Statement of Pat Choate Vice President of Policy Analysis TRW Inc. Before the Subcommittee on Economic Stabilization Washington, D.C. November 15, 1989 Madame Chairman and Members of the Committee: I am pleased to have the opportunity to share with you some thoughts on foreign investment. In fairness to you and my employer — TRW Inc. — I also want to point out that the views that I offer are my own and are not necessarily representative of the position of TRW or any other organization. An International Comparison This morning the Congressional Economic Leadership Institute released a study by my colleague Linda Spencer titled "Foreign Investment Barriers: Where America Stands Among its Competitors." I commend it to you and offer a copy for your use. The study compares the foreign investment regulations of the United States with its eleven principal trading partners. It reveals stark differences — in law and practice as to how individual nations deal with foreign investment. The greatest difference is that all nations can block foreign investments that threaten national security, but only the United States has no authority to stop -2 In France, Australia, Canada and Japan, for instance, an American investor must have the permission of the government to establish a subsidiary. American investors can practically forget about trying to forcibly acquire a foreign firm in these and most other nations. Indeed, many governments encourage domestic companies to structure themselves so foreigners cannot purchase even a significant minority position without the targeted company's approval. By contrast, the United States has no pre-registration requirements for foreign owners. It does not systematically monitor buy-outs or hostile takeovers. Unlike most foreign companies, American businesses are structurally vulnerable to hostile foreign takeovers; such takeovers are made easy in America because of lax federal regulatory and monitoring policies. Indeed, there are few U.S. restrictions on foreign investment. The federal government limits foreign participation in classified defense contracts and ownership of enterprises associated with atomic energy, hydroelectric power, communications, air transport, coastal and inland water shipping, fishing and development of federal owned lands and mineral resources. A number of state and local governments impose limitations on foreign purchases of farmland and banks. In all other industries, European, Japanese, and other foreign investors are given a virtual free hand to buy American companies or build new facilities. Indeed, America's federal, state and local governments subsidize the foreign buy-outs of U.S. companies or foreign start-ups with gifts, low-interest loans and tax-concessions. The vast majority of foreign investment barriers and restrictions are not covered under existing international treaties. They are also outside the authority of existing international authorities. The American Land Run Given the great disparity between the foreign ownership policies of other nations and those of the United States, it appears that either the Government of the United States knows something that other governments do not, or visa versa. What is clear, however, is that foreign owners have seized the opportunity created by a cheap dollar to rapidly buy up key American assets. Even the faulty statistics available on foreign investment reveal that foreign interests hold more than $1.8 trillion of American assets, including one-seventh of the U.S. manufacturing base; one-fourth of all commercial loans; one-third of the prime commercial urban real estate; seventy percent of all municipal underwriting; and control of a diverse list of such critical industries as consumer electronics, concrete and advertising. Even more striking, foreign ownership in the United States has grown at a hyperpace, -3 The pace of foreign investment already fast is accelerating. Between 1980 and 1988, it grew by 300 percent, a pace six times greater than that by which U.S. foreign direct investment abroad expanded during the same time period. At this rate, foreign ownership in America is sure to double — perhaps even triple — by 1995. Nearly $1.5 trillion of the U.S. assets in foreign hands are portfolio investments: government securities, bank deposits and stocks. Put into perspective, foreign creditors now hold roughly 20 percent of the U.S. federal debt. As foreign governments have become America's bankers, they have gained the political whip hand over the U.S. government, giving them the ability to force concessions on defense, trade and foreign policy issues in return for a willingness to bankroll the ongoing binge of America's debt-financed federal spending. Another $330 billion of foreign ownership consists of American companies and real property. The weak dollar has dramatically slashed the prices of these assets for foreign buyers, the cheap price is merely frosting on the cake. Foreign buyers have long been attracted by America's political stability, easy access to the world's largest market, and the hedge that their U.S. investments provide against resurgent protectionism. Seven nations claim more than 86 percent of the total foreign ownership in America. By rank, they are the United Kingdom, Japan, the Netherlands, Canada, France, West Germany and Switzerland. In 1988, the United Kingdom had $102 billion of American assets; Japan had $53 billion; and the Netherlands had $49 billion. What is striking about these ownership patterns, however, is that Japanese purchases are growing at a significantly faster pace than those of any other country. Between 1980 and 1988, Japanese investment expanded by 1,027 percent. At this rate, Japan will be the largest foreign owner in America by 1991. Statements by officials of Japan's Ministry of International Trade and Industry (MITI) only underscore this: they acknowledge that one basic MITI goal for yen-rich Japan is to increase its share of that nation's total production in its offshore locations from 5 percent in 1988 to 20 percent in 1999. If this occurs, Japanese ownership in the United States will expand by 600 percent — at least. Of course, U.S. companies also