Despite a Rough Year, the U.S. Still Preferred for FDI
We’re finally living in the year following the pandemic with 2020 behind us. It comes as no surprise that the pandemic left a wake of challenges as we settled in and learned to adapt. Foreign direct investment (FDI) is essential to U.S. economic growth and prosperity and supports nearly 8 million jobs. It took quite a hit from the pandemic in 2020, with FDI dropping 42% globally, as businesses were forced into shutdowns.
The country that recovered the earliest and got back to work faster claimed the leading position of FDI. In 2020, China bumped the U.S. out of its long-running top position to become number one in FDI. In the U.S., FDI declined 49%.
While this sounds impressive, China’s growth was modest, around $163 million. Even though FDI in the U.S. dropped sharply, it still totaled $134 billion last year. China may be temporarily in the lead, but the U.S. is still ranked as #1 in total foreign investment.
Before the Pandemic
Many factors affect FDI such as wage rates, labor skills, taxes, transportation and infrastructure, political stability, intellectual property rights, commodities, and even the exchange rate.
The tensions between the U.S. and China over tariffs and intellectual property rights added to the decline in FDI, prior to beginning of the COVID-19 pandemic. The back-and-forth trade uncertainty between the two countries sparked temporary declines in business investments and direct investments in the first half of 2019 and lasting through 2020.
What are the Future Trends Predicted for FDI in 2021?
Although FDI is predicted to fall more this coming year, which everyone expected, the good news is the FDI decline will stay between 5-10% in 2021, or even possibly stabilize as vaccines roll out and we find our path through the pandemic.
The other positive news is that, even though 2020 dropped U.S. FDI levels, the U.S. is still rate number one in total foreign investments. A.T. Kearney released its 2021 Foreign Direct Investment (FDI) Confidence Index, ranking the United States as the top destination for foreign investors for the ninth year in a row.
Recovery will vary throughout U.S. economic sectors. In 2018, the high-tech industry accounted for 46% of total FDI in the U.S. Software and IT services, med tech, and renewable energy are three sectors to watch for quicker recovery/growth. Communication platforms and e-commerce grew in 2020 as people demanded more online products. In 2021, high-tech is predicted to grow 28.5% along with the service industry (13.9%).
SelectUSA believes that as FDI continues its growth in this sector, the U.S. will see advanced innovation, employ millions of highly skilled and educated workers, and further increase the competitiveness of our high-tech industry.
During the pandemic, companies that reassessed their FDI strategies, including a renewed focus on “incorporating sustainable development and environmental, social and governance goals into their FDI plans,” states the Investment Monitor.
Companies were already trending toward smaller office sizes prior to COVID-19 and the pandemic only heightened the desire to downsize. Advancements in innovation and technology, and the desire for more telecommuting, are driving companies to reimagine offices with a smaller physical blueprint. Therefore, the capital investment saved from more extensive projects may be put on hold until COVID-19 restrictions relax. This may also affect where companies invest, possibly taking advantage of locations farther out of urban areas to reduce overhead costs.
For manufacturing, the pandemic made it painfully clear that companies needed to shorten their supply chains to mitigate future disruptions. FDI may shift to closer, developing economies to take advantage of cost efficiencies. More companies are finding reshoring more attractive. According to data collected by the Reshoring Initiative, reshored jobs were up nearly 45% last year, with FDI jobs down 40%. Due to the pandemic, reshoring investments outpaced FDI for the first time since 2014. COVID-induced business uncertainty could reduce FDI in the U.S. as foreign companies invest in operations in their home countries.
Most experts believe the flow of FDI into the U.S. will stay steady during the Biden administration. Dennis J. Donovan, principal at Wadley Donovan Gutshaw Consulting, expects more workplace and labor regulations will take effect, increasing overall payroll costs to U.S. businesses However, Donovan says, “while that will be a nuisance, and not welcome, I don’t think it’ll be enough to present a formidable barrier to FDI.”
Dr. Alexis Crow, lead, geopolitical investing practice, PwC U.S. believes Biden’s infrastructure plan will have a big impact on FDI. “A lot of capital has been waiting in the wings in terms of infrastructure investing. If we see a large-scale, stimulus-style infrastructure spending bill, then you would continue to see a lot more foreign investment.”
Preferred Destination FDI
Even during the global pandemic, companies across the world continue to target the U.S. as the preferred location for global growth, which reflects the appeal of the U.S. economy, especially access to one of the largest and most affluent consumer populations in the world.
Investors want established markets that are safe, with solid infrastructure and governance and a stable, innovative economy overall. The U.S. market embodies all these attributes. According to SelectUSA, “The United States offers unmatched diversity, a culture of innovation, and the world’s most productive workforce to companies of all sizes, from start-ups to multinationals, looking to grow and succeed in the U.S. market.”