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VIEWPOINTS : The Engine That Couldn't : Despite Appearances, Foreign Investment in the United States Doesn't Do Much to Power Job Creation or Drive the Economy

December 04, 1988|JOCK O'CONNELL | JOCK O'CONNELL, an international trade and investment consultant, is an adviser to the California Commission for Economic Development

Late in his ill-fated campaign for President, Massachusetts Gov. Michael S. Dukakis, doing his best to impersonate U.S. Rep. Richard Gephardt (D-Mo.), tried to capitalize on the public's growing apprehension over foreign investment in the United States.

While the Democratic candidate was predictably labeled a protectionist (the dreaded "P" word) by Wall Street pundits, Dukakis' concerns also seemed at odds with the interests of many rank-and-file Democrats.

After all, aren't foreign investors the ones who are creating hundreds of thousands of new jobs for American workers at a time when U.S. companies are busily closing down factories, laying off personnel and moving their operations overseas?

This perception of foreign investment as an engine of job creation is not unique to blue collar workers. It's also held by legions of state and local officials throughout the nation who are aggressively courting foreign investors and spending enormous amounts of taxpayer money in the process.

But what if foreign investment turns out to be something of a dud when it comes to job creation?

That just may be the case, according to new research indicating that foreign investment accounts for less than 1% of all new U.S. jobs and, in certain sectors of our economy, may even contribute to job losses. Moreover, because the role of overseas investment in creating new jobs is often exaggerated, state and local governments may not be making the best use of public funds in trying to stimulate employment.

Overall, foreign investment in the United States exceeds $1.5 trillion. Of this, $1.3 trillion is invested in government securities, bank deposits and corporate stocks and bonds. Another $262 billion is classified as foreign "direct" investments (FDI) in manufacturing plants, retail stores, banks and real estate.

Nearly 3 million Americans are employed in what, for statistical purposes, are regarded as foreign-owned businesses, up from just 1.2 million a decade ago. About 300,000 of these jobs are in California. But, before anyone assumes that foreigners were responsible for creating those jobs, hold on. As is customary in these matters, it's important to know how the government's statisticians came up with their figures.

As it turns out, there are three major reasons why the data inflates the significance of FDI as a source of new jobs.

First, the government's data does not distinguish full-time employees from part-time or seasonal employees. Second, federal officials regard a company as foreign-owned even if as little as 10% of its voting stock is held by foreigners. Thus, all employees of a company in which a foreign investor holds a minority interest are considered to be employed by that foreign investor. Third, because mergers and acquisitions are by far the most common form of FDI, the great majority of the jobs attributed to foreign investors actually existed before the new owners took over.

When Nestle, the Swiss conglomerate, bought out Carnation in 1985 for $3 billion, all of the thousands of Californians who worked for the Los Angeles-based food company became employees of a foreign company. Even though the acquisition itself created no new jobs, the ranks of Californians employed by a foreign investor rose considerably.

To be sure, an infusion of new capital and managerial skills can rescue a failing company, thereby saving jobs. More commonly, though, owners of newly acquired businesses move to cut costs, often through personnel reductions. For example, the Los Angeles Times recently reported that the acquisition of the Los Angeles-based Union Bank by the Japanese-owned California First Bank of San Francisco will result in the loss of at least 640 jobs as the two banks merge some of their operations.

Further contributing to our tendency to regard FDI in a positive light is that, while new investments are widely heralded, failures of foreign-owned businesses are seldom reported. Yet foreign-owned companies are subject to the same rules of economic life as domestic firms. They endure business cycles, hire new workers, lay off employees and sometimes go out of business. Jobs are created, but jobs are also destroyed.

According to a number of recent studies using government data, FDI accounts for no more than 15,000 to 20,000 net new jobs annually, largely because the great bulk of FDI activity involves the acquisition of existing companies, not the investments where new businesses are established from scratch.

Writing last summer in the New England Economic Review, Jane Sneddon Little, an economist with the Federal Reserve Bank of Boston, reported that FDI accounted for 19,000 net new jobs nationally in 1986.

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