Watch what foreigners do with their money to gain perspective on American competitiveness.
A fundamental tenet of free markets: Given few barriers, over time, capital tends to flow where it’s most efficiently used (expected risk versus expected return). In practice, this sweeping principle can take many forms. But one way to see this in action is foreign direct investment.
Reported last week, US foreign direct investment (FDI) rose by $28 billion in Q1 2012. While that’s not as big a net gain as in the prior quarter, it still marked the 12th consecutive quarter in which foreigners’ purchases of US assets outweighed the opposite. Last year, net foreign investment in the US grew 14% to $234 billion. Those are just numbers. But all this foreign cash seeking American targets seemingly illustrates a broader point: While many in America bemoan our supposed decline or looming demise, those abroad still see the US as a very attractive place to seek long-term returns.
In reporting this increased cash inflow, some were quick to point to the eurozone’s woes or Chinese hard landing fears as drivers. And maybe to an extent that’s the case. But consider: If fear is the sole motivator, why put the cash to work at all? These investors clearly have choices—like German or US debt (FDI doesn’t include purchases of US debt). Or cash! Or burying it in the backyard (a very low returning form of greenfield investment indeed).
Recent reports don’t seem to indicate this cash is, en masse, fleeing trouble. You see, much of the capital seems to be targeting real estate—which, whatever you think of real estate today, the last few years seemingly show is not an area of quietude. Moreover, an investment in US real estate tends to be quite illiquid and long term in nature, which doesn’t smack of a fear-based move to us. Instead, it seems some foreigners may view aspects of the US real estate market as undervalued.
But it isn’t just bottom fishing at work, either. FDI targeting US firms—through stock purchases, mergers and the like—has positively contributed in recent quarters. Particularly in manufacturing, which, unlike real estate, is an area largely at the forefront of the US economic expansion. It seems there’s fuel for continued growth in this area—while foreign acquisitions of US firms totaled about $7.5 billion in Q1, $25 billion in acquisitions have already been announced this quarter to date. In a blast from the past, Japanese firms seem poised to acquire American properties and firms, leveraging a strong yen and big cash balances to expand their global reach. Similarly, European businesses are increasingly allocating capital to American targets.
As this capital flows toward America’s shores, what washes up isn’t doom and gloom. Nor is this a financial invasion. As a nation, foreigners’ clamoring to do business in your country is desirable. (The opposite isn’t as much.) In fact, in a report released earlier this year, PriceWaterhouseCoopers estimated over 21 million direct and indirect jobs are associated with foreign investment. While that specific figure is debatable for sure, if it’s anything close to reality, foreigners’ job creation skills will have vastly exceeded virtually any US politicians’.
There are myths galore surrounding globalization, that supposed scourge sucking away American jobs. And to be sure, some are hurt by increased competition. But there are also many positives, though they’re less often discussed. America as a nation, a workforce and an economy, stands to gain far more from competing on a global stage than it loses. The sucking sound we should fear more would be that brought by a vast, long-term flow of billions of dollars reversing out of America.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.