Tax Incentives

EMEL AKAN is a senior reporter for The Epoch Times in Washington. Previously, she worked in the financial sector as an investment banker at JPMorgan. Emel Akan

Foreign Greenfield Investment Collapses

Greenfield FDI flows to the US have dropped more than 90 percent since the 1990s

The united states has a poor track record of attracting global investors, with foreign investments in new facilities having fallen sharply over the past few decades.

The value of greenfield foreign direct investments (FDI) relative to the size of the U.S. economy has dropped by 96 percent since the 1990s, according to a recent analysis from the Information Technology and Innovation Foundation (ITIF), a technology think tank. Greenfield FDIs are foreign investments in newly constructed or expanded facilities.

While foreign investment in the United States rebounded in 2021, the situation isn’t as bright as it appears, according to Ian Clay, a research assistant at the ITIF.

“The share of FDI going to new or expanded facilities in the United States continues to shrink,” he wrote in a recent report. “Foreign companies appear willing to purchase existing U.S. company assets but not very willing to build new facilities or expand existing ones in the United States.”

In 2021, the overall value of greenfield expenditures was just $3.4 billion, or 0.01 percent of U.S. gross domestic product.

The sluggish investment in new infrastructure disproves the notion that the United States is a magnet for foreign investment, in Clay’s opinion.

The U.S. Bureau of Economic Analysis (BEA) has reported that FDI flows to the United States recovered in 2021 after seeing a sharp decline since 2018. Foreign investment increased to $333.6 billion, up from $141.4 billion in 2020.

However, acquisitions—the purchases of established U.S. businesses—were largely responsible for this rebound. The industries that benefited the most from foreign acquisitions last year were pharmaceuticals; real estate; and professional, scientific, and technical services.

The BEA divides FDI into three groups: acquisition, establishment, and expansion. Establishment and expansion are considered greenfield expenditures, which are more desirable.

The ITIF stated that greenfield investments are direct investments in the productive capacities of the receiving economy. Acquisition, on the other hand, only involves transferring ownership to a foreign entity. Hence, greenfield investments are the most crucial and attractive ones for countries.

In 2021, greenfield expenditures accounted for only 1 percent of the FDI flows to the United States, while acquisitions accounted for the remaining 99 percent.

Some observers say the U.S. government isn’t doing enough to encourage greenfield investment at a time when many global corporations are considering leaving China.

According to the ITIF, greenfield FDI flows to the United States aren’t recovering since they’re heavily reliant on research and development (R&D) incentives and other generous policies for capital expenditures.

“R&D incentives relative to other countries have really taken a hit in recent decades,” Clay told Insight.

He noted that the United States was lower than the Organization for Economic Cooperation and Development (OECD) average in the government tax relief for business R&D.

“On top of that, our capital allowances aremuchlessgenerouscomparedtoother countriescompetingfortheFDIthanthey were in previous decades,” Clay said.

A capital allowance is the amount of capital investment expenses that a company can deduct from its income through depreciation.

Governments throughout the world are increasingly relying on these incentives to promote greenfield investments and encourage innovation.

A recent Tax Foundation study shows that the United States ranks 21st in terms of the average of capital allowance among the OECD’s 38 members. The U.S. tax code permits businesses to recover 67.7 percent of capital investment costs on average, compared to the OECD average of 70.7 percent. More specifically, the United States ranks 32nd in capital allowances for buildings and 34th in intangible assets.

It ranks third in capital allowances for machinery, because of the full expensing provisionofthe2017taxreform.However, the provision will begin phasing out this year and will be eliminated by 2026.

According to the ITIF, Congress should acknowledge this shortcoming and focus on boosting greenfield investment.

Congress recently passed legislation dubbed the Chips and Science Act, which provides incentives to boost domestic semiconductor manufacturing in the United States. According to Clay, the 25 percent investment tax credit for investments in chip manufacturing included in the measure will incentivize reshoring to the United States.

Such incentives will become more common in the future to promote U.S. competitiveness, he said.

Some observers say the U.S. government isn’t doing enough to encourage greenfield investment.