CONGRESSIONAL RESEARCH SERVICE LIBRARY OF CONGRESS uIImii'"”]'[ ‘ J: i: “jfijj O ijulfi iI';I'i»'TIInIIJ 11 -1 FOREIGN INVESTMENT IN U.S. INDUSTRY Issnn agar saunas I$78091 AUTHOR: Wilson, Arlene Economics Division THE LIBRARY OF CORGRESS CONGRESSIONAL RESEARCH SERVICE MAJOE ISSUES SYSTEH » F0R_ADDITI0HALEIlE§RflATI0H’CALLS287fS7Q0 0220 cns- 1 1373091 upnamnéoz/15/no .I.§§!l§-P..T§!l££'..1.'-L122! Although the total amount of foreign direct investment (hereinafter called FDI) in the 0.5. is small relative to 0.5. direct investment abroad, it is growing rapidly and may have a large effect on some industries and geographic .areas of the 0.3. The two main issues raised by FDI in the 0.3. are first, shall Congress require more extensive data collection efforts than are already underway, and second, should laws be enacted to limit foreign direct investment in the 0.3. The second question turns in substantial measure on whether then benefits of FDI in the 0.5. exceed the costs. The purpose of this issue brief is to inform Congress of ithe legislative history of the issue, the magnitude and distribution of EDI in the 0.3., the existing data collection efforts, the potential implications for the 0.5., the motivations for FDI in the 0.5., and 0.5. policy regarding EDI. The data in this issueubrief refer to all foreign direct investment in the 0.8.; however, the discussion excludes for the most part those issues related to EDI in 0.5. farmland, which is the topic of IB780o4. 1.3.£.\§..fS.C.9.t3.Q.QE;I2-.A..;|!1.>..£QLl§X..L\§.élX§..J;§ Foreign investment is often divided into two categories, namely, (1) direct investment where the investor exercises considerable control over the enterprise in which the investment has been made, and (2) portfolio, or indirect, investment where the investor has little or no such control. The International Investment Survey Act of 1976 defines direct investment as ownership or control, directly or indirectly, by one person (defined as an individual, association, corporation, governmental body, etc.) of 10% or more of the voting securities of a corporation or an equivalent interest in an unicorporated enterprise, and portfolio investment as any investment other than direct investment, including ownership of debt obligations. Except where data are not separated in the Historical Perspective section below, this issue brief is concerned only with direct investment and not with «portfolio investment, since direct investment is currently of most concern.l HISTORICAL PERSPECTIVE 0.3. economic development was stimulated by foreign capital, primarily ~British, French, Dutch, and Spanish. In the early 18005, 0.5. railroads and canals were financed largely by federal and state securities sold abroad and by 1854 foreign investors held about one-half of the existing federal and state securities. Foreign investment in 0.8. real estate and iprivate industry (especially communications, utilities, and industrial corporations) became substantial ;oward the end or the 18005, followed by large foreign investment in petroleum around 1900-4905. may 191a total foreign investment inn the 0.5. (including portfolio and direct investment as well as loans) was estimated to be about $7 billion, compared with 0.3. investment vabroad of about $3.5 billion. However, because loans to foreigners increased and total foreign investment in the 0.3. declined during World War I to about $4m billion by CRS- 2 IB78091 UPDATE-02/15/80 1919, the U.S. became a net creditor (in international investment) -- a position it still maintains. ' LEGISLATIVE HISTORY Foreign direct investment in the 0.5. increased very gradually until it was about $7.6 billion in 1962, but then almost doubled in the next decade, reaching $14.9 billion at the end of 1972. By the early 1970s, the increase in Japanese foreign direct investment and the potentially high level of OPEC's investable funds led to Congressional and public concern about the extent and effect of present and future FDI in the U.S. The previous survey of FDI was conducted in 1959 and although the data were annually updated and published in the Survey of Current Business, they were thought to be insufficient. In the 93rd and 94th Congresses, 70 bills and resolutions were introduced ranging from those restricting or prohibiting certain foreign direct investment at one extreme to those authorizing studies to obtain ‘more information. For example: one group of bills established a national foreign investment control commission to prohibit or restrict foreign persons from acquiring domestic securities deemed vital to the economic security and national defense of the U.S. Extensive policy review by the Administration in 1974 and 197i? and Congressional hearings were undertaken. In general, the Administration's position was that the existing restrictions on foreign direct investment were sufficient. However, both the Administration and Congress agreed that more extensive, timely data were necessary to make informed analyses of the issue. while no restrictive laws were passed, the Foreign Investment Survey Act of 1974 (P.L. 93“479) became law on Oct. 26, 1974. Under this Act,L the Secretary of Commerce was directed to conduct a comprehensive, overall _study tof foreign direct investment in the 0.5. while the Secretary of Treasuryy was authorized to-do the same for foreign portfolio investment in the 0.5. ‘Civil penalties were includd for failure to provide information, and "Wthe Secretaries of Commerce and Treasury were required to submit an interim report by October 1975 and a full report by April 1976. Three million dollars was authorized to be