Strategy

U.S. Investment Overseas Up 90 Percent

Companies are not ramping up these investments strictly to save on wages, the study also found; 81 percent is directed at high-wage, developed mark...
Stephen TaubJune 3, 2005

U.S. corporations are ramping up their investments abroad in a huge way. After three flat years, direct investment by U.S. manufacturers in foreign countries surged a whopping 90 percent in 2004, to more than $54 billion, according to a new study by Deloitte Research.

Of course, the recovering economy played a big role in this resurgence. Kevin Gromley, practice leader for global manufacturing consulting at Deloitte, cited improved profitability of foreign operations and enhanced confidence by manufacturers in global markets, as well as cross-border mergers and acquisitions activity, which has continued to climb since 2002.

Companies are not ramping up these investments strictly to save on wages, the study also found. Direct investment abroad by U.S. companies remained steady — at about $22 billion per year from 1999 to 2003 — in higher-wage, developed countries in Western Europe, in the Asia-Pacific region (including Australia), and in Canada. However, investments are declining in fast-growing, low-wage economies such as China and India.

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Indeed, high-wage, developed markets reaped an 81 percent share of direct investment abroad by U.S. companies in 2003 (the latest year for which data is available), compared with 61 percent in 2000. In contrast, U.S. manufacturer investment in India fell to just over $50 million in 2003, compared with nearly $250 million in 1999. This investment has been concentrated in high-wage countries because “companies are focused more on growth than on cost-cutting,” said Peter Koudal, Deloitte’s director of global manufacturing research, in a statement.

That said, Deloitte noted that over the next three years, China figures to become the primary overseas destination for U.S. direct investments (as well as partnering and arm’s-length contracting) in marketing and sales operations (55 percent), sourcing (57 percent), manufacturing (38 percent) and engineering/R&D (26 percent).

Meanwhile, foreign direct investment in the United States rose for the second consecutive year, climbing 26 percent in 2004 to $79.8 billion, according to a report by the Department of Commerce. However, FDI remained below the record levels of 1998-2000, including a high of $335.6 billion in 2000.

Acquisitions — many worth at least $5 billion — were the primary type of FDI, according to the Commerce Department, which also observed that financial and insurance institutions were the top targets of foreign investors.

The report also noted that investment used to buy existing U.S. businesses was 10 times more than the money spent to establish new ones; that foreign money flowing to the information technology sector declined for the fifth consecutive year; and that as a whole, the biggest investors in the United States were Canadians, who more than tripled their 2003 FDI, to $32.4 billion in 2004.