Barriers to U.S. FDI Inflow Share Growth

Understanding the competition, and having an effective product development plan are critical to long-term share growth for any product. Place brands are no exception. Understanding what the underlying dynamics of the global economy and the implications for your location competitiveness, which countries represent true competition for your FDI inflow attraction efforts, and recognizing your location’s strengths and weaknesses as seen by the foreign capital investor are critical to your community’s long-term FDI inflow dollar share growth.

The easiest way to understand the barriers to investment is to ask the question of people with an informed opinion. To do so, I reached out to LinkedIn members in relevant Groups and ran a short survey asking a few probing questions. I would like to give my personal thanks to those who were kind enough to respond.

In the spirit of proper characterization, I would not position the results of this simple survey as reliably predictable, but rather as a directional conversation starter. More rigorous and robust market research would be required to develop a reliable understanding of the challenges Brand America faces. None-the-less, I believe the results were interesting and worth sharing. Hopefully, the comments will be educational and carry the discussion forward.

First, the perfunctory respondent data –

FDI Respondent Data Chart

The respondent mix suggests the data primarily reflect the perception of Brand America from outside the United States. That is a good thing since we want to better understand how potential foreign direct investors perceive Brand America. On the downside, the responders are mostly economic development professionals so they may or may not accurately reflect the opinion of foreign direct investors.

The first thing I wanted to know is which countries are seen as competitors to Brand America. The respondents had to prioritize their choices as #1, #2 or #3. Consequently, it is possible for a given country to appear in each position in the final tabulation. It simply means three respondents each ranked the country in different positions.

Top 3 countries you see as competitors to the U.S for share of foreign direct investment inflow dollars

I found the list pretty interesting. China and India represent emerging markets where the potential for profit is driven by a rapidly growing middle class with increasing disposable income, and a governmental need for basic infrastructure investment. For the foreseeable future, multi-national corporations will likely continue to invest in building capability and capacity to service these high population markets. I did find the inclusion of Canada and Mexico as a healthy reminder that Brand America continues to compete with our NAFTA partners. We definitely need to work hard an make certain the business climate in the United States remains highly competitive in our own backyard and that Brand America is in a position to win when competing with our neighbors.

The next thing I wanted to better understand is what the key barriers are to FDI attraction for Brand America. I used the same type of question to get answers.

Top 3 barriers to foreign direct investment into the United States

The citing of regulation fear and politics reminded me of the importance business executives place on predictability. There is enough variables that are extremely difficult to control when managing a company, that unpredictable public policy can become a real competitive disadvantage.

I also think economic optimism or conversely pessimism can impact the capital investment decision. Most respondents felt the business climate in the U.S. was declining slightly in attractiveness for foreign direct investment inflow.

Decline Greatly – 18%
Decline Slightly – 53%
No Change – 6%
Improve Slightly – 23%
Improve Greatly – 0%

Perception is often reality, so clearly pessimism about Brand America is not helpful. Of course, the best way to address this is with positive economic performance.

I was a little surprised that when asked what direction they thought foreign direct investment inflow to the U.S. was going to take, the pessimism didn’t translate directly in their prediction. The opinion was split about equally. Maybe this is a reflection that all countries were negatively affected by the economic meltdown.

Decline Greatly – 12%
Decline Slightly – 41%
No Change – 6%
Improve Slightly – 41%
Improve Greatly – 0%

Finally, I wanted to know what one thing they would recommend focusing on changing to help make Brand America more competitive for FDI inflow. I was genuinely surprised at how the responses varied dramatically. I think it reflects the complexity of the FDI choice.

Here is a representative sample of verbatim answers.

  1. Get the boys back home from hot spots
  2. Main problem is the shrinking consumer market
  3. Change peoples’ attitudes that FDI is good for the US, and not a bad thing
  4. Fed strategy
  5. See concrete steps toward dealing with US deficit / US trade
  6. Standard appraisal and evaluation methods
  7. Easier Visas
  8. Improve corporate tax system
  9. Access to market
  10. The view that U.S is a part of the world, not the world
  11. Protectionist Policies should be limited
  12. More money for innovative start-ups
  13. Review plans for more regulation and more taxes
  14. Lower taxes

This study provides an interesting perspective on the possible areas of improvement for Brand America. It illustrates the kind of study you could implement to better understand the opportunities for improving the competitiveness of your location for FDI. Of course you would want to make it more robust (projectable) and ensure the respondents were potential foreign direct investors.

The intent of this survey is to stimulate discussion on the opportunities for Brand America to be more competitive for FDI inflow dollars. In that spirit, I’d appreciate it if you would share links to additional resources that address the topic and would share your thoughts by leaving a comment. If there is one thing you would improve to make Brand America more competitive, what would it be?

