The Brookings Institution deserves two real cheers and a Bronx cheer for its new report on how well American states and localities are doing in attracting and retaining direct investment from abroad – the kind that’s spent on productive facilities, like factories and labs, as opposed to purely financial assets, like U.S. Treasury bills. In other words, foreign direct investment is the kind of investment that directly creates good jobs – or at least can create such jobs.
The stakes are high. Productive investment from domestic sources is lagging. Largely as a result, Washington has adopted an open-arms policy toward capital from abroad. And job- and growth-starved states and localities are falling all over themselves offering overseas firms tax big breaks and various other subsidies.
For years, the organization Good Jobs First has done a great job tracking these subsidies, and showing that the payoff is often minimal, at best. Unfairly, though, the group’s findings are sometimes neglected or shrugged off because it’s got strong labor union ties. Seeing this crucial message being reinforced by (often undeservedly respected) Brookings, which receives boatloads of corporate backing, is most welcome.
Kudos to Brookings also for confirming a finding known for many years (including by yours truly) but relentlessly ignored by the federal government and the states and localities: Most foreign direct investment consists of foreign acquisitions of existing productive U.S. assets, not the creation of new assets. Therefore, “[F]DI itself is not a net source of direct job creation.” For good measure, whether the acquiring firm is foreign or domestic, most such transactions aim at creating greater efficiencies and eliminating redundancies. Therefore, they usually wind up reducing employment, not increasing it.
Yet FDI keeps getting lauded as an employment bonanza because the mainstream media seems as enthralled with these capital flows as it is with free trade extremism. Another, more important problem: In 2008, the federal government’s data on FDI stopped making the crucial distinction between so called “greenfield” investment, which adds to the U.S. economy’s productive base on net, and so called “brownfield” investment, which only involves ownership changes.
Now, however, for the Bronx cheer: The Brookings report perpetuates the myth that foreign interests that employ Americans pay workers more than domestic business owners. Here’s the problem: This claim compares too many apples with too many oranges.
Weirdly, the Brookings authors actually concede this: “These firms pay higher wages because they tend to be highly productive and concentrate in capital-intensive, high-skilled industries.” In other words, foreign-owned U.S.-located firms pay more than U.S.-owned firms in this country because foreigners mainly acquire (and sometimes create new businesses) in sectors of the economy that pay relatively well to begin with, not because they’re more generous. But the authors then try to qualify their explanation — by citing research they ultimately acknowledge sends a “somewhat mixed message.”
The Brookings study also ignores some important reasons to be wary of foreign ownership of U.S. assets. For example, the profits tend to go overwhelmingly to foreign shareholders, not to Americans. Foreign factories in America also tend to be strong magnets for imports, which add to the nation’s trade deficits and debts. And of course, foreign ownership of defense-related assets can undercut national security.
As with cross-border economic activity in general, foreign direct investment in the United States can entail opportunities and risks, and generate costs and benefits – depending of course on circumstances. If the Brookings report helps to encourage U.S. leaders to incorporate this complexity into FDI policy rather than basing their position on ideology, it will deserve another genuine cheer – warts and all.