A Safe Haven for Frightened Funds

Whatever the merits of the quarrels in Washington these days about the health of the American economy, there is one element of the business scene so bracing that Commerce Department officials become ecstatic when they talk about it. The flow of foreign funds into the U.S. has crested in a seemingly endless wave that is nourishing local economies from ailing New York to the striving Sunbelt states. Since 1971 total foreign direct investment has more than doubled from $13.7 billion to an estimated $30 billion in 1976. The Western Europeans, in particular, have been snapping at every investment opportunity--Midwestern farms to outright acquisitions of sizable companies. Says Richard Roberts, a senior international investment adviser at Commerce: "This investment is the hottest thing on the economic scene, and is probably the best-kept secret in Washington."

Western European investment in the U.S., as measured by Government figures, has grown by almost $9 billion since 1971, to $19 billion today. While those longtime investors in America, the British, Canadians and Dutch, have steadily increased their stake, the French, Germans and Swedes have been pumping funds across the Atlantic in truly spectacular fashion. In six years, German investment has increased by 138%, to $1.9 billion; the Swedes have tripled their investment, and the French have raised theirs by almost 470%. Operating through businesses they control or family investment companies, such influential individuals as France's Baron Guy de Rothschild, Britain's Sir Jimmy Goldsmith and the Agnellis of Italy have all acquired seasoned American businesses.

Flight Talk. The phenomenon reflects both cold economics and some fevered concern about political and social malaise abroad. Canadians fret about increasing tensions between the French-and English-speaking communities. Middle Easterners are apprehensive about what they see as political and economic drift in the European countries, where they have traditionally salted away their wealth. Says Dr. Nazmi Abdel Hamid, former governor of Egypt's Central Bank and now an adviser to the Arab-European Bank: "Increasingly,

Arabs feel the safest place to put their money is in the U.S."

So, for that matter, do the Europeans themselves. American officials do not like the term, notes Paul Baudler of the U.S. Chamber of Commerce in Frankfurt, "but if you talk to a German banker, he'll talk about 'flight capital.' " A long list of gloomy economic realities --slumping stock values on European exchanges, high unemployment rates, the rise of left-wing parties and the inability of liberal, middle-of-the-road governments to deal effectively with these problems--has prompted a chorus of Spenglerian gloom from European business leaders.

Guido Carli, the former governor of the Bank of Italy who now heads the Italian Confederation of Industry, openly forecasts "an era when private industry is no longer able to make a profit." In West Germany, Kurt Richebacher, chief economist of the Dresdner Bank, speaks of "a grave profitability crisis." In Belgium, Baron Leon Lambert, chairman of the Compagnie Bruxelles Lambert, flatly declares that European regimes are "impotent before the enormousness of the political, economic and social problems that confront us."

In this atmosphere, the U.S. beckons as a safe haven, both for foreign companies and wealthy individuals. Today, says Rob Hazelhoff, a director of Holland's Algemene Bank Nederland, "most entrepreneurs regard the U.S. as the last bulwark of capitalism. They feel that America can hold out, and this is the main psychological factor behind the rising investment." Profit margins of U.S. corporations are now almost twice those of European firms, partly because productivity is higher. The U.S. has become something of a cheap-labor market in comparison with its European trading partners. Until the early 1970s, European labor was less costly than American. But all that has since changed. Washington devalued the overpriced dollar, inflation gathered momentum in Europe, and powerful European labor unions began winning not only higher wages but all sorts of other benefits.

Barre's Law. These and other factors have altered some old established patterns of foreign investment in the U.S. While British investors still have the largest stake in their old colony, the big change in recent years has been the surge in investment by the French and the Germans. The French stake in the U.S. economy has grown more quickly than any other, expanding from a mere $300 million in 1971 to an estimated $2 billion today. French officials are actively encouraging firms to move abroad. Says Premier Raymond Barre: "You can't take on the Germans and the Americans, let alone the Japanese, unless you have a well-diversified international industry, which implies foreign direct investment on an ever increasing scale." Michelin, the big tire firm, is leading the way with plans to spend upward of $400 million to produce its radial tires in four American plants.

