There is probably no single elixir to reverse the declining long‐term U.S. growth rate. Getting significantly more mileage out of our labor and capital likely will require a variety of reforms. Among them should be measures that expand the potential for economies of scale, such as deepening global economic integration through harmonization of regulations and standards, removing tariffs on industrial inputs and final goods, and eliminating barriers to services trade. Two “mega‐regional” trade negotiations that could yield that outcome are currently in progress.
But the priority developed in this essay is for policymakers to focus on making the United States a more attractive location for foreign direct investment. The United States is competing with the rest of the world for investment in domestic value‐added activities, and foreign providers of that capital have demonstrated the capacity to raise averages across a variety of economic metrics, including GDP.
According to a study published by the Organization for International Investment, U.S. subsidiaries of foreign headquartered companies (or U.S. “affiliates”) represent less than 0.5 percent of U.S. companies with payrolls, but punch well above their weight, accounting for 5.9 percent of private‐sector value added; 5.4 percent of private‐sector employment; 11.7 percent of new private‐sector, non‐residential capital investment; and 15.2 percent of private‐sector research and development spending. These affiliates earn 48.7 percent more revenue from their fixed capital and compensate their employees at a 22.0 percent premium compared to their respective U.S. private sector averages.
Between 2001 and 2010, U.S. private‐sector value added increased by 39 percent; for affiliates the increase was 56 percent. In the manufacturing sector, affiliates proved even more consequential: while overall U.S. manufacturing‐sector value added increased by 21 percent over the decade, it rose by 53 percent for manufacturing‐sector affiliates. Affiliates increased their stock of U.S. property, plant, and equipment by 46 percent over the decade — double the overall private‐sector rate of increase. The list of superlatives goes on.
Affiliates have raised average U.S. economic performance by boosting output, sales revenue, exports, employment, and compensation. They have also demonstrated stronger than average long‐term commitments to operating in the United States with increasing levels of capital investment, reinvested profits, research and development spending, and cultivation of relationships with U.S. suppliers. Moreover, U.S. companies have benefitted from exposure to the best practices employed by affiliates, many of which are world‐class companies that have stood out in their home markets and have what it takes to succeed abroad.
Competitive jolts to established domestic firms, technology spillovers, and the hybridization and evolution of ideas have all been positive consequences of the infusion of foreign direct investment. One can only wonder whether the Detroit automakers would still be producing Ford Pintos, AMC Pacers, and Chrysler K‐Cars had foreign producers not begun investing in the United States in the early 1980s, helping to reinvigorate a domestic industry that had fallen asleep at the wheel.
No country has ever been a stronger magnet for FDI than the United States. Valued at $4.9 trillion in 2013, the U.S. stock of inward FDI accounted for 19 percent of the world total — more than triple the share of the next largest single country destination. However, the U.S. share was a whopping 39 percent only 15 years ago. Since then, annual inflows have failed to establish an upward trend.
To some extent, this development reflects inevitable demographic changes. Strong economic growth over the past 15 years in developing countries has followed periods of political stability and economic liberalization, creating new opportunities and inspiring greater confidence that these formerly high‐risk bets are desirable places to invest in productive activities. However, another important reason for the declining U.S. share is the deteriorating U.S. investment climate.
Companies looking to build or buy production facilities, research centers, and biotechnology laboratories consider a multitude of factors, including access to skilled workers and essential material inputs; ease of customs procedures; the reliability of transportation infrastructure; legal and business transparency; and the burdens of regulatory compliance and taxes, to name some. According to several reputable business‐perception indices, the United States has slipped considerably over the past decade in a variety of these areas.
Out of 142 countries assessed in the World Economic Forum’s Global Competitiveness Index, the United States ranks 24th on the quality of total infrastructure; 50th on perceptions that crony capitalism is a problem; 58th on the burden of government regulations; 58th on customs procedures; 63rd on the extent and effect of taxation. Meanwhile, ongoing uncertainty over energy, immigration, trade, tax, and regulatory policies continues to deter investment, while encouraging U.S. companies to offshore operations that might otherwise be performed in the United States.
In a recent paper, Harvard Business School professors Michael E. Porter and Jan Rivkin wrote: