Foreign Capital: Friend or Foe?

by William H. Peterson

Morning. You get ready for another workday. You hear the news on your Sony TV as you wash up with a bar of Dove soap. You put on your Brooks Brothers suit or an outfit from Bloomingdale's. Soon you drive to work in your Honda equipped with Bridgestone tires.

At work you call up a customer on a Northern Telecom phone system after consulting a spreadsheet on your Sharp terminal. For a mid-morning snack you nibble on some Keebler cookies, paying for it with cash from the First American Bank. On your lunch-hour you buy a sweater at a Benetton store.

Sometimes these brand names have a nice American ring to them -- Keebler, Bloomingdale's, Dove, for example. Other times the brands are often recognized as distinctly foreign -- say, Sony, Honda, Bridgestone.

But in every instance all these brands are not only foreign-owned, they all have substantial American operations. They reflect foreign capital invested here. Is that bad? Some people think so, and they mean to do something about it. That something is called protectionism.

Look at First American Bankshares, for example. It is a $10 billion bank holding company with 5,700 employees in 280 branches in New York, Virginia, Maryland, Georgia, Florida, Tennessee, and the District of Columbia. Some critics note that, despite its name, First American's owners are not Americans but Arabs. The company was purchased in 1982 with "petrodollars" by private investors in Kuwait, Abu Dhabi, and United Arab Emirates.

Too, while all of the above brands are marketed extensively in America, critics say, darkly, marketing control resides overseas. For instance, Benetton stores are Italianowned and feature knitwear made in Italy.

To be sure, some of those brands are manufactured in America -- i.e., they wear the label, "Made in the U.S.A." But manufacturing control lies elsewhere, say the critics. In their eyes the label is almost as deceiving as the pre-World War II label sported by some Japanese imports. Then "MADE IN USA" referred to a Japanese industrial city, Usa, whose letters neatly corresponded with the acronym for the United States of America.

Northern Telecom, to further illustrate, is a $5 billion company with 15 manufacturing plants and five research facilities in the U.S., but its headquarters are in Canada. Dove soap is manufactured in a Baltimore factory owned by Unilever, a giant British-Dutch consumer-good conglomerate with such other brands as Pepsodent, Lifebuoy, and All. Your Sony TV was assembled in Southern California, your Sharp terminal in Tennessee, your Honda in Ohio.

Americans, be wary of this development, of this internationalization of capital, caution the critics.

Of recent foreign ownership, too: Campeau, a Canadian retailer, just purchased Bloomingdale's, and not long ago Marks & Spencer, a British merchandiser, bought Brooks Brothers. Bridgestone of Japan took over Firestone Tire and Rubber for a stunning $2.8 billion in 1987. So the critics vex Congress with the questions: Where is the control? Who is in control?

In addition, with the fall of the American dollar, Japanese and other investors have stepped up the purchase of many resort and other properties in Hawaii as well as office buildings and other real estate in large American cities such as Seattle, San Francisco, Los Angeles, Denver, Houston, Chicago, Atlanta, New York, Boston, and Washington, D.C.

What is more, by 1990 seven Japanese auto companies will have established American "transplants" to assemble cars in California, Illinois, Ohio, Michigan, Kentucky, and Tennessee, with a horde of Japanese auto parts and equipment producers following in their wake with American manufacturing facilities. By 1992 Detroit estimates that 1.5 million vehicles will be rolling off the assembly lines of these "transplants" each year.

So Americans, proclaim critics, hold out, stand fast against this "invasion" of America by foreign capital -- by, what they really mean, the foreign owners of that capital. They look to Congress to pass laws impeding these "outsiders," who, as the critics see it, slowly but surely are taking over the American economy.

Typical of these critics are Martin and Susan Tolchin, authors of Buying into America: How Foreign Money is Changing the Face of Our Nation (Times Books, 400 pp., $19.95). Martin Tolchin is a correspondent with The New York Times; Susan Tolchin is a professor of public administration at George Washington University. Their persuasion is further revealed in the title of their previous book, Dismantling America: The Rush to Deregulate.

