Investing on What You Know

USA Today ran a great interview with Mohamed El-Erian, CEO and co-Chief investment officer of Pimco – an investment firm that manages more than $1 Trillion.  He is the author of a best selling book, When Markets Collide. Mohamed shared his perspective on the changes in the global economy and the implications for investor thinking.

While the article is worth a full read, I believe Mohamed made several key points of particular relevance for the economic development community.

“The world is on a bumpy journey to a new destination and the New Normal.” Have you noticed the impact on your capital attraction efforts?  Things that seemed to work well for you in the past are no longer producing the results you expect.  Budgets are slashed and you are being asked to do even more with less.   Capital markets are flowing one day and dried up the next.  Deal opportunities start and then stop.  You go to bed Friday believing you have a deal only to go to work Monday morning to find a phone message that another location was selected. It just feels like your experience and instincts are no longer trustworthy.  Welcome to the New Normal.  The rules of the past no longer apply as reliably when working through the deals of today.  Speed to a decision is becoming more and more important.  According to DCI market research, 73% of the time a short list of location options is created without ever contacting an economic development professional.  In the New Normal, our community can lose without even knowing.  The New Normal requires you to revisit long held paradigms and understand the financial pressures companies are facing in today’s interdependent global economy.  Welcome to the New Normal.

“The global realignment is accelerating the migration of growth and wealth dynamics from the industrial world to the larger emerging economies.” Since the 80’s, U.S. companies have invested more money in foreign countries than the world has invested in the U.S..

US International Direct Investment Flows

Period FDI Outflow FDI Inflows Net
1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn – $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Every FDI dollar you can attract is important to the continued growth of our economy.  According to Invest in America, there are six ways FDI helps (this list is copied from the website)-

  1. Creates New Jobs: U.S. affiliates of foreign companies (majority-owned) employ approximately 5.3 million U.S. workers, or 4.6% of private industry employment. Between 2003 and 2009, over 4,500 new projects were announced or opened by foreign companies, yielding over $314 billion in investment and about 632,500 new jobs.
  2. Boosts Wages: U.S. affiliates of foreign companies tend to pay higher wages than other U.S. companies. Internationally owned companies support an annual U.S. payroll of $364 billion, with average annual compensation per employee of over $68,000. On average, U.S. subsidiaries of foreign firms pay 25 percent higher wages and salaries than that of all U.S. establishments.
  3. Increases U.S. Exports: U.S. companies use multinationals’ distribution networks and knowledge about foreign tastes to export into new markets. Approximately 19 percent of all U.S. exports ($195 billion) come from U.S. subsidiaries of foreign companies.
  4. Strengthens U.S. Manufacturing and Services: Thirty percent of the jobs supported by U.S. affiliates of foreign companies are in the manufacturing sector, accounting for 12 percent of all manufacturing jobs in the United States. Approximately 60 percent of all foreign investment in the United States is in the service sector, improving the global competitiveness of this critical segment of the U.S. economy.
  5. Brings in New Research, Technology, and Skills: Affiliates of foreign companies (majority-owned) spent over $34 billion on research and development in 2006 and $160 billion on plants and equipment.
  6. Contributes to Rising U.S. Productivity: Inward investment leads to higher productivity growth through an increased availability of capital and resulting competition. Productivity is a key factor that increases U.S. competitiveness abroad and raises living standards at home.

This is a competition we simply cannot afford to lose.  And, our competitors are not standing still.  I was amazed to read the other day, China has already surpassed Japan and become the second largest economy in the world. If you believe China’s growth is even near peaking, think again.  Here is a quote from Foreign Policy to consider – “In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000.”   Capital follows middle class expansion.  The competition for FDI is only going to get tougher.

“Most people start the day positioned for the old normal, not the New Normal.” How did you start your day?  Was it thinking about how to more effectively compete in this new interdependent economy where your community is being compared with other locations around the world?  Or, did you wake up thinking about how to attract companies away from your neighboring state?  In the New Normal world, it is important to think about the risk that a multinational firm may acquire the major employer in your community and jobs could be at risk due to a global operation rationalization that leads to a consolidation.  You need to think about how to improve the business climate so companies can lower cost and deliver a competitive price point for global markets.  Business as usual is a luxury you no longer can enjoy.  The door is closed forever on the old normal.

“Investors will have to manage their money in an upside-down world relative to what they’ve been used to.” One of the great things about forecast models is that they can help you make better choices.  One of the bad things about most models is that they are retrospective in nature relying heavily on historical data to determine future events.  To the extent the future behaves like the past, your forecast is reliable.  But, in today’s New Normal the past is no longer a good indicator of the future.  We are in uncharted waters and like they say in the U.S. Marines, it is time to “improvise, adapt and overcome”.  But, you are not alone.  Capital investors also have to figure out the rules of the New Normal as they try to please shareholders.  The competition is getting more complex every day.

Raise your tray to its upright position, and buckle your seatbelt.  The New Normal promises to be a wild and unpredictable ride.

Please leave a comment and share your perspective.  By sharing, you help everybody get a better learning experience.

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1 Comment so far

  1. Steve Sahlfeld

    August 23, 2010

    Good article. The “new normal” was the right way to put it. As we move towards the future I agree with him that China’s economy will become the biggest in the world and I would even think the “financial capital of the world” may relocate there. With so many people over there and many families essentially “coming off the farms” for the first time and discovering what the world has to offer that their economy is poised for tremendous growth. Very similar to the US economy after WWII when the soliders came home and our country’s economy really took off.

    I have to get the book ….

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