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Alarm Over Foreign Investment in U.S. Firms May Be Just Misplaced Anxiety

THE BALTIMORE SUN

America is up in arms over increasing foreign ownership of prized U.S. assets from New York's Rockefeller Center to the lone cedar tree of Pebble Beach. Many have expressed concern over the loss of not just prestige, but critical technologies to Japanese or German competitors. In fact, foreign direct investment here raises many policy issues and invites redefinition of just what is an American company and what's good for it.

One way to start is to ask how these issues affect Maryland in particular. This offers insights into the strengths and weaknesses of Maryland's economy and suggests conclusions for the U.S. as a whole.

Before we begin, let's debunk the notion that, "We'll all be working for the Japanese by 1995." One in 500 is more like it. While foreign investment is growing faster than the U.S. economy as a whole, it controls less than 5 percent of our Gross National Product.

The dollar value of American direct investments in other countries exceeds foreign investments in the U.S., and the Americans control proportionately larger shares of other countries' economies than they do of ours. The ratio is 4:1 for the United Kingdom, 6:1 for Holland, 25:1 for Canada and even for Japan, the ratio is about even, with each country controlling only 1 percent of the other's GNP.

These are the four largest foreign investors in the U.S. (Japan is a distant second to the United Kingdom). Thus, we should be careful restricting foreign investment, as 24 bills now before the Congress propose, lest we invite retaliation against even larger and more visible U.S. investment overseas.

Foreign investment in Marylnad follows national patterns, except that Canada is relatively more important here. Foreign direct investment cuts across all industries in Maryland, from finance to chemicals to natural resources to manufacturing to services to real estate.

A random sample includes First National Bank (Irish), Monumental Insurance (Dutch), SCM Chemicals (British), Genstar Concrete (British), Delsey Luggage (French), Locke Insulator (Japanese), Corroon & Black/Herget (British), Harbor View (Thai & Singaporean financing).

However, the 60,000 to 70,000 Maryland employees working for more than 600 foreign affiliates are only about 2.5 percent of the local workforce, compared to the 3.5 percent of the total U.S. labor pool employed by foreign interests. Maryland ranks just 20th of the 50 states by number of foreign investments in manufacturing (with 62), and overall foreign investment here is worth about $5.5 billion.

These numbers suggest Maryland is right to focus on attracting foreign investment for economic development. While the foreign presence here has increased, there's much room to grow. Achieving the national average in employment supported by foreign direct investment would mean 25,000 more Maryland jobs. Incidentally, the foreign investment here is disproportionately in manufacturing.

Foreign investment in Maryland may also help our relatively poor export record. While exports account for only 3 percent of Maryland's output -- versus 7 percent for the entire U.S. -- 40 percent of foreign affiliates here engage in exporting, according to a KPMG Peat Marwick survey. Foreign affiliates here thus may improve Maryland's exports and encourage other Maryland companies to grow through exports.

The reasons foreign companies come here suggest clear strategies. The KPMG study identified the two principal draws as Maryland's proximity to key markets or industries and its transportation infrastructure. That coincides neatly with another study, also by Peat Marwick, of 2,400 European investors in 13 U.S. states. That survey found these same two criteria far more important to investors than financial incentives in influencing foreign investment decisions.

This is good news for Maryland, as financial incentives can be prohibitively expensive. In the highly contested races for new auto plants, state incenties offered by Indiana, Tennessee and Kentucky, for example, quintupled between 1980 and 1986 to $50,000 per job. Maryland can easily focus on its existing strengths without spending big money on tax rebates, grants, etc.

The way a foreign investment is made also has important implications for whether it can be deemed beneficial or harmful through, for example, the stripping of U.S. technology. Especially since takeovers of existing American companies account for an increasing percentage of foreign investment. The ratio has gone from 1:1 in 1982 to 6:1 in 1990. Publicity aside, it's virtually impossible to characterize takeoveres as harmful or beneficial per se.

Perhaps a better way to assess the risks of foreign acquisitions is to look at their effect on research and development and other value-added activities. Whenever R&D; goes offshore, technology and high-paying jobs follow, so the U.S. clearly loses. There are no consistent patterns of how foreign parents handle research and development at acquired U.S. companies; it varies from industry to industry. There is even some evidence that foreign owners increase U.S.-based R&D.;

Maryland, despite its large population of engineers, hasn't seen the controversial high-tech takeovers of Silicon Valley. And Maryland seems to be doing well with foreign parents establishing U.S. headquarters here. In more than 100 cases so far, Maryland will benefit from use of local headquarters as springboards for the foreign firms' U.S. growth.

Perhaps the biggest issue about foreign investment is the relatively small amount of U.S. income taxes paid by U.S. affiliates. There is alarming evidence foreign owners use transfer pricing or other techniques to evade corporate taxes. One study showed that, over a decade, half of 36 foreign-owned firms with combined annual revenues of $35 billion paid no U.S. income tax.

Similarly, one-third of foreign car distributors paid no taxes. Another study found Japanese-owned companies reporting 50-percent sales increases during a recent year, but taxable income down by two-thirds. Maryland says foreign-owned companies now pay $170 million in state taxes, but the job of curbing abuses clearly lies with the IRS and the Congress.

The question remains -- what is an American company? Is Black & Decker-U.K., with mostly British employees, more American than First National Bank of Maryland simply because Black & Decker is owned (mostly) by U.S. shareholders? The issues get more complicated the more global our economy becomes.

Maryland is inexorably caught up in this evolution. By recognizing this and exploiting our advantages, we've gained tremendously without much risk to our independence. Our competitiveness has improved with foreign investment, primarily when value-added activities like research and development and manufacturing remain here. Other opportunities await.

This follows a long Marylnad tradition. Remember that British investment back in 1829 was what made the B&O; Railroad possible.

Peter A. Bowe heads Ellicott Machine Corp.'s Dredge Division.

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