appropriated to carry out the Act. ”“”‘ Since under the Foreign Investment Survey Act of 1974 the lcommercefland Treasury_SecretariesP authority to collect information expired when thegstudy was completed, the International Investment Survey Act of 1976 (P.L. 94§472) was enacted on‘Octg 11,j1976. wunder this act, the President is directad to set up a regular aha comprehensive data collection program and to conduct periodic"benchmark”surveys"Von direct and portfolio investment, both by foreigners inftheflU.S.iand by U.S. investors abroad. The President- is“ also directed to conquct a study of the feasibility of establishing a systegy to monitor’foreignfldifectfinvestment‘in agricultural, rural, and urban jreal propefty‘in”thefiD.S.jafid;to submit the findings to Congress by OctoberfQj978. The President”defegated the responsibility for the direct investment “studies to the Bureau ofhficonomic Analysis of the D.S. Department of Commerce._ Civil penaltiesare“included;fior:£ailure”to,provide information and authoriz§§;9ns fiscal year 1979 were m%de{§”_7 for appropriatiohsfof $Wffi3l1iQn for fiscal year °1?7B_ and $1g;§illigfi§§§pr 1;m; w . * . ‘ 1 jpg a r ;g *.é;r;nng , . , . I _ . . _‘.. p .:_ Yr“ u Of the 34 bills and resolutions introduced in the 95th Congress regarding FDI in the D.S., 17 focused on foreign investment in 0.3. farmland. one of these bills, 5. 3384, became P.L. 95-460 on Oct. 14,1 1978 (discussed more *fully in Issue Brief 78064). The remainingv 17’ bills either restricted CBS- 3 1373091 0PDATB—02/15/80 foreign ownership of some types or amounts of securities or resources, required improved disclosure of beneficial owners, or amended the International Survey Act of 1976. The Domestic and Foreign Investment Improved Disclosure Act (Title II of AS. 305), which became P.L. 95-213 on Dec. 19, 1977, requires expanded disclosure to the SEC of beneficial owners (both foreign and domestic) of more than 5% o specified kinds of securities. on Sept. 22, 1978, the Amendments to the International Investment Survey Act of 1976 (P.L. 95-381) were approved. These amendments increased the appropriation authorization from $1 million to $4 million for the fiscal year ending Sept. :0, 1979, extended the date for submission of the findings of the feasibility study regarding the monitoring of agricultural, rural, and urban real property mto October 1979, established a requirement for an interim report on the feasibility study to be submitted by October 1978, and made other minor changes. THE DATA Although data on FDI in the U.S. are collected by many government agencies, they are compiled, analyzed, and made public only by the Bureau of Economic Analysis and the Office of Foreign Investment in the 0.5., both of which are units of the Department of Commerce. Three relatively recent studies are the main sources for comprehensive data: The first, a nine-volume study "Foreign Direct Investment in the Jnited States," conducted by the Department of Commerce in compliance with the Foreign Investment Study Act of 1974 (P.L. 93-#79), contains the most comprehensive data. This study , hereinafter called the 1974 Benchmark Survey, was based on a complete survey of foreign ownership of U.S. firms as of 197a, and indicated that foreign companies do not hold a large share of any of the major sectors of the U.S. economy and that FDI is generally beneficial to the U.S. Secondly, the Bureau of Economic Analysis of the Commerce Department publishes an annual article in the Survey of Current Business which, based on a sample of firms, updates the latest Benchmark data; the most recent article was published in the August 1979 edition of the Survey of Current Business. Another study entitled. “Foreign Direct Investment in the United States“ was published by the toffice of Foreign Investment in the 0.5. of the Department of Commerce in December 1977. This studygcovers all forms of foreign investment in the d.S. during 1976 and also includes mergers, acquisitions, and equity increases for the three years 1975 ithrough 197b. In addition to providing lists of fogeign gdirect-iinvestments§ in the 0.3., this study gives breakdowns by country squrce,3ihdustry,_ Btate,f and type of investment. However, the data are based dn’ repgrts_;ofn[§ederal’ agencies (often in connection with regulatory ‘procednres),i newspapers,, standard business reports, etc., and the coverage is not as Ccomplete was, in: the 1974 Benchmark Survey or the Survey of Current Business_ar;iclesg Another source of data is a quarterly report ‘ént:§iéd;,minhoqhdemenisghoti ‘..r APoreign’Investment in Des. Manufacturingj Indq§tri3§f%flfpufiIi§hed_jbyjfthe ¢onference“Board in New York City. The list of amnapnéémén;s”1anicn is based .n published sources and consequently not completef, includes the domicile of the foreign company, the firm undertaking the investment, and a description of the investment, although no totals for foreign investment in the 0.5. are given. cas- n 1373091 UPDATE-OZ/15/80 92222.1.-‘.L..na.c12;1.:2s1e_anQ.r§.