Thursday, October 13, 2005

Foreign Direct Investment

The latest World Investment Report, issued the 29th of September by the United Nations Council on Trade and Development, found that foreign direct investment, or FDI, into Britain rose sharply, and put Britain into the second place globally for FDI, ahead of China. (Keep reading if you want to know about first place). Foreign Direct Investment is tracked by governments and economists as it indicates the investments that Multinational Enterprises (MNE'S) make in a country. In other words, FDI keeps "score" or tracks the "winners" and "losers" in the global investment game. Like the picture that is worth a thousand words, this recent UN report paints a picture of the preference by Multinationals and the promise of a better return from the mature British economy of 60 million people than from big and booming China.

In addition to Great Britain, the "New Europe" countries in Central and Eastern Europe like Romania, Ukraine, Bulgaria and Latvia increased their flow of FDI by more than 40 per cent. The trend over the past ten years is that global foreign direct investment (FDI) is increasingly shifting towards the developing world as multinational corporations (MNE's) seek new investment opportunities and reduce their labor costs in fast-growing emerging economies like China, Mexico and India.

However, I was most impressed with two interesting facts released but either under-reported or ignored by the UN and initial news reports. The first is that after three years of decline, total global flows of FDI rebounded by 2 per cent on a year-on-year basis last year to $648 billion, reversing a trend post 9/11.

The second fact is that the United States continues as the world's most favored place for foreign investors, drawing in almost $100 billion in Multinational investments. That's right, no matter what you may read about the US struggling and losing their competitive edge, the United States finished first in the global game of FDI investments as new foreign sourced dollars continue to pour into this country where MNEs bet real money on the continued success of the US economy.

The reality of US success, while a surprise to some, has a number of supportive factors that many of us have been stressing for years. Each year the World Economic Forum computes a growth potential index for 117 economies. It examines factors like government stewardship of financial resources, budgets, tax system, civil institutions and respect for the law. In this assessment of national competitive potential, the United States ranks second after Finland while China and India rank 49th and 50th. Also, the WEC ranks the fitness of businesses, and on that score the United States ranks first while India ranks 31st and China 57th.

What is also going for the United States is that our labor force is much stronger than pessimisticc news reports would have us believe. Our literacy rates are very high as typically our entire native born population finishes high school and two thirds receive some post secondary training. Our colleges and universities are the world's best with many foreign students willing to pay our pricey admission in deference to their own countries' universities which are often tuition-free. Due to competition (and despite JibJab's satire on jobs at WalMart..a must see regardless) U.S. productivity is advancing briskly. Based on other reports, since 1999, private business productivity has increased 3.2 percent a year; in durable goods manufacturing productivity has been advancing at a 5.4 percent pace.

Finally, what was most revealing regarding the latest preference of FDI flows into the United States is where these dollars landed. Of all FDI 2004 investments in the United states, the top category by Key Business Function was in Manufacturing with 703 identified projects, much ahead of 280 projects in the second place Key Business Function of Sales and Marketing. So much for the lack of manufacturing opportunities in the US!

Turn those assembly lines back on!

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