By the standards of international finance, the figure is joltingly small: $10.5 billion. That is how much foreign money entered the United States in the first six months of 1990 to buy existing companies or open new ones. Buried in Commerce Department tables that were released last month, the figure for so-called direct investment has helped fuel speculation that an era of ever-expanding capital flows across the world's oceans and borders is coming to an end.
A few years ago, $10.5 billion would have seemed like a bumper harvest. But in the context of a transnational investment boom that tied the world ever-closer together in the late '80s, it is a drought crop, equal to less than 30 percent of what came in during the same period in 1989. Other types of foreign capital inflows -- purchases of company stocks and U.S. Treasury securities, for example -- were down drastically as well.
Now, some economists and politicians are talking about an emerging international "capital shortage," caused in large part by Japan and Germany keeping more of their money at home. International Monetary Fund Director Michel Camdessus recently called the slowdown and persistent low rates of savings in the world "one of most crucial issues of the '90s."
The trend could further slow growth in the United States, which is already facing danger of a recession from high oil prices. In the Third World, it is also unwelcome news. A reduction in investment flows "will be just one more reason why, when the developed world gets a cold, the developing world gets pneumonia," said World Bank President Barber Conable during the recent annual meeting of the bank and its sister organization, the IMF.
Once the unchallenged economic leader in the world, the United States has found that its share of the planet's total economic pie is shrinking as foreign countries grow faster and catch up from the devastation of World War II. Europe, in particular, with the 1992 united market fast approaching, has become a lightning rod for international capital.
The U.S. economy is becoming more closely linked to foreign markets and subject to their whims. Richard Berner, director of bond market research at Salomon Brothers Inc., said, "Europeans and Japanese have lived with this for a long time and now we're going to have to get used to it."
Yet, even if somehow the flow were to run dry altogether, the changes it has wrought on the world's economic landscape would remain indelibly. In countries across the globe, major corporate icons have already changed hands in the last five years, and a new generation of foreign start-up factories have appeared, tying the world's economies together like never before. In 1988 alone, about $150 billion in direct investment crossed various borders, bringing the world's total stock of cross-border ownership to about $1 trillion.
Today, Pillsbury Co. is British-owned. Columbia Pictures Entertainment Inc. is Japanese-owned. British luxury car maker Jaguar PLC has entered the garage of General Motors Corp. Renault SPA, once as French as the Marseillaise, now has mixed blood, having traded stock with Volvo AG (whose Swedish identify was diluted in the process). And when New Zealanders dial friends on the telephone, they are using a system bought this year by two U.S. regional phone companies.
"Companies are trying to locate themselves strategically in various regions" of the world, said Persa Economou, an analyst at the United Nations Center on Transnational Corporations. "... Barriers are falling down."
Investment is flowing more heavily, and it is flowing in different directions as well. In decades past, it tended to move from north to south -- from the industrialized countries to poorer countries near the equator, often to develop natural resources. Today, it is far more likely to flow along the globe's east-west axes, as one industrialized country invests in another to get technology, skilled labor and direct access to big markets. In 1950, for instance, about 40 percent of U.S. investment was in Latin America. That region's share today is about 16 percent.
"Worldwide, direct investment has become more a thing of interdependence between developed countries," said John Rutter, senior economist with the Commerce Department's International Trade Administration.
Governments have scrapped many of their legal barriers to cross-border investment in the 1990s, helping the money flow. Today, large companies, provided they can raise the cash, can assemble world empires in weeks by buying local companies -- and the customers they have spent years cultivating. Just as quickly, they can sell their holdings, getting out and moving on to other fields and countries.
The Big Spenders The United States in the 1980s became the world focus of direct investment, taking in $72 billion in 1989 alone. The Europeans were the biggest spenders. Among their acquisitions here: the RCA and General Electric Co. consumer electronics brands, acquired by the Thomson electronics group of France; Zenith Electronics Corp.'s computer business, bought by Groupe Bull of France; and Farmers Group Inc., the insurance company, bought by BAT Industries of Britain. The United States drew heavy investment, too, from Canadian companies such as Toronto-based real estate firm Olympia & York.
The Japanese, with a corporate culture that prefers starting up something new rather than buying something already established, have built major new plants producing electronics and automobiles. They also did some acquiring, with Bridgestone Corp. buying Firestone Tire & Rubber Co. and Sony Corp. buying Columbia Pictures. Japanese investors have also assembled a large collection of real estate properties, including such "trophies" as New York's Rockefeller Center.
Across the Atlantic, Europe, once held to be crippled by economic sclerosis, is now a target of intense cross-border investment as the historic 1992 market integration deadline draws near. Increasingly, investors have come to view Europe as a single economic unit, an economy of 340 million people that for purposes of investment can be treated almost as a single country.
Japanese companies invested there heavily in the late '80s, particularly in Britain, which under Margaret Thatcher's leadership has been among the most open destinations. In many cases, what is driving them is fear that "if they don't get themselves into the European community, the community will build high trade walls that will keep them out" after 1992, said Joel Paul, a professor of law at American University.
In addition, market integration means that companies, European or non-European, get more bang for the investment buck. A plant in, say, Italy will be free to sell throughout a single market of 340 million people, in theory at least.