<=ens-9r92th As of Dec. 31, 1978, the EDI position in the 0.3. was- $40.8 billion, up from $34.6 billion at the end of 1977 and $30.8 billion at the end of 1976 ‘‘ annual growth rates or about 18% 1b 1978 and 12% in 1977. By comparison, the 0.5. direct investment position abroad, which increased 10% in 1977 and 12% in 1978, was $168.1 billion at the end of 1978. Thus, while EDI in the U.s. is small relative to 0.5. direct investment abroad, it is growing at a higher rate . The EDI position can change in the following three ways: (1) Through net capital inflows (termed "equity and intercompany account inflows“ in the statistics); (2) through reinvestment of earnings; and (J) by valuation adjustments (if, for example) an investor changes his country of residence from the U.S. to a foreign country or vice versa). FOREIGN DIRECT INVESTMENT 122% FDI position on Dec. 31 20.6 Annual Percent increase in EDI position Annual change in FDI position due to -- Net capital inflows Beinvested earnings valuation adjustment Total Annual Change N:K. Not Available 3011 ICES 2 Investment in the United States, 1 59, August 1979, Part I, p. 39; Christopher L. Bach. International Transactions, Third Quarter Gregory 6. Pouch and L.A. Lupo. CBS’ 5 TABLE 1 (billions of dollars) 1213 l2l§ l2.§ 25.1 27.7 30.3 21.3% l0.u% 11.23 1.1a 1.2 1.5 -0.2 -0.1 -1.2 4.. 2.5 3.1 1978. Business, v. 59, Dec.. 1979, p. 26. 1979. IB78091 (FDI) IN THE 0.3. 12.3% Foreign Direct Survey of Current Business, v. U.S. Survey of Current la ~.I lor- -F C 0 G 17.9 2.3 -0.1 UPDATE-02/15/80 (Jan. ~ thru Sept. 1212 cns- 6 IB78091 UPDATE-02/J5/80 The unusually large negative valuation adjustment of S-1.2 billion in 1976 was primarily due to the reclassification of a large investment from U.K. to U.S. ownership. Excluding the valuation adjustment gives a better idea of the investment decisions of foreigners. Table 1 shows that net capital -inflows were large in 197a and 1978, but no discernible‘ upward trend is obvious for the four years studied. Beinvested earnings appear to be increasing over time, as would be expected since the FDI position is increasing, causing earnings to increase. At the end of 1978, the total PDI position was $40.8 billion: parent firms in the Netherlands held the largest amount ($9.8 billion), followed by the U.K. ($7.4 billion), Canada ($6.2 billion), Germany ($3.2 billion), Switzerland ($2.8 billion), Japan ($2.7 billion) and France ($1.9 billion). To discern which countries were leading when measured by new investment, the countries were ranked also by the total of their net capital inflows and reinvested earnings during 1978. Total net capital inflows and reinvested earnings in 1978 were $6.3 billion: of this, the Netherlands accounted for the largest share ($1.9 billion) followed by the U.K. ($1.0 billion), Japan ($.9 billion), Germany ($.7 billion) and Canada ($.5 billion). The most notable fact is that Japan, which is the sixth largest country investor when measured by the FDI position, is third in terms of new investment in 1978. The direct investment or members of the Organization of Petroleum Exporting Countries (OPEC) is quite small. At the end of 1978, the FDI position in the U.S. by OPEC countries was $325 million, an increase of $69 ,million from 1977. l£-!2l§2.lQQE§E£;§§ 飧.§9 §;QE§£§.in!e5E1nQZ T T jjjijj of total FDI in the 0.5. of $u0.8 billion at the end of 1978, by far the llargest industrial category was manufacturing ($16.3 billion),. followed by I trade ($8.9 billion), and petroleum ($7.9 billion). when measured by new investment during 1978, the ranking of industries was the same; investment in manufacturing was $2.3 billion, investment in trade $1.6 billion and investment in petroleum $1.3 billion. of the manufacturing category in 1976, ‘the chemical and allied products industry is by far the largest subgroup when ranked by theeamount of FDI, while the primary and fabricated aetals industry is the largest recipient of new investment. iEE§§§l-9§2QEQEEEEéllIl_l£.E2§-Ql§l.QQ.§Q£§lQE§£§.E£§§§E_EQ.2Q!§§EZ rhe most recent data available on the geographical distribution of foreign *direct investment are given in an article by Jane) snedden Little entitled “Locational Decisions of Foreign Direct‘ Investors in the 10.5.," in_ the July/August 1978 issue of the §gg_§gg;anQ §§QgQ§;§_§§!;§!;, Based on data"£g the 1974 Benchmark Survey, Announcements of Foreign Investment in 0.5. Manufacturing Industry and the Statistical Abstract of ‘the (United States, regions of the U.S. were ranked by criteria such as the number of foreign manufacturing plants, the number of foreign manufacturing plants per thousand CRS- 7 IB78091 UPDATE-Oz/15/80 square miles, and the number of foreign plants per million persons in 1975. For the period 1975 through the 3rd quarter of 1977, the criteria used for rankings were the number of foreign acquisitions and constructions per thousand square miles, the number of foreign constructions per thousand square miles, the number of foreign acquisitions and constructions per million persons, and the number of foreign constructions per million persons. The uideast and New England regions ranked first or second by all of the above criteria, except the number of constructions per million persons, where the Southeast was the most popular, and the number of foreign plants in 1975, where the Southeast ranked second after the uideast. Those states that are most attractive to foreign investors differ depending on the criterion used, although as would be expected from the regional analysis discussed above, most of them are in the Mideast, New England, and the Southeast. Using the criterion of the number of foreign acquisitions and constructions per thousand square miles from 1975 through the 3rd quarter of 1977, the ten most preferred states were Bhode Island, New Jersey, Connecticut, New York, Massachusetts, Delaware, Pennsylvania, Virginia, Maryland, and Vermont. This study indicated that foreign investors stress some factors more than U.s. investors when deciding where in the U.S. to locate their productive facilities. Of particular importance to foreigners are differences in wage levels among States, and the availability of large port facilities, while domestic