American Economy Reaps the Benefits of Foreign Investments

November 19, 2013

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Several weeks ago, President Barack Obama touted the benefits of foreign companies investing in U.S. businesses, declaring that the U.S. is "open for business." A new study shows that foreign companies that have made investments in the United States have had an “outsized impact” on the American economy. 

The decade-long study examined large, multinational businesses that have succeeded in their home markets and are investing in the U.S. These “insourcing companies” represent some of the most recognizable brands in the world.

Conducted by The Organization for International Investment (OFII), a trade association representing 170 subsidiaries of such foreign companies as Sony, Nestle, Volvo, Michelin, and Siemens, the study shows:

  • While they represent about 0.5 percent of all companies in the U.S., foreign-owned companies produce 20 percent of U.S. exports and pay nearly 14 percent of all U.S. corporate taxes.
  • Over the past decade, insourcing companies increased their contribution to U.S. GDP by 25.2 percent -- nearly double the U.S. private sector’s 14.3 percent increase.
  • Approximately 84 percent of all foreign companies have entered the U.S. through mergers and acquisitions of U.S. companies over the past decade.
  • Insourcing companies increased their research and development spending at a much faster rate than the U.S. private sector -- 31.5 percent compared to 15.5 percent.
Insourcing companies are demonstrably committed to the U.S. economy, making large capital investments, reinvesting earnings in U.S. operations, and fueling a U.S. supply chain, the study shows.

“More often than not they are sourcing locally,” Nancy McLernon, president and CEO of OFII, told IMT.

This is true whether they have a greenfield investment (building a factory from the ground up) or whether they acquire a U.S. company; these are long-term strategic investments.

Foreign-based companies increased their domestic purchases by almost 50 percent over 10 years, showing that these companies are looking locally for materials to manufacture products that they sell here and around the world, McLernon said.

“So when a Toyota facility starts up or a Siemens acquires an old facility that they are looking to grow and expand, it provides tremendous opportunities for small and midsize manufacturing companies to supply these firms,” she said.

Insourcing companies produce not only for the U.S. market but also customers around the world. For example, a Michelin plant in South Carolina that will have its ribbon-cutting ceremony next month will manufacture large earth-mover tires, about 80 percent of which is slated for export, according to OFII.

The study notes that insourcing companies employ 5.6 million U.S. workers and pay them on average 22 percent more that U.S. companies.

“If you look at some of the retention numbers and job attrition rates at these foreign-based companies, it was less than half that of the U.S. manufacturing sector overall,” McLernon added.

“Even though there have been some concerns about the skill of the U.S. workforce, time and again, I hear executives from my companies talk about the high-level nature of skills in the U.S. workforce compared to some places around the world, as a competitive advantage for the U.S.,” she said.

An insourcing company might introduce a different corporate culture into its U.S. workplace, but that’s not necessarily a drawback.

“Some of the cultural differences can provide a bit of hurdle, but sometimes they really can provide some lessons for us to learn from,” McLernon said.

A number of German companies, such as Siemens, are using their apprenticeship programs to help train American workers.

“In this case, a corporate culture that is very common in Germany is not as common here, and we can absolutely learn from it,” said McLernon.

No other country attracts more foreign direct investment than the U.S., according to the OFII study. But investment has declined. More than a decade ago, America received about 37 percent of worldwide investment. Now that figure is about 17 percent.

One reason for the decline is that the U.S. is not drawing much from emerging markets, which right now have a lot of capital to spend, McLernon said. “We only seem to attract about 3 percent of emerging markets outbound investment.

“The global economy is certainly here to stay, and the more that small and mid-sized companies embrace the nature of global companies and understand some of the factors that make them succeed, the easier it will be to work with them and benefit from them directly.”

 

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