The Avenue

Foreign Direct Investment a Learning Channel for U.S. Business

Devashree Saha and Mark Muro

Foreign direct investment (FDI) benefits national and regional economic development by providing higher wages, increases in trade, new R&D spending, and greater productivity, as a paper our group released made clear.

However, there’s another great benefit: FDI is a learning channel. It brings in not just capital but new ideas. As it does, FDI keeps the United States sharp in a world in which America has no monopoly on cutting-edge ideas.

To see how this works consider a few examples of how foreign companies’ introduction of new ideas has driven advances here.

In renewable energy, for instance, dominant European companies like Siemens and Vestas have helped prod American companies like GE, Dow and American Semiconductor to develop new wind turbine blade models at lower cost. Now GE is working on a new design using fabric blades instead of fiberglass—cutting costs by 40 percent. Where once the Europeans had a near monopoly on the production of monster rotor blades for wind turbines the U.S. is now becoming competitive.

Similarly, the arrival of German apprenticeship programs blending traditional high school education with on-the-job skills training has stimulated a new look at apprenticeship. Multinational companies like Siemens, BMW, and Volkswagen have visibly demonstrated the German model in America and now U.S. companies like General Electric and Caterpillar and states like South Carolina, Michigan and Minnesota are moving toward the model. That is learning that came from abroad.

And there are other examples of how new business practices from around the world have spread into the United States through FDI. “Lean manufacturing“—the influential production system model that focuses on just-in-time delivery, built-in quality, and continuous improvement—is a hugely significant instance. Developed by Toyota during the 1950s, the “lean production model” turned the automaker into a global brand. Then Toyota replicated the model in its efficient scale-up in North America. The recent recession prompted increased use of the system. Boeing, for instance, has literally put itself to school with Toyota, and has since 2000 been working with Toyota’s Kentucky plant and the University of Kentucky to learn ways to eliminate waste in manufacturing.

Or consider the nascent transition from batch to continuous processing in the pharmaceutical industry. Continuous processing—a manufacturing process that is all done in one location, cutting time and cost and improving quality of the final product—is used in most large-scale manufacturing but the pharma industry has lagged behind. However, in 2007 the Swiss pharma giant Novartis established the Novartis-MIT Center for Continuous Manufacturing with $65 million to fund research activities in this area. Soon thereafter, the project yielded the first prototype process that produces drug tablets from raw chemical ingredients through a fully integrated, non-stop process. And now Novartis has initiated a technology transfer to its Basel unit while CONTINUUS Pharmaceuticals—an American spin-out company—has been launched to apply the new process to the broader pharma industry. In this case, foreign investment in a powerful R&D collaboration is accelerating the development and diffusion of new practices in a whole industry.

In short, FDI transactions—like other global exchanges—are not just good for U.S. economy in terms of jobs, productivity, and wages. They are occasions for learning that help maintain U.S. competitiveness in a world full of good ideas.

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