have massive foreign holdings. According to the Department of Commerce these investments are worth some $330 billion. Moreover, Commerce's estimate may understate the true value of America's assets abroad by $200 billion or more, since the lion's share of America's overseas investments were made prior to the 1980s, and Commerce's figures are based on historic book value rather than current worth. These U.S. assets, however, were accumulated over several generations as part of long-term strategies by U.S. companies to expand their global operations. The surge of foreign ownership in the United States in the 1980s, on the other hand, has been more like the Oklahoma Land Rush of a century ago, with prospective buyers rushing out to claim undervalued American assets for their portfolios. Advantages and Disadvantages As a consequence of a land-rush mentality, most of the increased foreign ownership has come in the form of buy-outs of established operations rather than new, start-up firms. A recent General Accounting Office (GAO) survey reveals that foreign acquisitions of U.S. companies has increased from 6 percent of all transactions in 1984 to more than 13 percent for the first half of 1988. Notably, a preponderance of foreign acquisitions are hostile takeovers. The GAO study reports that 75 percent of the $15.5 billion of foreign takeovers during the first half of 1988 were opposed by the Boards of the acquired companies. While many of these purchases are made to take advantage of the historic economic opportunity created by the weak dollar to buy undervalued American assets, other purchases are made because of the political stability in the United States, to gain a foothold in the vast American market or to engulf U.S.-owned competitors. Still other purchases enable foreign companies to circumvent U.S. trade policy and international agreements. After the Japanese agreed to increase their imports of American beef over the next three years, for example, Japanese companies began to buy U.S. cattle ranches and small meat plants such as Washington Beef Inc. of Yakima, Washington, enabling them to take advantage of this market-opening measure negotiated on behalf of the U.S. beef industry. Foreign investment, of course, has its advantages. It has facilitated the financing of the federal budget deficit at a time when the federal authorities were unwilling to responsibly match its expenditures and revenues. It has provided capital for Wall Street, financing for many U.S. companies, some jobs, some new technology and — sometimes — improved labor-management relationships. Yet, these advantages are often overstated. Had the federal government been unable to finance its budget deficits, it would not have been able to ignore its rise. Much of the foreign capital made available to Wall Street has been used for a senseless wave of takeovers, leveraged buy-outs and other destructive financial maneuvers that have forced a short-term mindset in the U.S. corporate community. Indeed, a month ago, the State Department reported that up to 25 percent of the daily volume on the New York Stock Exchange is generated by Japanese investors. Last week, the Financial Times reported that Japanese banks are now providing between 30-40 percent of the funds for the LBO movement, which has done so much harm to long-term corporate thinking -5 The number of jobs created by foreign purchases, moreover, has been vastly overstated. Indeed, the nearly three million jobs usually cited as having been created by foreign investment is unsubstantiated. The Department of Commerce does not know what percent of these three million jobs are "created" and how many are simply shuffled from American-owned firms to foreign-owned firms through takeovers of existing companies. Moreover, this estimate includes all workers employed not only by foreign-owned companies, but also by all U.S. firms that have at least ten percent foreign ownership. Estimates for 1988 reveal that of the 677,000 jobs claimed to have been created by foreign owners that year, only 34,000— that is, five percent — were created by the establishment of new operations within the United States. When layoffs of U.S. affiliates of foreign firms due to liquidations and cutbacks are considered, the net number of new jobs created by foreign companies is nominal at best and may actually be negative. Also, many foreign purchases are little more than an inexpensive and quick way to access and then transfer advanced U.S. technology overseas. For instance, when Kubota Ltd, Japan's largest producer of agricultural machinery, decided to enter the computer business, it bought five small U.S. companies that specialized in software and supercomputer technology. Less than two years after Kubota's first U.S. acquisition in 1986, the company began manufacturing a mini-supercomputer. Finally, as foreign owners increase their investments here, they also deepen their involvement in America's domestic politics. Political Action Committees of foreign affiliates here, for instance, contributed more than $2 million dollars during the 1988 election cycle, foreign companies and their governments now wield more political power in Washington than only a few of the largest American industries. While no one questions the right of foreign companies to Washington representation, the raw political power of foreign owners to shape U.S. trade policies to their own purposes is a troubling new development on the American political scene that is unexplored. American Policy The rapidly expanding foreign investment in the United States may or may not require changes in U.S. policy. Today, the nation lacks the basic data and analyses needed to make such a determination. Because the basic survey instruments used to calculate foreign investment into the United States were designed to measure balance of payment flows, they provide only the roughest outline of foreign ownership, the foreign owners themselves, or which industries and technologies that foreigners now possess. Among the many consequences of this information gap is that the Defense Department does not know who controls the critical industries that produce the key technologies |