Buying America

Daniel Gross discusses the potential for an increase in foreign ownership of U.S. firms, in particular, the potential for foreign governments to gain control of U.S. based corporations:

Now It's Their Turn to Buy U.S., by Daniel Gross, Commentary, Washington Post: ...In countries that are resource-rich or export powerhouses, governments and government-controlled entities have amassed huge pools of capital. A report issued last month by Morgan Stanley economist Stephen Jen estimated that funds such as the United Arab Emirates ADIA ($875 billion), Russia's stabilization fund ($32 billion) and Singapore's Temasek Holdings ($100 billion) collectively hold $2.5 trillion in assets -- a sum equal to about 18 percent of the value of the S&P 500.

The funds' managers have generally been content to invest in safe assets such as bonds. But in recent weeks, ... General Electric ... sold its plastics unit to Saudi Basic Industries Corp. (SABIC), which is 70 percent government owned... On May 20, the private equity firm Blackstone Group announced that China's State Investment Co. is buying a 10 percent stake for $3 billion.

This phenomenon isn't entirely new. In 1996, Norway's government, planning for a day when its North Sea petroleum bounty would slow to a trickle, began plowing oil revenue into a mutual fund, which is now worth about $311 billion -- or about $67,000 per Norwegian.

China, which has a whopping $1.2 trillion burning a hole in its coffers, has thus far been content to invest in U.S. government bonds and bonds issued by quasi-government agencies such as Fannie Mae. But like any smart investor, it is looking to diversify...

This phenomenon presents opportunities for Americans... Portfolio managers on Wall Street are salivating at the idea that China's government may start rolling cash into the S&P 500 index, for example.

But there are complications. Many of the governments starting such funds have shown a propensity to intervene in their domestic economies and capital markets. And when governments own companies, that creates the potential for geopolitical mischief. Hugo Chavez has used the Venezuelan government's shares of Citgo ... to poke his fingers in the eyes of the U.S. government. In Russia, Vladimir Putin has used state control of energy companies as a political tool against domestic enemies and a diplomatic tool against Russia's neighbors. ...

Americans don't seem to mind that foreigners own 45 percent of U.S. publicly held debt, in the form of low-yield government bonds. After all, as long as we pay the interest, the debt doesn't entitle the foreigners to any say in how we run our business. But stock investors have a say in how the corporations they own are run. ... One could imagine a day when the Chinese or Saudi government is a top shareholder in blue-chip companies.

What's more, the foreign state-affiliated companies tend to cluster in industries that have a bearing on national security: logistics, infrastructure, oil, petrochemicals, airlines. Remember the outrage when Dubai Ports World wanted to buy a British company that operated U.S. ports? Or when the Chinese-government-controlled petroleum company CNOOC tried to buy Unocal in August 2005? Expect more of these episodes. China is thought to be setting up a $300 billion investment fund...

Other concerns arise from the prospect of foreign governments acquiring big chunks of corporate America. Fortune 500 companies such as General Electric are comparatively enlightened employers when it comes to issues of gender, race, sexual orientation and religion. Can anybody say the same about Saudi Arabia? What kind of future might a female Jewish engineer with G.E. plastics have at SABIC?

Some of the fears engendered by rising foreign ownership of American assets are certainly overblown ... [and] the greatest impact is likely to be psychological. The vast sums of money being deployed by foreign governments remind us of two uncomfortable facts, also ironic byproducts of globalization. Partly because of our huge trade deficit, the dollar isn't nearly as strong as it used to be, so many foreigners view the United States as a sort of global bargain basement. And the fact that the big hitters in the game are Chinese, Indian or Saudi reminds us that while the United States is clearly the richest and most powerful nation on Earth, we Americans no longer have the field to ourselves.

I'm not too concerned by this. And it may be that instead of increasing geopolitical and economic risk, a more interconnected world through international trade and foreign ownership of assets decreases the chances of conflict. Martin Wolf:

One of the stories of our era is the way in which vast countries such as China and India are orienting their politics around the goal of prosperity. This forces them to seek domestic and global stability and accept international openness and mutual dependence. They see no benefit in international conflict. It is surely possible that this view of national priorities will take hold in more of the world, including the Middle East. ...

Comments

[Bruce Wilder]

Kind raises one's long-term inflation expectations, doesn't it?

