacturers reduce production, and let the inventory adjust. When inventory runs down to a level that it no longer satisfies the final demand, the production can resume again. This is just economics 101। Plain and simple.

The question is: have we reached the point that the production needs to be resumed again?

Look at the chart. Since the monthly published PMI is a more timely indicator than the quarterly published GDP number, the expected huge negative inventory adjustment in the first quarter in 2009 has not shown up in the chart yet. But based on the history of PMI and GDP lines from the chart, every time PMI dropped below 40, inventories contributed to about average 5% of contraction of GDP. Given this pattern, recent data on international transportation (http://www.joc.com/node/409860), and recent huge promotion seen in U.S. retail businesses, the adjustment on inventory is surely under way now. Also, ISM inventories dropping fast in the first quarter of 2009 is another piece of evidence of the adjustment in inventories. In Chart 2, ISM new orders and inventories are presented.

Chart 2

You can see that new order series is always one step ahead of inventory series. New orders series recently just recovered from the below 30 level back to 41.2 in March. This means the number of new orders are still declining, but at a smaller pace. Notice that inventories index is now 32.2. Historically speaking, when new orders index has been lower than 30, the inventory index will also go down to the level of 30. It seems that the inventory is near the bottom now।

When the warehouse is empty, productive activities will begin to accelerate from the now distressed level. The economic indicators will certainly turn more positive and the sentiments will be more optimistic, at least for a while. Therefore, I expect the consumer confidence and consumption will drop at a slower pace and then rise gradually for the next few months. The implication for the supply chain is that more new orders will slowly begin to show up।

One last observation on the Chart 1, the downward trend of PMI peaks and the upward trend of inventory adjustment bottoms showed that the U.S. moved away from manufacturing during the past six decades. It coincides with the fact that inventories index is more volatile before 1990 and less volatile after 1990. It could well be that the supply chain management has been more efficient. Or, these suppliers are no longer in U.S. So, what does the picking-up in PMI means to those foreign suppliers?

The final question is: Now we have more and more protectionism, will this outsourcing trend continue? And if not, what are the impacts?

Why invest in U.S.?

When everybody is outsourcing and U.S. banks is failing every week, why does anyone want to invest in U.S., especially as a foreigner?

The answer is always money.

If one can make an above opportunity cost return, it is always a good idea for one to put his money on the table. The key is to study the possibilities thoroughly, plan the move carefully, and implement the projects forcefully. This BLOG dedicates to investigate the opportunities, risks, and costs of foreign direct investment (FDI) in U.S.

The most compelling reason to invest in U.S. is MARKET. U.S. market is one of the most large and important markets in the world. Almost every recognized international brand in every industry wants a strong presence in U.S. market, such as Sony, Toyota, Siemens, BMW, and UBS etc. The list can go on and on. Entering U.S. market is one of the necessary steps for an ambitious business organization. Even under current severe recession and with American consumers tightening their belts, U.S. market is still one of the most vital places for global vendors.

Of course, the huge size of U.S. market itself is not the sufficient reason for foreigners to invest in U.S. During the past three decades, world exporters tried very hard to penetrate U.S. market and largely succeed in general. Just look at the annual U.S. total imports. However, for many suppliers, simply producing goods in their own factories and shipping the goods through oceans to U.S. are no longer good enough, or safe enough. The reason is PROTECTIONISM.

U.S., though always promoting free trade around the world, has a history of protectionism. One example is “Smoot-Hartley Act” during the Great Depression. A more recent example is the import tariff toward Japanese automobiles in 1980s. Does anyone forget “the Plaza Accord” on September 22, 1985? This is not to criticize the U.S.’s protectionism policy or its hypocrite attitude toward free trade, but rather simply state the obvious fact. When time is bad, protectionism is always the first and the most popular weapon that the government can deploy. Anyone who is not total ignorant can bet that the world is entering a stage of protectionism.

Facing the harsh reality, what should our producers do? Of course I think that one should always focus on its domestic market first. Support your own people. But would you rather let your rivalry take advantage the recession to grab more market shares and grow their businesses in the largest market in the world, while you are rejected by the trade barrier? Protect your marketplace and keep your access to market safe. This is the single biggest reason why you should consider invest your money in U.S.

Another reason of investing in U.S. is technology. U.S., while is gradually losing its edge in several technologic fronts, is still enjoying huge leads in many fields, such as energy efficiency, electronic engineering, bioengineering, heavy mechanics, aviation and aerospace technology. To shorten the technologic gap, investing in U.S., especially merger and acquisition, is essential to obtain the important intellectual patents and engineering know-how.

Also, U.S. has a largest pool of talents in the world. It is relatively easier to find qualified engineers, scientists, marketing experts, and managers. Usually it is quite expensive to hire American skilled employees. But under the current recessionary circumstance, you will be in a strong position to take advantage of this employer’s market. It would be a good strategy if you can hire some essential employees and transfer their know-how and experiences into the institutional knowledge of your organization.

There are many other reasons of investing in U.S. that are cited by those consulting companies, such as capital availability (usually true, but not so distinguished from many other regions in the world nowadays), political stability (NOT automatically translated to low political risks, especially for foreigners), transparent and fair legal system (but complicated and expensive, could be a huge disadvantage to foreigners), integrated internal market (mostly true, but depending on industry), and ample natural resources (true but not so cheap). This post won’t analyze everyone of them. There are also numerous downsides of investing in U.S., largely due to the cultural gaps and the higher costs to manufacture goods and provide services in the states.

Again, make carefully calculation before you move, the winners of this recession will not only survive but also dominate in the future.