Foreign investment in the United States continues at a rapid pace, both in nominal and percentage terms, heightening fears that foreigners are "buying up America." These concerns, which have ignited a new round of economic nationalism, are largely grounded in emotion and not economic reality. Nevertheless, they are likely to lead to more proposals in Congress to restrict foreign investment.
On the face of it, the latest Commerce Department figures seem gloomy. In 1987 foreigners invested $195.4 billion in America, mostly in stocks, bonds and debt instruments, bringing their total U.S. investment to $1.54 trillion. At the same time, Americans invested $96.4 billion abroad, totaling $1.17 trillion. Thus, the U.S. net investment position in 1987 declined further to $368.2 billion.
It is too easy to blame others for the investment imbalance and glibly assert that we are losing control of our political and economic destiny to foreigners. The fact is that until measures are taken at the macro-economic level to correct the economy--and, in particular, to reduce the budget deficit--current trends in foreign investment will likely continue. It is virtually inevitable then that protectionist proposals to curtail foreign investment will be introduced in Congress. Such proposals, however, may injure our economy and weaken the competitive position of American business and financial markets. Several factors bear mention.
First, the inflow of foreign capital helps finance the huge U.S. trade and budget deficits. The budget deficit has been funded by the sale of government securities, which compete with the private sector for capital. This competition has created a vacuum, attracting all available capital, both domestic and foreign. Without foreign funds, as Steven Marris of the Institute for International Economics has pointed out, interest rates would rise rather substantially, perhaps as much as 3.5% to 5.5%, as the federal government competes with the private sector for fewer financial resources. This would almost certainly trigger a recession. In any event, higher interest rates would, of course, discourage productive investments and have serious long-term consequences for the American economy.
Second, the real growth and competitiveness of U.S. industry are boosted by foreign investment, which contributes to the industrial capacity of the economy by expanding the nation's stock of new plants and equipment, enhancing our export capabilities, and introducing new management techniques and technologies.
Last, a cornerstone of U.S. economic policy has been to encourage foreign governments to reduce barriers to U.S. investment. For Congress to erect barriers to the free flow of capital would undermine our traditional policy, as well as the American position in the new round of international trade and tariff talks. This would be a particularly unfortunate outcome as services that benefit from lower barriers become an increasingly important component of U.S. exports.
Fears that foreign investment is out of control are unfounded. Direct investments (generally considered ownership of 10% or more of the equity or its equivalent in a business) by Americans in other countries grew 19% last year, the same as foreign direct investment in the United States. If real estate is reclassified as a financial asset and, therefore, a portfolio investment, foreign direct investment by Americans grew at a faster rate than foreign investment in the United States.
To put things in perspective, foreign direct investment constitutes only about 5% of all U.S. corporate assets. Moreover, American overseas direct investments as of April, 1988, amount to almost $309 billion, compared to $262 billion in foreign direct investment in the United States.
Not only is the amount of foreign investment well in hand, but a number of measures are in place to safeguard America's national security. Like U.S. investors, foreign investors must comply with all applicable laws, such as Securities and Exchange Commission reporting requirements and the antitrust laws. Unlike U.S. investors, foreign investors face special restrictions for activities in certain key industries. The Defense Department has comprehensive regulations covering the performance of government contracts involving classified information that limit or bar foreign ownership of the contractors. The President may impose restrictions on imports that threaten to impair national security. In addition, since 1975 an interagency group reviews foreign investments that in the judgment of the group might have major implications for U.S. national interests. Finally, the omnibus trade bill (which is soon expected to become law) contains an amendment giving the President power to block on national security grounds a takeover by a foreign investor.
Rather than turning inward, we should intensify our efforts to get our own budget deficit under control. Reducing the deficit would reduce demand for investment capital, permitting the financing of private investment expenditures out of available funds. This could be accomplished without driving up interest rates and, indeed, could result in a lowering of these rates as inflationary expectations receded.
In turn, added investments in plants and equipment would help reinvigorate the economy's industrial base, allowing U.S. exports to compete even more effectively. We should simultaneously continue to urge our major industrial trading partners to stimulate their own domestic demand and, to the extent that these countries maintain barriers to the free flow of capital, to reduce them.