foreign-controlled domestic corporations
Joerg Sarbach/AP

Offshore Companies Shore Up Investment in United States

August 29, 2008 01:15 PM
by Anne Szustek
In terms of assets, foreign ownership of U.S.-based firms more than tripled from 1996 to 2005, according to a report released by auditing and consulting company Grant Thornton.

Appeal of Cheap Dollar Offsets High Taxes for Foreign Investors

The Grant Thornton report, released on Wednesday, is an analysis of data on “foreign-controlled domestic corporations” provided by the Internal Revenue Service through 2005, the most recent year for which statistics are available. 

Over the same 10-year period, foreign ownership of companies whose headquarters are on American soil more than doubled. Reuters reports that from 2004 to 2005 alone, total receipts jumped from $3.1 trillion to $3.5 trillion—an increase of 13 percent.

This figure stood at $1.7 trillion in 1996. In 1971, when foreign entities owned but 1.3 percent of America’s corporate holdings, it was $39 billion.

After taking both state and federal tax rates into account, the United States has the second-highest tax burden of the member states of the Organization for Economic Cooperation and Development, with nearly 40 percent. Only Japan has a higher tax rate.
Grant Thorton National Tax Office partner Joseph Calianno analyzed the rationale for foreign companies buying into the American economy: “Despite the high corporate tax rates, many foreign multinationals recognize the importance of the U.S. market from a global standpoint,” he told Reuters.

Background: The cheap dollar makes for ripe FDI environment

But in addition to reasonable certainty that making inroads into the United States will garner steady returns, the flagging greenback has been a further beckoning call to foreign investors. The American market has seen a flood of foreign takeovers over the past three quarters, largely at the hands of the eurozone’s higher purchasing power and petrodollar-fueled sovereign wealth funds (SWFs), state-run money-management vehicles often used to re-invest wealth derived from natural resources.

Swiss pharmaceutical Roche’s July 22 bid to buy up what it does not already own of U.S. biotech firm Genentech for $89 per share, 8.8 percent up on the stock’s July 18 closing price, was still a relative bargain for the company whose home currency is the resilient Swiss franc.

When Roche sold Genentech shares to the public in 1999, the Swiss franc traded around 63 cents to the U.S. dollar. In July, when the Swiss firm made its bid, the Swiss franc traded at near parity to the dollar, at approximately 98 cents.

Genentech is rejecting the bid for the time being on the grounds that it would undervalue the company.

Belgian firm InBev’s $52 billion takeover of American brand Anheuser-Busch was also pushed in large part by the higher buying power of the euro. Lower market valuation also played into the deal.

Other bastions of Americanism have been swept in a trend of foreign buyouts. SWFs based in Gulf oil economy United Arab Emirates, one of the world’s six highest users of SWFs, purchased the Chrysler Building this summer, as well as multi-billion dollar stakes in Citigroup and Merrill Lynch over the past nine months.

And in June, Chinese SWF State Administration of State Exchange (SAFE) committed to a $2.5 billion stake in Texas-based private equity fund TPG.
An estimated $2 billion to $3 billion is tied up in SWFs worldwide. This amount is estimated to increase to the $6 trillion to $10 trillion over the next five years.

Opinion & Analysis: Foreign buyouts but part of a cycle

The buyouts of American holdings are being met with populist alarm by some, reminiscent of the Japanese buying spree in the United States in the early 1990s. But in his 2007 letter to Berkshire Hathaway shareholders, investment guru Warren Buffett, chairman and CEO of the conglomerate, pointed out that like economies, investment trends are cyclic. “There’s been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses … When we force-feed $2 billion daily to the rest of the world, they must invest in something here,” Buffet writes.

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