investors place more emphasis on state differentials in fuel and electricity costs than do foreign investors. w ihx_Q2-f2rei9ne£§_inze§2.in-she-Q2ii2d-§sares According to the 1974 Benchmark Survey, the large market size and the economic stability of the United States are two of the most important reasons why foreigners invest in the U.S. The large U.S. market, unified by a common language and tastes, is perceived as offering better opportunities for future growth and profits than the European market, where the large growth rates of the post-war era are slowing down. Also, the, trend toward government participation in the economy is thought to be progressing slower in the 0.3. than abroad, and overall, the private enterprise system preferred by foreign investors is regarded as healthier here. Two other important reasons mentioned in the 1974 Benchmark Survey are the growth in corporate capacity to finance PDI in the U.S. through retained ‘earnings, borrowing, or issuing equities and the desire to diversify, both by. product line and geographically. Recently, unit labor cost developments, adjusted for changes in exchange rates, have become more favorable in the U.S. than in many countries abroad. Also, labor unions in the United States are considered more flexible and less interested in participating in management decisions than they are abroad. Another‘ important factor is the desire to gain access to U.S. ‘echnological.developments, managerial skills, and marketing techniques. The proximity to large U.S. capital markets for future financing needs, relatively low prices for shares of U.S. companies, the elimination of transportation costs (particularly important in the chemical and heavy machinery industries), the possibility of vertical integration to secure raw material supplies, and relatively low U.S. tax rates are all of varying CBS- 8 IB78091w UPDATE-02/15/80 significance to different industries. Although avoiding tariff and non-tariff barriers has always been an important motivation, the more recent trend toward increasing protectionism within the United States may be encouraging more foreign investment. For example, 0.5. restraints on Japanese TV exports to the 0.5. was probablyh a factor in the Japanese TV-manufacturing investment in the United States. The non—discriminatory attitude of the 0.5. government regarding foreign investment as well as the incentives offered by many state governments may be important. Also, the 0.5. is considered politically more stable, and the fear of terrorism, a common factor abroad, is largely absent in the 0.5. The recent depreciation of the 0.5. dollar in the foreign exchange markets provides an added stimulus to foreign investment in the 0 0.5. The depreciating dollar, by making investment in the 0.5. cheaper in terms of foreign currencies, increases the purchasing power of foreign firms that want to invest here. Also, if the dollar appreciates in the future, the future income earned.on FDI in the 0.5. and sent abroad will be worth more in units of foreign currencies; thus, if foreigners, perceive the dollar as presently undervalued, they see this as an added incentive to invest in the 0-5. IS FDI BENEFICIAL OB HARMFUL TO THE UNITED STATES? It is virtually impossible to estimate the net effect of EDT on the 0.5. economy, since many factors are involved. For example, the effect depends on (1) whether the foreign investment results in a net addition to 0.5. domestic investment or substitutes for 0.5. domestic investment; (2) whether or not the 0.5. is operating at or near full employment when the foreign investment is undertaken: (3) whether the funds for the investment are obtained from abroad or in 0.5. financial markets: and (4) whether the short-run °effects are being considered. In the following discussion, a fg;g;gn_;ngg§tmgnt is defined as the amount of money involved in the acquisition of 0.5. productive facilities or the construction or expansion of productive facilities in the 0.5. by foreign entities. g;§;_ g9mg§g;g_ iggggggggt is defined as the construction or expansion of productive facilities in the 0.5. by both 0.5. and foreign entities. T Effeet 211. inzes.:nen1=....§N l.J2ns an -21-‘isee Probably the most important effect of foreign direct investment on the 0.5. economy is its impact on 0.5. domestic investment, jobs, real GNP, hand prices. In general, as long as there are unused resources in the economy, an increase in 0.5. domestic investment (whether from 0.5. or foreign» sources) results in an increase in 0.5. productive capacity, new jobs, higher local, State, and Federal tax revenues, and an increase in real GNP by more than thr increase in 0.5. domestic investment due to the "ripple" effects on the economy. If the economy is at full employment, an increase in 0.5. domestic investment will tend to increase prices more than jobs and real GNP, at least in the short run. cns- 9 1373091 upbAmn—oz/1:/so whether or not a foreign investment ultimately increases 0.3. domestic investment beyond what it would have been in the absence of the foreign investment (i.e., results in a net addition to 0.5. domestic investment) depends partially on whether the foreign investment is an acquisition of a 0.S. firm, or represents new construction or expansion of facilities. Foreign investments that involve new construction or expansion of facilities ‘always result in a net addition to 0.3. domestic investment; however, in some cases, construction or expansion by a foreign firm may cause a 0.3. firm to reduce its planned investment expenditures and consequently the inflow of foreign investment is ultimately offset by a decline in planned investment by a 0.3. firm. On the other hand, a foreign acquisition of a 0.3. firm is not itself a net addition to 0.5. domestic investment; however, if the funds received by the 0.5. selling company are reinvested in plant and equipment elsewhere in the 0.5., a net addition to 0.5. domestic investment ultimately occurs. On balance, it is likely that foreign direct investment increases 0.5. domestic investment beyond what it would have been in the absence of the foreign investment, with a beneficial effect on jobs, real GSP, and tax revenue S . Efiiect 03 Ul5- Qéééflgé. f Eélm nE§_§BQ.