Foreign Investment to Their Aspects of FDI Examined Include the Countries of Origin, Respective States
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Rural Spring 1996 RESEARCH REPORT Volume 7, Issue 4 Published by the Illinois Institute for Rural Affairs Stipes Hall 518 Western Illinois University 1 University Circle Macomb, IL 61455-1390 309/298-2237 Rural Illinois in a Global Economy: The Impact of Foreign Direct Investment by Christopher D. Merrett1 Development officials prioritize industrial recruitment and Affairs (DCCA) operates or has operated offices in Brazil, job creation above all else. In an expanding global economy, Japan, Belgium, Hong Kong, Mexico, and Canada. These foreign direct investment (FDI) has attracted attention offices promote the products and services of Illinois firms in because it has created an increasing number of jobs in the international markets and encourage FDI in Illinois. The United States. FDI also accounts for an increasingly large question is, how successful has Illinois been in recruiting proportion of the U.S. gross domestic product (GDP). In FDI compared with other states? Furthermore, what benefits 1982, FDI in the United States was valued at $124.7 billion. accompanied FDI in Illinois, especially in rural communities? By 1993, that value had risen to $445.3 billion measured on Recent studies suggest that during the 1980s, 10 percent of a historical-cost basis. FDI has grown from 2.3 percent of all FDI in the United States was located in nonmetropolitan the U.S. GDP in 1977 to almost 6 percent by 1992 (U.S. communities (Glasmeier and Glickman 1990). Have rural Department of Commerce 1995a). The total number of communities in Illinois benefitted from this influx of FDI into foreign firms operating in the United States has grown from the United States? 7,676 in 1980 to 11,698 by 1992 (U.S. Department of Commerce 1983a, 1994). This report investigates the role played by FDI in the rural economy of Illinois using the following approach. First, FDI Because of this growth, development specialists believe is defined, and we examine why foreign firms might choose that FDI can positively affect local economic development. to invest in the United States. Implications are also examined Accordingly, officials from across the United States have for communities that have successfully recruited FDI. Section devoted greater attention to recruiting FDI into their states two examines the geographic, temporal, and sectoral patterns and communities. A 1982 survey by the Council of State of FDI in the United States and Illinois using secondary data Governments revealed that 23 states had at least one from the U.S. Department of Commerce and DCCA. Specific foreign office created to attract foreign investment to their aspects of FDI examined include the countries of origin, respective states. By 1991, 41 states had foreign offices to economic sector, how Illinois compares to other states in promote exports and recruit FDI (Corporation for Enterprise recruiting FDI, and urban versus rural comparisons in FDI Development 1991). Illinois has expanded its global location. Section three provides concluding thoughts about recruitment strategy by opening trade offices around the the role of FDI in economic development strategies pursued world. The Illinois Department of Commerce and Community by nonmetropolitan communities in Illinois. Causes and Consequences of Foreign Direct Investment in the United States The U.S. Department of Commerce (1995a) defines foreign Two separate questions confront managers of foreign firms investment as direct when a single foreign investor has who consider expanding production into the United States. acquired 10 percent or more equity in a U.S. firm. That firm First, they must decide whether or not it makes sense to is then considered a U.S. affiliate of a foreign investor. The actually produce abroad: they could just engage in 10 percent figure, while arbitrary, was chosen by the U.S. international trade or license a competitor to produce in the Department of Commerce because it was deemed to United States. Second, once the firm decides to engage in represent the minimum stake required by foreign investors FDI, the firm must decide upon the geographic location of its to wield long-term influence over the management of a firm investment within the United States. in the United States. 