Invest in the United States:
There are several compelling reasons for people to consider investing in the United States. Despite global recessionary pressures, the United States is maintaining its status as a vibrant and thriving marketplace with stable economic, political, and legal structures offering a wealth of opportunities for foreign investors.
Investing in the United States: Opportunities and Challenges:
For decades, the United States has served as a beacon for foreign investments and business opportunities. Two significant factors, a relatively strong economy and political stability, are powerful attractions to foreign entrepreneurs and established businesses alike, and result in a steady increase in direct foreign investment through mergers and acquisitions. The strong economy, coupled with technological innovation, has created robust consumer demand in the U.S. marketplace that has steadily boosted gross domestic product (GDP). In addition, the seamless tradition of transition from one presidential administration to the next has supported business and consumer confidence.
However, the recent global recession affected growth significantly in the United States. The recession has been followed by a gradual recovery. Even with a strengthening economy and political stability there are barriers, risks, and challenges that investors must address to establish a foothold in the United States and thrive. The content below will cover some of the opportunities and the challenges common to investing in the United States. Reasons for Investing in the United States Now more than ever, there are several compelling reasons for foreign investors to consider investing in the United States. Positive investment factors can be categorized into the following components:
A favorable economic environment for investors is bolstered by currency appreciation, significant foreign exchange reserves, and distressed businesses and assets in the United States. Because of the recent economic downturn globally, there are opportunities for acquiring business assets at lower valuations in the United States. Assets, particularly real estate, have depreciated considerably in value from peak levels in 2006–07. Encouraged by healthy U.S. dollar reserves and a favorable exchange rate, foreign investors can look to capitalize on the opportunity of purchasing assets in the United States at lower cost. With the U.S. economy improving and other economic environments stabilizing, these lowered costs may soon begin to rise.
Access to advanced technology also forms a solid investment foundation in the United States. The United States is well known for innovation in consolidated information and technology (IT) infrastructure, which is not readily available elsewhere. Therefore, foreign firms are increasingly considering acquiring U.S. companies for increased access to technical innovation and advanced techniques. A recent 2010 poll of Chinese enterprises conducted by the China Council for the Promotion of International Trade revealed that 60 percent of the respondents believe that the United States has a favorable investment environment due to easy access to high technologies and the availability of a rich and diversified labor pool. Government Incentives Added to the investment mix are U.S. government policies and regulations that are considered favorable by foreign investors. The United States is an attractive destination for foreign companies because several U.S. states and cities offer tax credits and other investment incentives to attract global manufacturer investments. These locales recognize that new factory construction can create jobs for their area residents, particularly in states most impacted by the recession. In addition, under the Real Estate Revitalization Act of 2010, the U.S. federal government is planning to lower or eliminate the U.S. taxes currently imposed on foreign investors of U.S. commercial real estate, a sector that has been particularly impacted over the past few years. The United States also provides a strong regime of intellectual property rights protection and enforcement, which is a key attraction for investing in research and development (R&D). The United States is the center for global innovation and ranks first in research and development expenditures worldwide. Foreign investors come to the United States to invest in R&D and to commercialize the results of their creativity in their own countries and globally.
Access to New Markets:
In addition to demand for foreign goods from U.S. consumers—one of the world’s largest markets—the North American Free Trade Agreement (NAFTA) gives U.S.-based foreign manufacturing companies open access to distribution networks across North America. This provides cross-border trade with neighboring countries such as Mexico and Canada. With this, foreign firms not only tap the U.S. market but also use their U.S. operations as a base to expand into neighboring markets.
From June 2009 to June 2010, U.S. imports from China increased 37.1 percent. To meet the growing demand, Chinese investors are creating production and distribution centers in the United States by acquiring businesses and assets .Also, the U.S. trade deficit grew exponentially from $27.2 billion in June 2009 to $49.2 billion in June 2010.
Chinese investments into the United States increased 360 percent in the first half of 2010 compared to the same time period in 2009, according to Chinese government figures. In 2009, Chinese companies announced new direct investments in the United States of nearly $5 billion—up from an average of $500 million a year ago, according to New York City–based economic consultancy Rhodium Group.
Risks and Challenges:
A relatively strong economy makes the United States an extremely competitive marketplace that rewards efficiency, productivity, and integrity while mandating rigorous compliance with the nation’s complex rules and regulations. As the U.S. economy improves, the cost of doing business in the United States may rise. This would require a corresponding higher level of investment in order to compete with established domestic businesses.