In their latest book, they tell us that, sure, foreign "takeovers" may be completely legal but it is being accomplished "with the stealth and anonymity of illegal aliens." Accordingly they ask the American people to stop, look, and listen.

Well, all right, listen to their arguments. Among them are...

Tolchin Argument No. 1: They complain, among other things, that U.S. laws discriminate against American companies in favor of foreign investors. They cite the case of Citicorp being shut out from buying a California bank, only to see it sold to a Tokyo bank.

Tolchin Argument No. 2: The authors wonder about the wisdom of states competing for foreign capital, putting up millions of dollars in tax abatements and other incentives. They ask: Don't those incentives amount to U.S. taxpayers subsidizing foreign investments and acquisitions?

Tolchin Argument No. 3: The Tolchins also question whether some industries are so vital to our national security or industrial strength that the U.S. must maintain a controlling interest in them. They cite such fields as banking, transportation, communications, semiconductors, machine tools, and biotechnology.

Tolchin Argument No. 4: Again, with the Japanese, Canadians, British, Arabs, and other foreigners increasingly becoming holders of prime commercial and residential real estate, the Tolchins ask: Are we becoming a nation of tenants?

And Tolchin Argument No. 5: They also ask if it is really protectionist to demand a quid pro quo for foreign access to our markets by having our foreign trading partners end their restrictive practices on American trade and investments abroad. Reciprocity, they claim, is the name of the game: Foreigners, you open your markets, and we'll open ours.

Foreigners. Aliens. Outsiders. People of other lands, other cultures, other races, subject to other governments, increasingly taking charge of our economic affairs.

What we witness, I think, is xenophobia: that unreasoning fear of something or someone foreign -- here in its latest form: capital xenophobia, the fear that many critics attach to foreign capital invested in America.

The xenophobes may concede -- but not always -- the urgency of capital as an indispensable tool in modern-day production, as a catalyst in creating jobs and industrial progress; but when that capital originates in other countries, as noted above, ugh! Disadvantages outweigh advantages.

But do they?

Let me try to answer those five Tolchin arguments one by one.

As to the first Tolchin argument on U.S. laws discriminating against interstate banking mergers and acquisitions in favor of foreign investors -- yes, the Sherman Antitrust Act of 1890 and the Glass-Steagall Banking Reform Act of 1933 do inhibit bank expansion across state lines. The inhibition may be breaking down today but it is still relatively easier for a foreign bank to buy an American bank than for an American bank to buy a bank in another state.

So what? This argument has nothing to do with foreign capital; it has to do with our competition-inhibiting antitrust and other laws. True enough, Citicorp was accordingly precluded from bidding for the California bank. So much the worse for competition -- a perennial antitrust confusion, I submit, over size and numbers in relation to competition.

To illustrate: Britain has, essentially, but five commercial banks; the U.S. has some 13,500. But does this contrast mean banking is really any less competitive in Britain? Hardly, with the crucial factor of freedom of entry ever determining the vigor of competition. In any event, the fault for foreign bank investment favoritism here stems from Washington and not Tokyo or Zurich.

This line of rebuttal applies to the second Tolchin argument on state laws favoring foreign investors via tax abatements and other incentives. For again the problem lies not with foreign capital but with those states courting and subsidizing overseas investors at the expense of firms and all other taxpayers domiciled in those respective states.

Still, without defending those states, I can see how they rationalize, how they subsidize new capital knowingly, how they perceive a trade-off. What they lose, these states reason, they more than gain through the acquisition of more jobs, greater development, higher realty values and other tax bases -- so that, if they are right, ultimate tax revenues greater than immediate tax losses accrue to the states involved.

The third Tolchin argument raises the flag of national security and industrial strength, citing certain industries and seeking American control. But the authors seem to get mixed up over control, location, and consumer sovereignty. Any entrepreneur, foreign or domestic, setting up business in the U.S. has to meet all local, state, and Federal laws, licenses, and other regulations, including local, state, and Federal taxes, with any tax forgiveness expiring in a matter of years. In brief, legal control, insofar as a foreign affiliate here is concerned, is entirely American.

