Impact of Foreign Direct Investments: Contemporary Issues and Research: In the United States and Central and Eastern Europe

By Gabriel Ogunmokun and Lucyna Kornecki

International business and economic literature counts Foreign Direct Investment (FDI) as one of the most essential components of the globalization process. This research book consists of two parts and presents evidence of the impact of foreign direct investment on the U.S. economy and the economy of Central and Eastern Europe.

• Language: English
• Publisher: BookBaby
• Release date: Apr 14, 2015
• ISBN: 9780975227299

Book preview

Research.

PREFACE

Globalization is a dynamic process of liberalization, openness, and international integration across a wide range of markets, based upon the freedom to trade with the rest of the world and to capitalize on each country’s comparative advantage, the freedom to invest where returns on capital are greatest (Guillermo de la Dehesa, 2006). Proponents of globalization believe that it boosts productivity and living standards around the world. The current economic literature counts the foreign direct investment (FDI) as one of the most essential component of the globalization process.

This research book consists of the two parts and present the evidence of foreign direct investment impact on the U.S. economy and the economy of the Central and Eastern Europe (CEE). Foreign direct investment plays an extraordinary and growing role in the global markets and represents integral part of the U.S. economy. It played an essential role during the process of transformation in the Central and Eastern Europe facilitating transformation from central planning to market oriented economy.

As the world’s largest economy, the United States is well positioned to participate in the increasingly competitive global environment. The United States is the largest recipient of foreign direct investment in the world and the leading global investor. The U.S. upholds its longstanding open investment policy, recognizing that the free movement of capital across borders is at the heart of today’s global economy. Foreign direct investment constitutes an essential component of the U.S. economy, contributing to output growth, employment and export.

The collapse of the communism era in Central and Eastern Europe and the advanced Economic Integration of Europe shaped the global development in the twenty-first century. The Central and Eastern European economies have been integrating in to the global market and this process has accelerated over the past few years. Foreign capital has fulfilled a very important role in the process of transformation and restructuring in the Central and Eastern Europe. The FDI has become an essential factor stimulating sustained economic growth, expansion of capital stock, increase in productivity, employment, innovation and technology transfer. The positive results of transformation process on Central and Eastern European economies and importance of foreign investment in the post-communist era in this region, in particular in Poland, is evident. The Central and Eastern European countries became a part of the global market and have changed economic macrostructure toward open market.

The first part of the book consists of 7 chapters and is devoted to the development of a better understanding of the impact of both - inward FDI (investing by foreign companies in the U.S.) and the outward FDI (overseas investing by U.S. companies) - on the U.S. economy. The chapters from 1 to 5 discuss the inward US FDI developments. Chapter 1 describes the trends of the inward US FDI, while chapters 2 to 5 have empirical character and constitue scientific documentation of the inward FDI impact on the U.S. economy. The econometric models, included in the empirical chapters, provide the evidence of the contribution of inward US FDI to output growth and employment in the U.S. economy. The essential part of this research identifies determinants of inward US FDI stock, and additionally the stock of the southeastern U.S. states. Chapters 6 and 7 relate to the outward U.S. FDI trends and empirically approach the factors affecting investing abroad.

The second part of the book includes chapters from 8 to 12 and examines the importance of inward FDI during the transformation process in Central and Eastern Europe. It covers a studies on the position of outward FDI in the internalization process of Central and Eastern European companies. Chapters 8 and 9 contain the empirical analysis of the impact of inward FDI stock on output growth in Central and Eastern Europe and the effect of foreign investment on economic growth in Poland. The significance of inward FDI in Poland is discussed in Chapter 10, while Chapter 11 describes importance of the American investment during the transformation process and its positive contribution to output growth and employment in the Polish economy. Chapter 12 is focused on outward FDI trends and internationalization process of Central and Eastern European companies.

Lucyna Kornecki and Dawna Rhoades

PART I

Foreign Direct Investment in the United States of America

CHAPTER 1

TRENDS AND DEVELOPMENTS IN INWARD U.S. FOREIGN DIRECT INVESTMENT

Lucyna Kornecki

Embry-Riddle Aeronautical University,

College of Business, Florida, USA

ABSTRACT

Foreign direct investment (FDI) plays an important role in the global business and represents an integral part of the U.S. economy. The inward FDI constitutes important factor contributing to output growth and employment in the U.S. economy. This research focuses on the inward FDI trends analyzing the FDI flow and stock, geographic and sectoral distribution, FDI employment, FDI financial flows (equity, reinvested earnings, intercompany debt) followed by the FDI corporate players, mergers and acquisitions (M&A’s) and Greenfield investment. Presented study focuses on the impact of the last financial crises on inward FDI performance in the United States.

