Greenfield foreign investment in the US continues to collapse

The United States has a poor record in attracting global investors, as foreign investment in new assets has plummeted in recent decades.

The value of greenfield 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 FDIs are foreign investments in newly constructed or expanded facilities.

While foreign investment in the United States has recovered in 2021, the situation is not as rosy as it looks, according to Ian Clay, research assistant at ITIF.

“The proportion of foreign direct investment flowing into new or expanded facilities in the United States continues to shrink,” he wrote in a recent report. “Foreign companies appear willing to buy existing assets from 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 US gross domestic product.

Sluggish investment in new infrastructure, Clay says, belies the notion that the United States is a magnet for foreign investment.

The US Bureau of Economic Analysis (BEA) has reported that FDI flows to the United States have recovered in 2021 after falling sharply since 2018. Foreign investments increased to US$333.6 billion from US$141.4 billion in 2020.

However, takeovers – the purchases of established US companies – 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 foreign direct investment into three groups: acquisition, establishment and expansion. Construction and expansion are considered greenfield expenses, which are more desirable.

According to the ITIF, greenfield investments are direct investments in the production capacities of the recipient countries. Acquisition, on the other hand, involves only the transfer of ownership to a foreign entity. Therefore, greenfield investments are the most important and attractive for countries.

In 2021, greenfield spending accounted for just 1 percent of FDI flows to the United States, while acquisitions made up the remaining 99 percent.

Some observers say the US government is not doing enough to encourage greenfield investment at a time when many global companies are considering exiting China.

A recent survey by QIMA, a quality control and compliance service provider, found that efforts by global companies to reduce their dependence on China continue, especially after the Chinese regime-imposed COVID-19-related lockdowns in 2022, which resulted in a significant supply of chain breaks.

However, it appears that the United States is not benefiting from this exodus.

R&D incentives

According to ITIF, greenfield FDI flows to the United States are not recovering as they are heavily dependent on R&D incentives and other generous investment measures.

“R&D incentives relative to other countries have really taken a hit over the last few decades,” Clay told The Epoch Times.

He added that the United States ranks below the Organization for Economic Co-operation and Development (OECD) average for government tax breaks for corporate R&D.

“Furthermore, compared to other countries competing for foreign direct investment, our capital allowances are much less generous than in previous decades.”

A capital deduction is the amount of capital expenditure that a company can deduct from its earnings through depreciation.

Governments around the world are increasingly relying on these incentives to encourage greenfield investment and encourage innovation.

A recent study by the Tax Foundation (pdf) shows that the United States ranks 21st among the 38 OECD members in terms of the average capital allowance. US tax law allows companies to recover an average of 67.7 percent of capital investment costs, compared to the OECD average of 70.7 percent. More specifically, the United States ranks 32nd in capital depreciation for buildings and 34th in intangible assets.

It ranks 3rd in capital deductions for machinery thanks to the full expense rule of the 2017 tax reform. However, the provision will expire this year and will be abolished by 2026.

According to ITIF, Congress should recognize this deficiency and focus on boosting greenfield investment.

Congress recently passed legislation called the Chips and Science Act that provides incentives to boost domestic semiconductor manufacturing in America. According to Clay, the 25 percent investment tax credit for chip manufacturing investments included in the bill will provide an incentive to outsource to the United States.

Such incentives, he believes, will become more common in the future to boost US competitiveness.

consequences

Emel Akan writes on business and economics. Previously, she worked in the financial sector as an investment banker at JPMorgan. She graduated with a master’s degree in business administration from Georgetown University.

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