Foreign greenfield investment in the US continues to collapse

The United States has a poor track record of attracting global investors, with foreign investment in new facilities declining sharply over the past few decades.

The value of greenfield foreign direct investment (FDI) relative to the size of the U.S. 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 expanded facilities.

Although foreign investment in the United States recovered in 2021, the situation is not as good as it seems, according to Ian Clay, research fellow at ITIF.

“The share of FDI directed to new or expanded facilities in the United States continues to decline,” he wrote in a recent report. “Foreign companies seem willing to buy existing assets of American companies, but are very reluctant to build new facilities or expand existing ones in the United States.”

In 2021, total green spending was just $3.4 billion, or 0.01 percent of U.S. gross domestic product.

Sluggish investment in new infrastructure, Clay said, belies the notion that the US 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 a sharp decline since 2018. Foreign investment increased to $333.6 billion from $141.4 billion in 2020.

However, acquisitions – purchases of established US businesses – were largely responsible for this recovery. The industries that benefited the most from foreign acquisitions last year were pharmaceuticals; Property; and professional, scientific and technical services.

BEA divides FDI into three groups: acquisition, establishment and expansion. Establishment and expansion are considered greenfield costs, which are more desirable.

ITIF says greenfield investments are direct investments in the host economy’s productive capacity. Acquisition, on the other hand, involves only the transfer of ownership to a foreign entity. Therefore, green investments are the most important and attractive for countries.

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

Some observers say the U.S. government is not doing enough to encourage green investment at a time when many global corporations are considering exiting China.

A recent survey by QIMA, a provider of quality control and compliance services, found that efforts by global companies to reduce their dependence on China continue, especially after the 2022 COVID-19-related lockdown imposed by the Chinese regime, which caused serious supply chain disruptions.

However, the United States does not appear to be benefiting from this exodus.

Research and development incentives

According to the ITIF, greenfield FDI flows to the United States are not recovering because they are highly dependent on R&D incentives and other generous capital expenditure policies.

“Incentives for R&D relative to other countries have really taken a hit in recent decades,” Clay told The Epoch Times.

He added that the United States is below the Organization for Economic Co-operation and Development (OECD) average in government tax breaks for business research and development.

“On top of that, our capital allowances are much less generous compared to other countries competing for FDI than in previous decades.”

A capital allowance is the amount of capital investment costs that a company can deduct from its earnings through depreciation.

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

A recent study by the Tax Foundation (pdf) shows that the United States ranks 21st in average wealth among the 38 OECD members. The US tax code allows businesses to recoup an average of 67.7 percent of capital investment costs, compared to the OECD average of 70.7 percent. Specifically, the United States ranks 32nd in capital allowances for buildings and 34th in intangible assets.

It ranks No. 3 in terms of capital allowances for machinery, thanks to the full expensing provision of the 2017 tax reform. However, the provision will begin to phase 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 percent investment tax credit for investment in chip manufacturing included in the bill will encourage reallocation to the United States.

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

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Emel Akan writes about business and economics. She previously worked in the financial sector as an investment banker at JPMorgan. She holds an MBA from Georgetown University.

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