[ken melvin]

Moving petro-chem to Arabia makes sense in many ways. So, Chinese ownership of firms in China. Which is better/worse, foreign ownership of production or real estate? Be interesting to see what outcome Chinese owning firms in America. None of this corrects for wealth distribution. Mexico is buying US but can't afford it's own existing population, let alone the growth.

[yartrebo]

If one keeps investing more than one saves, such as the US, the extra resources have to come from somewhere. In the case of the US, gross investment is on the order of 10% of GDP, and gross savings is negative, so foreign investment of over 10% of GDP (over $1.2T/year) is needed to cover our shortfall.

As far as who owns large corporations, their nationalities don't really matter. Most ultra rich people have loyalty only to the almighty dollar anyway. It's not like an ultra-rich US person is going to look out for my interests any more than the House of Saud will.

[yartrebo]

"Which is better/worse, foreign ownership of production or real estate?"
- kel melvin

Real estate, and the more local the better. Foreigners (and non-residents) don't get to vote in local elections, and it's pretty easy to fleece them with property taxes and eminent domain should public sentiment turn against them.

That foreigners have a knack for buying high and selling low doesn't hurt either.

[Outside the Box]

Two random thoughts came to mind:

1) Having foreign nationals own part of the US, and US citizens own part of overseas operations promotes world peace, and support for free trade. Owners don't want to see their own factories destroyed. As long as it doesn't go to one sided extremes. If foreigners eventually wind up owning too much of the US, and US citizens too little of overseas operations, an excessive amount of world corporate profits (dividends) will wind up being repatriated overseas rather than here. This is where the low US savings rate comes into play, as relative national savings rates eventually determine who owns what.

2) There can be a large difference between private capitalists owning companies, and government entities. Private individuals tend to run the companies they own in an efficient manner, so as to earn the maximum profit. Governments sometimes run the companies they own according to politics. Just look at how inefficient many foreign state run enterprises are. If not structured properly, the danger exists that the Chinese or Saudi politicians may try to run the US companies they own, and production efficiency could decline. Less total goods/services in this case.

[Steve Waldman]

Mark:

"The purchase of U.S. companies is due to the potential for profit relative to risk, i.e. these companies are the best investments available to the purchasers, not because of the potential geopolitical leverage ownership might give. If there are better deals elsewhere, that's where the money will flow."

Is this something that you know to be true, or something that you hope to be true?

It seems to economists are often loath to consider the geopolitical ramifications of present trade arrangements. That makes sense, both because geopolitics is beyond the scope of economics, and because of an inherent optimism in the profession: Economists view trade through a lens of positive-sum games and interdependent equilibria, while geopolitics may require participation in zero-sum, or even negative-sum, games, chaotic change, and conflict. Nevertheless, geopolitics sometimes asserts itself. A good world is one where geopolitics is sufficiently in abeyance that the optimistic logic of economists can obtain. Unfortunately, the world is not always so good.

[Mark Thoma]

I don't doubt that strategic considerations will come into play in these decisions from foreign governments (private sector decisions are different), e.g. ensuring adequate supplies of raw materials such as oil, but I don't see anything to suggest that this is offensive - intended to set things up so that the U.S. is vulnerable in the future - rather than an attempt to ensure stability within their own borders, etc.

[And, I'll note that the quote from Martin Wolf does recognize there can be geopolitical "externalities."]

[ken melvin]

Contracts/troops - what diff?

[ken melvin]

I think/hope you find this worth the read-

http://www.firedoglake.com/2007/06/02/the-view-from-the-third-world/

[DRR]

I'm sure I'm a familiar enough commenter that people can guess my Econ views. Given that I'm much less hot about & bothered about foreign ownership then trade in goods & services, I could probably be talked into supporting a measure restricting some of the abilities of foreign state-owned companies to control U.S. assets.

[anon]

Well China and other nations with large dollar reserves sooner or later will want to invest those dollars in something other than US government bonds. The alternative would have to be US stocks or real estate. The US can try to block this, as it did when China tried to purchase Unocal, but I doubt it can do so for long without causing more trouble than it is worth. Sooner or later it will have to give. And the Chinese investment authority of course can buy up smaller interests in a large number of US companies. A ten percent interest in the largest twenty US companies by market capitalization would amount to about 402 billion. China probably has 900 billion at least in dollar reserves (treasuries and agencies). This would take that down by quite a bit.