INTRODUCTION

Foreign direct investment is an essential component of the U.S. economy, contributing to production, exports and high-paying jobs. As the world’s largest economy, the United States is well positioned to participate in the increasingly competitive international environment for FDI that has emerged as both advanced and developing economies have recognized the value of such investment. The U.S. hosts the largest stock of IFDI among the world’s economies and is the largest investor abroad. The financial crisis, which began in summer 2007, has led to a progressive deterioration of the investment situation in the world economies. Various indicators during the first half of 2008 already suggested a decline in world growth prospects as well as in investors’ confidence. This deteriorating climate began to leave its first negative marks in investment programs in early 2008 (unctad.org/en/docs/wips2008_en.pdf.).

During the recent economic crisis, between 2008 and 2009, FDI flows to the United States decreased by 50%. This setback in FDI has particularly affected cross-border mergers and acquisitions (M&As), the value of which sharp decline as compared to the previous year’s historic high. International Greenfield investments have been less impacted to this point but a large number of projects have been cancelled or postponed. The value of M&As and Greenfield investment in the United States by foreign MNEs picked up again in 2010, contributing to a rise in FDI flows from US$ 153 billion in 2009 to US$ 198 billion in 2010 and further to US$ 227 billion in 2011. Although not yet back at their pre-crisis level, FDI inflows in 2010 and 2011accounted for 15% of global inflows in both years, still by far the single largest share of any economy in the world (Kornecki, 2013).

The aim of this paper is to discuss and analyze the evolution of FDI flow and FDI stock, between 2000 and 2011, emphasizing the strong impact of the last economic crisis resulting in declining trend in FDI flow and stock, and a post-recession recovery. Inward FDI in the United States contribute immensely to the domestic output growth and employment. The empirical research indicates the existence of a positive and significant relationship between FDI stock and output growth (Kornecki and Borodulin, 2010). The current study has descriptive character and aims to illustrate, how the last financial crises affected U.S. FDI flow and FDI stock, FDI employment, FDI financial structure, M&A and Greenfield projects.

INWARD FDI LITERATURE AND DATA SOURCES

The United States continues to be the leading destination for foreign direct investment (FDI) and the leading investor in other economies. A.T. Kearney’s FDI Confidence Index measures investor sentiment on the basis of a survey of senior executives in the world’s largest enterprises, and ranks present and future prospects for FDI flows to different economies with respect to the factors that drive corporate decisions to invest abroad. The FDI Confidence Index Report of 2013 ranked the United States and China and as the most attractive FDI locations in the world, recording unprecedented levels of investor confidence. The United States remained a strongest magnet for FDI in the world economy, followed by China, Brazil, Canada, India, Australia, Germany, U.K., Mexico, Singapore (http://www.atkearney.com/gbpc/foreign-direct-investment-confidence-index).

The empirical research results indicate the existence of a positive and significant relationship between FDI stock and output growth. The research used the regression analyzes and indicated that FDI stock in the U.S. economy shows a relatively higher rate of growth in comparison with that of domestic capital, and contributes about 23% to GDP growth in comparison with domestic capital contributing 20% (Kornecki and Borodulin, 2010). Goss, Wingender and Torau applied the Cobb-Douglas production function to data from 1988 to 1999 and found that foreign capital accounted for almost 16% of overall U.S. productivity growth (Goss, Wingender and Torau, 2007). The inward FDI contributes significantly to employment in the U.S. economy (Kornecki & Ekanayake, 2012). Researchers identified link between job growth in the U.S. economy during a period of increasing foreign direct investment flow (Payne and Yu, 2011).

In evaluating the effects of FDI on the local economies, economists focus primarily on the performance of foreign-owned subsidiaries operating in the U.S. It is already known that the establishment of a new foreign subsidiary or the expansion of an already existing one leads to higher employment and wages (Axarloglou, 2005). Bode and Nunnenkamp investigated the effects of inward FDI on per-capita income and growth of the U.S. states since the mid-1970s. This study analyzed the long-run relationships between inward FDI and economic outcomes in terms of value added and employment at the level of U.S. states. The study found that employment-intensive FDI, concentrated in richer states, has been conducive to income growth, while capital-intensive FDI, concentrated in poorer states, has not (Bode & Nunnenkamp, 2011).

