The Globalization of U.S. Business Investment

But if there's nothing we can do to stop it, then I say allocate our investments from these higher-income economies and take advantage of low cost labor markets in the east

You underestimate the power of government.

The continuous outsourcing of jobs to foreign markets has created a growing panic in America. It's like global warming. We know its a growing problem, we know its not good for us, yet we do not take any serious action to control it. But if there's nothing we can do to stop it, then I say allocate our investments from these higher-income economies and take advantage of low cost labor markets in the east. I as well am also curious to see the figures of the top five countries we currently hold investments in.

You great point LCJ? If it were a perfect world and everyone was a homo economicus, we'd all be the rich and the world would be a perfect place. Was not the point of the article that U.S. investors are preferring to outside of the U.S. then in the U.S.? It that a good thing or a bad thing? Who knows? Could it mean that the U.S.A. so slowly turned into the U.S.S.A. over the 20th century no one except investors really noticed? Or that the U.S.A. has no way to grow larger and is 'done'?

Cassandra made just the point I was going to. Again.

I invest in foriegn markets because they generally perform somewhat better than US stocks, and I like to diversify. Plus, if they take a dive, well, I will just work for another year. I would imagine that a similar theory holds true for foriegn investors too, that the US is stable but perhaps not super rewarding, while different markets have better returns if higher risk. Depending on where they are from though, they might not have as much built in security in their lives to say "well, if I lose 10K$ out of my savings, it isn't a huge problem at this stage in the game." Comparatively speaking, that is.

"U.S. investors don't look to the U.S. as a good place to invest"

Another possible explanation is that U.S. investors are less risk averse than foreign investors. Wouldn't one expect to find savy, aggressive investors in a country that has led the world in its share of global capital investment (ie. stock & bond markets).

And when foreign-held US debt is converted to ownership?

They'll take massive losses as they attempt to move out of the debt instrument they currently own. Those debt instruments have maturity dates and other repayment terms printed on the front. Those debt instruments will likely not be repurchased by the issuer, and even if they are, the selling presuure would casue the asset prices to fall making the subsequent sales cause heavier losses.

Not only that but some foreign banks use the purchasing of U.S. debt instruments to affect currency exchange rates so that U.S. consumers are more likely to continue to purchase goods made from their countries.

Also, if purchasing our debt instruments were to decrease going forward, it might put pressures on our legislators to reduce deficit spending, cut the size of government [one can dream], and cut tax rates on interest returns which are currently taxed at the dividend/interest-rate-receiver's income tax rate. And many of you handwring and wonder why there's a so-called negative savings rate in the U.S. -- there are tax and inflation disincentives to non-equity investments in our country.

Gil,

If all investors had identical knowledge and entrepreneurs had identical specialization skills, then perhaps you might see a world where investment flows would chase only one country's potential returns on equity at a time.

But, of course, investments are usually long-term and require commitments and, strangely, not everyone has identical knowledge or specialization skills. I know this explanation doesn't fit into your everyone-in-perfect-goose-step-cadence view of the world, though. Perhaps if we had re-education camps we could come close.

Oh, and P.S., in a free market, exchanges are made voluntarily. And while I suspect that that doesn’t allow enough government interference (or, conversely, too much private ownership) for your particular tastes, it is the definition of a free market.

Warren Buffett said in his report to shareholders last year, that the US was just about to go from a net receiver on international equity, to a net payer. I don't think he's stupid with money.

And when foreign-held US debt is converted to ownership?

I thought the bolded text implied the U.S. must be a crappy place to invest if U.S. investors seek their fortunes elsewhere. Contrary to what Chris asks I think the statement "And foreign investment in the U.S. has been an important source of employment growth in recent years." doesn't say that the non-U.S. investor prefer to invest in the U.S. over the non-U.S. investments but reconfirms the previous statement that U.S. investors don't look to the U.S. as a good place to invest.

P.S. Well I s'pose there's no such thing as 'exploitation' in a true free market then? The 'victim' was the exploiter by putting themselves in a crappy position that they had to take the first crappy deal that came along?

Chris,

Because FDI is only a part of total capital flows. We have a net export of FDI but a net import of portfolio flows (purchases of government securities, bonds, equities).

So, this raises two questions:

(1) If US investors are doing better outside the US than foreign investors are doing in the US, why aren't foreign investors investing outside the US instead?

(2) How is it possible that net investment is outside the US (we invest more elsewhere than they invest here) AND for the US to have a trade deficit?

I thought that when the US spends green pieces of paper overseas either in "Investment" or "Trade," those green pieces of paper return to the US as either "Investment" or "Trade." It should all balance out. Isn't that what all the "Capital Account"/"Current Account" stuff is all about?

It doesn't matter in the end. The socialists will always agitate against business. Once again it has nothing to do with the nuts and bolts of the argument. It's about aesthetics. Surprisingly, the GMU professors haven't touched on that subject yet.

Don Boudreaux - have you given any thought to how people's aesthetics inform their economic ideology?

Thank god some papers are locked behind internet walls, otherwise I would be forever reading.

even if the bulk of investment were going to developing countries, the exploitation argument is still silly because it's creating jobs that would otherwise not be there.

The real beauty of the socialist argument is that job creation, job movement and even the stifling of new job creation can always be good or bad depending on circumstances. Same goes for price or cost increases or decreases.

Heads they win, tails you lose

I always find it interesting when those who subscribe to the socialist (or the like) dogma comment on how we are exploiting those who work in emerging economies. If that were the case, wouldn’t the bulk of our investment flow to those emerging economies?