09 Apr The Revival of US Competitiveness for Foreign Direct Investment Part 2
In a series of FDI blog posts discussing the competitiveness of the US for Foreign Direct Investment (FDI), we are continuing the conversation with this topic.
Four General Motives for Companies to Engage in FDI
- Market seeking
- Resource seeking
- Efficiency seeking
- Strategic asset seeking
MARKET SEEKING: foreign investments are driven by the market potential of the foreign market.
According to the recent World Wealth Report by Merrill Lynch Global Wealth Management (MLGWM) and Capgemini, globally the High Net worth Individual (HNI) population is still concentrated in three markets: the US, Japan and Germany, who together accounted for 53% of the world’s HNIs in 2010. More specifically, the US alone constitutes 28.6% of the global HNI population and will remain the largest market now and in the near future.
RESOURCE SEEKING: recent trends in raw materials seeking FDI show that Chinese firms invested significantly in African countries to secure the increasing demand for raw materials.
Typically these types of investments are rather labor and capital intensive, instead of knowledge intensive. The extent of value added logistics is in most cases very limited and does not add to any capacity building for the foreign local economy.
EFFICIENCY SEEKING: investors are continuously exploring ways to optimize their current footprint of facilities by shifting activities to new locations that offer increased efficiency, hence lower cost levels.
However, selecting locations providing lower labor costs only can result in a very costly mistake. If the production process is capital and knowledge intensive, and the main markets for high value added goods and services are United States, Canada or Mexico, then an integrated financial model must prove the feasibility of the offshore business case compared to keeping the production in the US.
STRATEGIC ASSET SEEKING: multinational corporations (MNCs) as well as small and medium sized enterprises engaging in strategic asset seeking FDI are motivated mainly by the quest for strategic resources and capabilities.
The underlying rationale for such asset-seeking FDI is strategic needs. The United States have a distinct competitive advantage over emerging economies in terms of developed industries, number of specialized suppliers, and clusters of supporting industries. These are unique selling points to potential investors that cannot be imitated in the short to medium term by other countries.
As the US economy needs to create 21 million jobs by 2020 (according to the latest analysis by McKinsey) for the unemployed and the new entrants into the labor force, Foreign Direct Investments to the United States can facilitate the boost in new jobs as the largest economy of the world is still very well positioned to attract market seeking FDI and strategic asset seeking FDI. In some business cases, the United States may even be more competitive than the BRIC (Brazil, Russia, India and China) for attracting efficiency seeking FDI, especially when you take into account the overall supply chain and operating costs, customs and duties and exchange rate risks.
The last decade the BRIC and emerging countries did enlarge their competitive position in manufacturing projects significantly, but low labor costs is only a temporary situation as the case of China today clearly demonstrates. The transition to the next level in economic development requires different conditions, where the US can again show its economic muscles: knowledge, strategic infrastructure and purchasing power.
Investment Consulting Associates – ICA and Atlas Advertising will continue the conversation around this idea through a shared series of blog posts. The full presentation of research will be presented at the 2011 IEDC in Charlotte, North Carolina by ICA.
Dr. Douglas van den Berghe
CEO Investment Consulting Associates – ICA