FOREIGN INVESTMENT IN THE UNITED STATES (Issue)

Since World War II (1939–1945), and especially in the 1950s and 1960s, the United States dominated world-wide foreign investment. But with the advent of the energy crisis and the oil shortages in the early 1970s the situation was reversed. The United States became the recipient of large investments from Great Britain, the Netherlands, and especially Japan. Although the 1980s witnessed unusually rapid growth in worldwide foreign direct investment, from approximately $55 billion in 1980 to $137 billion in 1987, world output rose by only 20 percent and the volume of world trade by 28 percent. During the 1980s the United States became the largest recipient of foreign direct investment and Japan became the leader in direct investment abroad. Since 1985 foreigners, especially the Japanese, have increased their acquisitions in the United States or have expanded or established businesses in the United States.

The reasons for this surge in investments were varied and complex. Some foreign companies felt they must have a position in the U.S. market, which was still the richest and largest consumer market in the world. U.S. political stability and the appreciation of foreign assets made U.S. assets relatively attractive and cheap. For example, Mitsubwashi purchased Rockefeller Center in downtown Manhattan (New York) for approximately $850 million, a fraction of what a similar piece of real estate in downtown Tokyo would have cost. In addition the lure of overseas profits pushed many multinational companies into staking out international claims. Exporting countries could frequently work around other countries' protective legislation by establishing factories within that country's borders. Honda, a case in point, now produces more cars in the United States than it does in Japan.

Another attractive feature for foreign investment was that the new global economy emphasized consolidation and bigness. Mergers and acquisitions occurred six times more frequently in the United States than in foreign counties. Mammoth deals in pharmaceuticals, media, and food industries helped set a new record of $144 billion for the combined value of the fifty largest annual acquisitions and mergers in 1989. Moreover the scientific, industrial, managerial, marketing, financing, advertising, insurance, and especially research and development systems in the United States had all developed and matured to make the United States very attractive for investors.

Foreign investment in research and development experienced especially explosive growth. From 1987 to 1995 investment in research and development rose from $700 million to more than $17 billion. In addition to investment foreign companies by the end of the 1990s employed more than 150,000 U.S. citizens in research and development activities at hundreds of research laboratories and manufacturing facilities across the country. The growing presence of foreign companies conducting research and development in the U.S. reflected a fundamental trend in the world economy, the globalization of innovation. Multinational enterprises had long operated international networks of manufacturing plants, but during the 1990s these multinational companies added a new dimension to their activities—an increasing capacity for research and development and innovation in various locations outside their home countries.

In addition to the debate over foreign investment in general, the relatively new phenomenon of foreign-owned, U.S.-based research and development programs also provoked controversy. Proponents believed foreign-owned laboratories contributed to the U.S. science and technology base, and that the government should encourage their development. Critics however argued that the facilities were merely skeleton research operations designed to monitor the U.S. research scene, or even pirate ideas developed within U.S. borders. Part of the controversy stemmed from the startlingly rapid growth of foreign research and development programs. Until recently most multinational companies conducted virtually all of their research and development at home. The 1990s however saw an explosion of international research and development activities by large multinational firms. The magnet that drew research and development to the United States was talent. Companies opened labs in the United States to gain access to world-class researchers. (Thus, the proximity of many labs to major research universities, which were regarded as a key source of commercial innovation.) The NEC Research Institute, for example, was able to recruit renowned computer scientists partly because it was adjacent to Princeton University. When Canon established a research center for work on optical character recognition, image compression, and network systems, the company chose Palo Alto to be close to Stanford University and Xerox's famed Palo Alto Research Center. Mitsubwashi Electric Research Laboratory, which conducted research and development on a range of information technology including computer vision, was next door to MIT.

In the automotive industry foreign laboratories geared their work to supporting U.S. manufacturing plants and customizing products for the U.S. market. Nissan Design International's close ties to the U.S. market enabled them to realize that Nissan could attract U.S. car buyers by adding a stylish body to a pickup truck platform. The result, the Pathfinder, launched the sport utility craze and transformed the entire automotive market.

While the funding for these research labs came from abroad, the style of work in them was very U.S.oriented. Offshore companies generally recognized that to recruit and retain U.S. researchers required adoption of a U.S. style of management. In this respect these labs differed markedly from foreign-owned manufacturing facilities. Japanese companies that ran U.S. factories, for example, typically sought to transfer and transplant to their U.S. facilities manufacturing practices honed at home. On the other hand foreign laboratories in the United States were organized much like leading research centers of U.S. universities. These labs encouraged scientific and technical staff to work autonomously and publish widely. They sponsored visiting scholars and hosted seminars and symposia.

But critics saw a threat to U.S. technological leadership by giving international companies easy access to U.S. technology. For them foreign research and development facilities were skeleton operations designed to monitor and pirate U.S. ideas. They believed that federal policymakers should tilt the rules of innovation to benefit U.S. companies over foreign competitors, or develop rules and regulations that reward "good" U.S. companies (those that invest in the United States) over "bad" ones (those that invest abroad). Proponents of foreign investment counter this argument and believe that although such policy proposals were well-intentioned and sought to protect U.S. investments, they were completely out of touch with the reality of a global system of innovation. According to proponents of foreign investment, financing of U.S. research and development by foreign corporations strengthened U.S. science and technology, especially when government and private sponsorship of U.S. research was being cut back. Proponents also pointed out that these labs churned out patents at rates that exceeded those of U.S. industrial research and development. They also argued that foreign laboratories also added considerably to the stock of new scientific and technical knowledge by reporting their findings in scientific and technical journals. They claimed that they published an average of 10 journal articles per 100 scientists and engineers per year, better than the rate for industrial research and development by U.S.-owned companies.

FOREIGN INVESTMENT IN THE UNITED STATES (Issue)

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