Rethinking How US Firms Compete in the Global Economy
Transatlantic foreign direct investment (FDI) flows declined markedly last year, reflecting a number of factors like the higher cost of capital, depressed M&A activity, and uncertain economic prospects. The push by both the US and Europe to have firms invest locally, or at home, via massive public sector incentives also contributed to the downturn in transatlantic FDI flows. In the first nine months of 2023, US FDI flows to Europe declined by nearly one-third, while European inflows to the US dropped nearly 30%.
Cross-border investment flows are expected to remain weak again in 2024 given the uncertainty around the transatlantic election cycle. European Union parliamentary elections are scheduled for June 2024, while US voters go to the polls in November. The risk to investment flows is that firms take a “wait-and-see” attitude towards the election and hold off spending until after the votes. The key is this: the downturn in investment is more cyclical than structural, with both the US and Europe continuing to leverage each other’s strength to promote economic growth and prosperity.
True, the clarion call to “bring it home” or for American firms to reshore production to the US is growing louder and louder, underpinned by bipartisan support from both Democrats and Republicans. The goals are to shorten supply chains and boost America’s economic self-sufficiency in the face of rising competition from China and other rising economic powers. Industrial policies have made a comeback in the US, with the Biden Administration set to dole out some $465 billion in subsidies for investments in green energy, electric cars, and semiconductors over the next few years.
But that said, US multinationals remain just that—multinational in nature. They have no choice—Corporate America needs the resources of strategic partners—Ireland included. US firms are in constant need of talent — or skilled and unskilled labor in a world where labor market growth has peaked, demographics is reducing the amount of available labor and immigration remains constrained by political forces. At the end of 2023, the US unemployment rate was still below 4%, while more than 8 million jobs were unfilled in the United States. This has created a mad scramble for global talent. Not helping matters, some 10,000 baby boomers in the US reach retirement age every day, with many of these workers opting out of the labor force. The US labor force participation rate remains stuck at 62-63%, below its pre-pandemic level. Against this backdrop, and contrary to the clarion calls to reshore, rarely have US firms been more dependent on external resources, Ireland’s included.
Figure 3
Most Favored Nation
Other industries include wholesale trade, finance and insurance, professional services, mining, and utilities.
Source: Bureau of Economic Analysis. Data as of Jan 5, 2024.
