Foreign companies have been on a buying spree in American markets. But, is accepting foreign investment into the U.S. economy a bad thing?
Every day in the media you hear how bad the U.S. economy is – whether it’s a recession, slowdown, etc [1]. This negative perception that is accentuated by the one-sided news coverage has created fears about the U.S. economy, and these fears are being blamed for the drop in stock values [2].
On the other hand, stock prices of American companies might be undervalued – and foreign entities are viewing this as a prime buying opportunity.
“So far foreigners buying chunks of Wall Street has not triggered the same political uproar as a Dubai company’s ill-fated effort to take over operations of U.S. ports, perhaps because politicians know the alternative could be painful,” NBC correspondent Lisa Myers said on the January 16 “NBC Nightly News.”
Turning foreign investment away would have dire consequences in the short-term, as CNBC’s Erin Burnett pointed out.
“[T]hey could lay off a lot more people, lose a lot more money, put the financial system at risk; or they could get the money being offered by Asians and Arabs,” Burnett said in the report. “Right now that's by far, of the two, the better choice.”
Even though Burnett showed the reward outweighed the risk, “Nightly News” still trotted out Alan Tonelson of the United States Business and Industrial Council [3], a “trade and manufacturing policy” think tank that advocates a protectionist trade policy according to its Web site.
“We should all be worried at the prospect that foreign governments are going to gain even more influence than they already enjoy over the U.S. economy and the U.S. government,” Tonelson said.
According to NBC, there has been a lot of foreign investment in U.S. financial companies, particularly companies that were hit hard by the rash of bad debt plaguing the housing market.
“The influx of money from everyone from a Saudi prince to foreign governments has been staggering: Citigroup, $20 billion, including funds from governments of Singapore, Kuwait and Abu Dhabi; Merrill Lynch, $12.8 billion, some from Korea, Kuwait and Singapore; Morgan Stanley, $5 billion from China. Experts say the banks had little choice,” Myers said.
The report did not explain why it makes sense for foreign entities to invest in the United States. It’s not to have a controlling stake in the U.S. economy, but because the American free enterprise system gives them the benefit to make the most money.
“The Chinese aren’t investing in America, the Arabs aren’t investing in America because they like us,” said George Freidman, founder of Strategic Forecasting, Inc. [4], a private intelligence company, on the Dec. 17, 2007, Dennis Prager radio program [5]. “They are making very careful choices about where they’re likely to make the most money by investing. And what the Chinese are saying is, ‘I don’t want to invest in China. I don’t care if it’s got 10, 12 percent growth. This is a dangerous climate. If I want to put my money into long-term growth, I’m going to do it in the United States.’ And the Arabs are saying the same thing.”
According to Freidman, the U.S. economy has an advantage to lure foreign investment because it can handle large infusions of investment better than any economy in the world, including the European economy.
“The problem is, there is no economy large enough for them to metabolize,” Freidman said. “There are no markets as large as American markets. So for them to sell it off, you then have to ask, ‘Where are they going to put it?’ And the real issue is – let’s say they found ways to stuff it into Europe. Well, they’d force interest rates down in Europe and interest rates would come pouring back into the United States.”
On January 17, Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee [6] and explained despite the perception of doom and gloom about the American economy, it has shown time after time it has the ability to overcome these speed bumps.
“But, over longer periods of time, the U.S. economy has shown remarkable and consistent growth particularly in the last decade or so,” Bernanke said. “Productivity growth has been outstripping other industrial countries quite consistently.”