Former Policy Analyst and Engagement Strategist - Metropolitan Policy Program
Nonresident Fellow - Brookings Metro
Nonresident Senior Fellow - Brookings Metro
Somewhere in America, a hometown company is acquired by a large multi-national conglomerate. The familiar corporate logo is replaced on the welcome sign at the former headquarters. Rumors swirl about new leadership in a far-away global location and the future of local jobs and product lines. Local residents and leaders worry about the uncertain future of a community giant.
That’s the common narrative of a foreign takeover. Last month, our colleagues Devashree Saha and Mark Muro highlighted yet another reason that local leaders might worry about the harm wrought by foreign mergers and acquisitions (M&A). There is an increasing concentration of U.S. cleantech patents in foreign-owned enterprises, at a time when U.S. patenting in the industry itself seems to be slowing. This trend isn’t limited to the cleantech industry; for example, the acquisition of foreign technology is key to China’s industrial policy and a push to make up ground in higher-value global manufacturing.
So, should this be viewed as confirmation of the standard story line of corporate villains and zero-sum deals? Our view, based on five years of collaborating with over two dozen regions to harness the benefits of foreign investment, is that foreign M&A is more complex than often portrayed. These latest concerns serve as an opportunity to reiterate that foreign M&A – including in the cleantech industry – is neither categorically good nor bad for regions. While regional and local actors have little influence on whether M&A transactions occur, they can respond by working to create conditions in which the novel expertise and global connections of the foreign firm are likely to spread to local firms.
It’s important to point out that, despite local fears, foreign M&A can have significant firm-level benefits. Foreign investment often represents an infusion of low-cost capital to fund an expansion. Global investors that use M&A to take advantage of new markets and access specialized local talent are often more willing to invest in local operations than domestic buyers who may be seeking to neutralize the competition. Global firms tend to be stronger, more established companies that offer better wages and benefits to employees. They can meld American and foreign expertise to create new products and services. (In fact, acquisitions confirm the high premium U.S. research and development commands in the global marketplace, and subsequent foreign-registered patents reflect innovation developed by scientists and researchers based in the U.S.) Lastly, they can open up global distribution channels that smaller domestic firms could never have accessed on their own. There is no reason to believe that the cleantech industry is immune to these effects. As Saha and Muro point out, for example, Asian countries are major markets for green solutions, meaning that there are sizeable opportunities for U.S.-based foreign-owned firms to export to Asia.
But the impact of M&A on regional economies depends not just on individual firm performance, but perhaps more so on the extent to which “spillovers” – or learning between firms – occurs. These spillovers aren’t necessarily automatic results of foreign investment. Research suggests that learning is more likely to occur when existing domestic companies in the same industry or supply chain are nearly as technologically advanced as the foreign firm, and therefore have the capacity to “absorb” new information. This process also requires that both firms come into regular contact (as either suppliers or peers). Economic development organizations (EDOs) at the regional and local level can help promote this learning by deeply understanding their firms to identify and then make specific connections between each group. This is especially important given recent evidence that the “diffusion” of information and talent between top-performing firms and others is in decline broadly across the U.S. economy.
When regions create conditions for these spillovers, it can be transformative. For instance, much of San Diego’s success harnessing foreign investment to support its life sciences cluster is enabled by sophisticated associations and groups like Biocom, which deeply understand the local industry and are able to steer potential foreign investors to fill specific market gaps. In Greenville-Spartanburg, S.C., which has long relied on foreign investment to build out its manufacturing sector, EDOs are examining whether it’s possible to facilitate the transfer of unused patents from large multinational firms to smaller local manufacturers. From leaders in Syracuse, N.Y. working to jumpstart a regional specialization in unmanned aerial systems, to Milwaukee’s efforts to transform historic water assets from breweries and tanneries into a modern water-technology specialization, foreign investment is serving as a means of solidifying and expanding local firms and industries.
So, how should U.S. firms, regional economic development leaders, and federal officials consider foreign investment in the cleantech industry? Just as globalization and the rise of global value chains have complicated notions of where goods are actually produced, foreign investment flows should be seen as a reality of globalization. They are not without risk or cost, but – if steered correctly – can serve as a key ingredient of regional and national growth. America should invest to protect its status as a global innovation leader, but leaders should also recognize that growth will often have to occur in partnership with others.
Brookings worked with metros mentioned in this blog post to develop global trade and investment strategies through the Global Cities Initiative. Donahue and McDearman have also independently advised Greenville-Spartanburg on economic development policy.