The Offshore Issue-Foreign Direct Investment

By Ketaki Sood and Larta Staff

July 8, 2002

The media's recent preoccupation with domestic corporate affairs threatens to obscure the increasingly critical role foreign direct investment (FDI) plays in the U.S. economy. Foreign direct investment has softened the effects of the recent recession, and will continue to gain significance as U.S. financial institutions come under further scrutiny. Although the tech downturn, the weakening of the dollar, and the impact of September 11 have affected investor confidence worldwide, American public policy could help increase the amount of foreign direct investment currently available to U.S. companies.

As one of the nation's leading technology-producing states, California has features that make it especially attractive to foreign investors, and will probably survive the recent waning of investor confidence. Even so, a collaborative effort by government policy-makers and the business community could help facilitate communication between local and foreign firms, strengthening California's ability to attract foreign investments, and increasing the likelihood of the positive effects associated with FDI. California has led the nation in the amount of foreign direct investment received, with technology-sector investments increasing significantly over the past decade.

Patterns of foreign investment in California companies have altered dramatically over the last decade, shifting from traditional industries to technology, with investments in telecommunications increasing by 290% between 1990 and 1999. More recent data is pending and will be important to observe.

California's ranking is based on a variety of factors. Foreign firms have several motives to invest in U.S. companies, including the desire for knowledge, skills, and technology that they hope to absorb by locating in regions that might supplement and boost their already existing capabilities. Extensive research has been conducted to investigate the spillover effects of FDI and its role as a channel of knowledge and technology exchange between domestic and foreign firms. The extent of knowledge diffusion and the direction of knowledge transfer are gauged by determining which of the partners is the technology leader, the domestic incumbent, or the foreign entrant. Globally, California is viewed as a tech breeding ground and a leader in the creation and adoption of advanced technologies, making it an exceptionally attractive destination for foreign investment. The State has assumed a position of global technology leader, and multinationals that locate in California aim to absorb and exploit this technological advantage.

Another significant incentive for foreign direct investment is the clustering of tech companies in California, which allows for a unique environment of collaboration and networking within the industry. California companies are aided by a sharing of resources and infrastructure that specifically supports the needs of the industry, and by the availability of partnerships between government, the business community, and educational institutions. Alcacer and Chung of New York University state: "More recent research suggests another motivation for FDI seeking technology. Instead of utilizing capabilities already in hand, firms may expand abroad in search of knowledge and skills." In addition, they observe that "technology differs across locations since technology depends on location-specific factors, such as innovations previously established, education system, and linkages between educational institutions and firms. As a consequence, firms may supplement their existing technologies by expanding internationally to access new knowledge."

Numerous studies have also suggested that knowledge-seeking is more prevalent in R&D-intensive industries, and that California's impressive technological research base and knowledge wealth is another key driver of foreign investment in the U.S. While technological laggards have incentives to locate in R&D-intensive areas like California, recent research shows that even technologically advanced countries like Japan can exploit the research capabilities of the State by tapping into its extensive knowledge resources. In a study of foreign direct investment in the United States by a group of Japanese manufacturing firms, Columbia University economist Lee Branstetter found evidence of the positive effects (for both parties) created by the knowledge flowing between domestic and foreign firms.

Potential benefits to the host economy are therefore also a strong possibility, providing incentive for policy makers to create a legal framework that is conducive to the inflow of such investment. Among the policy recommendations made in the 2002 State New Economy Index for revamping economic development strategies is: "Know your state's function in the global economy. States should target resources to industries and skills in which they have a strong comparative advantage."

Policy makers should recognize and help strengthen those advantages that regions can promote when attracting FDI in order to bolster their state's ability to compete in global markets. Even in tough economic times, the importance of FDI to long-term growth should not be underestimated.

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The Nano Republic Conference 2002 - July 17
The Nano Republic Conference is a one-day Larta event featuring world-class speakers and highlighting California-wide nanotechnology efforts. The Nano Republic Conference will serve as a serious examination of the current state of nanotechnology and focus on its near-term developments and constraints. The Nano Republic Conference will bring together all current industry segments and leaders from industry, academia, labs and the capital markets. Registration for the Nano Republic Conference will give you free admission to the ZONE Club dinner reception and program.
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The ZONE Club - July 17
Immediately following the Nano Republic Conference the ZONE Club will host a dinner/networking event featuring one of the leaders of the venture capital community. Steve Jurvetson, Managing Director, Draper Fisher Jurvetson, will speak on "Nanotechnology: What's Hot, What's Hype, What's Not"
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8-9 More networking, food and drink
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