Remarks of Franklin L. Lavin, Under Secretary of Commerce for International Trade - Role of Foreign Investment in U.S. Economic Growth

Remarks by Franklin L. Lavin

Under Secretary of Commerce for International Trade

Role of Foreign Investment in U.S. Economic Growth

Peterson Institute for International Economics

Washington, DC

March 7, 2007

As Prepared

Introduction

I’d like to thank the International Institute for Economics for hosting this event. Both in and out of government, I have developed a substantial appreciation for the Peterson Institute’s work. Scholarly work such as China: the Balance Sheet and your papers and conferences make a valuable contribution to policy formulation here in Washington. It is in that spirit that I wanted to focus today on an economic issue, which in my view has received insufficient attention, and to announce an initiative to remedy that situation.

The FDI Challenge

The challenge is this: perhaps alone among the major economies, the United States does not have a federal government program to attract or retain inward foreign investment. All other major economies have mechanisms such as investment boards and investment promotion activities to encourage FDI.

In the U.S. this role has been left to the state and local governments, some of which have been highly effective. For example, we saw the announcement last week of Toyota’s decision to build a $1.3 billion assembly plant near Tupelo Mississippi, and the Governor of Mississippi, along with local development authorities, led this highly competitive project. The United States Government played almost no role in this decision.

This historically passive role toward FDI is increasingly anachronistic, for several reasons. First is the surge in worldwide investment flows. Worldwide FDI flows have increased from $538 billion in 2003 to $916 billion in 2005.

Second is the fact that we are facing more competition for FDI than ever. As other countries come “on line” – begin to partake in the global economy, they work to improve their attractiveness as a platform for inward investment. So the United States is frequently in competition against Central Europe, Mexico, China, or India, for investments. This is a phenomenon that is only about two decades old.

Third is the fact that if we do not play an active role in promoting inward investment, we are at risk of having our investment climate perceived around the world only by the occasional difficulty. Given the sizeable nature of FDI in the United States, there will occasionally be a controversial case that finds its way into the media, so we need to remind our investment partners that the overwhelming majority of investment activity in the U.S. takes place on a normal commercial basis.

The United States Government needs to take the role of FDI seriously. We need to make clear that as a matter of policy, we welcome foreign investment in the United States. It is a key driver for our economy and I will review some key figures regarding this in a minute.

Before that, let me say a word about CFIUS – the Committee on Foreign

Investment in the United States -- which I support and which is a useful part of the foreign investment process. CFIUS is a U.S. Government body whose purview extends only to those inward investment cases that have a national security dimension. So the initiative we are discussing today is not designed to supplant CFIUS or its rightful role, but to deal more effectively with those cases where there is no national security dimension.

FDI Overview

Let’s review some of the FDI fundamentals. The U.S. continues to be a leading recipient of FDI and in 2005 we were the recipients of $99 billion of inward investment, according to BEA. For comparison, the UK attracted $164 billion, China, including Hong Kong, $108 billion, Singapore $20 billion and India $7 billion.

Beyond the annual number, over the long run one can conclude that those countries with the highest rate of foreign direct investment tend to be those with the highest rate of growth. This correlation is no accident: inward direct investment contributes directly to the economic well being of its citizens and economy.

Just consider some of the benefits of FDI to the U.S.:

Over five million Americans work for companies headquartered overseas;
They paid over $80 billion in taxes;
These companies had payrolls of $325 billion in 2005;
They account for 15 percent of American R+D expenditures;
They account for some 20% of U.S. exports; and
Nearly a third (31%) of their jobs are manufacturing;

For example Novartis, the Swiss Pharmaceutical Company, recently decided to invest $2 billion in high-wage, high-skill jobs when it moved its global research headquarters from Basel, Switzerland to Cambridge, Massachusetts.

Indeed there is such a significant presence of foreign companies in the U.S. economy that they have formed their own organization, the Organization for International Investment (OFII).

Every company might have a different reason why it invests in the U.S., however the reasons are likely to include:

Open, secure markets - Easy to buy and sell assets and acquire inputs;
Size and strength of the economy – Entrepreneurship is rewarded;
Low taxes that encourage innovation and investment;
Flexible and productive workforce;
Open society- Easy to attract and retain top talent irrespective of background;
High degree of transparency;
Effective legal system from setting up a business to intellectual property protection; and
Outstanding infrastructure and communications, both physical and economic.

The idea of FDI is not without its critics. There are some in the U.S. who are uncomfortable with FDI despite the benefits I enumerated. And there are some foreign investors who have the same misperception. We need to be thoughtful in our response to the critics and be able to remind all participants of the success that is driven by foreign investment.

As Americans, we should be proud that we tend to occupy a preferred status in the eyes of the global investment community. In other words, as long as we keep doing things right, we will be attractive to foreign investment.

So whether it is Aventis-Pasteur’s vaccine production facility in Swiftwater Pennsylvania, Mercedes’ research and development facility in Michigan or Nestlé’s Stouffer’s Division in Cleveland, Ohio, these investments are an endorsement of the United States.

We want to make sure that America continues to be the place people want to come to invest.

Solutions

With these thoughts in mind, I am therefore pleased to announce the establishment of the Invest in America Initiative, to be led by the U.S. Department of Commerce and housed in the International Trade Administration.

The objective of the Initiative is to attract and retain foreign investment – to create jobs and prosperity here in the United States.

This will be achieved through three primary activities:

•First, outreach to the international investment community. We will make use of our commercial attaches around the world to engage potential investors directly;

•Second, serving as ombudsman in Washington for the international investment community. We will work across the Federal Government to cut through red tape and address impediments to investment; and

•Third, we will support state and local governments engaged in foreign investment promotion. We will make sure the inquiries and leads we develop overseas get transmitted to the state capitols and city halls for follow up.

The Invest in America Initiative will complement the work of state and local governments. The one activity we will not undertake will be to steer prospective investors toward or away any particular locale in the United States. That part of the investment decision must be led by the localities, and the U.S. Federal Government should remain strictly neutral in any competition among sites within the U.S. Our job is to promote the U.S. in general as a site for investment.

We must up our game if we want to continue to lead. The Initiative will help make sure the U.S. can compete effectively in the global competition for investment.

When the water gave way to shore for the first settlers in North America in 1607, that claim was made by a private English firm, the Virginia Company, which was making an investment in building an American settlement to grow crops for export. In the 400 years since then much of our economic growth, notably financing of much of our railroads, was undertaken by foreign investment.

In sum, the United States benefits from being an economy open to products, to ideas, and to investment. If I may quote two specialists in the field, “without FDI U.S. manufacturing, employment, competitiveness and innovation will all be at risk…and maintaining an open environment for FDI is in itself deeply in the interest of America’s national security.” The quote is by Edward Graham and David Marchick from their book US National Security and Foreign Direct Investment, published last summer by the Peterson Institute. FDI is a sign of strength, a strength that leaves both the investor and those invested in better off. The more we can do to encourage those who want to participate in our economy the better off both America and the foreign investor will both be.

Thank you.