Overseas Investments Boom

July 21, 2005
U.S. manufacturers set record in 2004; 'high-wage paradox' continues.

After three years of stagnant activity, foreign direct investment (FDI) by U.S. manufacturers reached a record level of more than $54 billion in 2004, reports Deloitte Research in a new study. The figure is a 90% increase over the approximately $28 billion invested in 2003.

Several factors have combined to shift investment into a higher gear. "The staggering increase in FDI is partly due to improved profitability of foreign operations and enhanced confidence by manufacturers in global markets," says Kevin Gromley, Deloitte's Global Manufacturing Consulting Practice leader. "In addition, a rise in cross-border [mergers and acquisitions] activity, which has continued to climb since 2002, is fueling the growth."

The increased FDI by U.S. manufacturers spanned many industries in 2004, including chemicals; computer and electronic products; primary and fabricated metals; and transportation equipment. FDI declined in several sectors, including industrial machinery.

The Deloitte report, "Growing the Global Corporation: Global Investment Trends of U.S. Manufacturers," also points to the continuation of a "high-wage paradox" that was identified in previous reports. Foreign direct investment held steady at about $22 billion per year from 1999 to 2003 in higher-wage, developed countries in Western Europe, North America and Asia-Pacific, while it declined in fast-growing, low-wage economies such as China and India.

The share of FDI going to high-wage markets was nearly 81% in 2003, up from 61% in 2000, according to Deloitte. By contrast, U.S. manufacturing investment into India was just over $50 million in 2003, down 80% from 1999.

Deloitte suggests that the U.S. preference for high-wage countries points to firms focused on growth rather than cost-cutting. However, that trend needs to change, says Deloitte's Peter Koudal, director of global manufacturing research. "U.S. manufacturers may find it more difficult to manage profitable operations in these emerging countries, but if this trend continues, we believe they will lose their competitive position in rapidly emerging global manufacturing powerhouses like India and China."

The report says China will be the primary overseas destination in the next three years for U.S. manufacturing multinationals for marketing/sales operations; sourcing; manufacturing; and engineering/R&D. This includes direct investments as well as partnering.

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