Moreover, there is in a sense a larger control confronting the foreign entrepreneur and investor. He must still, inescapably, satisfy the consumer, must still meet competition from all comers, with the consumer having the final say, with the ultimate control coming through King and Queen Customer's life-and-death power to confer profits or impose losses.

Thus, for example, Japanese managerial mystique may be vaunted but not invincible. As pointed out by The Wall Street Journal of June 23, 1988, for example, one decade after its celebrated takeover of an American firm, Sanyo Electric has seen its payroll in its Forrest City, Arkansas, plant slump from 2,000 to 350, its three dozen or so Japanese executives becoming but 10, its nine TV assembly lines slimming down to two, as it shifts production to Mexican plants. Productivity and quality have simply not been forthcoming. Sanyo has run into, apparently, serious union and other communications problems.

All of which has been swiftly telegraphed to Sanyo by the American consumer, the final controller.

Even so, the transcendency of consumer control over socalled foreign control should not blind us to the fact that overseas investments here can have benefits beyond that of additional capital. Take, for instance, New United Motor Manufacturing Inc., NUMMI, the successful five-year old joint venture of General Motors and Toyota, in Fremont, California. Toyota sought low-cost entry into the U.S. auto market; GM sought new technological and management skills. The marriage worked, and the sovereign consumer is the beneficiary.

What of the fourth argument of the Tolchins as seen in their plaintive if not disingenuous query: Are we becoming a nation of tenants? The query seems odd in light of the fact that most Americans -- practically two out of every three -- own their homes. And practically every firm in the Fortune 1,000 is a commercial tenant in one degree or another.

So I ask: Landlord or tenant, to own or to rent, what's the better option? It all depends, let me respond, on the firm or the individual -- his age, income, credit rating, etc. -- and on the general situation, including location availability, the height of mortgage interest rates, and so on.

In any event, landlords, foreign or domestic, are hardly privileged. They must compete. They can face onerous property taxes, bewildering zoning restrictions, confiscatory laws. Some landlords, for example, face local rent control laws stretching from New York City to Los Angeles, although I concede the foreign realty investor usually, and most understandably, avoids rent-controlled properties.

And from the viewpoint of the American tenant, commercial or residential, does it follow that his foreign landlord is any less competitive or any less concerned for tenant welfare than his domestic counterpart? The Tolchin query, in short, does not appear germane. Again, it reflects xenophobia.

The fifth Tolchin argument on reciprocity also does not seem overly germane. For all too often such reciprocity becomes a cloak for continuing a policy of protectionism. To reiterate: Says Congress, bolstered by a host of protectionminded industries, unions, and other lobbyists, to foreign investors: If you don't open your market for our wares and investments, we'll not open ours.

But who's hurting whom? On whose side is Congress? What of those Americans who wish to sell -- and of their constitutional right to sell -- their property, shares, firm, patent, invention, etc. to foreign investors? What of American consumers who benefit, inexorably, from such general optimization of capital investment?

I contend that protectionism betrays more than xenophobia, that, whatever its form -- tariffs, quotas, licenses, embargoes, exchange controls, etc. -- it reflects a hidden agenda of...

• constricting consumer choice,
• infringing on constitutional rights of life, liberty, and property,
• jacking up domestic prices,
• suppressing competition,
• rejecting foreign technology,
• excluding foreign management skills,
• setting back job creation,
• restraining economic growth,
• impeding peaceful international cooperation, and
• rebuffing constructive people-to-people division of labor.

All of which would otherwise flow from freedom of trade and investment.

True, ideally, free trade and investment ought to be worldwide. But we don't live in an ideal world. We, critics included, should face up to the fact that imports finance exports, that protectionism breeds protectionism, that economic retaliation can even breed military reaction.

