Matthew Slaughter of Darthmouth's Tuck business school is one of the most consistently interesting academic commentators on globalization. This morning, after the news of India's Tata Group acquisition of Ford Motor Co.'s Jaguar and Land Rover lines, he writes about the hugely important role foreign investment plays in the U.S. economy.
From 1987 through 2006, the U.S. received a lot of greenfield FDI: $220 billion worth. But over that same period, it received $1.78 trillion of new FDI via mergers and acquisitions (M&A) with existing U.S. businesses. M&A activity, not greenfield investment, is far and away the predominant method foreign companies use to invest in the U.S. It accounts for more than 88% of new FDI in the U.S. over the past two decades. M&A transactions have been essential for insourcing companies to expand in -- and generate benefits for -- the U.S.
The second key feature of insourcing that the Tata transaction underscores is who does it. For many decades, the bulk of FDI into the U.S. flowed from other high-income countries such as Germany, Japan and the United Kingdom. But in recent years there has been a rise of FDI from multinational firms based in developing countries such as China and India. In 2006, outward M&A transactions by Indian companies totaled $23 billion, more than five times the 2005 total and approximately 20 times the annual total in 2000.
But, Slaughter warns, populism threatens to undermine this great American advantage.
In recent U.S. policy discussions about inward FDI, however, these facts have largely been ignored. Instead, many voices are calling for new restrictions on inward M&A -- especially on transactions from nontraditional countries....
There is no law of physics that the U.S. will continue receiving transactions like Tata's. The world has recently enjoyed some of strongest, most widely shared growth ever seen -- in large part due to dramatically liberalized trade and investment regimes. For globally engaged companies like Tata, all this means an ever-wider range of countries in which they can expand. For the U.S., all this means stiffer competition to attract and retain these companies. The U.S. share of global FDI inflows has already been declining for decades: from 31.5% in 1988-1990 to 24% in 1998-2000 and to just 16% in 2003-2005.
American policy makers should strive to make the U.S. a premier location for the dynamic, high-productivity activities of globally engaged companies -- both insourcing companies and U.S. multinationals alike. To truly be such a location would require dramatic progress on many fronts: renewing the president's trade promotion authority; resuscitating the World Trade Organization's Doha Development Round; passing comprehensive immigration reform.
The U.S. recently blocked Bain Capital's acquisition of 3Com because China's Huawei was to be a small minority partner in the deal. Some say there are classified details that raised security concerns. But the U.S. should not lightly go down the path of protectionism.