Amid Rebound, U.S. Regains Position as World Leader in FDI
Traditional and rapidly emerging industries alike are choosing the U.S. for its stable and innovative market, skilled workforce, and favorable tax and regulatory climate.
According to Kearney’s Global Business Policy Council’s 2022 Foreign Direct Investment Confidence Index and for the tenth consecutive year, the U.S. is the world’s No. 1 destination for FDI.
Figures from the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2022 also highlight the U.S. as the world leader in FDI. After unseating the Netherlands as the top recipient in 2019 and buttressing this position until the onset of the Covid-19 pandemic, the U.S. fell into second place behind China as America struggled to manage the crisis. But much has changed in a year. The pandemic is waning, and experts are characterizing current economic hardships as a slow squeeze rather than the sharp contractions of the pandemic’s worst days. While the U.S. regains its No. 1 spot, China now finds itself hampered by an untenable zero-COVID policy and increasingly bellicose rhetoric on Taiwan that have scared away businesses fearful of lost revenues from shutdowns, a shortage of available workers, unreliable supply chains, and high-profile military posturing. And with the White House taking a much more aggressive tack at curbing Beijing’s advanced technology industry, investors are likely to be even more reluctant to bank on Chinese enterprises.
Know Your Customer
Across the East China Sea, the foreign leader in FDI inflows to the U.S. is no stranger to American business enterprises. Japan tops the field in U.S. investment, with more than $690 billion in FDI inflows to the U.S. in 2021. In second place is the Netherlands with nearly $630 billion, followed by our northern neighbor Canada in third with $528 billion. Mexico, despite sharing nearly 2,000 miles of one of the world’s busiest borders, did not appear in this ranking.
According to Kearney’s Global Business Policy Council’s 2022 Foreign Direct Investment Confidence Index, the U.S. is the world’s No. 1 destination for FDI. Of the top 20 countries in U.S. investment, 14 are European. The only other Asian countries were South Korea and China, the former of which is representative of the investing trend between very developed markets, and the latter of which continues to assert its growing economic influence on the global stage. Overall, FDI in the U.S. increased from all reported regions, though gains from the Middle East and Africa were marginal.
By industry, analysis of recent inbound FDI indicates that investment has been focused primarily in manufacturing, with 42.4 percent of all inward FDI stocks for the U.S. concentrated in the sector. Wholesale trade and the finance and insurance industry accounted for 9.7 percent and 12.5 percent, respectively.
UNCTAD’s World Investment Report 2022 also showed an increase of 64 percent for FDI in 2021 to reach nearly $1.6 trillion, a figure which represents extreme economic rebound after COVID’s equally extreme initial setbacks. However, U.N. Secretary General António Guterres states that such a growth rate is not sustainable, and that triple food, energy, and finance crises stemming from geopolitical events such as Russia’s war against Ukraine will see this trend flatten, if not reverse, in the data in the coming year. Even so, according to the U.S. Bureau of Economic Analysis, FDI in the U.S. increased by $74.4 billion in the second quarter of 2022.
Japan — the foreign leader in FDI inflows to the U.S. — is no stranger to American business enterprises. “There is definitely a lot of uncertainty right now in the United States,” says Nancy McLernon, president and CEO of the Global Business Alliance. “But when I talk to executives at my member companies, they’re feeling bullish.”
Open for Business
The U.S. offers a rare combination to investors of a fully developed market with a large consumer base and an economic climate that is incredibly advantageous for and receptive to foreign investment. A highly skilled workforce, low corporate tax rates, and relatively lax regulatory structures make the U.S. fertile ground for businesses looking to grow via mergers and acquisitions, expansion, or establishment. Given these factors, it’s not surprising that global investors find the U.S. an attractive option and one deserving of the Kearney study’s top spot.
“This ranking is cause for celebration, and it reflects what so many in the global business community already know: the United States is unmatched not only in its economic power, but also in its appeal for business development through a strong culture of innovation and employment of a world-class productive workforce,” says U.S. Secretary of Commerce Gina M. Raimondo.
Increased FDI can be similarly beneficial for American communities. The influx of industry means more job opportunities; moreover, many of the fastest-growing sectors require specialized skills, such as advanced technology, renewable energy, and chemical manufacturing. The need for foreign employers to fill these roles with a localized workforce will naturally create more opportunities in higher education, training and certification programs, and other service industries as well.
Just as the U.S. experiences an uptick in inbound FDI, some top U.S. corporations are leading the way in outbound FDI. But just as the U.S. experiences an uptick in inbound FDI, some top U.S. corporations are leading the way in outbound FDI. Amazon increased the number of its foreign investments by 55 percent from 2020 to 2021, with India receiving the largest share of new projects. Electric vehicle producer Tesla experienced an even bigger increase in outbound FDI over the same period to lead the automotive industry, rising from 12 greenfield projects in 2020 to 53 in 2021, with the majority of those going to Europe or Canada. Marriott was the top outbound investor in the hospitality sector.
Greenbacks for Greenfield
One of the forces driving FDI to the U.S. is greenfield investment, in which foreign parent companies build a subsidiary operation from the ground up as a means to increase production capacity, alleviate supply chain disruptions, and gain access to a new base of customers and workers. As the U.S. receives a growing number of these investments, more parent companies must build facilities for their U.S. operations.
In 2021, total planned expenditures for greenfield investment were $15.6 billion. Such a trend puts engineering, design, and construction firms at the forefront of economic development. In just the last year alone, Gray began or completed industrial construction projects for U.S. subsidiaries and affiliates of customers from South Korea, Japan, Germany, Austria, India, the Netherlands, and Sweden. Over the past five years, Gray has executed more than $4 billion in FDI projects.
One of the forces driving FDI to the U.S. is greenfield investment, in which foreign parent companies build a subsidiary operation from the ground up. Häns Kissle, a fresh and prepared foods processor owned by Japanese industrial holding company Mitsui & Co., established a manufacturing facility designed and built by Gray in Gastonia, N.C., as a part of the customer’s five-year plan. “The U.S. is the center of growth on the planet,” says Yohei Sugimoto, senior vice president for Häns Kissle. “A strong economy and increasing population will keep driving that growth. We wanted to capture that.”
Many of these projects have seen companies locate manufacturing operations in the South and Midwest, regions which had previously been as well-known for their industry roots as they were notorious for those industries’ declines.
An increase in FDI is helping to flip the script on this tale of attrition, bringing desperately needed jobs and economic opportunities to small-town America and traditional economic hubs alike.
UNCTAD states that the U.S. reported 1,671 inbound FDI projects in 2021, a roughly 2 percent increase from 2020’s 1,641, but considerably lower than 2019’s all-time high of 2,015.
Preliminary reports for FDI in 2022 are cautiously optimistic vis-à-vis widespread inflation and an increasingly multinational war in Ukraine. When the dust settles, 2023 may indeed see a decline in FDI (among other economic indicators), but the factors that have led foreign businesses to invest in the U.S. for decades — a strong workforce, stable system of government, welcoming culture, and pervading spirit of innovation — bear deep roots built for long-term growth.
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