To get the ball rolling, here is a link to a white paper of FDI that you may find interesting – http://www.vcc.columbia.edu/pubs/documents/KekicPerspective-Final.pdf

A second is the section on how to improve competitiveness in the “Assessing Trends and Policies of Foreign Direct Investment in the United States” report that can be found at – http://www.investamerica.gov/iia_main_019689.asp

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8 Comments so far

  1. Imelda McGrattan

    February 11, 2010

    Interesting question Ed, and quite a lot of information. I have yet to finish reading it all but the one thing that strikes me personally in regards to bringing FDI into America or even Ireland and the UK presently is how do we achieve this when the markets of China, India and Asia are more appealing in the current financial climate.

    The likes of Walmart are now cutting out the middleman in their operation and dealing with China directly which will enable them to pass on the price advantages to their customers which is good for consumers but not for the business who lose out on that business.

    I will maybe post again once I have read the information contained in the links. There are a lot of challenges still ahead and I don’t believe the true reality of the situation is being acknowledged.

  2. Gary Giles

    February 11, 2010

    Interesting that Politics showed up as one of the barriers. I wouldn’t have been surprised to see it as an internal issue but since you have a fairly high outside response I find it significant. Since it and the regulation fear adds to the cost issue as well it becomes very significant

  3. Jonathan Carter

    February 12, 2010

    Great article. I think that we’re a much stronger brand than we realize, although there are some changes that need to be made.

    The US is still the world benchmark for developing human capital. Although much of the international manufacturing & export market has shifted to South Asia, we can also expect growth as those markets begin to yield viable middle class consumers. Those consumers have already proven to be very receptive to American-made / American branded products. For example, look at GM, who has a leading market share in China & where the Buick brand is the top selling luxury auto. Considering that the auto market in China is expected to grow 67% over the next five years and eventually exceed the American market, it gives a look into the potential for American export growth.

    I think the fear caused by the trade deficit will subside a bit once US companies start seeing & capitalizing on the potential of these developing markets. The future of American business is providing product for international consumers, as opposed towards mainly US consumers as it’s been for the past 60 years or so. That’s a huge paradigm shift, but keep in mind that once the Asian markets begin to mature, they’ll begin to lose their cost advantage & the key to success will be process efficiency, brand awareness, and OD… all areas where we have competitive advantage. A definite plus to encourage FDI.

    The legislative / political environment hasn’t helped; as there have been some very high-profile examples of our government increasing business taxation, implementing trade barriers (especially with China) and increasing regulation of private enterprise. All of these present red flags for potential investors. If we can overcome the stigma of having a relatively expensive labor force & legal environment, I think the future is much brighter than most of us realize.

  4. Katerina Sokolova

    February 16, 2010

    Ed,
    Thank you for broaching this important subject. The global competition for foreign investments keeps heating up and without a focused and energetic effort, United States is at risk of losing out on significant capital inflows and thousands of jobs created by FDI projects. Certain developments in the US domestic politics, including the notorious “Buy American”, are a cause for concern among many European and, especially, Asian and Middle Eastern potential investors and can hurt the US in the longer run. It is unfortunate that US EDOs are having to face these additional brand issues during these already challenging post-crisis years.

  5. Antonios Kalyvas

    February 20, 2010

    Ed that was a very interesting survey! Just a couple of comments.

    1) Competition for FDI has two dimensions. The Regional one and the Global one. Obviously for market seeking investments (targeting the US-NAFTA market) geographic proximity is very important and the main competitors are at the regional level. Now the US can’t compete with Mexico on a pure cost basis but can compete with them in FDI attraction at cost adjusted to productivity level. In order to compete like that the US economic environment (both gov and private sector) should invest more in technology and education improvement. There is a premium in the global economy for an educated workforce at all levels because most of the FDI projects even in manufacturing (if it is high value added) need people that can adjust to shortened product life-cycles etc.

    2) On the global scale. China, India will continue to attract an increasing amount of FDI projects and that’s natural because of their market growth. However the US should see them as a competitor not for market seeking investments (where the geographic proximity is important) but for knowledge-R&D seeking projects which have the highest value for the host economy as they can transfer created assets from other economies. The US need to worry for increasinlgy low levels of people studying subjects such as engineering etc as again human capital is a major factor to attract such investments.

    3) Is important also to see the emerging markets as new sources of FDI in the US especially in declining-mature industries and to akcnowledge that at the end of the day economic growth is mostly depending on the local industry and FDI can act as an accelaerator but not the major engine for economic development.

    all the best,

    Antonios

  6. In terms of FDI in the US and concerns over the weakening of Brand America, the situation is not rosy, but let’s not forgot that markets all over the world have been negatively impacted by the global economic downturn and that the US, in terms of FDI, remains a top investment destination.