§§§ LBEEEDEEEQEQL I§lE§ 9§-£E§-QQll§E In general, a foreign direct investment in the 0.5. is beneficial to the 0.5. balance of payments and the international value of the dollar if the net effect of all transactions connected with it results in an increase in the demand for dollars on the foreign exchange market, causing the dollar to appreciate, or depreciate less rapidly. However, if a foreign direct investment leads to a net outflow of 0.5. dollars, it is harmful to the 0.5. balance of payments and the dollar, since it adds to the supply of dollars on the foreign exchange market and causes the dollar to depreciate, or rappreciate less rapidly. In the short run, a foreign direct investment is beneficial to the 0.5. balance of payments if the funds for the investment are transferred to the United States from abroad. However, if the funds are borrowed in the 0.5. financial markets, or represent reinvestment of earnings, there is no effect on the 0.5. balance of payments or the dollar. * ‘ In the long run, the foreign direct investment will be beneficial to the 0.5. balance of payments and the dollar to the extent that (1) 0.3. imports are displaced by goods produced in the 0.5. by foreign investors or (2) 0.3. exports increase due to the production in the 0.5. and shipment abroad of ’ goods that were formerly produced in the foreign country. on the other hand, the long-run effect on the balance of payments and the dollar will be harmful to the extent that (1) payments are made abroad ‘of dividends, interest, royalties, and fees or (2) the foreign investment is a sales outlet for a foreign firm (which results in higher 0.3. imports). 0.5. imports increase if capital equipment for use in the new plant is imported into the United States from abroad. However, if the capital equipment is paid for by the "foreign parent company (instead of the 0.5., subsidiary) the import increase is offset by an investment inflow and there is no net effect on the 0.3. ‘alance of payments. 2e2hn9l9gx-$ran§:er§ cns—4o 1373031 upnamn-02/15/30 Foreign direct investment leads to both technology inflows and technology outflows; some foreign investment may introduce superior technology or invigorate an old firm, while in other cases foreign firms acquire 0.3. companies primarily to obtain the benefit of their technology. According to the 1974 Benchmark Survey, the net effect of technology transfers has been an inflow in the area of product and process technology, while in the realm of management and marketing techniques, technology outflows have exceeded technology inflows. .<21_:1.1e£..f esters other possible implications of FDI include its effect on competition among firms within the 0.5., its effect on 0.5. capital markets, the national security, the concern regarding foreigners‘ gaining control of raw materials or other strategic supplies, and its effect on some localities in the 0.5. In general, foreign direct investment is likely to enhance competition by bringing new firms into an industry. This is especially true if the 0.5. industry is dominated by a few large firms and the new foreign firm is both large and dynamic. However, a small foreign firm entering a 0.3. industry dominated by a few large firms or an industry which already has a large number of firms would have a negligible influence on the degree of competition. Domestic borrowing by foreign-owned firms has the same effect on 0.3. credit markets as does domestic borrowing by 0.3. firms; the demand for funds increases and, to the extent that money markets become tighter, interest rates tend to rise. At present and in the foreseeable future, the amount of domestic borrowing by foreign-owned firms is very small relative to the size of 0.5. capital markets and its impact is minimal. And, if domestic borrowing by foreign—owned firms increases substantially, it may not create additional problems since presumably the Federal Reserve System could take ithis as well as other factors into account when determining its policy regarding the.supply of money. Concern is sometimes expressed that EDI threatens the 0.3. national ~security and might impede 0.5. access to its own strategic supplies. However, foreign-owned firms have to obey the same 0.5. laws asi domestic firms. Strict federal controls over management of foreign-owned assets in the 0.3., and in an extreme case expropriation of foreign-owned assets, is always possible. 0 0 .