2015 Outlook for FDI in the US: Two Key Sources of Growth Are China and Japan
FDI by Chinese firms in the United States
Chinese investment in the United States has been growing in recent years, concentrated in manufacturing, electrical equipment, information technology (IT), chemicals, and extractive industries. But total foreign direct investment (FDI) by Chinese firms in the United States is still much lower than what would be expected based on characteristics of the Chinese and US economies. This gap between actual and potential investment, along with larger trends in China's economy and economic reforms, leads us to expect that Chinese investment will continue to rise rapidly and even accelerate in the coming years.
According to a January 5, 2015 report by the Rhodium Group, since 2012, an increasing share of Chinese outward FDI has been aimed at advanced economies, with the United States consistently being among the most important. FDI by Chinese firms in the United States continued to expand in 2014, and we expect that it will grow even more in 2015. As China continues to develop its domestic energy sector, we expect outward FDI by Chinese firms in this sector to decline in importance. Meanwhile, one of the greatest challenges for Chinese firms is to position themselves to move up the value chain, and many have addressed this challenge by looking outside of China for management and technological prowess. This has been evidenced by outward FDI by Chinese firms in well-known brands and high-tech industries, a trend that will only get stronger in coming years.
Investment by Chinese firms in the United States benefits US workers. Workers employed by Chinese-owned firms earn much higher wages than their counterparts at domestic or other foreign-owned firms. Chinese companies locate in the United States in order to hire US workers, engineers, and executives to do what these Americans do best: perform high-skilled activities such as management and research, which creates high-skilled, high-wage jobs in the United States. While Chinese research and development (R&D) spending is lower than that of US multinationals and affiliates of other foreign firms, it is much higher than the R&D spending of other emerging-market firms operating in the United States, including Indian, Brazilian, Russian, and Mexican owned firms.
We have updated earlier research to show that FDI by firms from highly developed countries with cutting-edge technology spurs productivity growth among US firms. More surprising, in recent research, we have found that productivity spillovers exist even when the investment is from a less developed country such as China (Moran and Oldenski 2013).
Our analysis also shows that the types of potential national security threats from foreign acquisitions, including Chinese acquisitions of US firms, can be rigorously defined: 1) denial of output (Threat I); 2) leakage of sensitive technology (Threat II); and 3) surveillance or sabotage (Threat III).
Since the reform of Committee on Foreign Investment in the United States (CFIUS) in 2009, the procedures to assess foreign acquisitions have been systematized and made more immune to congressional pressure and public outcry. With appropriate legal counsel, Chinese investors should be able to discover whether they will be subject to serious obstacles. A hypothetical Chinese acquisition of a US rare-earths mine would probably be denied since China already controls more than 95 percent of rate-earths output and has demonstrated a willingness to manipulate supply to Japan (Threat I); a Chinese acquisition of a small US oil company would not. A hypothetical Chinese acquisition of the most advanced US encryption firm would probably be denied (Threat II); a Chinese acquisition of a meat-packing company would not. A Chinese acquisition of a US wind-power facility overlooking the Air Force's most sophisticated drone-testing base would probably be denied (Threat III); a Chinese acquisition of a US wind-power facility overlooking open ocean would not.
Within this framework, the vast majority of Chinese operations, like other foreign investor operations, can be shown to pose no genuine national security threat whatsoever.
Thus we predict that Chinese FDI in the United States will not only continue to grow rapidly in the coming year, but that these flows of FDI will deliver overall benefits to the US economy and US workers.
FDI by Japanese firms in the United States
Japanese direct investment in the United States has been increasing in recent years. In 2013 Japanese firms were the largest source of new inflows of FDI in the United States for the first time since 1992, injecting almost $45 billion of new investment into the US economy in 2013 alone. We predict that US investments by Japanese firms will continue to grow through 2015.
Japanese firms were among the most important investors in the United States from the 1980s through the mid-1990s but were surpassed by firms from the United Kingdom, Germany, France, Canada, Switzerland, and the Netherlands for most of the past two decades. The most recent data, however, suggest that direct investments by Japanese firms in the United States are again on the rise, both in absolute terms and relative to investments from other countries.
One of the most striking trends in Japanese FDI in the United States is how much R&D spending on the part of Japanese investors has grown in recent years—more than doubling between 2000 and 2011, as well as how much the R&D intensity of Japanese operations has increased. This R&D intensity underpins our finding that Japanese wages and benefits are higher than wages and benefits of other foreign multinationals in the United States.
There are a number of reasons that we expect Japanese FDI in the United States to continue increasing. First, as software patents have become increasingly prominent in patenting overall, Japanese software patenting behavior at home been much weaker than in other countries, especially in the United States. Perhaps to compensate, Branstetter, Arora, and Drev (2013) show that software patents filed by Japanese companies that have moved operations to the United States account for 24 percent of Japanese patents issued in the United States, even higher than the 17 percent share prevailing among American firms, and much higher than the 6 percent of overall Japanese patents.
Second, Tsukada and Nagaoka (2015) have suggested that the relative lack of English-speaking Japanese workers leads Japanese firms to locate operations in the United States where they can hire native English speakers. Third, as noted by Marcus Noland (2015), Japan permits far fewer IT workers to immigrate to Japan than does the United States. The flow of labor into the software sector from domestic and immigrant sources was three times as large in the United States as in Japan, notwithstanding the relatively restrictive H-1B visa program. Finally, Noland points out that home-based US firms are more active than their home-based Japanese counterparts in offshoring software and other operations as well. So companies based in the United States are much more actively engaged as a sender and receiver of software and other activities than companies based in Japan, and the latter may come to the United States precisely to take part in this global engagement. None of these conditions are likely to diminish in the future, and the importance of software will certainly increase. Thus we predict that Japanese firms will stay at the top of the list of direct investors in the United States in 2015.
Arora A., L. Branstetter, and M. Drev. 2013. Going soft: How the rise of software-based innovation led to the decline of Japan's IT industry and the resurgence of Silicon Valley. Review of Economics and Statistics 95, no. 3: 757–75.
Hanemann ,Thilo, and Cassie Gao. 2015. "China's Global Outbound M&A in 2014." Rhodium Group Online Note, January 5, 2015.
Moran, Theodore H., and Lindsay Oldenski. 2015 (forthcoming). Japanese Investment in the United States: Superior Performance, Increasing Integration. Policy Briefs in International Economics. Washington: Peterson Institute for International Economics.
Moran, Theodore H., and Lindsay Oldenski. 2013. Foreign Direct Investment in the United States: Benefits, Suspicions, and Risks. Washington: Peterson Institute for International Economics.
Noland, Marcus. 2015. Comment on "Determinants of International Research Collaboration: Evidence from International Co-Inventions in Asia and Major OECD Countries." Asian Economic Policy Review 10, no. 1.
Tsukada, N., and S. Nagaoka. 2015. Determinants of research collaboration: Evidence from international co-inventions in Asia and major OECD countries. Asian Economic Policy Review 10, no. 1.