[Tom Schofield]

Lenin is quoted as saying, "The Capitalists will sell us the rope with which we will hang them". But to Martin Wolf's point - and to mangle metaphors - these new soveraign-wealth funds (a term used in the May 26th edition of The Economist) have no interest in hanging geese that lay such golden eggs. The Chinese government goes on and on about a 'harmonious society' and seems proccupied with keeping their own people reasonably happy - and themselves safely in power. (Ownership interests in American corporations also gives them the opportunity to more efficiently steal Western technology and management methods.) In any event, corporations are creatures of government. The prospect of a Chinese-controlled corporation lobbying the U.S. Congress for tax breaks, favorable tarriff schemes, regulatory loopholes, and subsidies has a certain ironic appeal. Perhaps the putatively Communist Chinese will also bring a fresh viewpoint to the compensation lavished on corporate management here in the U.S.

[real person from the real world]

Kevin Melman has a link to an article where I found this quotation:
"Yet, the fact is that most “development” of the 3rd world – most of the advice, often advice with a big stick, has been very bad for most countries that took it. The countries that got themselves out of undeveloped status didn't do it by following the advice of western development experts, quite the contrary. Instead of doing what experts told them to do, they found their own path, which in almost every case, was essentially mercantalism – protecting the internal economy and creating an export driven economy on manufactured goods by subsidizing manufacture in one way or another. It's the same way that the US industrialized in the 19th century, as far as that goes."

Frankly, globalization, in my opinion, is the revenge of the 3rd World, for the excesses of the age of global empires by Britain and France. Unfortunately, the US is paying the price, and we barely ever got involved, except maybe the war in cuba and the phillipines.

Anyway, I doubt that manufacturing will make a comeback soon, in the US. I also think that the need for cheap labor being imported has its limitations (needing to learn a foreign language, and forgoing a family life to live like a gypsy) is not appealing to everyone. Those of the US, with the courage to do it, will be winners.

As for buying America. We did it to them, now they can do it to us. what goes around, comes around. Real Estate, as someone up above pointed out, can be taxed. Corporations are mainly interested in the bottom line, so it's doubtful the purchase of a portion of some corporations will make that big a difference, but who really knows? Hindsight is always clearer than forsight.

[calmo]

Some day I, too, will be this familiarI'm sure I'm a familiar enough commenter that people can guess my Econ views. and then I beg you to drag me out to the woodshed and give me a good thrashing.
What are you saying DRR? That we are incapable of altering your Econ views? Us!
Is this a taunt: I could probably be talked into supporting a measure restricting some of the abilities of foreign state-owned companies to control U.S. assets. that might depend on our abilities to free up an otherwise ossified brain that perished from lack of exercise?
Getting unfamiliar with DRR by the moment.

[jonfernquest]

"...more interconnected world through international trade and foreign ownership of assets decreases the chances of conflict."

Or nationalisation, as it has in the past. There seem to be a lot of counterexamples to the above statement in Asia. Temasek's purchase of AIS in Thailand. Untransparent private equity in Korea. IP monopoly rights for drugs and software that are hard to bargain over and reach a fair price.

Going slowly in an exploratory fashion might is inevitable and avoiding assumptions of instantaneuous adjustment.

Big money buys political influence which often works in indirect ways and is difficult to detect. I think small atrategic cooperative ventures are the best bet, but IP protection is a problem here....the barriers within the more culturally homogeneous west might be less....

[baileyman]

"the potential for foreign governments to gain control of U.S. based corporations"

Let 'em buy. Not even the US can control its corporations.

[Lafayette]

DG: ... as long as we pay the interest, the debt doesn't entitle the foreigners to any say in how we run our business. But stock investors have a say in how the corporations they own are run.

Wow. Stock investors have a say in how American corporations are run?

What planet does this guy live on ... ?

[Lafayette]

DG: China is thought to be setting up a $300 billion investment fund...

Yep. What China could not do with military might it will attempt to accomplish with financial clout. That is, influence American foreign policy and thereby gain an advantage.

Think of that when next shopping at Wal-Mart.

[Thomas]

Recently one reason China gave for setting up the $300 billion investment fund, was dollar inflation and the US approaches to inflation. None of the presidential candidates (except Ron Paul) seem to understand this.