Foreign Investment Helps Americans; C. Bohanon and T. N. Van Cott

Support for these proposals is usually grounded in nationalistic rhetoric. That the United States lacks such restrictions, for example, is character ized as unilateral economic disarmament. Foreign investors, in turn, are equated with foreign eco nomic armies. All in all, the perspective on foreign investment is one of foreign investors re-slicingthe U.S. economic pie in their favor and against Amer icans. For the most part, opponents of foreign invest ment restrictions leave this re-slicing perspective unchallenged. Instead, they contend that Ameri cans' 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 Professors Bohanon and Van Cott teach in the Depart ment of Economics, Ball State University, Muncie, Indi ana.

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 for eign investment would diminish the pie because it would weaken a linchpin in the institution of pri vate property-namely, the right to transfer owner ship that resides with individual owners. Leaving thisright unencumbered increases the likelihood of ownership of productive resources flowingto those who use resources most productively. While for eign investment does not provide Americans with free lunches, it makes for better helpings. A ForeignInvestmentScenario 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" hard ware stores. He is selling his 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 obliga tions 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 prof110 THE FREEMAN • MARCH 1991 itable under their ownership compared to alterna tive 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 buyout Mr. Brown.

Less apparent to many, perhaps, is that other Americans also share in the expansion of the eco nomic 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 Ameri cans' livingstandards. 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 necessarilyhave alterna tive 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 tech nological 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 swallowup economic wealth.

WhitherFreedom? 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 en terprises. To take away these rights, even partial ly, 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. D 111 Term-of-Office LimitsWon'tReduce GovernmentAbuse by Gary M. Galles P ublic outrage at an increasingly irresponsi ble government, especially at long-term incumbents who seem immune to re-elec tion pressures, has led to a risingwave of sentiment to limit the number of terms elected officials can serve. An Oklahoma term limitation initiative received 67 percent of the vote last September, and similar referenda in November won in California (53 percent) and Colorado (71 percent).