£DI often attracts attention, and sometimes hostility, particularly if it is an acquisition of an existing firm (most people feel more hospitable toward foreign direct investment if it involves the construction or expansion of facilities, especially by former foreign competitors). This might reflect a fear of foreigners themselves, a fear that foreigners are buying domestic firms at uneconomic prices (perhaps overpaying) making it hard for local firms to compete, or a fear that foreign! firms will not understand local labor or community needs. u.s. POLICY REGARDING PDI with a few exceptions, the 0.5. policy on FDI is to accordi it equal »treatment with domestic investment, i.e., neither to encourage nor to cas—11 IB7bO91 UPDATE-02/15/80 discourage it. Eor example, President Ford made the following statement at the signing of the Foreign Investment Study.Act of 1974: As I sign this act, I reaffirm that it is intended to gather information only. It is not in any sense a sign of a change in America's traditional open door policy towards foreign investment. we continue to believe that the operation of free market forces will direct worldwide investment flows in the most productive way. Therefore my Administration will oppose any new restriction on foreign investment in the United States except where absolutely necessary on national security grounds or to protect an essential national interest. This policy was reaffirmed in extensive administrative reviews of EDI‘ in 1975 and 1977 that resulted in the establishment of an interagency Committee on Foreign Investment in the 0.S., under the chairmanship of ‘the Treasury Department. This Committee consults with foreign governments concerning potential investments in the 0.3., monitors foreign investment trends and makes recommendations to the National Security Council and the Economic Policy Group. Another administrative action was the creation of the Office of Foreign Investment in the 0.3. in the Commerce Department to collect and analyze data on FDI in the 0.3. The "open-door" policy is consistent with the bilateral treaties of friendship, comerce and navigation between the 0.5. any many of its trading partners, and with 0.S. obligations under the Code of Liberalization of Capital uovements of the organization for Economic Cooperation and Development, adopted in June 1976. one reason for 0.5. policy toward EDI is the traditional belief that only in a free market environment (with a free flow of investment funds) can maximum-economic efficiency be achieved. Related to this is the recognition of the benefits of FDI for the 0.3. economy. Also, since 0.5. residents are large direct investors abroad, the principle of equitable treatment for all investors is in the interest of the 0.5. Lastly, restrictions on FDI in the 0.5. might have adverse foreign policy implications. The exceptions to the *open—door“ policy are federal laws that restrict foreign ownership of firms in national defense industries, certain natural resource sectors of the economy, coastwise and freshwater shipping, domestic a radio communications, domestic air transport, acquisition of federal mineral lands, and hydroelectric power. It should again be noted that foreign firms have to obey the same laws and regulations as ‘domestic firms (such as anti—trust laws and SEC regulations). Although there are some state laws restricting foreign ownership in real estate, banking, and insurance, most states are eager to attract foreign investors. The wide range of incentives to foreign (as swell as domestic) investors by manyw states includes initial financing assistance, working capital loans, tax exemptions or holidays, technical help, and the vailability of industrial development bond ‘issues. Atv least 24 states maintain offices in Europe and seven states maintain offices in Japan to persuade manufacturers to locate plants in their state. cns-12 1373091 UPDATE—02/15/80 LEGISLATION During the 95th Congress, three bills pertaining to disclosure of foreign direct investment in the 0.5. were passed. Title II (Domestic and Foreign Investment Improved Disclosure Act) of P.L. 95-215 (S. 305) requires expanded disclosure to the SEC of beneficial owners of more than 5% of specified kinds of securities. P.L. 95-381 (S. 2928), the Amendments to the International Investment Survey Act of 1976, increased the appropriation authorization from $1 million to $4 million and nade other minor changes. P.L. 95-460 (5. 3384), the Agricultural Foreign Investment Disclosure Act, requires reporting to the Agriculture Dept. and analysis of foreign ownership, purchases or transfers of any interest in 0.5. farmland. fl.R. 158 (Brodhead) Amends the Securities Exchange Act of 1934 to require notification by foreign investors of proposed acquisitions of equity securities of U.S. companies, authorizes the President to prohibit such acquisitions as appropriate for the national security, to further foreign policy or to protect the domestic economy of the U.S., requires issuers of registered securities to»maintain with the SEC a list of the names and nationalities of beneficial owners of their equity securities. The bill was introduced and referred to the House Committee on Interstate and Foreign Commerce on Jan. 15, 1979 and referred to the Subcommittee on Consumer Protection and Finance on Jan. 31, 1979. H.B. 1372 (Grassley)/H.R. 1494 (Alexander) Amends theslnternal Revenue Code of 1954 to subject foreign investors to the capital gains tax on gain from the sale of real property situated in the United States. The bills were introduced on Jan. 24 and 25, 1979 and referred to the House Committee on ways and Means, which held hearings on Oct. 25, 1979. H.R. 1906 (AuCoin et al.) Limits and requires an annual report with respect to the level of foreign investment in the U.S. fishing industry, and for other purposes. The bill was introduced on Feb. 8,‘ 1979 and referred to the House Committee on Merchant Marine and Fisheries and the subcommittee on Fish and wildlife. H.R. 3182 (Gaydos) (Amends the Securities Exchange Act of 1934 to restrict persons who are not citizens of the U.S. from acquiring more than 35% of the nonvoting securities or more than 5% of the voting securities of any issuer whose securities are registered under such Act. This bill was introduced on Mar. 22, 1979 and referred to the House Committee on Interstate and Foreign Commerce and the Subcommittee on Consumer Protection and Finance. 