The United States has a poor record of attracting global investors, with foreign investment in new facilities falling sharply in recent decades.
The value of foreign direct investment (FDI) relative to the size of the US economy has fallen 96 percent since the 1990s, according to a recent analysis by the Information Technology and Innovation Foundation (ITIF), a technology think tank. Greenfield FDI is foreign investment in newly built or expanding facilities.
While foreign investment in the United States rebounded in 2021, the situation is not as bright as it seems, according to Ian Clay, research assistant at ITIF.
“The share of FDI going to new or expanded facilities in the United States continues to shrink,” he wrote in a recent report. “Foreign companies seem willing to buy existing assets of US companies, but not very willing to build new facilities or expand existing ones in the United States.”
In 2021, the total value of greenfield spending was just $3.4 billion, or 0.01 percent of U.S. gross domestic product.
Sluggish investment in new infrastructure, in Clay’s opinion, belies the idea that the United States is a magnet for foreign investment.
The US Bureau of Economic Analysis (BEA) reported that FDI flows to the United States rebounded in 2021 after falling sharply from 2018. Foreign investment rose to $333.6 billion, up from $141.4 billion in 2020.
However, takeovers—the purchases of established U.S. businesses—were largely responsible for this recovery. And the industries that benefited most from foreign acquisitions last year were pharmaceuticals. real estate; and professional, scientific and technical services.
The BEA divides FDI into three groups: acquisition, establishment and expansion. Establishment and expansion are seen as “green” expenses, which are more desirable.
ITIF says that green field investments are direct investments in the productive capacity of the host economy. Acquisition, on the other hand, involves only the transfer of ownership to a foreign entity. Therefore, greenfield investments are the most critical and attractive for countries.
In 2021, Greenfield spending accounted for only 1% of FDI flows to the United States, while acquisitions accounted for the remaining 99%.
Some observers say the U.S. government is not doing enough to encourage greenfield investment at a time when many global companies are considering leaving China.
A recent survey by QIMA, a quality assurance and compliance services provider, found that efforts by global companies to reduce their reliance on China continue, particularly following the 2022 COVID-19-related lockdowns imposed by the Chinese government. regime, which caused serious supply chain disruptions.
However, it appears that the United States is not benefiting from this exit.
According to ITIF, foreign direct investment flows to the United States are not recovering, as they depend heavily on R&D incentives and other generous capital expenditure policies.
“R&D incentives relative to other countries have really taken a hit over the past few decades,” Clay told The Epoch Times.
He added that the United States was below the Organization for Economic Co-operation and Development (OECD) average for state tax breaks for business R&D.
“Furthermore, our capital allowances are much less generous compared to other countries competing for FDI than they were in previous decades.”
The capital allowance is the amount of capital investment expenditure that a company can deduct from its income through depreciation.
Governments around the world are increasingly relying on these incentives to promote greenfield investment and encourage innovation.
A recent study by the Tax Foundation (pdf) shows that the United States ranks 21st in average capital compensation among the 38 OECD members. The US tax code allows businesses to recoup 67.7% of the cost of capital investment on average, compared to the OECD average of 70.7%. More specifically, the United States ranks 32nd in capital allowances for buildings and 34th for intangible assets.
It ranks No. 3 in capital allowances for machinery thanks to the full spending provision of the 2017 tax reform. The provision, however, will begin phasing out this year and will be phased out by 2026.
According to ITIF, Congress should recognize this shortcoming and focus on boosting green investment.
Congress recently passed legislation called the Chips and Science Act, which provides incentives to boost domestic semiconductor manufacturing in America. According to Clay, the 25% investment tax credit for chip manufacturing investments included in the bill will provide an incentive to reinvest in the United States.
Such incentives, he believes, will become more common in the future to promote US competitiveness.