Originally posted, Apr. 8, 2019
The United States continues to be an attractive destination for foreign direct investment. The continued appeal results from the large U.S. domestic market, strong economic conditions, and the new lower corporate tax rate instituted under President Trump.
Many foreign companies interpret our trade policies as strongly advantageous, and, despite American protectionist rhetoric, think the best path to gain access to the US market is through foreign direct investment.
American and global investors alike are risk adverse. Investors are rightfully concerned about high-profile corruption flourishing in many of the major emerging markets, including Russia, Brazil, and South Africa. Understandably, they view the US and the West favorably in this light.
Over the past few years there’s been a significant surge in Chinese investment in the United States, especially in M&A. Both private and state-owned Chinese investment groups are trying to find ways to develop business in what they perceive as the most desirable consumer market in the world.
Chinese investments span across all sectors, with a significant focus on innovation. The IT sector is the source of much deal-making activity as investors seek to position their companies to compete in the 21stcentury digital economy. Investments in US technology and telecommunications are highly scrutinized, as they should be. Clearly, our national security cannot be put at risk for the sake of M&A activity.
Perhaps unreasonably, this activity has been received in the U.S. with mixed feelings. On one hand, investment capital is generally welcomed. Conversely, many remain unreceptive to any form of investment from China, believing that the investment and its influence on the local business economy could be detrimental.
Foreign direct investment in the U.S., however, provides much-needed growth capital, along with manufacturing excellence, and competency in a responsive supply chain. Optimally, over time an interdependent relationship develops: Material value is added to the acquired company, and ideally a mutual learning environment follows.
All told, major factors for increased Chinese M&A activity in the U.S. include:
Availability of funds, both private and public
Strong macroeconomic environment in the United States
Favorable regulatory environment
Foreign exchange dynamics
Unreliable macroeconomic environment in China
Lower risk in the U.S. and the West
Abundance of high-quality targets
Yet with all these positives, numerous Chinese investments in both global and American brands have been only moderately successful. Why?
Go Global Retail’s experience in the consumer vertical, particularly in the fashion retail industry, shows that the most successful foreign investors are those that capitalize and build their knowledge of the local economy. Oftentimes the acquiring company uses their traditional operational model, developed in their home market, a critical flaw when adapting to a vastly different business environment. Go Global Retail believes that the best approach partners local institutional experts with foreign investors, to develop and implement a long-range plan for regional and, ultimately, global expansion of their brand.
On the positive side, we’ve observed that successful Chinese investing companies often adopt a “light touch” engagement style, seeking to neither dominate nor change the acquired asset. Equally important for driving corporate revenue, and increasing enterprise value, is the favorable prospective for brand expansion into China. The wisdom that the Chinese investors bring to opportunities in their home country is clearly invaluable for American companies.
Go Global Retail believes it’s necessary for U.S. businesses to be thorough in every M&A process, whether the acquirer is from the US, China or anywhere in the world.
In sum, we feel that investors will continue to face a volatile global operating environment, and that the United States and the West will continue to be attractive to foreign direct investment. We’re certain that FDI will continue at a robust level, especially in respect to the fashion retail business over the next few years.