US Foreign Direct Investment Competitiveness: Take a Note

A.T. Kearney recently surveyed business executives and found the U.S. is losing ground to other world locations for new business investments, especially to China. The U.S. remains the second most preferred destination for FDI among respondents globally and the top choice for the leading FDI players - British, Canadian, Dutch, and Swiss investors.

The sharp fall in actual U.S. FDI inflows in 2002 ? roughly 80 percent ? was mostly the result of a global decline in M&A activity, suffering from deflated equity valuations and higher CEO risk aversion. Looking ahead, investors said the most important factor impacting U.S. attractiveness will be economic recovery ? with 93 percent indicating that U.S. economic growth, or lack thereof, will impact their outlook on the U.S. market.

Aside from the economy, investors viewed depreciation of the dollar as the most critical factor impacting U.S. attractiveness. Global investors have become accustomed to a steady, strong dollar over the last decade. Dollar fluctuations, coupled with a ballooning U.S. deficit increasingly financed by more volatile portfolio flows, have heightened investor concern about currency risk. About 14 percent of the global executives surveyed cited the U.S. deficit as likely to influence investor confidence in the U.S.

Future U.S. FDI attractiveness could be eroded by an ongoing war on terror, the A.T. Kearney study found. More than a third of global investors indicated that domestic security and terrorism is likely to influence the attractiveness of the U.S., more than corporate governance issues, corporate restructuring or trade agreements. Respondents believe increased border controls and more stringent visa requirements could undermine commerce, while the rising costs of homeland security are expected to push the U.S. fiscal position further into the red. Moreover, 14 percent of global executives believe a backlash against U.S. foreign policy in the Middle East, which could fuel increased concerns over terrorism, is likely to impact future U.S. FDI potential.

Notwithstanding these concerns, global investors view the open and competitive U.S. market system, flexible labor markets and productivity rates as the most important factors impacting U.S. FDI competitiveness. These positive attributes take greater weight in determining investors' outlook than security, terrorism or corporate governance. The lure of the world's largest market remains strong, according to the study.

What's my take? FDI activity will grow in 2004. Communities should be ready for more inquiries, especially as more foreign companies acquire existing US business operations. This is the time to strengthen your international business marketing efforts.

Download the AT Kearney report here.