This calls on the U.S. policy makers to formulate policies that are conducive to increasing the amount of foreign direct investment in the economy. Foreign companies and their U.S. subsidiaries generate enormous economic benefits for the American economy and create thousands of in- sourced American jobs, and highlight the importance of the U.S. market for foreign companies. During 2007, global foreign direct investment flows reached a historical high of around $2 trillion—more than 16 percent of the world’s gross fixed capital formation (GFCF) at the time. This marked the peak of a four-year upward trend in FDI flows. Along with the subsequent worldwide collapse in real estate values, stock markets, consumer confidence, production, access to credit, and world trade, global FDI flows also began to fall—by 16 percent in 2008—and when worldwide contracted in 2009 for the first time in 60 years, FDI declined further 40 percent (Poulsen and Hufbauer, 2011). As the impact of globalization process, foreign capital flows increased significantly and accelerated in 2007. The last crisis, affected negatively the dynamic FDI flows in both developed and developing economies (Carp, 2011). Compared with global economic downturns since the 1970s, the current FDI recession has been greatest in magnitude (Poulsen and Hufbauer, 2011).

The financial crisis started in the United States in 2007 and involved financial institutions in many OECD countries affecting FDI flows (Dullien, Kotte, Márquez and Priewe, 2010). Empirical studies show that multinational corporations (MNC’s) continued invest in their host country during recession—and even increase investment—after the financial crisis. FDI flows from overseas parent companies contracted, but intercompany debt and reinvested earnings were affected much more (Contessi and Li, 2012).

For dealing effectively with the financial crisis and its economic aftermath, as well as benefiting from the positive contributions of FDI to output growth and employment, it is important that policymakers maintain an overall favorable business and investment climate. In order to promote foreign investment, the United States has entered into a number of international investment agreements, including bilateral investment treaties (BITs) and double taxation treaties (DTTs). The total number of BITs concluded by the United States as of June 1, 2012 was 48, and the total number of DTTs concluded as of June 1, 2011 was 164. For over 70 years, the United States has negotiated bilateral tax treaties with its trading partners to facilitate economic flows and investments between the treaty partners, eliminate double taxation, and provide certainty to taxpayers where overlapping taxing jurisdictions can cause confusion. The major focus of these treaties is to provide clear rules as to which taxing authority has the authority to tax income that has some connection to entities or persons in both the United States and the country with which a treaty was negotiated. Some of the other key features of these treaties include prevention of income tax evasion, avoiding double taxation, reducing barriers to cross border investment, and avoidance of discriminatory tax treatment (http://www.ofii.org/docs/Background_on_Tax_Treaties.pdf.).

This research constitutes base for the further exploration of the importance of inward FDI in the U.S. economy. The goal of this paper is to show the impact of last financial crises on foreign investment performance in the United States. The basic statistics related to inward FDI flow and stock came from the UNCTAD’s FDI/TNC and from the United States, the Bureau of Economic Analysis (BEA), a section of the U.S. Department of Commerce. BEA is responsible for collecting economic data related to FDI flows in the United States. Monitoring this data is very helpful in trying to determine the impact of FDI on the economy’s output and employment, but it is especially helpful in evaluating performance of the particular states and industry segments.

INWARD U.S. FDI STOCK AND FLOW

The last financial and economic crises negatively impacted FDI flows to the United States and opened a period of major uncertainty. The effectiveness of government policy responses at both the national and international levels in addressing the financial crisis and its economic consequences will play a crucial role for creating favorable conditions for a rebound in FDI inflows. Unlocking the full potential of the future global inward FDI developments for the United States, as elsewhere, will depend on wise policymaking and institution building by governments and international organizations.

Inward foreign direct investment is an essential component of the U.S. economy, contributing to production, exports and high-paying jobs for the country’s workers. As the world’s largest economy, the United States is well positioned to participate in the increasingly competitive international environment for FDI that has emerged as both advanced and developing economies have recognized the value of such investment. The U.S. hosts the largest stock of IFDI among the world’s economies, and continues to be at the top as a destination for inward FDI flows.