Federal, state, and local regulations require a healthy knowledge of tax, commercial, and labor laws. For instance, the Fair Labor Standards Act establishes federal minimum wage provisions for hourly workers. The Fair Minimum Wage Act of 2007 amended the federal minimum wage to $7.25 per hour, effective July 24, 2009. In addition, many states have their own minimum wage laws. With the federal increase, more states are below the federal wage and some states have phased increases like the federal government. However, when an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.
Corporate scandals in the late 1990s contributed to a crackdown by federal regulators and increased scrutiny of how publicly owned businesses operate. The Sarbanes-Oxley Act of 2002, which requires publicly owned Securities and Exchange Commission (SEC) registered companies to document financial-reporting controls, has heightened compliance standards and has increased the cost of compliance while also improving financial reporting transparency.
Overcoming some of the risks and challenges inherent with investing in the United States may become clearer when compared with potential opportunities in the same areas. The following sections highlight this point.
An abundance of natural resources and skilled labor have helped the
United States become one of the leading industrial powers in the world. Its highly diversified and technologically advanced industries include petroleum, steel, motor vehicles, aerospace, telecommunications, chemicals, electronics, food processing, consumer goods, lumber, and mining. The strength in the financial services industry has made New York’s Wall Street a global capital for foreign investment, as is London and Hong Kong. The recession of 2008–09 created uncertainty in the global marketplace. A gradual recovery, however, has opened the doors of opportunity again. The recovery has boosted the confidence of industry players to invest further in the U.S. marketplace.
The United States market-oriented economy currently is one of the largest and most technologically powerful in the world, with a 2009 GDP of $14.26 trillion or median household income of $70,597.
Private individuals and businesses make many of the decisions that drive the economy and the federal and state governments buy needed goods and services predominantly in the private marketplace. U.S. businesses enjoy greater flexibility than their counterparts in Western Europe and Japan regarding decisions to expand capital expenditures, lay off workers, and develop new products. At the same time, they face higher barriers to enter their rivals’ home markets than foreign firms face when entering the United States. The U.S. economy witnessed negative growth during the recession, but has recovered gradually since the second half of 2009. The inflation rate declined sharply to a level below zero in 2009. However, it increased to a modest level in 2010. The unemployment rate has been consistently increasing since 2007, but most recently has declined from its highest point and is expected to average around 9.5 throughout 2010. Despite such recessionary effects, the U.S. economy has witnessed rapid technological advancements with a skilled labor force. U.S. companies are at the forefront of many technology-driven industries, especially computers, medical equipment, aerospace, and military materiel. However, the onrush of technology has contributed to the development of a “two-tier labor market” in which those at the bottom lack the education, professional knowledge, or technical skills of those at the top and fail to get comparable pay, health insurance coverage, and other benefits. Since 1975, practically all the gains in U.S. household income have gone to the top 20 percent of households.
GDP Growth and Stability:
The U.S. economy has proven to be remarkably resilient to the immediate effects of natural disasters and terrorism. The terrorist attacks on Sept. 11, 2001 had an intense but relatively short-term impact on U.S. financial markets. United States, NATO, and coalition military engagements in Iraq and Afghanistan required major shifts of U.S. resources to the military. Hurricane Katrina caused extensive damage along the Gulf Coast in August 2005, but had a small impact on the year’s national GDP growth. Soaring oil prices in 2005 and 2006 threatened to cause inflation and unemployment, but the economy continued to grow through 2006. (Imported oil now accounts for about two-thirds of U.S. consumption.) Despite the U.S. stock market crash in 2008 and the recent recession, the U.S. economy has gradually improved.
According to the Economic Intelligence Unit (EIU), the economic recovery will help reduce the federal budget deficit in 2010–11, though it will remain large. Some states and municipalities are grappling with severe financial pressures and are introducing strict measures to rein in deficits. Long-term challenges facing the United States that may affect stability include inadequate investment in economic infrastructure, rapidly rising medical and pension costs, stagnant income in the lower economic groups, and sizable trade and budget deficits. U.S. exports fell to $1.55 trillion in 2009, from $1.83 trillion in 2008; imports fell to $1.93 trillion from $2.52 trillion; and the trade balance reached a deficit of $374.9 billion, down from $698.8 billion.
Political System Compared to other nations, the United States has a long history of political stability. The United States is a federal republic consisting of 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and a number of small territories. The political system is based on a division of powers between the states and federal government. Within the federal government and each state government there also is a separation of power among the three branches of government: legislative, executive, and judicial. Many federal and state laws and agencies protect the consumer and the economy from what are determined to be unacceptable business practices.
Nationally, these agencies include the Federal Trade Commission, the Securities and Exchange Commission, the Environmental Protection Agency, the Food and Drug Administration, and the Equal Employment Opportunity Commission.
