Inward and Outward Foreign Direct Investment: the Case of U.s. Forest Industry

In the 13 years preceding 1995, foreign direct investment in the U.S. forest industry increased 54 percent, but the U.S. direct investment in forest industry abroad nearly doubled. The forest industry's share of total foreign investment in the U.S. manufacturing sector declined, but its share of foreign investment abroad increased. During the same period, the U.S. forest industry attracted only about one-fourth as much as the foreign direct investment in the Canadian forest industry, although its size is six times as big as its Canadian counterpart. Foreign investors, both in the United States and other countries, have been attracted to the paper and allied sector much more than the wood products sector. The relatively stable political and economic system and the size of the U.S. market appear to be the main attractions for foreign investors to invest in the United States. The continuing decline in timber availability may be the main cause for U.S. forest industry finns to invest abroad, especially in timber-rich countries. Market structure and economies of scale could explain the concentration of investment in the paper and allied industry. This pattern of foreign investment has important implications for economic development and long-term competitiveness of the industry. T he influence of foreign capital in the U.S. economy has become controversial. It was an issue during the 1988 and 1992 presidential elections (11). Since the early 1980s, the U.S. export-import account has been in deficits. This could be the result of a lack of private and government savings and government deficits. Foreign investment inflows balance the deficits in the export-import account. Public debate focuses on two aspects of this issue. One is the trend in foreign investment in the United States, especially whether it is increasing or decreasing in terms of both its absolute level, and its relative share in particular industries. The other aspect of the issue is the form of the investment, particularly whether it represents passive portfolio investment or control of U.S. firms and resources. A pessimistic view regards surplus in a capital account as foreign control of u.s. resources. On the other hand, some policymakers see this as a good thing, because foreign capital helps boost the employment and productivity of u.s. industry. The parties in the debate tend to be polarized and their arguments are political and uncompromising. The only accurate way to evaluate the issue is through a careful analysis of the magnitude and form of foreign investment in particular industries, how foreign investment affects the U.S. political economy, and its related consequences for Americans with reference to the broad objectives of public policy. This debate has taken place in some developing countries for many years, mainly about firms from the United States and other developed countries taking over their resources. This paper examines recent trends in foreign direct investment in the U.S. forest industry (inward foreign direct investment) and the U.S. direct investment in the forest industry abroad (outward foreign direct investment), and provides an overview of related issues. This industry historically has not been the focus of much of the broader debate about fo~ign investment and control. However, as will be shown, recent developments in public policy, especially spillovers from regulations that protect endangered species, have drawn attention to the outflow and the consequences of foreign investment by American firms (1,3). The paper consists of three parts. The first documents trends in foreign direct investment in the U.S. forest industry and the U.S. direct investment in forest industry abroad. The amount and proportion of foreign investment in recent years are traced and the trends in each of the major sectors of the wood products industry and pulp and paper manufacturing are analyzed. United States inward and outward foreign investment in for~IS The author is an Assistant Professor in the School of Forestry, Auburn Univ., Alabama 36849-5418. He wishes to thank John Bliss, Warren Flick, Larry Teeter, two anonymous referees, and one associate ditor of this journal for commenting on an earlier draft. This paper was received for publication in May 1996. Reprint No. 8525. @Forest Products Society 1997. Forest Prod. J. 47(5):29-35. FOREST PRODUCTS JOURNAL VOL. 47. No.5 29 Figure 1. U.S. inward and outward foreign direct investment in the forest industry (SIC 24 and 26). as stocks and bonds in amounts considered unlikely to convey a controlling influence in decision making within the enterprise. Portfolio investors are less concerned with influencing policy and the operations of an enterprise. However, it is important to note that under this classification, both direct and portfolio investors may hold both equity and debt issued by an enterprise. This paper focuses only on direct investment due to its importance to foreign control of resources and data availability. The u.s. Department of Commerce has provided detailed information regarding foreign direct investment in the U.S. forest industry since 1980 and the U.S. investment in forest industry abroad since 1982 (19). Figure 1 shows foreign direct investment in the U.S. forest industry over the last 15 years and the U.S. direct investment in forest industry abroad over the last 13 years, measured in current dollars. It suggests that the level of foreign direct investment in the U.S. forest industry and U.S. direct investment in forest industry abroad rose fairly steadily during the study period, and that U.S. direct investment in the forest industry abroad is roughly three times that of foreign direct investment in the U.S. forest industry. During the period from 1980 to 1994, foreign investment increased from $1.2 billion to $4.1 billion and U.S. overseas investment increased from $4.2 billion in 1982 to $13.0 billion in 1994 (19). To illustrate the real trend in foreign investment, adjusted for inflation, Figure 1 also shows these annual flows expressed in constant 1982-1984 dollars. This shows that one-third of the apparent increase over the study period is attributable to inflation, and that the real value of foreign investment in the United States actually only increased 54 percent in 13 years. However, the U.S. investment abroad rose steadily until 1988, then accelerated, and increased 86 percent during the same time. As a result, the net outflow of capital from the forest industry (i.e., the difference between the U.S. direct investment in forest industry abroad and foreign direct investment in the U.S. forest industry) increased 178 percent in the last 13 years, from $2.98 billion in 1982 to $5.98 billion in 1994, all in constant 1982-1984 dollars. (For the purpose of comparison, this paper will use the 1982 figures as baseline for Share of forest industry in U.S. manufacturing sector. Figure 2. able the foreign investor to influence the management of the enterprise (21). Investment is classified as direct when the investor owns at least 10 percent of the voting securities of an incorporated business enterprise, an equivalent interest in an unincorporated business enterprise, or a 10 percent or more interest in real property transaction (16,21). However, in addition to the equity owned, it includes any other long-term claims against the enterprise in such forms as bonds, debentures, loans, and advances. This is in contrast with portfolio investment, which usually consists of financial assets such estry is also briefly mentioned. The second part offers an explanation of the observed trends in terms of changing international circumstances in forest products production and marketing and the incentives of foreign investors. The final section discusses the policy implications of the observed trends. RECENT TRENDS IN FOREIGN INVESTMENT LEVEL AND FORM OF FOREIGN INVESTMENT Foreign direct investment means direct or indirect ownership of foreign enterprises in amounts or in kinds that en-