Re: US foreign investment

["Charles Jannuzi" <jannuzi@xxxxxxxxxxxxxxxxxxxxxxxxx>]

Doug Henwood:
> It's widely believed that foreign investment is largely about chasing
> low wages.

You are right to address these beliefs.

If you asked at a company, it would be to get a good rate of return on the
investment. If I want to sell labor-intensive goods in an affluent market,
then I try to set up manufacturing in a low wage country with weak unions,
weak environmental laws (and little liability), and an adequate
infrastructure to get my goods to their ultimate markets.

>But most FDI is targeted at high-income countries.

Because these countries offer affluent consumer markets if you are selling
goods and services. Nike doesn't make sneakers in Indonesia because it wants
to sell them in Indonesia. It wants Walmart to sell them in North America
and Carrefour to sell them in Europe. So Nike benefits from Carrefour's
investment in retail all over Europe, but it's Nike chasing cheap wages.

I'm just using Nike as an example, but I think one of Nike's biggest
investments in the past 5 years is to set up retail stores exclusively for
marketing Nike in the affluent markets. This is as important to Nike than
its cheap factories in Indonesia, if not more so. They could quickly
substitute Vietnam for Indonesia, but the affluent markets are still the
same, though competition in them might well have increased (resurgent
Adidas, new brands with more cachet with younger consumers, like Skechers,
etc.).

High income countries also offer juicy takeover targets. A private equity
group like Carlyle finds the defense contractors or telecoms or software
companies it wants in affluent, developed countries (though software
includes India, too).

It's
> also widely believed that imperial investment is the source of
> superprofits that power the whole system; that doesn't seem to be
> borne out by the data either.

I always thought how MNCs got profits was always pretty dodgy, but Enron
(and Tyco) puts the whole concept in doubt for even the least skeptical
people.

But consider a company like Coca Cola. It went after (and got) a high stock
valuation  by reporting higher profits, but the 'profits' really came from
selling small bottling companies to bigger ones and by passing on price
hikes in materials to the bottlers. Nevertheless these were 'profits' in the
scheme of things.

>
> Following up on Michael Yates's point - of course it's useful to
> compare profitability at engine plants, etc. But given the
> fungibility and mobility of capital, it makes plenty of sense to talk
> about economywide rates of profit too. People seem to think that if
> you assert A it somehow rules out an interest in B, C, and D. It
> doesn't.

Japan kept investing in the US, including to build new factories, even
though, overall, the rate of return for Japanese companies in the US has
been rather awful, actually. It's the politics and the rush not to be locked
out of the US market and NAFTA that led to this. If you were a Japanese
automaker, for example, if you wanted to sell cars in the US unfettered, you
had to make a show of making them there, too.  They also underestimated just
how much things like law suits over discrimination can cost.

It was American companies who mastered the idea of manufacturing in China
and then selling the goods in Japan (so US companies made profits in Japan
but did nothing to create trade surplus between US and Japan). Uniqlo, a
Japanese clothing retailer, has copied the model and is looking to try
clothing retail in the UK--though probably wary of the US, what with the Gap
bust.

OTOH, US equity groups--not manufacturers, though they might hold
manufacturers because they act as holding companies--are now moving into
Japan and buying up banks, insurance companies, consumer finance and
leasing, and real estate. I suppose if a company like Ripplewood Holdings
can turn around the failed resort complex on Kyushu, they will have added
some value. Other than that, most of these interests strike me as parasites
seeking quick returns or the chance to hold and squeeze profits from
capacity they themselves didn't create.  I know they are not here to build
new manufacturing to lead Japan into the next big thing that everyone is
talking about, and the only turnaround plans they have is how to talk up the
value of the assets so they can be sold for profits.

Charles Jannuzi