Deloitte study points to emergence of "global investment divide" as most foreign direct investment goes to higher-wage countries
New York — May 27, 2004 — Foreign direct investment (FDI) by U.S. manufacturers dropped in 2003 for the third year in a row, adding up to nearly a one-third decline in overseas investments by U.S. producers since 2000, according to a new study by Deloitte Research that also pointed to the emergence of a "global investment divide."
The study, "Globalization Divided?: Global Investment Trends of U.S. Manufacturers," showed that U.S. manufacturers' FDI dropped by one percent in 2003 to an estimated $29 billion.
In addition, the study revealed that FDI flows have dropped more than 32 percent from a high of $43 billion in 2000, representing the third consecutive year of declines.
In a surprising finding, the report noted that the slowdown in U.S. manufacturing investment overseas is spread unevenly around the world, indicating the emergence of a "global investment divide," with foreign direct investment concentrating in higher wage countries, such as Canada, Germany and the United Kingdom.
In lower-wage, fast-growing economies, such as Brazil, China, India, Korea and Mexico, U.S. manufacturers turned to outsourcing and partnering as their strategy of choice for sourcing and marketing.
"We are seeing a dramatic slowdown in direct manufacturing investment into low-wage locations because more companies appear to be outsourcing work to local vendors rather than establishing or acquiring their own operations," said Doug Engel, U.S. manufacturing practice leader with Deloitte Consulting. "This trend is quite troubling because it means, in essence, that U.S. manufacturers may be paying ultimately to create their own competitors."
The survey found that contrary to the widespread impression that U.S. manufacturers are moving operations abroad solely to lower labor costs, they have been concentrating their investments in high-wage countries. The latest data available, from 2002, show that developed markets continued to receive an increasing share of investments: 84 percent in 2002, up from 61 percent in 2000.
Despite an overall decline in investments, Europe remained the top destination, with FDI into such higher-wage countries as Canada, Germany, Japan and the United Kingdom remaining fairly steady at roughly $25 billion annually between 1999 and 2002, the last year for which comparative data are available.
But global investments to such low-wage countries as Brazil, China, Korea, Mexico and India reached just $2 billion in 2002, a drop of 83 percent from $12 billion in 1999.
"Without ensuring a direct stake in the manufacturing industries in low-wage nations, U.S. firms may be sacrificing their long-term global competitiveness through too much reliance on an 'asset-light' strategy," said Peter Koudal, research director of manufacturing research with Deloitte Services. "As the hub of global manufacturing moves toward low-wage countries, including China and India, product, process and technology innovations are going to move right along with it."
According to the Deloitte Research study, the following industry sectors showed declines in direct foreign investments in 2003: food and kindred products ($3.1 billion in 2003, down from $3.9 billion in 2002), chemicals and pharmaceuticals ($8.9 billion in 2003, down more than 12 percent from $10.1 billion in 2002), industrial machinery (dropping to a negative $200 million in 2003, from $200 million in 2002), primary and fabricated metals (reaching an all-time low of a negative $1 billion in 2003, from a positive $1.8 billion in 2002) and transportation equipment ($2.7 billion in 2003, down from $3.2 billion in 2002; and nearly $8 billion in 2000).
Industry segments showing greater FDI include computer and electronics, electrical equipment, appliances, and components, and "other manufacturing" (a category that includes beverages, paper, petroleum and coal, plastics and rubber, and medical equipment and supplies).
From a record high of $17 billion in 2000, computer and electronic manufacturers reduced FDI to a mere $900 million in 2002. But global investments rebounded in 2003 to reach $4.6 billion as the technology sector continued to show signs of recovery. Similarly, foreign direct investment into electrical equipment, appliances and components grew to $460 million in 2003 from just $60 million the previous year. "Other manufacturing" increased 15 percent to $10.6 billion in 2003 from $9.3 billion in 2002.
The report pointed out that the ability to manage complexity and synchronize global networks is critical. "The globalization of U.S. manufacturing is at a crossroad as companies struggle to identify the best overseas investment strategies," said Kevin Gromley, a partner with Deloitte Consulting and consulting leader for Deloitte Touche Tohmatsu's Global Manufacturing Industry Group. "Companies that have the capabilities for mastering global complexity over the long run are likely to be much more successful than those that do not."
The complete Deloitte Research study "Globalization Divided? Global Investment Trends of U.S. Manufacturers" study and the related study, "Mastering Complexity in Global Manufacturing: Powering Profits and Growth through Value Chain Synchronization" are available www.deloitte.com/research. These studies were prepared for Deloitte Touche Tohmatsu's Global Manufacturing Industry Group, which is comprised of practitioners from various Deloitte Touche Tohmatsu member firms.
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