What Tata tells us

April 9, 2008

Free Market Foundation

Ford Motor Company announced that it will sell its Jaguar and Land Rover divisions to India’s Tata Group. This is the latest example of the changing nature of Foreign Direct Investment (FDI) in the United States, says Matthew J. Straughter, associate dean at the Tuck School of Business at Dartmouth University.

Foreign direct investment has long been a source of strength for the American economy:

In 2005, in-sourcing companies employed nearly 5.1 million Americans, 4.4 per cent of the private-sector labour force.

Beyond their employment, in-sourcing companies perform large amounts of the crucial activities that make their workers and the overall economy more productive.

They invest in physical capital and in research and development, and they help connect the United States to the global economy through international trade.

In 2005, compensation per worker at in-sourcing companies was $66,042 31.8 per cent above the average for the rest of the private sector ($50,124).

The Tata deal demonstrates one of the two main ways foreign direct investment happens, says Straughter:

From 1987 through 2006, the United States received a lot of “greenfield” (investments that build companies from scratch) FDI: $220 billion worth.

But over that same period, it received $1.78 trillion of new FDI via mergers and acquisitions (M&A) with existing U.S. businesses.

M&A activity, not greenfield investment, is far and away the predominant method foreign companies use to invest in the United States; it accounts for more than 88 per cent of new FDI in the United States over the past two decades.

Source: Matthew J. Slaughter, What Tata Tells Us, Wall Street Journal, March 27, 2008.

For text: http://online.wsj.com/article/SB120658030582967343.html

For more on Trade Issues:
http://www.ncpa.org/sub/dpd/index.php?Article_Category=42

FMF Policy Bulletin/ 01 April 2008