The Employment Impact of Chinese Investment in the United StatesThilo Hanemann and Adam Lysenko | September 27, 2012
The recent uptick in Chinese acquisitions in the United States has rekindled old fears about the political and economic impacts of foreign investment. A particular concern is that Chinese investments will harm rather than help local employment, because state ownership and China’s industrial policy might lead its firms to acquire assets overseas only to move jobs and production back home. In this note we assess the validity of such claims by analyzing the employment impacts of almost 600 Chinese direct investment transactions in the United States between 2000 and 2012. Our key findings are:
Chinese investment creates American jobs: The recent surge in Chinese investment is yielding employment benefits. We estimate that majority-owned U.S. affiliates of Chinese companies directly support around 27,000 jobs in the United States today, up from fewer than 10,000 five years ago.
Acquisitions help sustain existing jobs: While greenfield projects create the most new jobs, acquisitions have also helped support employment. Chinese investors have rescued numerous firms from bankruptcy, and there is no evidence of asset stripping behavior. Chinese buyers usually increase staff after acquiring a US business, as key assets – human talent, experience and know how – are rooted locally and not prone to transfer abroad.
Enormous potential remains in the years ahead: Today China is a minor US employer compared to long-time foreign investors such as Germany or Japan, but the potential for Chinese investment-led job creation is tremendous. If investment from China remains on track, Chinese firms will employ 200,000 – 400,000 Americans by 2020.
A Chinese Investment Boom in America
Since 2009 Chinese foreign direct investment (FDI) in the United States has increased rapidly, growing from an annual average of around 30 deals worth less than $500 million before 2009 to almost 100 deals worth about $5 billion in 2010 and 2011. Cumulative investment from 2000 to 2011 totaled more than $16 billion (see Figure 1).
This is the beginning of a structural shift in the motives and patterns behind Chinese FDI. As the growth model changes at home many Chinese firms are finding that their prospects are tied to direct investment in developed economies. Acquiring rich-world brands and technologies, learning how to operate under advanced regulatory regimes, and gaining experience in providing higher value-added services are now part of the diverse mix of motives drawing China’s firms to the United States.
With these new drivers growing in importance, 2012 is on track to be another record year for Chinese investment. Over the first half of 2012 the value of completed deals topped $3.6 billion, including large-scale acquisitions in energy (Sinopec and Devon Energy; Wanxiang and GreatPoint Energy) and financial services (ICBC and Bank of East Asia). Recently closed and pending deals including the acquisitions of AMC, Hawker Beechcraft, and A123 Systems are poised to bring in billions more during the second half of the year. If all of these deals close, investment flows in 2012 will top $8 billion to set a new high.
The Employment effects of Chinese investment
As newcomers to the United States, Chinese firms are raising suspicions as to their motives and behavior, just as Japanese firms did in the 1980s. In light of the unique characteristics of the Chinese state and economy, Americans are wondering whether or not Chinese investment will have the same positive impacts as FDI from other countries. One of the most important questions is how Chinese investment affects U.S. employment. Will Chinese investment have the same positive impacts on job growth as capital from other countries? Or are Chinese firms incentivized to move jobs back to China because of patriotic doctrine, as a quid-pro-quo for state support to go abroad, or industrial policy designs? Because the rise of Chinese investment is so recent, official statistical data do not yet provide a good basis for answering these questions.
To help fill this gap we analyzed almost 600 Chinese FDI transactions in our database from 2000 through the first half of 2012 for evidence of impacts on employment. We calculated conservative jobs figures based on a review of every firm in our proprietary database, using official company documents, regulatory filings, and other sources including databases with company information and online networking websites.
We find that the number of Americans employed by Chinese-owned subsidiaries has risen in tandem with recent growth in China’s US investment. From fewer than 2,000 12 years ago, the number of US jobs associated with majority Chinese-owned subsidiaries in the United States grew to more than 27,000 today (Figure 2). Chinese firms were negligible employers before 2008, with the exception of Lenovo’s acquisition of IBM’s personal computer division in 2005. Since 2009 the number or jobs provided has increased substantially on the back of greater annual investment flows and an increase in large-scale acquisitions.
It is important to emphasize that our figures only refer to U.S. subsidiaries with a Chinese majority ownership, so they do not include employment provided by firms in which Chinese investors hold a minority interest. The latter account for about $8 billion or 40% of the total value of investments in our database from 2000-H1 2012, including shale gas assets by Devon Energy or Chesapeake Energy. If we added jobs at firms with Chinese minority equity stakes, our figure would be higher by at least several thousands. Nor do we include indirect job creation related to the construction of facilities or at suppliers. Tianjin Pipe Corporation’s (TPCO) new steel plant in Texas is estimated to employ 1,000-2,000 construction workers alone
Chinese Acquisitions: Asset Stripping or here to stay?
By definition greenfield investments establish new facilities from scratch – factories, distribution centers, R&D establishments and so on – and therefore have a positive net impact on job creation. Our database records more than $3.5 billion worth of greenfield investments since 2000, which created about 8,000 U.S. jobs. Among the most prominent investors are Wanxiang, which entered the US market in 1994 and grew into a diversified business employing 6,000 Americans; Haier, which established its first production facility in South Carolina in the late 1990s and today employs about 350 people; Huawei, which employs around 1,500 people at its R&D centers in California, Texas and New Jersey and its other facilities in the United States; and Sany, which runs a manufacturing facility employing more than 130 people in Georgia. Big manufacturing projects currently under construction include TPCO’s steel pipe plant in Texas, and a copper tube manufacturing facility by Golden Dragon in Alabama.
