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The United States: Revival of an Economic Powerhouse

Its large internal market, highly educated workers, and strategic infrastructure are steering foreign investors to the United States.

Douglas van den Berghe, Managing Director, Investment Consulting Associates (ICA) (Location USA 2012)

The flow of inward investment and, in particular, foreign direct investment (FDI) brings with it potential benefits for locations — they are able to differentially benefit from a strengthened technological base, enhanced supplier base, and improvements in both the quantity and quality of local employment opportunities. Investment also plays a key role in enhancing the capacity of a host location to respond to opportunities offered by global integration, investment, and production.

Traditionally the developed countries had the most inflow of foreign investments. However, the economic downturn that started in 2008 changed the global landscape. For the first time in history, developing countries and transition countries, i.e., those in transition from a centrally planned economy to a free-market economy, absorbed more than half of global FDI flows (UNCTAD Global Investment Trends Monitor: Global and Regional Trends 2010, No. 5, Jan. 17, 2011). Given the rise of emerging markets and the economic developments in the United States since the financial crisis — e.g., debt ceiling debates, increasing budget deficits, and high unemployment — the United States has been increasingly warned for its deteriorating investment climate.

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Figure 1: Present and forecast U.S. and China Price and TCO (click 'enlarge' to see full infographic)

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Figure 2: U.S. Global Competitiveness (click 'enlarge' to see full infographic)

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However, in 2008, Investment Consulting Associates (ICA) challenged this widespread view by positing that the United States could be re-invented by investors as a favorable location for manufacturing processes and outsourcing activities. By means of our research study — presented at the IEDC 2011 annual event in Charlotte, North Carolina — ICA justified and validated our statements to a wider audience. The presence of a large internal market, highly educated employees, strategic infrastructure, and relatively decreasing international labor costs point toward a newly emerging trend in foreign direct investment, i.e., the revival of the United States as an economic powerhouse.

U.S. Global Competitiveness
The competitiveness of the United States versus emerging and low-cost markets has been assessed by a fact-based benchmark analysis using objective data from international organizations and national statistics sources. The criteria used in the competitiveness benchmark are comprised of:

Business environment

Labor costs

Business risks

Macro economy

Infrastructure

The web-based benchmarking tool LocationSelector.com transforms the actual country values into a relative score between 10 and 100 (e.g., best-in-class country for a particular factor receives a relative score of 100) and calculates the overall country competitiveness scores.

The overall competitiveness ranking implies that the United States still offers a very competitive investment location compared to the selected emerging low-cost and high-growth markets. The United States consistently scores well in terms of business environment, business risks, infrastructure, and tax.

Needless to say, in terms of labor costs, the United States has a distinct cost disadvantage compared to its competitors. Yet, a new trend called “re-shoring” has been observed. Re-shoring involves re-migration of business activities back to the United States from overseas locations, as illustrated by Ford Motor Company and Wham-O (the makers of the Frisbee®), which have brought their overseas production back to the states. Also Presair, a manufacturer located north of New York City, is returning production of switches to the United States from China. Presair’s reasons for moving production back to the states include the desire to cut long lead times for product and to free up capital that would have been needed for expansion in China.

Total Cost of Ownership (TCO)
In addition to a fact-based global competitiveness benchmark and real life examples from the corporate markets, ICA’s research simulated a manufacturing business case located in the United States and in China.

Any financially based case analysis of the impact of offshoring manufacturing activities must take into account all the costs associated with an offshore initiative. In practice, corporate decision-makers often ignore important cost drivers and focus only on the labor cost differential between the United States and emerging economies such as China, i.e., a labor cost of US$2.80 per hour in China versus US$25 per hour in the United States. However, the manufacturing business case simulation highlights the hidden costs of relocating overseas and illustrates that the so-called Total Cost of Ownership (TCO) actually favors the United States as an investment location over China.

The Total Cost of Ownership approach (TCO) — based on the TCO model provided by Reshoringmfg.com — analyzes the entire cost a company incurs when producing or purchasing a particular manufactured part overseas and consists of the following key components:

Raw material costs

Packaging costs

Transportation costs

Customs and duties fees

Inventory costs

Lead times and local warehousing costs

Quality control costs

Travel costs

Training and productivity

IP risks

Exchange rate fluctuations

Inflation rates

Let’s look at an example:
Company XYZ is active in the automotive industry and is a first-tier supplier to original equipment manufacturers (OEMs). It produces high-technology braking and gearing systems, for which it also uses its own software systems, fully integrated with its “hardware” products. For its supplies of specific steel products, XYZ is depending on several suppliers that are located globally. The board of directors is following a vertical integration strategy to allow for further growth of the company. The board must decide whether to source the steel from third parties or produce and process the steel for the company’s products internally. Secondly, it must decide where to locate such a steel processing plant. Would it be more beneficial to locate the steel plant overseas and potentially benefit from lower cost levels, or does it make more sense to keep it close to the other U.S. facilities to minimize lead times and transport costs?

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About the Author

Douglas van den Berghe, Managing Director, Investment Consulting Associates (ICA)
Douglas van den Berghe (PhD) is the CEO and founder of Investment Consulting Associates, headquartered in Amsterdam, and of two web-based FDI advisory products: www.locationselector.com and www.ICAincentives.com. He holds a Ph.D. in Business Administration from Erasmus University Rotterdam-Rotterdam School of Management (RSM) and was previously a director at Ernst & Young International. As a management and strategy consultant, he has assisted many corporate clients in successfully implementing their global investment strategies, their location selection, as well as optimizing their global supply chains across the world. Some of his corporate clients include Shell, Philips, Electrolux, HB Fuller, John Deere, Johnson Controls, and ING. As an economic advisor, he has also worked on issues related to foreign direct investment (FDI), economic development, and competitiveness for numerous governments, free zones, and investment promotion agencies (IPAs) in numerous countries. AHe has also worked for various international organizations like the U.S. State Department, United Nations Conference on Trade and Development (UNCTAD), United Nations Development Program (UNDP), Organization for Economic Co-operation and Development (OECD), European Commission, and the Economist Intelligence Unit (EIU). Douglas has lectured at a large number of universities and business schools worldwide including Harvard Business School, and published in several journals such as the International Business Review, Transnational Corporations, and Business Strategy Review. He has worked in many countries including EU-27, Central America, Albania, Australia, China, Ghana, India, Jordan, Iraq, Mexico, Saudi Arabia, Senegal, Ukraine, United Arab Emirates, United States, and Turkey. In addition, he has the following sector expertise: electronics, consumer products, financial services, automotive, oil and gas, chemicals, and IT.

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