    Notably, in the 2009-2010 Global Competitiveness Report, the US ranked #2 after Switzerland. And while no one can negate that BRIC countries are challenging Brand America with their cheap labor, new middle class, and advances in R&D, there are assets in the US that continue to work in Brand America’s favor.

    First, FDI in the US increased by 3% in 2008, even as the recession was in full force. Most investments were made by existing foreign affiliates with the intention to expand or consolidate operations. The weak US dollar has undeniably facilitated mergers and acquisitions in this tough economy, and activity in this area has remained steady.

    Second, the US market is still a safer bet than many emerging economies when it comes to investments. The unstable political climate in many of these countries and uncertainty over the democratic process elevates the US standing in this area and the US maintains a competitive advantage in terms of intellectual property rights, transportation infrastructure, and proximity to major markets. Moreover, while the EU remains attractive and the UK, France, and Germany remain strong competitors for US investment dollars, the EU as a whole is still fragmented and is mired in regulatory issues that are not yet hampering Brand America as much.

    Third, the US has faced many challenges since the Second World War, from unpopular wars, to unpopular Presidents, to the fear of Japanese economic takeover in the 1980s. Despite the challenges, the US sustained its role as a global leader and consistently displayed its ability as a nation to adapt and innovate through difficult periods.

    And lastly, I think that there is something to be said about the intangible American spirit that continues to attract investment, tourists, and talent. Concretely, the Anholt-GfK Roper Nation Brands Index (NBI) – which looks at things like human rights, education, cultural issues, sporting prowess and even “kindness to strangers” – reports that the value of Brand America has increased by $2 trillion in 2009 to $11.8 trillion, up from $9.7 trillion in 2008. And that is despite the fact that US GDP growth fell 2.3% points over the last year.

    Therefore, I remain optimistic that Brand America is sustainable, but maintaining and growing the brand will require some elbow grease. We will need to work harder to foster an innovative business environment that:

    – Promotes entrepreneurship and start-ups.
    – Provides a cooperative regulatory system.
    – Supports the ease of commercialization.

    On a policy level, we need to look at balancing trade and boosting US exports, as well as engaging in serious discussions over the Chinese exchange rate.

    In addition, it is imperative that the US maintain a pool of skilled labor and engage in partnerships among key community stakeholders in the public, private, university, and research park sectors. This is an absolute must in order to grow and strengthen the US workforce and for Brand America to remain competitive.

    As a final comment, we must gain resiliance as a place of manufacturing excellence. We cannot be an importer nation and win in the global marketplace. Services is not going to cut it and we do not have enough natural resources to exploit to grow our wealth. If this issue is not addressed, I would be seriously concerned about our future.

  7. David Scrimgeour

    February 22, 2010

    Dear Ed
    The survey is certainly a useful exercise to kick off an informed discussion from outside the US about how the US is viewed. My particular perspective is on FDI from Germany into the US and a couple of the points raised by the survey which chime with my experience are the following:

    There is indeed anxiety about over-regulation and the real or perceived difficulty of obtaining visas. German investment projects tend to have a high proportion of nationals involved in management of the subsidiary so this anxiety is a barrier to investment.

    China is certainly a serious competitor for available capital and management resources as Germany is the biggest investor in China and this is a trend that will surely continue.

    Other points which were not mentioned by participants in the survey:

    German investors often have an extreme impression of the degree of risk relating to product liability and the protection of intellectual property and will adjust their investment plans accordingly. For example many German medical device companies either avoid the US entirely (although it is the world’s largest market) or establish operations in Canada to serve the US market.

    German investors are “information hungry” and there is a lack of good quality information providing detail on sectors and markets for the US as a whole and thereby giving comfort to potential investors. The national FDI and trade agency here http://www.gtai.com does a good job on this and perhaps Invest in America could further extend their service in this area? Generally I believe Brand America in these highly competitive times would benefit from a beefed up national agency as in Germany, France, UK etc.

    Best wishes
    David

  8. Slim Fairview

    February 18, 2011

    Leverage. ROI.

    It is easy to see that start up costs in some countries are much lower than start up costs in another.

    If the other country does not have the physical plant for example, it will be cheaper to build that plant in the other country.

    Currency considerations are another factor

    Incentives from a country with little industry are greater than they are from a country where you will compete with the locals.

    Market penetration. Would people in countries in the region be more inclined to buy from countries in the region or from western nations.

    Partnering. It is easier to partner with business in some countries where western technology is not readily available by making that technology available.

    Just a few thoughts.

    Regards,

    Slim

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