THE BLOG
11/07/2013 01:18 pm ET | Updated Jan 23, 2014

Select the USA: The Importance of FDI to the US Economy

The US has historically been the world's leading destination for inward investors - driven by its standing as the largest free-market economy, open investment policy, political and economic stability, comprehensive infrastructure, sound rule of law, large educated workforce, and excellent intellectual property protection. But no more.

In the period 1999 to 2012, the US share of annual global foreign direct investment flows fell by more than half, from 26 per cent to 12 per cent. While the US remains a leading destination for FDI, it is no longer number one in terms of market share. In 2012, China moved ahead of the US to capture first place. Many other nations like Brazil, Canada and Mexico are competing aggressively through promotional efforts, reform and infrastructure investment.

This is not surprising considering that the US political, social, business and economic environments are increasingly challenging to navigate; tax, immigration, education and regulatory policies fall short of corporate expectations. The recent government shutdown was just another example of the political stalemate that could potentially dissuade inbound investment in the US and bring sudden halt to burgeoning interest from potential foreign investors.

In addition, US investment in R&D as a percentage of gross domestic product trails most developed nations and, according to the American Society of Civil Engineers, deferred investment in infrastructure is on pace to reach $3.6tn by 2020. Several vocal public figures have been calling for Infrastructure Investment for some time, with some going so far as to suggest if nothing is done, the US should erect signage at the beginning of bridges indicating "good luck" and at end stating "consider yourself lucky."

This ought to worry Americans: foreign direct investment is a powerful economic engine, promoting job creation, increasing wealth and living standards, and driving growth and innovation that support economic competitiveness. In 2011, US subsidiaries of foreign-owned firms accounted for nearly one fifth of all US exports, employed 5.6m workers and invested $45.2bn in US R&D.

Investment really matters to individual towns and cities, too. In 2010 India-based Jyoti Structures invested tens of millions of dollars to build an advanced manufacturing facility in Conroe, Texas where they created hundreds direct and permanent jobs and generated revenues for many companies supplying and servicing Jyoti's operations.

So the US must optimize its investment climate now. This means elevating awareness of the importance of FDI and evolving policies, practices and attitudes to the new global standard that include concrete outward facing initiatives. The Global Investment in American Jobs Act that passed the House in September with strong bipartisan support provided an encouraging and substantive first step. Now the US must focus on the dynamics that it can control such as continuing to voice the welcome message which got lost after 9/11 and forming a central body that has real authority, appropriate standing and adequate funding on par with other nations competing for inbound investment. It is important that such a body has the legitimacy and cross-border positioning necessary to effect change including engaging Ambassador level leadership and dedicated personnel in this effort.

The US has lots of work to do. Fortunately, there are several indicators of positive change. First, the President's creation of SelectUSA, a cross-federal initiative launched in 2011 to facilitate FDI, was a step in the right direction. In the 2013 ATKearney FDI Confidence Index, an indicator of future trends, the US returned to number one position for the first time since 2001.

Recent discoveries of shale gas in the US have been a real game changer, allowing it to boast the lowest energy prices in the world. This translates to greater appeal for industrial companies which are so important to revitalizing the US manufacturing sector and to creating higher paying jobs. Lower energy prices coupled with the Trans-Atlantic and Trans-Pacific trade deals currently under negotiation make the US more attractive than ever for FDI.

Although this a promising start, the US must give FDI attraction the serious attention and resources that it deserves. In this moment the US is face-to-face with a great challenge and an even greater opportunity. Last week in Washington DC, President Obama and Commerce Secretary Penny Pritzker headlined the first-ever US FDI summit hosted by SelectUSA. With over 1200 public and private sector participants from 60 countries, the Summit provided a milestone for advancing the US as the premier destination for business investment.

Mr. Wolf, founder & CEO of strategic advisory firm 32 Advisors, is a member of the President's Export Council. Mr. Johnson, former founding executive director of SelectUSA from 2011-2012, is Head of Inbound Investment at 32 Advisors.