American purchases or bids for European companies in 1989 added up to $19 billion, according to Translink's International Deal Review, an investment industry publication. Among recent U.S. activity there: Tobacco giant Philip Morris Inc. offered $4 billion for Jacobs Suchard AG, a Swiss confections and coffee conglomerate, and General Motors bought 50 percent of Swedish automaker Saab-Scania AB for $600 million. U.S. companies have built from scratch as well: Last month, Digital Equipment Corp. christened a $165 million computer chips plant in Scotland.
American Telephone & Telegraph Co. last year spent $290 million to acquire Istel, a major British data communications firm. AT&T believes its new possession will educate it about new fields in the business -- notably the booking of travel arrangements -- and position it for further expansion in Europe. "We could use Istel as a springboard to the rest of Europe," said Rob Dalziel, AT&T vice president for global networks. But if that doesn't work, he noted, "we could in the future obtain other Istels in other countries."
Japanese companies had direct investments in Europe of about $45 billion as of the end of March, according to the Japan Economic Institute of America, $14 billion of it made in the previous fiscal year alone. Matsushita Electric Industrial Co., Sanyo Electric and the electronics groups of Mitsubishi Corp. and Toshiba Corp. all built or have announced plans to build videocassette recorders in Europe; Toyota Motor Corp. last year said it will open a $1.2 billion automobile plant in Britain that would rank as Japan's largest new plant venture in Europe to date. Japanese companies have also acquired companies, notably Fujitsu Ltd., which this year offered $1.8 billion for International Computers Ltd., Britain's flagship computer maker.
The impending arrival of the single market also set off a cross-border investment frenzy within Europe -- $74 billion worth of it in 1989 alone, up from just $12 billion in 1986, according to Securities Data Corp. The second quarter of 1990, for instance, saw renewed activity: A Swedish papermaker bid for a British one, a French glass company bid for a British one and a Dutch insurance company for a Belgian one, according to Translink International Deal Review.
Portugal and Spain have drawn some special attention, due to their generally lower costs, as companies eye production sites for post-'92. "The Germans have made a beeline, along with the U.K. and Holland, to Spain," said Jonathan Story, a professor at the Insead school of business near Paris. U.S. companies have shown strong interest, too. Both Ford Motor Co. and General Motors, for instance, have disclosed plans to set up auto parts plants in Portugal.
Investors can look in another direction for low-cost labor -- to the de-communizing economies of Eastern Europe. For now, however, the region remains slow to draw money because of bad infrastructure, currency exchange problems and fears of renewed political instability. A few U.S. companies have taken the plunge, however. General Electric Co. bought Hungary's largest maker of light bulbs, Tungsram Co.
Some theorists see what is happening inside Europe as a positive shake-out, caused by national barriers coming down and noncompetitive companies losing protection. Others, however, see companies blindly seeking size for the sake of size or following the lead of others. Robert W. Dunn, a professor of economics at George Washington University, said, "If companies A, B and C combine, then firms D, E and F feel threatened, and they combine." Many analysts predicted that the result will be loss of the competitive spirit and innovation.
In Southeast Asia, meanwhile, another regional investment boom is underway, but for different reasons. Companies in Japan, Taiwan and Hong Kong, flush with export earnings and wary of rapidly rising costs at home, are moving production of lower-end components to lower-cost countries nearby. U.S. companies are also active there. And China emerged in the 1980s as a major site for foreign investors, but lingering anger in the West over the military crackdown on the democracy movement last year has now slowed the flow.
On the whole, Southeast Asia is an exception to worldwide trend of sluggish north-south investment. Investment in Africa is largely moribund. Turmoil in South Africa and international sanctions against it have put off many foreign companies; the rest of the continent is dismissed as a bad risk due to heavy debt and bad infrastructure.
Mexico an Exception
Latin America, also burdened by debt payments, is also having trouble attracting foreign money, though there are exceptions, notably Mexico.
Despite its reputation as a closed market, Japan hosts considerable direct investment, much of it dating from the 1950s and 1960s, when major foreign companies were invited in as part of a government strategy to build a high-technology base. Today some of them, Honeywell Inc., for instance, are selling off those now fabulously valuable assets to raise cash in the United States.
But for the most part, investors find Japan too expensive, too regulated and too unfriendly to get in now. In many cases, Japanese companies just aren't for sale at any price -- the present investors prefer to hold shares long-term than to sell out for a short-term profit.
A few foreigners have bucked the norm, such as Polly Peck International of Britain, which last year worked out a $111 million deal to buy Sansui Electric Co., an ailing consumer electronics producer, and American investor T. Boone Pickens, who bought part of a Japanese auto-parts maker and is now trying to secure board representation on it.
Japan is far more important as a source, rather than destination for direct investment capital. It sent out $68 billion last year. But many analysts believe it is tightening the reins as its stock market declines -- it has fallen close to 40 percent since Jan. 1 -- and its surpluses decline. West Germany is also now more likely to keep money at home in order to finance the rebuilding of East Germany.
Incoming investment here has also been slowed by a new wariness of big buyout deals in the United States, brought on by the costly collapse of several such deals and the junk bond market. Higher interest rates in Europe have slowed the flow of money to buy U.S. bonds and securities. Said Salomon Brothers's Berner: "There's a lot of competition for funds outside of the United States."