1The author is assistant professor, Illinois Institute for Rural Affairs. Cartographical assistance provided by Bill Westerhold. Layout by Nancy Baird. This second decision can have profound consequences for Carolina to recruit a BMW plant. Alabama provided incentives the community chosen as the site for the FDI. Foreign worth $300 million to attract Mercedes-Benz with its promise investment can bring new jobs into a local economy. From of 1,500 jobs (or $200,000 per job). The long-term multiplier a national perspective, employment in foreign affiliates has effects of these jobs are thought to offset the initial incentive grown from 2.1 million employees in 1980 to 4.7 million by costs. In addition, foreign plants in the United States can 1992 (U.S. Department of Commerce 1983a, 1994). provide new sources of regional financial capital, Development officials expend great energies to influence management expertise, increased technological capabilities, where these jobs are located. Witness the incentives provided and buyers for local supplies and services. by Alabama to attract a Mercedes-Benz plant and by South Characteristics and Geographic Patterns of FDI in the United States Country of Origin. During the past decade, the amount of this time. However, if development specialists are interested FDI in the United States has increased dramatically. The in FDI that generates local jobs, then they should continue origins of the FDI have remained constant, however (Table to recruit manufacturing FDI. In 1980, FIRE-sector FDI 1). The top seven investor countries in 1980 are the same accounted for 107,000 jobs or 20 percent of all FDI-generated seven in 1993. What has changed is the growing jobs. In the same year, manufacturing-FDI represented concentration and relative share of FDI held by firms from 1,103,000 or about 54 percent of all FDI-generated jobs. these seven countries. These seven countries represented 78.3 percent of the dollar value of FDI in 1980. By 1993, they By 1992, despite the massive increase in FIRE-sector FDI, accounted for 86.2 percent of the FDI. This is due to it could only account for 245,000 jobs, representing only 5.2 American international balance of payments problems, the percent of the 4.7 million jobs connected to FDI in the United devalued dollar, and protectionist U.S. trade policies. States. Manufacturing FDI generated 2,231,000 or 47 percent Increasing FDI also reflects America’s declining edge in of the jobs. Clearly, more jobs are connected to manufacturing productivity and technology. Simply put, foreign firms locate FDI than any other sector. Much of the FDI related to the in the United States because they can now compete with FIRE sector is acquisitions, rather than construction or American firms in America’s backyard. expansion of facilities. Table 1. Share of FDI in the United States by Country of Origin Table 2. Value and Percent of FDI Assets in the United States by Economic Sector Country 1980 1993 Sector 1980 1993 Japan 5.7 21.6 (US $ millions) (pct.) (US $ millions) (pct.) United Kingdom 17.0 21.4 FIRE 88,403 (30.3) 835,073 (46.1) Netherlands 23.0 15.4 Manufacturing 81,684 (28.0) 473,047 (26.0) Canada 8.9 14.6 Wholesale Trade 50,060 (17.1) 187,346 (10.4) Germany 9.1 7.8 Petroleum 44,060 (15.1) 95,634 (5.3) France 3.2 6.4 Retail Trade 9,685 (3.3) 41,621 (2.3) Switzerland 6.1 4.8 Other 18,133 (6.2) 177,229 (9.9) Top Seven Total 78.3 86.2 Total FDI 292,033 (100.0) 1,809,950 (100.0) Rest of World 21.3 13.8 Sources: U.S. Department of Commerce 1983b and 1995b. Sources: U.S. Department of Commerce 1995a and 1995b. Geographic Patterns of FDI. This section identifies the Economic Sector of FDI. In 1980 and in 1992, finance, location of FDI and its related employment in the United insurance, and real estate (FIRE) combined to represent the States. Table 3 shows the employment of U.S. foreign largest dollar value and proportion of FDI assets (Table 2). affiliates and FDI-employment location quotients by state The manufacturing sector has attracted the second largest from 1981 until 1992. A location quotient compares FDI- value of FDI during this time period. It appears that states related employment in each state to the FDI-related and communities should target FDI from the FIRE sector employment in the United States as a whole. A state with a because of the large value of the FDI. FIRE is also the location quotient greater than one has a disproportionately fastest growing component of FDI, increasing from 30 large share of FDI-related employment. Conversely, states percent to over 46 percent of FDI in the United States during 2 with location quotients less than one have been less more than any other region (Table 3). Much of the influx has successful at attracting FDI that generates jobs.2 been tied to Japanese automotive investment. Table 3 reveals that some states have been more successful We should not assume, however, that all states in the at recruiting FDI than others and that recruiting success Midwest have lost their share of FDI investment. The East changes over time. New England, Middle Atlantic, and North Central region, including Illinois, has increased its South Atlantic states successfully attracted FDI employment share of FDI and related employment. In addition to the in the past, but have seen their share decline during the past overall increase in FDI, the East North Central region has decade.