US money talks, but does it make foreign companies walk?

It’s the job of government ministers to attract foreign investment by talking up their national economies. The US is no exception. Secretary of State Antony Blinken’s pitch to investors at last month’s SelectUSA Investment Summit was crystal clear: “There is no better place in the world to invest than the United States and no better time to do it than right now.” Why? Having listed key strengths of the US economy, Mr Blinken also highlighted landmark legislation such as the Inflation Reduction Act and the Chips Act (which aims to strengthen domestic semiconductor sector) as making the US "an even better place to invest". Despite this talk , much less fanfare accompanied the release on July 12 of the latest foreign direct investment data into the US, which dropped by 28 per cent ($57.4 billion) in 2023 compared to the year before according to the US bureau of Economic Analysis. The government statistics cover cross-border mergers and acquisitions, greenfield investments and plant expansions by foreign firms in the country. This significant drop speaks volumes and begs the question, why are foreign companies walking away from investing in the US? The answer to that conundrum matters for the six-member economic bloc of the GCC. Quite often the region’s huge trade surpluses have exceeded 5 per cent of its income. Most of these surpluses are invested and the world’s largest economy would be a natural candidate to absorb some of these funds. So how is the health of the American economy perceived by business people? Not well, if the 2024 IMD World Competitiveness Ranking is anything to go by. American politics seemingly turned populist with the presidency of Donald Trump in January 2017. That makes 2016, the last year of the Obama administration, a natural benchmark. In 2016, the US was ranked the third most competitive economy in the world based on a blend of hard statistics and detailed polling of executives. By 2021, the ranking immediately sank after Mr Trump left office, the US had fallen to 10th. Three years into the Biden Administration and the US is now 12th, below both the UAE and Qatar. The deteriorating relative position shows in the lower levels of FDI into the US. In 2016, FDI totalled $379.7 billion. As data is only available for the first three years of the Biden administration and to avoid letting the calamity of 2020 influence the results, it makes sense to contrast that $379.7 billion total with foreign investor decisions in 2017-2019 (during Mr Trump's presidency) with those for 2021-2023 (Mr Biden's presidency). The first three years of the Trump administration saw on average $268.8 billion of annual investment by foreign firms. The situation worsened further under Mr Biden: the first three years of his term saw an average of $239.2 billion of foreign investment. What is clear is that these two totals are well below those seen at the end of the Obama administration, before the uncertainties and disruption of the populist era took hold. At a minimum, Mr Trump’s corporate tax cuts and Mr Biden’s subsidies couldn’t stop foreign investors cutting their new investments in the US. Actually, the situation is a lot worse than these headline numbers suggest. The reported totals take no account of the rising cost of mergers, acquisitions or greenfield investments. Let’s start with cross-border M&A, which accounted for more than 96 per cent of inward FDI into the US since 2016. The S&P 500 Index of stock prices closed in 2016 at 2,238. In the last day of trading in 2023 that index stood at 4,769. This implies that the average cost of purchasing stock rose 113 per cent in seven years: a US publicly listed company that was valued at $100 billion in 2016 would have cost $213 billion in 2023. Each dollar of cross-border M&A in 2013 bought much less stock than in 2016 and this must be factored in. Correcting for this means that the real value of foreign-financed cross-border M&A has fallen sharply since 2016. In the last year of the Obama administration, a total of $370 billion of American companies were bought by foreigners or merged with foreign firms. In the first three years of the Trump administration, such transactions fell sharply on average, to $213 billion. The comparable figure for the first three years of the Biden administration was $114 billion per annum. Taking into account the rising price of US corporate assets, the real value of cross-border M&A by foreign firms in the US last year dropped by 82 per cent below the 2016 level. The scaling back of foreign investment into the US is less pronounced in the case of new factories and in expanding existing plants. But there is little cause for celebration here as there was so little such investment in the first place. From 2016 to 2023, official US government data shows that on average each year, less than $10 billion of greenfield investments were made by foreign investors. This is peanuts compared to the huge amount of investment by the American private sector in new operational facilities. Once a correction is made for the price of capital goods, which has been subject to inflationary pressures in recent years, the total value of greenfield investments fell from $9.4 billion in 2016, to an average of $8.2 billion in the first three years of Mr Trump’s term, and recovered somewhat to $8.7 billion during Mr Biden’s first three years as president. These investment outcomes reveal little foreign enthusiasm for setting up new factories in the US. This year’s FDI report is particularly revealing as it covers foreign investments through 2023, the first full calendar year that the Inflation Reduction Act and the Chips Act were in force. Even if the overall picture isn’t great, maybe foreign investments in the sectors favoured by these subsidies picked up? Unfortunately, the report doesn’t provide granular data on FDI in the electric vehicle sector, but we know that foreign investor interest in this sector could not have been significant. After all, the total for greenfield FDI reported for all sectors is so small that any sizeable foreign investment in EVs would have shifted those numbers markedly. Foreign investment decisions in the semiconductor sector were reported, however. In 2022, foreign investors spent $4.4 billion building new or expanding existing semiconductor fabs in the US. In that year, those same investors promised to spend just under $50 billion more in the subsequent four years (2023-2026). Considering that the price tag for a semiconductor fab can run into tens of billions of dollars, these numbers aren’t large but they were a very promising start given Mr Biden’s subsidy incentives were only in effect for five months in 2022. However, only a total of $2.4 billion was committed by foreign investors in new fabs last year, down 45 per cent annually. Worse, the commitments to invest over the following four years (2024-27) was only $5.6 billion. The Chips Act might have just led to a short-term blip of foreign investor interest. Given the sweeping statements by some Asian and European chief executives and officials over the years, you would have thought that Mr Trump’s tax cuts and Mr Biden’s subsidies were a first-order threat to jobs and industrialisation. The data tells a very different story: foreign corporate interest in building new factories in the US has for long been feeble and appetite for snapping up US companies has declined sharply. Neither Mr Biden’s nor Mr Trump’s policy incentives have transformed the attractiveness of the US economy to foreign investors. Having the world’s largest economy, a strong rebound from the pandemic and a strong tradition for rule of law haven’t stopped foreign investors from voting with their feet. The nationalist tinge of populist policies have likely diminished the sense that the US is a safe place for foreigners to deploy capital. Simon J. Evenett is the professor of Geopolitics and Strategy at IMD Business School and co-chairman of the World Economic Forum Trade & Investment Council