While there is little dispute that the US ranks as one of the world’s top FDI destinations – by many measures, it remains the number one destination – observers question whether the country can retain its strong position given the ongoing political wrangling in Washington, DC, over public debt and deficit reduction.
The last time elected officials argued the issue with no real resolution, Standard & Poor’s lowered the US long-term sovereign credit rating to AA+ from AAA. That was in August 2011. At the time, S&P wrote: “The downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”
Public debt stabilisation remains a contentious issue in Washington. When the issue raised its ugly head again in October 2013 it resulted in a 16-day government shutdown. Only after exhaustive haggling did Congress pass a vote, which president Barack Obama signed, that ended the government shutdown, but only hours before the federal government’s borrowing authority was set to expire. Fitch responded by warning that it would review its AAA credit rating for the US for a possible downgrade.
The US Congress will revisit the issue again in January, as the vote only issued an extension of government spending to January 15. Many are following closely the possible ramifications this could have on US inward investment decisions. Consultants such as Gene DePrez, managing partner of Global Innovation Partners, feel that the recent upheaval in Washington has already had an impact on US credibility and its perceived stability.
“In my 30 years of advising global companies on location investment strategy and site selection, typically the US was always the economy that everything else was measured against,” says Mr DePrez. “It was regarded the most transparent and least corrupt, and certainly the most innovative and attractive country for hi-tech investments. Every place else was typically discounted. Not anymore.”
Setting the standard
Making FDI even more important in the US is the fact that most of its inward investment historically comes from Europe, a region that is undergoing a continued debt crisis. The fDi Report 2013, an annual report on greenfield investment produced by fDi Intelligence, further predicts a sharp decline in greenfield FDI of about 20% in 2013 worldwide. But Mr DePrez maintains that the US is still, in general, a very attractive market. “It will continue to attract more investment than almost anywhere else,” he says.
Larry Fink, CEO of multinational investment house BlackRock,is also bullish about the US's prospects despite the country's political deadlock. “We are the standard barrier of the principals for democracy,” he says.
Mr Fink expresses concern about any narrative about default on national debt, however. “It goes against those principals,” he says. “This narrative in Washington is forcing everyone to push the pause button at a very important time.”
Primed for growth
Still, Mr Fink and others contend that because of its rule of law, advantageous energy costs, workforce and wages, the US is poised for a period of unprecedented growth. “I believe this country has an opportunity to attract more inward investment in the next five years than it has in the past 10,” he says.
Much of that opportunity centres around a key ingredient that many say is catapulting an industrial renaissance in the US: the advent of low, stable natural gas prices. US secretary of state John Kerry emphasised at the SelectUSA Investment Summit earlier this year that he believes the US is on the verge of creating its greatest ever wealth from energy markets – shale gas in particular. “It’s one that will exceed the tech boom of the 1990s that created an unprecedented $1000bn market with 1 billion users,” he said. “The US's growing energy production is a game changer, and we are on page with becoming the largest oil producer in the world by 2020.”
Scores of energy-related companies are already flocking to the US to take advantage of this opportunity. The biggest to date is South African-based Sasol, which is proposing to build a $21bn gas-to-liquids and ethane cracker complex in Louisiana. The project is considered to be the largest investment by a foreign-based company in US history.
AT Kearney’s 2013 Foreign Direct Confidence Index points to another positive factor: US manufacturing productivity has soared since the recession and companies today are investing in productivity-enhancing tools and equipment. “Coupled with a weaker dollar and rising wages in developing countries, these gains could bring long-term benefits to the US economy,” the report says.
Already US multinational companies such as General Electric and Ford are bringing production back to US shores after considering costs, decreased time to market, better protection on intellectual property, and the benefits of having designers, salespeople and engineers at the same facility rather than oceans apart. Earlier this year, retailer Wal-Mart announced that it is increasing its US purchases by $50bn over the next 10 years. “Energy costs, labour and transportation components are now in our favour,” says Bill Simon, president and CEO of Wal-Mart.
Andrew Leveris, the CEO of Dow Chemical, emphasises the importance of the manufacturing value chain. “Where production goes, innovation follows,” he says. “The ecosystem that we celebrate in the US centres around universities and institutions, even government R&D.”
He is particularly keen to highlight the entrepreneurial spirit he finds in the US and its university system. “These are the things that make the US attractive for investment,” says Mr Leveris. “This is why 70% of all Dow R&D is done in the US. Right now, the US is unbeatable for that.”
Currently, Dow is spending $4bn to build factories in Freeport, Texas, and reopen a plant in Hahnville, Louisiana. Bloomberg Businessweek reports that five years ago, Dow was closing US plants and moving production to the Middle East to gain access to cheaper raw materials and be closer to Asian markets.
Besides being the world’s largest consumer market, Penny Pritzker, the US secretary of commerce, points to the fact that the US is the world’s most open economy, with 20 free-trade agreements. “Because of our existing agreements, companies operating here have a platform to access nearly 700 million global consumers representing a combined $7000bn in GDP,” she says.
Putting current debt debates in Washington aside, many also contend the current political environment for FDI in the US is the most favourable it has been in decades. “The SelectUSA Summit is an example of that,” says Nancy McLernon, president and CEO of the Organization of International Investment. “Having the Obama administration embrace foreign investment as an economic priority is a big deal and one that I did not [think] I would see. Our international trade policy has always focused on promoting US exports; not bringing in foreign investment.”
The budget debate still looms in the halls of the US Congress, however. And the jury is still out to see how that will be resolved. But Mark Wiseman, the CEO and president of the Canada Pension Plan Investment Board, maintains that the only thing missing in the US economy today is confidence. “If we can see progress inside the beltway in Washington, that confidence can come back quickly,” he says. “But businesses and investors need to see Washington working together.”