[Marxism] Capital reluctant to invest in US

Marvin Gandall marvgandall at rogers.com
Fri Dec 3 07:21:40 MST 2004

Two interesting and related items in Wednesday’s Wall Street Journal deal
with the sharp drop-off in productive investment by foreign and domestic
firms in the US, as companies look increasingly to China and other emerging
markets. Foreign direct investment in the US has “collapsed”, according to a
worried Journal commentary – dropping by 90% from a peak $314 billion in
2000 to $30 billion in 2003, as China, with $53 billion in FDI inflows,
overtook the US for the first time. The Journal also reports on cash
hoarding by US firms, which has become endemic. Total corporate liquidity
has risen by nearly a third since the peak of the investment boom in 1999,
and stands at a record 2% of GDP as companies park their cash in short-term
paper rather than invest in new plant and equipment. Partly this reflects
lingering overcapacity, but as one analyst told the Journal, it’s also
attributable to the “China shock: companies may be holding back on equipment
and other capital (investment) because they fear the can’t compete with
low-cost facilities abroad”.

The 'Insourcing' Problem WSJ December 1, 2004; Page A10

Now that the election is over, all the wailing about "outsourcing" seems to
have vanished, as it certainly should. So maybe we can all begin to pay
attention to the more important economic subject known as "insourcing,"
where some of the recent data really are worrisome.

Insourcing is what happens when foreign-headquartered multinationals operate
subsidiaries in the U.S. These companies contribute both to U.S. economic
growth and living standards, but a precise measure of these gains is hard to
come by. That's why the Bureau of Economic Analysis's recent data about
insourcing through 2002 is worth noting. As is the study of this data by
Matthew Slaughter, an economist at Dartmouth's Tuck School of Business.

Mr. Slaughter finds that insourcing companies boost the U.S. economy in two
ways: through their own operations and their interactions with domestic
firms. Insourcing provided jobs for more than 5.4 million U.S. workers in
2002, or nearly 5% of total private-sector employment. These are good-paying
jobs, too. Payroll came to more than $307 billion -- or 6% of all
private-sector compensation. The average annual compensation at such
companies was a tad over $56,000, or some 31% more than the average annual
private U.S. compensation.

The internal operations of insourcing companies also contribute to research
and development and to capital investment. Their share of private-sector R&D
expenditures came to 14% (or $28 billion) and their share of capital
investment topped 10% (or $112 billion). Just as eye-popping, insourcing
companies accounted for 20% of U.S. goods exports.

Insourcing companies also purchase a high and rising share of their
intermediate inputs from domestic suppliers -- in 2002, nearly 80 cents of
every dollar, or $1.3 trillion. Just as important, these companies share
technology and other knowledge with these U.S. suppliers to improve quality
and reliability.

As Mr. Slaughter points out, the vitality of U.S. insourcing has depended
upon several strengths -- talented workers across many occupations, deep
capital markets and a culture that supports innovation and risk-taking.

However, and here's the worry, the past is not necessarily prologue. There's
no guarantee that the world's best companies will continue to invest as much
in the U.S. They now have plenty of other choices. China and India are the
world's two most populous countries, have been growing rapidly, and have
liberalized their trade and investment policies. Ditto for some of the newer
members of the European Union.

And that's what makes some other data, through year-end 2003, a bit
disturbing. Total flows of Foreign Direct Investment capital into the U.S.
have collapsed since 2000 -- from a peak of $314 billion in 2000 to $29.8
billion in 2003. That's down 90%. No doubt some of that decline is a
cyclical response to the giant surge in the late 1990s. But some of the
falloff might be structural. In 2003, for the first time, China attracted
more FDI than the U.S. ($53 billion). This comes as the U.S. share of world
FDI inflows fell to only 5.3% in 2003, from 22.6% in 2000.

It's too early to say whether the attractiveness of the U.S. for business
and capital is diminishing. But it's not too early to do what is necessary
to maintain our status. That means pressing for more accountability in
public schools, and trying to broaden the appeal of science and math. The
U.S. remains heavily reliant on foreign-born scientists and engineers -- a
virtue of immigration. But they are increasingly difficult to retain in
America when opportunities for innovative R&D beckon in their homelands.

As Mr. Slaughter says: "Insourcing companies have contributed a lot to the
U.S. economy, but the country is facing rising competition to attract and
retain them." He's right.

Businesses Save in Wake Of Technology Bubble; Economy's Nature Changes By
CHRISTINE RICHARD WSJ December 1, 2004; Page C3

If Microsoft Corp. is Santa Claus, spreading good cheer and dividends
everywhere, then most other U.S. companies are Scrooge.

Even as Microsoft this week moves to distribute the largest dividend ever --
a stocking-bursting $32 billion -- most other companies are hoarding cash.

The evidence is writ large on balance sheets, which are swelling with
short-term, liquid investments, turning companies away from their
traditional role as users of capital.

Treasury Strategies Inc., a Chicago consultant, estimates that total
corporate liquidity -- investments in short-term, marketable securities --
now tallies up to about $4.7 trillion, up from $3.6 trillion in 1999.
Further, the consultant, which advises treasury-management officers and
other clients, surveyed over 360 midsize and large, nonfinancial companies
and found that over half consider themselves net investors rather than net
borrowers. Net investors are those companies with more short-term
investments than short-term debt outstanding, while net borrowers have more
short-term debt than short-term investments.

"The cash is piling up," says John Lonski, chief economist with Moody's
Investors Service in New York. Since 1999, corporate liquidity has increased
by around 30%, Mr. Lonski says, citing Federal Reserve data.

Part of the explanation for the growing corporate cash pile is the changing
nature of the U.S. economy, research firm Bridgewater Associates pointed out
in a recent report: Industries that spend heavily on plants and equipment --
oil and gas, mining and metals, manufacturing -- make up a smaller share of
the economy than they did even a few years ago. At the same time,
Bridgewater said, "low-capital expenditures and heavy cash flow producing
sectors, like the financial sector, have blossomed.

And Mr. Lonski of Moody's cites a reluctance by companies to spend heavily
after the 1990s technology-shopping spree backfired. He also cites fear of a
"China shock": Companies may be holding back on equipment and other capital
because they fear they can't compete with low-cost facilities abroad.

So much for the convention of businesses as natural investors. In fact, that
dynamic has been fading for years: Corporate savings now stand at an
all-time high of nearly 2% of gross domestic product while the individual
savings rate has fallen to record lows.

"There's no doubt that liquidity in financial markets is being fueled by
businesses rather than consumers," says Anthony Carfang, a Treasury
Strategies partner.

The majority of corporations surveyed see themselves as net investors
because "they have cash that goes beyond what the capital structure needs
for day-to-day operations," Mr. Carfang adds. "Companies reduced inventory,
tightened accounts receivable and deferred spending on property, plant and

But companies probably aren't signaling a permanent reduction in their cash
needs, Mr. Carfang believes, or they would be more likely to follow
Microsoft's lead and distribute the cash to shareholders or use it to buy
back stock and debt.

So what are treasurers and financial officers doing with all this money?
According to the Treasury Strategies survey, 36% is in money markets; 21% in
bonds and notes; 15% in commercial paper, "repurchase agreements" and
certificates of deposit; and 9% in fixed-income and bond funds.

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