1 H.B. 3653 (Bingham, et.al.)/S. 758 (Inouye) Authorizes appropriations of $4.4 million for the fiscal year ending Sept. 30, 1980 and $4.5 million for the fiscal year ending Sept. 30, 1981 under the International Investment Survey Act of 1976. .The bills were introduced on cas-13 IB78091 UPDA‘1‘E—02/ 15/80 Apr. 23, 1979 and nar. 26, 1979 and referred) to thew House Committee on. Foreign Affairs, the House Subcommittee on International Economic Policy and Trade'and the Senate Committee on Commerce, Science and Transportation. The House Subcommittee held hearings and approved H.R. 3653 on Apr. 26, 1979. For further House action, see H.B. 3783. sThe Senate Committee on Commerce held hearings on Apr. 11, 1979 and reported to the Senate without amendment, -Report No. 96-129, on day 10, 1979. S. 756 passed Senate without amendment on may 17, 1979. H.R. 3783 (Bingham) Title II -- International Investment Survey Act Authorization of Appropriations. Authorizes appropriations of $4.4 million for the fiscal year ending Sept. 30, 1980 to carry out the International Investment Survey Act of 1976. This hill was introduced on Apr. 30,_1979 and referred to the House Committee on Foreign Affairs, which held a hearing on hay 1, 1979 and mark-up sessions on hay 4, 7, 8 and 9, 1979. For further action see H.B. 4034: ' H.R. 4034 (Bingham, et al.)/S. 737 (Stevenson et al.) Title II of B.R. 4034 and Amendment to S. 737. Authorizes appropriations of $4.4 million for the fiscal year ending Sept. 30, 1980 and $4.5 million for the fiscal year ending Sept. 30, 1981 to carry out the International Investment Survey Act of 1976. h.R. 4034 was reported as a clean bill ‘in lieu of H.B. 3783 on day 10, 1979, and was laid on the tanle with S. 737, amended, passed in lieu, and referred to conferees on Sept. 25, 1979. The Senate and House agreed to the Conference Report (H.Bept. No. 96-432) on Sept. 27, 1979 and Sept. 28, 1979 and S. 737 became Public Law 96-72 on Sept. 29, 1979. I H.B. 5633 (Pascall) Amends the Internal Revenue Code of 1954 to provide that nonresident alien individuals and foreign corporations shall be taxed at capital gain rates on gain from theesale or exchange of real property located in the United States. This bill was introduced on Oct. 18, 1979 and referred to the House Committee on ways and means. H.B. 5634 (Fisher) Amends the Internal Revenue Code of 1954 to subject foreign investors to the capital gains tax on gain fro: the sale of real property situated in the "United states. This bill was introduced on Oct. 18, 1979 and referred to the House Committee.on ways and neans, which held hearings on Oct. 25, 1979. For further action, see H.B. 6007. I I H.B. 6007 (Fisher) Amends-the Internal Revenue Code to tax foreign investors Sin U.S. 7 real estate on the same basis as 0.3. citizens. This bill was referred. to »the "House Committee on ways and Means on Dec. 3, 1979 and a markup session was H.R. 6128 (Leach) Linits investment in the U.S. by nations which are henhers of an oil cartel and by the residents and other legal entities of such anations. This cas—14 1373091 UPDATE-02/15/80 bill was introduced and referred to the House Committee on Agriculture, the House Committee on Interior and Insular Affairs and the House Committee on Interstate and Foreign Commerce on Dec. 13, 1979. It was referred to the Subcommittee on mines and Mining on Jan. 28, 1980 and the Subcommittee on Consumer Protection and Finance on Feb. 1, 1980. A S. 192 (Bumpers) Amends thezlnternal Revenue Code of 1954 to equalize the tax treatment of domestic and foreign investors. The bill was introduced on Jan. 23, 1979 and referred to the Senate Committee on Finance and the Subcommittee on Taxation and Debt Management which held hearings on June 25, 1979. S. 208 (Wallop et al.) Amends the Internal Revenue Code or 1954 to subject foreign investors to the capital gains tax on gain from the sale of real property situated in the United States. The bill was introduced on Jan. 24, 1979 and referred to the Senate Committee on Finance yand the Subcommittee on Taxation and Ouebt Management which held hearings on June 25, 1979. Several bills regarding foreign investment in 0.5. farmland have been introduced in the 96th Congress. See IB780b4 for information. §§1.iB.££!§§ U.S. Congress. House. Committee on Agriculture. Subcommittee on Family Farms, Rural Development, and Special Studies. Impact on foreign investment in farmland. Hearings, 95th Congress, and session, on H.R. 13128 and related bills. June 20, July 19 and July 28, 1978. 433 p. -=--- Committee on Foreign Affairs. Subcommittee on International Economic Policy and Trade. International Investment Survey Act Authorization for Fiscal Years 1980 and 1981. Hearing and markup on H.R. 3653, 96th Congress, 1st session, Apr. 26, 1979. I46 p. I --~-- Committee on Foreign Affairs.~ Export Administration Act Amendments of 1979. Hearing on H.B. 3783, 96th congress, 1st sesion, may 1, 1979. Unpublished. ----- Committee on Government operations. Subcommittee on A Commerce, Consumer and monetary Affairs. Foreign investment in the United states. Hearings, 96th Congress, 1st session, July 16, 17, 18 and 26, 1979. Unpublished. ----- Committee on Government 0perations.i Subcommittee on Commence, Consumer and Monetary Affairs. The operations of federal agencies in monitoring, reporting on, and analyzing foreign investments in the United States (Part 1). mfiearings, 95th Congress, 2nd session, Sept. 19-21, 1978. 