The United States, which had earlier been primarily a home for multinational enterprises (MNEs) rather than a host for affiliates of foreign MNEs, has become a preferred host country for FDI since the 1980s. Foreign MNEs have contributed robust flows of FDI into diverse industries of the U.S. economy, and total FDI inflows reached US$ 227 billion in 2011, equivalent to 15% of global inflows, the single largest share of any economy.

Inward FDI represents an integral part of the U.S. economy, with its stock growing from from US$ 83 billion in 1980 to US$ 540 billion in 1990 (www.unctad.org/fdistatistics) to US$ 2,783 billion in 2000, and reaching $3,509 billion in 2011. In 2011 U.S. FDI stock exceeds by far the inward FDI stock of other large developed economies such as the United Kingdom (US$ 1,199 billion), Germany (US$ 714 billion) and the largest emerging market economy, China (US$ 712 billion) (Table 1). During last financial crises, inward global FDI declined from US$ 17,901 billion to US$ 15,451billion (by 14 %), when inward U.S. FDI stock declined from US$ 3,551 billion to US$ 2,486 billion (by 30%).

Table 1. United States: Inward FDI stock, 2000-2011 (US$ billion)

Source: UNCTAD’s FDI/TNC database, available at: www.unctad.org/fdistatistics.

The flow of international capital supported the U.S. economy in the 1980s and has been a key factor expanding economy. During the 1990s, the U.S. experienced extraordinary inflow of FDI corresponding with exceptionally high output growth (Goss, Wingender and Torau, 2007). The U.S. FDI flows, with a peak of US$ 314 billion in 2000 and another of US$ 306 billion in 2008, have been an important factor contributing to sustained economic growth in the United States. Between 2008 and 2009, during the recent financial and economic crisis, inflows decreased by 50%, from US$ 306 billion to US$ 153 billion, but grew again to US$ 197 billion in 2010 and further to US$ 227 billion in 2011.

In 2011, the U.S. continues to be the leading destination for FDI flows, with inflows reaching US$ 227 billion in comparison with China (US$ 123 billion), the United Kingdom (US$ 54 billion), and Germany (US$ 40 billion). Between 2000 and 2011, the U.S. received the largest FDI inflows of any economy in the world (Table 2).

Table 2. United States: inward FDI flows, 2000-2011 (US$ billion)

Source: UNCTAD’s FDI/TNC database, available at: www.unctad.org/fdistatistics.

The inward U.S. FDI stock as a percentage of GDP climbed up to 6% during 1980’s and up to 10% during 1990’s reaching a peak of 27% in 2000 and 25% in 2007. The U.S. FDI stock shows cyclical character and declined significantly after 2002 and 2008 as a result of economic recessions. This relatively high percentage of the FDI stock in GDP indicates important role of the inward FDI in the U.S. economy (Kornecki, 2010).

INWARD US FDI EMPLOYMENT

The FDI stock and the FDI-related employment are widely used as a measure of inward FDI effectiveness (Bode and Nunnenkamp, 2007). The most of the foreign direct investment flows in the United States between 2000-2010 entered the manufacturing industry. The FDI inflow in manufacturing industry reached on average, during analyzed period of time 36% of the total foreign flows, followed by finance 16%, wholesale trade 10%, and depository institution 6% (Figure 1). More detailed employment data are included in tables 3.

Table 3. U.S. inward FDI employment by sectors, 2000-2010 (thousands of employees)

Source: United States Department of Commerce, Bureau of Economic Analysis, FDI database, available at www.bea.gov/international

Figure 1. Sectoral Distribution of the Inward US FDI Flows (%) 2000-2010 (average)

Source: United States Department of Commerce, Bureau of Economic Analysis, FDI database, available at www.bea.gov/international

Inward FDI in the United States declined significantly during the financial crises. The U.S. affiliates employment in the United States reach the pick in 2008 with employment of 6,325 thousands of employees, declining to 5,979 thousands during 2009 and 5,802 thousands of employees in 2010 (Table 3). During the same period of time outward U.S. foreign affiliates employment increased from 11,801 in 2008 to 13,029 in 2009 and 13,256 thousands of employees in 2010, showing that affiliates of American MNC’s increased considerably activities abroad during this time (Table 4).

Table 4. Inward and outward U.S. FDI employment comparison, 2000-2010 (thousands of employees)