In this light, the massive Smoot-Hawley Tariff of 1930 went beyond, quite conceivably, triggering and exacerbating the Great Depression; it contributed to the frictions ultimately helping to ignite World War II.

To paraphrase 19th century French economist Frederic Bastiat: When goods -- and capital -- can't cross frontiers, armies will. Unilateral free trade and investment are still better than no free trade and investment.

Besides, the Tolchins and other critics of foreign investment in America are late in the game. For not so long ago Americans were being warned that our uncaring multinational companies were shifting, heartlessly, production and jobs to foreign low-wage lands.

Indeed, in 1964 French journalist Jean-Jacques ServanSchreiber made an international splash with his own xenophobic book, The American Challenge, describing in dire terms how IBM, General Motors, Ford, Exxon, General Electric, Dow, Dupont, Kodak, Coca Cola, etc. were taking over the world economy. Now the shoe of challenge, it seems, is on the other foot -- ours.

But instead of deploring foreign capital and threatening to shunt it aside, we should welcome it with open arms. The accompanying table shows wholesome trends: Three million Americans -- that number up by almost half since just 1980 -- are working for better than 10,000 foreign affiliates on our shores, with the number of such affiliates growing by also almost half in the same period.

FOREIGN INVESTMENT IN U.S.

                                        1980    1987  hange
                                               (Est.)  1980-87
Number of foreign company affiliates    6,822  10,143    48.7
Gross value of plt. and eq. (billions) $127.8  $349.2   173.2
Employees (millions)                    2.034   3.017    48.3
Source: U.S. Commerce Dept., Washington Post

So to the critics of foreign capital, I say that capital whatever its source, is our friend, not our foe. By boosting productivity, capital greatly helps meet human needs. It represents, in the broadest sense, savings turned into vital tools.

These tools of production are inevitably risky, ever subject to the vagaries of technology, politics, demographics, popular taste, caprices of history, acts of nature such as earthquakes, and so on. And, like everybody else, we Americans need all the tools, all the capital, we can get.

That capital is not free. It is not permanent. It flows out as well as in. It must be nurtured. It is inherently sensitive, timid, ever tentative, ever ambivalent in that it is at once risk-tolerant and risk-averse. It can be sullied and bullied, yes, but not for long. It can flee to safer climes, as witness capital flight for decades from much of Latin America, from much of Africa, Asia, and the rest of the world.

That flight accounts, in part, for the greatness, the integrity of tiny Switzerland, home of secret bank accounts, haven for politically-hounded "hot money," guardian of, for example, Jewish capital spirited out of Hitler's Germany.

Virtue has its rewards: The high-saving, capital-rich, free-enterprise, historically neutral Swiss, in terms of per capita income, are the richest people in the world. (Who, incidentally, celebrate their 700th anniversary as a democracy in 1991.) Capital and an amazing culture have bestowed peace and prosperity on the Swiss for centuries.

Too, capital is in a sense nationless, nervous, suspicious, mobile -- ever ready, if need be, to move. It stays as long as it is treated with reasonable security and respect, as long as it earns a competitive yield. Indeed, yield, productivity, gain, is its raison d'etre -- gain for both the investor and the consumer. The rule is...

Capital ever seeks the greatest yield consistent with the least risk.

Lucky for generations of Americans, the United States has long been a magnet for foreign capital as it has been for immigrants from all over the world. We are a country of immigrant people and immigrant capital. The question is: Will we continue to be? (The new immigration law should give us pause.) Or, will critics continue to harp on capital's ethnic or overseas origins and eventually kill this golden goose?

Consider. From colonial times to the present hour, investors in other lands -- in Canada, Latin America, Britain, France, Germany, Italy, the Netherlands, Belgium, Spain, Switzerland, Scandinavia, Eastern Europe, and, more recently, Japan, other Pacific Basin countries, and here and there in the rest of the world -- have bet on America, have risked their savings here, have spurred job creation here, have helped America grow and Americans prosper. As a 1930s pop song put it: Who could ask for anything more?