531 p. Committee on International Relations. Subcommittee on International Economic Policy and Trade. Hearing and Markup on H.R. 12589, 95th Congress, 2nd session, Apr. the CBS-15 IB78091 UPDATE—02/15/80 25, May 4 and 10, 1978. $3 p. ---- Committee on Post Office and Civil Service. Subcommittee Data on foreign ownership of Hearing, 95th Congress, 1st 15, 1977. 48 p. on Census and Population. property within the U.S. session on H.R. 7411. July ----— Committee on Ways and means. Taxation of foreign investors on the direct or indirect ownership of property in the United States. Hearing on H.B. 1372 and H.R. 5634, 96th Congress, 1st session, Oct. 25, 1979. Unpublished. Senate. Committee on Commerce, Science and Authorization for the International Hearing on S. 2928, 95th Congress, 1978. 114 p. Congress. Transportation. Investment Survey Act. 2nd session, Apr. 19, ----- Committee on Commerce. FY 80-81 authorizations for International Investment Survey Act programs. Hearing on S. 758, 96th Congress, 1st session, Apr. 11, 1979. Unpublished- Committee on Finance. Subcommittee on Taxation and Debt management. Hearing on S. 192 and S. 208 to provide for the tax treatment of foreign investors for property located in the United States. 96th Congress, 1st session, June 25, 1979. Unpublished. United States in the author A list of hearings on foreign direct investment in the 93rd and 94th Congresses can be obtained by calling (287’5756). E-1.12932 § ..é!Q_C0N §§§§.§£0N .;1.1.- -299 §2.12§!T5 Committee on Foreign Affairs. Direct foreign Washington, U.S. 0.5. Congress. House. Subcommittee on Foreign Economic Policy. investments in the U.S. July 7, 1974. Govt. Print. Off., 1974. 14 p. At head of title: 93rd Congress, 2nd session. Committee print. Committee on International Relations. Amendments to International Survey Act of 1976; report to accompany. H.B. 12589 including cost estimate of the Congressional Budget Office (95th Congress, 2nd session, Report no. 95-1154) Washington, U.S. Govt. Print. off., 1978. 6 p. Congress. Joint Committee on Taxation. tbescription of S. 192 and S. 208 relating to tax treatment of foreign investment in the United States, scheduled for a hearing before the Subcommittee on Taxation and Debt Management Generally of the Committee on Finance on June 25, 1979; prepared for the use of the Committee on Finance. Washington, U.S. Govt. Print. Off., 1979. 10 p. Congress. Conference Committees. Export Administration Act of 1979; conference report to accompany S. 737‘ CBS-16 1B78o91' UPDATE-02/15/80 (96th Congress, 1st session, House Report no. 96-#82) Washington, 0.3. Govt. Print. Off., 1979.‘ 59 p. 0.5. Congress. Senate. Committee on Commerce, science and Transportation. Authorizing appropriations for the International Investment survey Act for fiscal years 1980 and 1981; report to accompany S. 758 (96th Congress, 1st session, Report no. 96-129) Washington, 0.3. Govt. Print. off., 1979. 5 p. ----- Committee on Commerce, Science and Transportation. International Survey Act of 1976 authorization report to accompany S. 2928 (95th Congress, 2nd session, Report no. 95-863) Washington, 0.5. Govt. Print. Off., 1978. 9 p. 0.3. General Accounting Office. Office of the Conptroller General of the United States. Are OPEC financial holdings a danger to 0.5. banks or the economy? June 11, 1979. EHD-79-45. 51 p. 1 0.5. General Accounting Office. Office of the Comptroller General of the United States. Controlling foreign investment in national interest sectors of the 0.5. economy. Oct. 7, 1977. ID-77-18. 82 p. Q§§Q§QL9§!-QE.§!§!$§ 10/14/78 -- The Agricultural Foreign Investment Disclosure Act (P.L. 95-460) necame law. ' 09/22/78 —— The Amendments to the International Investment 1 Survey Act of 1976 (P.L. 95-381) became law. 12/19/77 -- Title II of P.L. 95-213 (The Domestic and Foreign Investment Improved Disclosure Act) became law. 10/11/76 - rThe International Investment Survey Act of 1976 (P.L- 94-472) became law. 10/26/74 -—-The Foreign Investment Study Act of 1974 ‘ (P.L. 93-479) became law. P §_Qli£QEAL_§§§E§§!Q§_§9H§§§§ Announcements of foreign investment in 0.5. manufacturing industires. The Conference Board, Inc., New York, published quarterly. Bach, Christopher L. 0.5. International Transactions, Third Quarter 1979. Survey of current business, v. 59, Dec. 1979, p. 21-32. Fouch, Gregory G. and L.A. Lupo. Foreign direct investment in the United States, 1978. Survey of current business, v. 59, August 1979, Part I, p. 38-51. Little, Jane Sneddon. Locational Decisions of foreign direct United States. CBS-17 IB78031 UPDATE-02/15/80 Federal Reserve Banx of July/August 1978. investors in the United States. Boston. New England Economic Review. p.4}£3. Department of Commerce. Foreign direct investment in the United'States: report of the Secretary of Commerce to the Congress in compliance with the Foreign Investment Study.Act of 1974, Public law 93-479. flashington, 0.8. Department of Commerce: for sa1e’by the Supt. of Docs., U.S. Govt. Print. Off., 1977. 9 volumes. ----- Office of foreign Investment in the United States. Foreign direct investment in the United States; 1976 transactions -- all forms; 1974-76 acquisitions, mergers and equity increases. Washington, for sale by the Supt. of Docs., 0.5. Govt. Print. Off., 1977. 43 p. Library of Congress. Congressional Research service. Foreign investment in U.S. farmland [by] Holly nirchel. (Continuously updated) Issue Brief 73064 Foreign ownership of property in the United States: federal and state restrictions [by] Howard Zaritsxy. Washington, July 11, 1978. 30 p. / nultilith 78-1455 —