All Commentary
Friday, March 1, 1991

Foreign Investment Helps Americans

Americans’ fear of foreigners owning U.S. based economic wealth has taken on epidemic proportions. Never mind that past periods of rapid U.S. economic growth have been accompanied by foreign investors’ active participation in the economy, the fear that “they” will own “us” is now endemic to the U.S. economic culture. Not surprisingly, political and media entrepreneurs have trotted out various proposals for government to restrict foreigners’ access to “our” wealth.

Support for these proposals is usually grounded in nationalistic rhetoric. That the United States lacks such restrictions, for example, is characterized as unilateral economic disarmament. Foreign investors, in turn, are equated with foreign economic armies. All in all, the perspective on foreign investment is one of foreign investors re-slicing the U.S. economic pie in their favor and against Americans.

For the most part, opponents of foreign investment restrictions leave this re-slicing perspective unchallenged. Instead, they contend that Americans’ current concern over foreign investment is much ado about nothing, because the fraction of foreign-owned assets in the United States remains small despite the substantial new investment of recent years.

While the opponents’ statistics are correct, their tacit acceptance of American losses needlessly cedes the debate’s higher ground. In a debate charged with nationalistic fervor, countenancing foreigners looting the American economy as long as the booty is within “manageable proportions” cedes the outcome before it begins.

This weak-kneed posture is unnecessary. Rather than looting the economy, foreign investors increase Americans’ economic pie. Restricting foreign investment would diminish the pie because it would weaken a linchpin in the institution of private property—namely, the right to transfer ownership that resides with individual owners. Leaving this right unencumbered increases the likelihood of ownership of productive resources flowing to those who use resources most productively. While foreign investment does not provide Americans with free lunches, it makes for better helpings.

A Foreign Investment Scenario

Suppose an American, Mr. Brown, decides to sell his chain of XYZ Hardware Stores and retire to Florida. Two suitors wish to buy XYZ, an American firm and a Japanese firm. The Japanese make the higher bid. In choosing to sell XYZ, Mr. Brown obviously believes that he is better off. More important, by selling to the Japanese, he is better off compared with being limited to the American firm’s lower bid.

Note that Mr. Brown is not selling “our” hardware stores. He is selling h/s stores. Even though the Japanese will receive XYZ’s future profits, this in no way disadvantages “us.” Prior to the sale, XYZ’s profits were Mr. Brown’s, not “ours.” Tax or other obligations attached to ownership of XYZ are not nullified by the sale; such obligations become the responsibility of the Japanese.

The Japanese are able to offer the higher bid for XYZ only to the extent XYZ will be more profitable under their ownership compared to alternative ownership. There are two possible sources for this increased profitability: the Japanese offer a more attractive product and/or they decrease XYZ’s costs. Mr. Brown participates in this increased profitability by accepting the Japanese bid. So do the Japanese, their portion providing them the incentive to buy out Mr. Brown.

Less apparent to many, perhaps, is that other Americans also share in the expansion of the economic pie. If the Japanese offer more attractive retailing services to American consumers, these consumers are obviously better off. On the other hand, a decline in XYZ’s costs also raises Americans’ living standards. Since costs are lower, if the Japanese keep XYZ’s output at its pre-acquisition level, fewer inputs will be required. Because the inputs released from XYZ necessarily have alternative production capabilities, Americans will be able to enjoy the original hardware store output plus additional amounts of other goods and services.

The improvements foreign investors confer on Americans are similar to what happens with technological innovation. New technologies also lead to better products and/or lower costs of producing existing products. Interestingly, it is not unusual for entrepreneurs who adopt new technologies to encounter “sky is falling” resistance similar to that engendered by foreign investment. The difference is that anti-technology crisis mongers assert that labor-saving machines rather than foreign investors swallow up economic wealth.

Whither Freedom?

A curious irony attaches to foreign investment restrictions. While their ostensible purpose is to increase “national independence,” their end result is to reduce individual freedom. Abrogating Mr. Brown’s ability to sell his hardware store to whom he pleases, on terms that are suitable to him, is equivalent to confiscating part of Mr. Brown’s property.

Private property rights have been the bedrock of the American economic and political system. They are the reason thousands of Mr. Browns worked and saved to establish productive enterprises. To take away these rights, even partially, insures that Americans have a smaller economic pie. It is hard to conceive how “our” interest is served by less freedom and lower living standards.

  • T. Norman Van Cott, professor of economics, received his Ph.D. from the University of Washington in 1969. Before joining Ball State in 1977, he taught at University of New Mexico (1968-1972) and West Georgia College (1972-1977). He was the department chairperson from 1985 to 1999. His fields of interest include microeconomic theory, public finance, and international economics. Van Cott's current research is the economics of constitutions.