Foreign Capital: Friend or Foe? W. H. Peterson

9 Foreign Capital: Friend or Foe? by William H. Peterson M orning. 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, Blooming dale's, Dove, for example. Other times the brands are recognized as distinctly foreign say, Sony, Honda, Benetton. But in every instance all these brands are not only foreign-owned, they all have substantial American operations. They reflect foreign cap ital 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 ex ample. 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 Ameri can's owners are not Americans but Arabs. The Dr. Peterson, an adjunct scholar with The Heritage Foun dation, is the Burrows T. and Mabel L. Lundy Professor of the Philosophy of Business at Campbell University, Buies Creek, North Carolina. company was purchased in 1982 with "petro dollars" by private investors in Kuwait, Abu Dhabi, and the United Arab Emirates. Too, while all of the above brands are mar keted extensively in America, critics say darkly, marketing control resides overseas. For instance, Benetton stores are Italian-owned and feature knitwear made in Italy. To be sure, some of those brands are manu factured in America-i. e., they wear the label, "Made in the U.S.A." But manufacturing con trollies 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 corre sponded with the acronym for the United States of America. Northern Telecom, to illustrate further, 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 Pepso dent, 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 Blooming dale's; and not long ago Marks & Spencer, a British merchandiser, bought Brooks Brothers. Bridgestone of Japan took over Firestone Tire 10 THE FREEMAN. JANUARY 1989 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 Ameri can 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 Ten nessee, 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 vehi cles will be rolling off the assembly lines of these "transplants" each year. "Invading America" 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 "out siders," 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 Univer sity. Their persuasion is further revealed in the title of their previous book, Dismantling Amer ica: The Rush to Deregulate. In their latest book, they tell us that, sure, foreign "takeovers" may be completely legal, but they are being accomplished "with the stealth and anonymity of illegal aliens." Ac cordingly the Tolchins ask the American people to stop, look, and listen. Well, all right, listen to their arguments. Among these 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' s being shut out from buying a California bank, only to see it sold to a Tokyo bank.

Tolchin Argument No.2: The authors won der 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. taxpay ers' subsidizing foreign investments and acqui sitions? 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, trans portation, 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 for eign-here in its latest form: capital xenopho bia, the fear that many critics attach to foreign capital invested in America. The xenophobes may concede-but not al ways-the urgency of capital as an indispens able tool in modem-day production, as a cata lyst 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 ar guments one by one. As to the first Tolchin argument on U.S. laws discriminating against interstate banking mergers and acquisitions in favor of foreign in vestors-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 com petition-inhibiting antitrust and other laws. True enough, Citicorp was accordingly pre cluded 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 de termining the vigor of competition. In any event, the blame for foreign bank investment favoritism here lies in Washington and not To kyo or Zurich. This line of rebuttal applies to the second Tolchin argument on state laws favoring for eign investors via tax abatements and other in centives. For again, the problem lies not with foreign capital, but with those states courting and subsidizing overseas investors at the ex pense of firms and all other taxpayers domiciled within. Still, without defending them, 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, ulti mate tax revenues greater than immediate tax losses accrue.

The third Tolchin argument raises the flag of national security and industrial strength, citing certain industries and seeking American conFOREIGN CAPITAL: FRIEND OR FOE? 11 trol. 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 reg ulations, 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 en tirely American. Meeting Consumer Demand Moreover, there is in a sense a larger control confronting the foreign entrepreneur and inves tor. He must still, inescapably, satisfy the con sumer, 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 cel ebrated 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 ten, 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 apparently run into 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 con trol over so-called 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 six-year-old joint venture of General Motors and Toyota, in Fremont, California. Toyota sought low-cost entry into the U.S. auto mar ket; GM sought new technological and mana gerial skills. The marriage worked, and the sov ereign consumer is the beneficiary.

12 THE FREEMAN. JANUARY 1989 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 "When goodsand capital~an't cross frontiers, armies will." three-own their homes. Yet practically every firm in the Fortune 1,000 is a commercial ten ant 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 availabil ity, 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, bewil dering 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 understand ably, avoids rent-controlled properties. And from the viewpoint of the American ten ant, 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 re flects xenophobia. The fifth Tolchin argument on reciprocity also does not seem overly germane. For all too often such reciprocity becomes a cloak for con tinuing a policy of protectionism. To reiterate: Says Congress, bolstered by a host of protec tion-minded industries, unions, and other lob byists, 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, and so forth to foreign investors? What of American consumers who benefit, inexora bly, 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-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 cooper ation, and • rebuffing constructive peopleto-people division of labor. All of which would otherwise flow from free dom 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 eco nomic retaliation can even breed military reac tion.

In this light, the massive Smoot-Hawley Tar iff of 1930 went beyond, quite conceivably, triggering and exacerbating the Great Depres sion; it contributed to the frictions ultimately helping to ignite World War II. To paraphrase nineteenth-century French economist Frederic Bastiat: When goodsand capital---can't cross frontiers, armies will. Uni lateral free trade and investment are still better than no free trade and investment. Besides, the Tolchins and other critics of for eign investment in America are late in the game. For, not so long ago Americans were being warned that our uncaring multinational companies were heartlessly shifting, production and jobs to foreign low-wage lands. Indeed, in 1964 French journalist Jean Jacques Servan-Schreiber made an international splash with his own xenophobic book, The American Challenge, describing in dire terms how IBM, General Motors, Ford, Exxon, Gen eral Electric, Dow, DuPont, Kodak, Coca Cola, and others 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 wel come it with open arms. The accompanying ta ble 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 also growing by al most half in the same period. FOREIGN INVESTMENT IN U.S. 1987 % Change 1980 (Est.) 1980-87 Source: U.S. Commerce Dept., Washington Post Number of foreign company affiliates Gross value of plant and equipment (billions, current dollars) Employees (millions) 6,822 10,143 $127.8 $349.2 2.034 3.017 48.7 173.2 48.3 FOREIGN CAPITAL: FRIEND OR FOE? 13 That flight accounts, in part, for the great ness, the integrity of tiny Switzerland, home of secret bank accounts, haven for politically hounded "hot money," guardian of, for exam ple, Jewish capital spirited out of Hitler's Ger many.

Virtue has its rewards: The high-saving, cap ital-rich, free-enterprise, historically neutral Swiss, in terms of per capita income, are the richest people in the world. (The Swiss, inci dentally, celebrate their 700th anniversary as a democratic republic in 1991.) Capital and an amazing culture have bestowed peace and pros perity 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 rea sonable security and respect, as long as it earns a competitive yield. Indeed, yield, productiv ity, gain, is its raison d' etre-gain for both the investor and the consumer. The rule is . . . Capital ever seeks the greatest yield consis tent with the least risk. What of Our Future? 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 technol ogy, politics, demographics, popular taste, ca prices of history, acts of nature such as earth quakes, 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 will 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. Lucky for generations of Americans, the United States has long been a magnet for for eign capital, as it has been for immigrants from all over the world. We are a country of immi grant people and immigrant capital. The ques tion is: Will we continue to be? (The new im migration 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, It aly, the Netherlands, Belgium, Spain, Switzer land, 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?" D 14 Letter to the COInInission by Robert Hellam Editors' Note: The following letter was sent to the Chairman of the Economic Development Commission of Seaside, California. The Com mission was formed as an advisory body, com posed of unpaid volunteer citizens appointed by the City Council, to represent the views of the public and the Council to the Economic Devel opment Department of the City of Seaside.