Foreign Investors Place Less New Money in US

By , Staff writer of The Christian Science Monitor

AS goes western Pennsylvania, so goes the nation. At least when it comes to foreign investment.

During the latter half of the 1980s, this region and the United States saw foreign companies buy up assets and start new companies. Now, that trend has slowed to a crawl. Foreigners, it turns out, are not buying up America.

Time to cheer? Not really. Many economists wish foreigners would buy up more than they are.

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"That's a mixed sign for the US economy," says Ward Connolly, economics professor at Trinity University in San Antonio.

"It's not the kind of a switch we need right now," adds David Wyss, chief financial economist at DRI/McGraw-Hill. "We're looking for more investment." Instead, many corporations are investing outside the US, in such places as eastern Europe and Asia.

Western Pennsylvania illustrates the problem. During the last half of the 1980s, this region added 9 to 12 new foreign-owned firms a year. They tended to be small, sometimes hard-to-find companies. Most of them were involved in manufacturing.

"They might be in the back of someone's garage," says Carl Wiker, a partner at KPMG Peat Marwick's Pittsburgh office. But in three years, these small companies often grow to respectable sizes. In all, the region's foreign-owned firms employ an estimated 13,700 people.

But the pace of new investment has slowed considerably in the 1990s. Instead of a dozen new companies last year, the region only saw four new foreign companies, according to a new report by KPMG Peat Marwick. Only 34 of the 88 foreign firms headquartered here plan to increase employees. Only 16 expect to add space or move to larger premises.

"As foreign investors become more selective, stiffer competition for investment dollars is almost certain," says the report, released Monday. "We must bring community leadership together to further `internationalize' our community."

The investment slump is not limited to Pittsburgh.

After peaking in 1989 at $69 billion, annual capital flows of direct foreign investment have fallen steadily. By 1991, they stood at $12.6 billion, according to the Commerce Department. In the first half of 1992, flows fell further to $2.9 billion - down from $6.8 billion in the same period last year.

There are many reasons for the decline: the global recession, an improving US trade balance, and competition from exciting investment opportunities elsewhere in the world. After such a large increase in the mid-1980s, the growth in foreign investment was bound to slow down, economists say. They expect direct foreign investment to begin inching up next year.

"We'll probably start making a gradual climb back upwards," says Nancy McLernon, director of the Washington, D.C., office of the Organization for International Investment. But "I wouldn't see a tremendous rise all of a sudden."The organization is an educational and advocacy group representing US companies that are foreign-owned.

Mr. Wyss forecasts a 5 to 10 percent increase in foreign direct investment next year.

What is really needed, these economists stress, is enough investment to allow US companies to stay competitive.

"It really doesn't matter to America much who does the investing here," says Michael Adler, international finance professor at the Columbia Business School in New York. "The key question is: Is there enough employment [of resources] for the future?"

Professor Adler says the jump in foreign investment after 1985 was an abnormal blip caused by rapid devaluation of the dollar. That devaluation allowed foreign companies to move into the US at an opportune time.

At the end of 1991, foreign entities still had $361.5 billion more invested directly or indirectly in US assets than US entities had of the world's assets.

"The US should be a capital exporter," Wyss says. "The key fact remains that we don't have enough investment because we don't have enough savings."

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