The impacts that mergers and acquisitions have on jobs are less clear. M&A deals can be positive for local employment if the investor saves the target from bankruptcy or hires additional staff after the acquisition. But the impacts could also be negative if the post-merger integration or restructuring results in the downsizing of local employment or if the investor chooses to extract valuable assets and shut down local operations completely. Reviewing the 170 M&A transactions in our data set that gave Chinese investors majority control of a US company, we find that the jobs impact is overwhelmingly positive. We see no evidence of “asset stripping” behavior and find that most Chinese parent firms have maintained or added staff after acquiring companies in the United States
The first important takeaway from our analysis of M&A deals is that Chinese buyers saved several troubled US firms from bankruptcy and successfully turned them around, saving hundreds of jobs at these companies. Compared to their previous owners, Chinese investors were able to bring three things to the table that helped companies to survive: First, capital injections to maintain expenditures in times of crisis. This is particularly true for industries that were hit hard by the financial crisis in 2008/2009, for example autos and general aviation. Second, better access to the fast-growing Chinese market, providing firms with better prospects for expanding overseas revenues. Two illustrative examples are information technology and general aviation. Third, synergies with existing operations in China that increased the value of US assets, for example access to cheap input materials or economies of scale in manufacturing.
Another important finding is that in the vast majority of acquisitions, the new Chinese parent company either maintained or increased the local staff base. The main reason is that Chinese firms are coming to America to acquire assets that are not transferable. This is particularly true of acquisitions in high-tech services, such as software engineering and product design, where the primary value for the Chinese parent firm is not patents or removable physical assets but the skills and know-how of the target firms’ employees. The same applies to acquisitions in high-tech manufacturing, such as aviation or machinery, where human talent and experience in managing advanced production processes and related high value-added services is a key value proposition for Chinese firms. Other reasons for maintaining local operations after an acquisition are proximity to local customers, for example in the auto parts industry, and the “Made in the U.S.” brand.
Finally, those few acquisitions that have resulted in job losses have generally not been driven by asset-stripping behavior on the part of Chinese firms, but rather structural adjustment and reorganization of value chains to react to changes in costs or demand. Examples are the relocation of jobs by Wanxiang’s Coupled Products LLC from Indiana to Mexico in 2008, or the recent downsizing at Goss International in reaction to slow global demand for printing machinery. The bottom line is that China’s new multinationals are not immune to the commercial pressures of rationalizing their global value chains, but there are no signs that industrial policy goals or patriotic doctrines are forcing them to move overseas operations back to China.
The Potential for Future Growth: What’s at Stake?
Despite the recent growth, Chinese investors remain only marginal employers in the United States: the 27,000 jobs currently associated with Chinese firms account for less than 1% of the 6 million jobs provided by US-based foreign affiliates. However, Chinese investment is expected to increase substantially in the coming decade, and the positive employment potential is huge. Historical precedents show how big of an impact FDI from newly emerging investors can have. Take the expansion of Japanese firms in the 1980s and 1990s. Japanese firms supported practically no jobs prior to the 1980s; today their U.S. affiliates employ almost 700,000 Americans.
We expect cumulative Chinese global investment abroad to top $1 trillion by 2020. In the past decade, the United States received on average about 17% of global FDI flows. If the United States manages to attract a similar share of China’s global OFDI (10-20%), the U.S. can expect $100-$200 billion of investment between 2010 and 2020. While an accurate projection of the jobs impacts of future investment flows is impossible, we can extrapolate employment figures under different scenarios using today’s parameters.
Assuming a similar labor intensity of investment as in recent years and a slightly higher share of majority stakes in total investment flows, Chinese investment of $100-$200 would result in 200,000 to 400,000 U.S. jobs through 2020. If cumulative investment reaches $100 billion, Chinese firms can be expected to employ about 200,000 Americans. Under the mid-range scenario of $150 billion of investment, 300,000 Americans would be on the payroll of Chinese U.S. affiliates by 2020. If the United States attracts $200 billion of investment, Chinese firms could employ up to 400,000 people (Figure 3).
Don’t count Chinese chickens yet
The promise of hundreds of thousands of jobs is based on the assumption that a significant portion of China’s global outward FDI flows to America. However that is not guaranteed, and both countries must work hard to sustain the recent upward trend in Chinese FDI in the United States.
Chinese firms come to the United States for the same commercial reasons as other foreign investors: its large consumer market, its good business environment, its creative and diverse workforce, its innovative and experienced firms and its strong global brands. They will only continue to invest in America if the US manages to sustain its attractiveness to foreign investors by fixing its structural problems. The US must also work to prevent its reputation from being tarnished through politicized high-profile deals, such as happened in the past. It is critical that leaders stand up and make sure that the public debate about the risks and benefits of Chinese investment is based on facts, not fears. If fear mongering and populism gain upper hand, Chinese firms may choose more hospitable investment destinations in Europe or Asia to expand their overseas business and generate jobs there.
China must contribute its share too to ensure a healthy US-China investment relationship. Instead of blaming protectionism on host countries, China’s leaders might consider the domestic roots of the problems that many Chinese firms face when investing abroad. Reforms that improve corporate governance and transparency, more freedom for firms to make their overseas investment decisions without government interference and credible steps to level the playing field for foreign firms in China would go a long way to dispel existing concerns about Chinese investment in the United States and elsewhere.