Foreign Direct Investment is Important to ED

A recent analysis by Economy.com of foreign direct investment in the US says it makes a difference in economic development.

Foreign direct investment (FDI) is a significant factor supporting economic development across the U.S. and it shapes regional development patterns in states. Flows of FDI have slowed considerably over the past two years, however, and will not resume any influence on the U.S. economy until two conditions are met.

First, the dollar must stabilize. Second, the global economy must accelerate and profit margins among firms in Europe, Canada and Asia must improve. When FDI does accelerate again, however, the U.S. will face considerable competition from China, India and other nations where workforce quality and productivity are improving.

As of 2000, the latest year of data available from the U.S. Commerce Department, the stock of FDI in property, plant and equipment nationwide amounted to 12% of U.S. GDP, up from just over 10% in 1995. Due to this rising presence, state governments have begun to more aggressively court FDI. Many states have investment offices in Europe and Asia, regions that are primary sources of FDI in the U.S., although many have trimmed their staffs recently in light of tight state government fiscal conditions.

FDI is concentrated generally among states that have high concentrations of manufacturing, and among those that produce energy, chemicals and other globally traded basic commodities. Among the manufacturing states with high concentrations of FDI is Indiana, which is the state with the highest concentration of manufacturing employment. Kentucky and South Carolina are not far behind. The economies of these three states have been boosted in recent years by investment from foreign auto manufacturers and other industries. South Carolina also has long historical ties to FDI related to the textile and chemical industries.

From my vantage point, eventually I see China and India becoming more active as sources of FDI for the US. This will not occur until their economic bases grow stronger, but both will be players in the next 3-5 years. As I reported in an earlier article this week, look for both China and India to move forward with more acquisitions and mergers with US companies. M&A activity has historically accounted for the lion's share of FDI investment in the US. China and India are no doubt watching Korea as it increases its production presence in the US, especially in the auto and electronics industries.

Read more here. (If you subscribe to Economy.com.)