Foreign Investment by U.S. Manufacturers Nearly Doubled in 2004

Foreign direct investment (FDI) by U.S. manufacturing multinationals increased a staggering 90% from about US$28 billion in 2003 to over US$54 billion in 2004 according to a new study by Deloitte Research.

According to Deloitte, the surge in FDI flows may be explained in part by a rise in outward U.S. manufacturing cross-border M&A activity, which has continued to climb since 2002, first surging 80%, from US$16 billion in 2002 to US$29 billion in 2003, and then increasing to nearly US$31 billion in 2004—its fourth-highest level over the last decade and a half. FDI growth may have also been fueled by improved corporate profitability and enhanced confidence by manufacturers in global markets.

Delliotte said that its optimistic outlook for global investments is also supported by the firm's global benchmark study of 226 U.S.-based manufacturing multinationals and their plans for growing their companies during the period from 2004 to 2007. The study results show dramatic changes ahead for global manufacturers. Entering and expanding marketing/sales, manufacturing, sourcing, and R&D/engineering operations in major emerging markets around the world—including China, India, Central and Eastern Europe, and Mexico—is a top priority for most companies studied.

Despite the bullish outlook on globalization, the challenges faced by global manufacturers are significant. Deloitte's research suggests a continuing global investment paradox. While foreign direct investment into high-wage countries has remained fairly steady from 1999 to 2003 (the last five years for which data are available for following comparative analysis), around an average of about US$22 billion per year, global investments into fast-growing, low-wage economies declined nearly 67 percent over the same period to just US$4 billion in 2003.

Interestingly, despite what would appear to be major opportunities for FDI in emerging markets, such as China and India, most U.S. manufacturers are putting most of their investment bets on the developed markets of Western Europe, North America (Canada), and Asia-Pacific (including Australia). For example, U.S. manufacturing FDI into India fell to just over US$50 million in 2003, down 80% from nearly US$250 million in 1999. Investments by U.S. manufacturers into China—a hotbed of global manufacturing expansion—reached $760 million in 2003; down more than 52% from nearly US$1.3 billion in 1999, although recovering slightly from a low of US$575 million in 2002.

In addition, most companies are still looking for better ways to leverage and optimize their global investments for both profits and growth. Despite enormous investments over the last decade, a majority of the U.S. manufacturers Deloitte studied are struggling to build an optimal global network.

“Less than 5% of companies say they have a strong advantage in their overall supply chain cost structure, and less than 2% of companies have undertaken significant initiatives to optimize their supply chain network,” Deloitte said. “Yet, investing in the capabilities for the management and continuous optimization of global network investments can pay off handsomely.

“As we have found, the few companies that are able to leverage their global investment-in networks of sourcing, manufacturing, research & development, distribution, marketing, sales, and service operations, as well as the flows of goods, services, and finances that link them-are able to sustain profit levels far ahead of their competitors with higher growth and returns on asset and invested capital,” Deloitte added.

The study "Growing The Global Corporation" is available as a PDF file on Deloitte's web site: www.deloitte.com.

PaperAge. Copyright © O'Brien Publications, Inc. All rights reserved.