How well do foreign firms compete in the United States?

Abstract

F oreign direct investment (FDI) in the United States has grown dramatically during the last two decades. The average annual growth rate amounted to 22 percent during the 1974-80 period and 16.7 percent during 1980-86. By the end of 1987, foreign firms, by various measures, controlled 3-4 percent of the U.S. economy as a whole and 7-10 percent of the manufacturing sector. By 1988, foreign firms controlled 15-20 percent of the U.S. banking sector. The position of the foreign direct investment in the U.S. reached $400 billion at the end of 1989. FDI in the United States is evidenced by U.S. affiliates engaged in a variety of manufacturing and service activities. The rapid growth of FDI in the U.S. in recent years stems from a number of causes: the relative U.S. political and economic stability, the sheer size and strength of the U.S. economy, and concerns about possible increased U.S. protectionism. Increased corporate restructuring activities in the 1980s also made more takeover targets available and attractive for foreign firms. Interest rate differences, exchange rate fluctuations, and incentives provided by state governments also motivated the flow of FDI into the U.S. Theories of foreign direct investment have suggested that subsidiaries of MNCs can manufacture successfully in foreign markets only if they possess ownership advantages. These ownership advantages must be sufficient to compensate for the costs of setting up and operating a foreign value-adding operation beyond those faced by indigenous producers. The foreign firm may have some firm-specific knowledge or assets that enable it simply to do a better job of managing. The apparently superior production-management skills of Japanese auto manufacturers are an example. Alternatively, the U.S. affiliate may be of greater value to the foreign firm because it has a potential role in the foreign firm's global strategy. For example, if there are strong advantages to vertical integration, foreign suppliers of upstream inputs may value downstream plants in the U.S. more than their rivals do. Foreign firms may also need to produce in the U.S. to appropriate the gains from their activities at home, such as R&D. Foreign-owned firms actually fail less often in the United States than do domestic firms.