Using foreign direct investment to strengthen U.S. advanced industries

Foreign direct investment (FDI) takes center stage in Washington this week as business, government, and regional leaders gather for SelectUSA’s 2015 Investment Summit. With the country perched atop investor confidence indices and U.S. economic growth accelerating relative to much of the rest of the world, expect the mood to be optimistic.  

That optimism should not slip into complacency, however. FDI is important to the U.S. economy at any time, but a confluence of favorable global trends presents the country with a short window to capitalize on investor interest and consolidate U.S. advantage in the critical advanced industries sector for the long term.

Recent Brookings research shows that advanced industries—a collection of 50 individual industries spanning manufacturing, services, and energy and sharing a reliance on STEM-skilled workers and a commitment to R&D—are the driving force behind an innovative, inclusive, and prosperous U.S. economy.

The link between FDI and advanced industries is a strong one. Foreign companies employed 5.5 percent of total private-sector workers in the United States in 2011 but in advanced industries the share was 15.7 percent. In half of the country’s 100 largest metro areas foreign companies account for an even larger portion of advanced industry jobs than they do nationwide.

FDI in Metro AIs thumb

But FDI’s contribution to the sector goes beyond employment. FDI also bolsters the three foundations of competitiveness in advanced industries—innovation, skills, and ecosystems:

  • Innovation: Foreign companies account for roughly 19 percent of total corporate R&D spending in the United States. But beyond this direct investment in innovation, foreign companies introduce ideas, technologies, and knowledge from abroad into the U.S. market that other businesses can then learn from, recombine, and turn into novel products, services, and business models themselves.  
  • Skills: Foreign companies tend to invest more in worker training than do domestic firms. They also bring with them best practices in education and training that domestic companies and institutions emulate. A classic example is the German apprenticeship model, pioneered in this country by companies such as Bosch and Siemens and now being scaled in places such as Michigan and North Carolina. Such learnings get passed along through networks and adapted to local contexts, improving workforce quality from the bottom up.
  • Ecosystems: Ecosystems are the regional industrial communities within which firms operate. When firms locate in close geographic proximity to one another, knowledge flows between them, pools of skilled workers deepen over time, and regional supplier networks form. The regional ecosystems that emerge end up constituting critical sources of competitive advantage for firms. By injecting brand new ideas and approaches into these regional ecosystems, FDI strengthens them more than do most other investments. And after decades of offshoring, many regional ecosystems would be far more depleted today had incoming foreign companies not offset some of the loss.

Not coincidentally, innovation, skills, and ecosystems are factors that attract high-quality FDI to the United States in the first place. In that sense, FDI and advanced industries have a symbiotic and mutually reinforcing relationship: A dynamic and innovative economy attracts high-performing multinationals; their presence here reinforces the country’s edge.

Yet public and private investment in the foundations of U.S. competitiveness is running at historical lows, and the country’s prospects are slipping because of it. While the push for increased FDI is timely and smart, U.S. public, private, and civic leaders need to commit themselves to encouraging innovation, upgrading workforce skills, and rebuilding and strengthening regional ecosystems—ideally before the macroeconomic winds start blowing more favorably toward other shores.