Upsides and downsides of international investments

Recently the Japanese Prime Minister visited North Carolina to celebrate a major new investment by a Japanese company in our state. The investment will be by a biotechnology firm that will spend over a billion dollars and create several hundred permanent jobs.

Such international investments aren’t new for North Carolina.  A recent ranking placed North Carolina 9^th among the fifty states in direct foreign investment, tied with Texas and ahead of our surrounding states except for South Carolina.

Of course, when we think of any investment we first think of jobs and salaries. This is a big reason why states and localities seek out foreign investors. But are there any downsides to foreign investments that make them fundamentally different from investments by domestic companies?

But before I address possible downsides to foreign investments, let me continue to address the upsides. Jobs and salaries are certainly one upside, especially if the salaries are higher than for existing jobs. But the new jobs and salaries don’t stop with the foreign investment. If the foreign investment is significant, supplier firms will likely also develop, and each of these companies brings their own jobs and payroll.   Furthermore, since total local salaries are increased, local spending on typical consumer products will increase as will jobs at the retailers.  When these two secondary impacts – from supplier firms and consumer firms – are included, the total job and salary gains could ultimately be from 25% to 50% higher than from the initial foreign investment.

The new foreign investment will also pay taxes to the State and to local governments. It is true that often large business investments – whether from foreign or domestic sources – sometimes receive incentives that lower their tax payments. But North Carolina’s incentives program is structured so that both the State and local governments still come out ahead on taxes even after the incentives are subtracted.

 Large foreign investments can lead to skill improvements for local workers. Especially today, with technology being a part of an increasing number of jobs, workers will often need special training to take the new jobs. North Carolina is lucky to have superb local community colleges that – if needed – will design specialized training programs to fit the new jobs. But of course, the same kind of skill and training improvements can result from domestic investments.

For decades, the US has run a deficit in international trade. This means we purchase more products and services from foreign countries than we sell products and services to them. Some economists worry that such deficits can lead to a lower valued dollar.

 However, the trade deficit will decline if a foreign owned company selling to US consumers moves its manufacturing from its home country to the US.  Why?  Because a significant part of the product’s sales value will go to US workers and US suppliers. If the product was made in the foreign country, most the salaries would go to the foreign workers as would a large part of the suppliers’ costs.

There can also be more intangible benefits from foreign investment. Some say the investments improve understanding between the US and foreign country. Others say the investments can reduce the likelihood of conflicts between the two countries. The idea is that foreign countries having investments in another country have a financial interest in seeing that country survive.

Now let’s move to the potential negative side of foreign investments. Probably at the top of the list is the issue of control. Foreign companies are usually owned by a majority of foreign individuals. Therefore one disadvantage from the perspective of the host country is that likely most of the profits flow outside the host country. That is, Japanese companies investing in North Carolina have Japanese owners who will receive the profits from the investment. Of course, this is what would be expected, but the point is it means less money from the investments stays in the US.

Another cited disadvantage may be cultural differences.  Counties usually have distinct cultures that can include expected behaviors and attitudes about work. If these differences aren’t known and considered, problems can develop between the foreign owner and the domestic management and workers. However, with increased understanding of different cultures, this issue is likely not as common as in the past.

 A related potential disadvantage – and I emphasize ‘potential disadvantage’ – is that with foreign owners making decisions about the company, the question is whether some of those decisions could be detrimental to US interests. This is particularly the case for countries who have distinct geo-political differences with the US, such as China. Would a country like China be motivated to use their US-based companies to gain information, or to use the companies to hurt the US in times of conflict between the countries.

Finally, there is some worry that foreign ownership of a new investment in the US may simply displace a domestic owner. While this may be true, there’s never a certainty. For example, North Carolina tried for decades to attract an auto manufacturer, including domestic manufacturers.  But it never happened. It was therefore understandable that when foreign-owned VinFast expressed interest, the State jumped at it. But there’s the lingering question of whether a domestic owned auto manufacturer ultimately could have come to North Carolina?

 Like almost everything, there are pluses and minuses to foreign investments. However, given the eagerness of states to lure foreign based investors, the perceived benefits appear to exceed the perceived costs. But, you make your own decision, and decide.   

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.