Some national laws have requirements limiting what individual states may do. Other laws are more of a foundation that states may choose to exceed. Each state has its own political subdivisions and each has its own set of laws governing the conduct of business within its jurisdiction. There is, therefore, no single governmental agency or body that determines all of the laws and regulations applicable to all businesses. There are no federal corporate laws. However, there is a significant body of federal and state regulations that affect the investment decisions of foreign businesses in the United States. For example, the federal government controls national defense and the use of federal lands and natural resources; it restricts ownership of communications industries (domestic radio, television, telephone, and telegraph), and the use of public utilities, including domestic transportation. Some states have banned, or are considering bans on, foreign investments in agricultural land. In addition, the United States has a dual banking system. Both the federal government and the states regulate banking depending on the type of banking charter an institution obtains— national or state. For example, banks and thrift institutions with a national charter are regulated by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), respectively. Both the OCC and OTS are bureaus of the U.S. Treasury Department.
Also, at the federal level, the Federal Reserve and the OTS regulate bank holding companies and thrift holding companies, respectively. An institution also can choose to obtain a state bank charter and elect to be either a member of the Federal Reserve System or not. If the institution is a state member bank, it is regulated by the specific charter issuing state and the Federal Reserve. If the institution is a state non-member bank, it is regulated by the specific charter issuing state and the Federal Deposit Insurance Corporation (FDIC). A national bank or thrift charter “preempts” state regulation where both federal banking law and state banking law might apply to a given institution.
Investing in the United States:
United States has an abundance of natural resources that have been used to develop a host of homegrown industries that have expanded their operations abroad. Timberlands have been cultivated to contribute to forest products, wood, and paper. Oil, natural gas, and coal reserves have fueled the development of multinational energy companies. Rivers power hydroelectric plants, and the moderate temperatures and fertile soil have been cultivated to develop an extensive agricultural industry in fruits, vegetables, and livestock. New York is the financial hub of the United States, and has been instrumental in developing public stock exchanges as well as financial products and services that are used worldwide. Silicon Valley, in California south of San Francisco and centered around San Jose, has become the center of advanced technology research and development, from silicon chips used in computers and software to venture capitalists that invest in and nurture young start-up companies. The demand for products and resources has led to the growth and development of consumer-product companies, ranging from automobile and aerospace manufacturers to retailers that offer a range of household products and commercial needs.
Foreign Investment Remains Strong:
U.S. economic policy generally welcomes foreign investment, viewing it as a means to promote capital formation, employment, productive capacity, and new technology. To reduce risks, companies and individuals spread their investments worldwide. The United States is viewed by many as a favorable jurisdiction for preservation of capital because of its political and economic stability. Since the 1990s, foreign direct investment has increased dramatically. Foreign direct investment inflows to the United States stood at $148.5 billion in 2009, down from $316.1 billion in 2008.Further, the inward direct investment is expected to increase in 2010 and in the coming years. The Economic Intelligence Unit forecasts the inward direct investments to cross the $200 billion mark in 2012 and $300 billion mark in 2014.A key factor in this growth is the large, reasonably homogenous, and largely unfettered market available in the United States.
The United States was the eighth most attractive business location in the world in the historical period (2005–09), but its rank deteriorates to thirteenth during the forecast period (2010–14), largely as a result of a relative deterioration in its macroeconomic environment and in the availability of financing. Concerns about national indebtedness, security, international relations, and the relationship between special interests and public policymaking weigh on the relative ranking of the U.S. business environment over the forecast period.
Despite the slippage in score and rank between the historical and forecast periods, as one of the world’s largest economies the United States will likely remain an indispensable business destination. It has a long-running reputation for a favorable business climate that will likely remain intact during the forecast period. Policies toward private enterprise and competition are very favorable. Apart from certain security-sensitive sectors, such as energy, foreign investment faces relatively few restrictions. The United States also features deep, liquid, and accessible capital markets, which gradually regained liquidity during 2009, a flexible labor market, and well-established intermodal infrastructure systems. Foreign interest in establishing a business presence in the United States is expected to continue in light of proposals to institute import restrictions, voluntary import curbs, and increases in reporting requirements. Of note is the emergence of multinational corporations from high growth and emerging markets. Exports of these emerging multinationals are increasingly competitive with those of the United States, Europe, and Japan. As these companies develop from simply exporting to manufacturing abroad, they most likely will seek to establish and protect a stake in the American market.
The level of sophistication of foreign businesses entering the United States has increased substantially over the past decade. Yet newcomers, as well as seasoned Chinese investors, must be wary of evolving barriers and challenges in order to succeed, thrive, and prosper.