Barre's law has also spread to West

Germany, whose businessmen are rapidly becoming enthusiastic investors in the U.S. For years a kind of national taboo in Germany against "exporting jobs" limited U.S. ventures to capital-intensive firms like chemical-making Bayer or Hoechst. Now a conviction is spreading that, as one leading German banker put it, "our domestic market is saturated, and our population is overaged and shrinking. It's just prudent business that if you have a market, your production should follow." With that argument, Volkswagen's boss, Toni Schmucker, persuaded German unions and political leaders that an American plant was vital if his company were to regain its traditional substantial share of the U.S. market. Volkswagen will invest $200 million in a Pennsylvania assembly plant that will begin turning out the popular Rabbit model.

The newly rich OPEC countries, concerned that Americans might think of such investments as attempts to use oil profits to "take over" the U.S., tend to make "passive" investments--in Treasury bills, bank deposits and corporate securities. The Saudis, who invested $14 billion in U.S. securities in 1976, are especially cautious. Explains Abdel Aziz Qoreishi, governor of the Saudi Arabian equivalent of a central bank: "We consider our surplus only temporary. We expect to bring the money home as our development plans get into high gear."

Unlike the Saudis, the aggressive Iranians have been scouting the world for imaginative long-term investments. But although they succeeded in making a deal for a 25% interest in Krupp, the West German heavy-manufacturing complex, they have not pursued any similar investment in the U.S. since their abortive attempt to buy into Pan American Airways in 1975. Lately, Iranian investment money has been appearing in the U.S. in less politically sensitive ventures like real estate, notably in New York, California and Louisiana.

New Patterns. The capital invasion is heartily welcomed by Washington. Commerce Department officials eagerly note that besides helping to offset somewhat the U.S.'s currently huge import bill (TIME, July 11), foreign investments in manufacturing have helped provide jobs (1.5 million by Commerce's reckoning) and broaden the tax base of local governments. Foreigners, for their part, are often surprised by the freedom of operation they enjoy in the U.S. Foreign businessmen find a tolerance of competition that would be inconceivable in their own countries. Example: Lucas Industries, the big British auto-parts maker, dispatched one of its top men to Detroit to announce that it intended to attain sales of $500 million a year by 1980--at the expense of U.S. companies.

By now, the flow of new investment funds from overseas has begun to take definite patterns. The Southeast has been getting the biggest share of corporate money, partly because foreign manufacturers are attracted by the region's relatively low labor costs and non union tradition, and partly because state and local governments there have aggressively pursued them with tax incentives and other attractions (see box).

Private investors, as opposed to companies, are turning up all over the U.S., mostly in search of real estate deals--the traditional haven for nervous money from abroad. Canadians. Iranians, Arabs (sometimes masquerading as Iranians), Germans and Japanese are leading bidders. Kenji Osawa. a Japanese investor, has bought six of the eight hotels managed by Sheraton in Hawaii; Lehndorff Management, the U.S. arm of a Hamburg investment management firm, estimates that foreigners will buy more than $2 billion worth of U.S. real estate this year, with West German investors among the leading purchasers.

Says Lehndorff's U.S. general manager, M. Thomas Lardner: "The enthusiasm of the Europeans for U.S. farm land is unbelievable." In Houston, Banker Richard Reneberg complains that "a problem we're faced with is coming up with enough good property to satisfy foreign investors."

Set Up. With the Communist parties of Italy and France stridently confident about future elections, the flight of capital is bound to continue. Otto Wolff von Amerongen, who heads his own $1 billion steel firm and is chairman of the German chambers of commerce and industry, shudders at the thought of a leftist victory in a Common Market country. Says he: "We cannot digest within the Community a Communist-dominated government." That may be so, although other European commentators are less fearful about Communist participation in Cabinets. Meanwhile, the U.S. Commerce Department has set up a new office of foreign investment to welcome all those well-heeled foreigners.

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