Academic journal article The American Journal of Economics and Sociology

U.S. Competitive Position and Capital Investment Flows in the Economic Citizen Market: Constraints and Opportunities of the U.S. Investor Program

Academic journal article The American Journal of Economics and Sociology

U.S. Competitive Position and Capital Investment Flows in the Economic Citizen Market: Constraints and Opportunities of the U.S. Investor Program

Article excerpt



ALL COUNTRIES, LARGE AND SMALL, modern and developing, are scrambling for global capital resources to bolster their economies. Economic citizenship is the most recent strategy for attracting foreign, investment capital adopted by several countries, including the U.S., Canada, the Commonwealth of Dominica, and, to a limited degree, Australia. Many countries design this strategy to attract the millionaires who might leave Hong Kong now that the People's Republic of China has taken over. Economic citizenship is the process of granting citizenship, or residency, to foreign nationals who have a stated sum for investing in the migrant receiving country. Proponents of this investment scheme believe that since new immigrants use up the host population's resources, they should pay for their cost. In spite of the growing use of this new investment mechanism to attract capital for economic development, very little literature has focused on its role in economic development. This paper evaluates the role and effectiveness of economic citizenship for facilitating investment flows and the problems associated with its use as an investment strategy in the U.S. The U.S. program is compared to that of Canada and the Commonwealth of Dominica to examine how closely these programs have come to their stated targets. Then socio-economic and political constraints impeding the U.S. program are discussed.


Foreign Capital Movements and Immigration Fears

IN RECENT YEARS, THERE HAS BEEN major concern over whether capital formation in the U.S. is accomplished at a rate sufficient to meet capital replacement and expansionary productivity requirements. In his Joseph Schumpeter's lecture, Feldstein (1995) stated that the U.S. had the lowest saving and domestic investment rates in the Organization for Economic and Co-operative Development (OECD). The U.S. also had the lowest investment ratio-- about 5.0%--among all OECD countries in the second half of the 1980s, compared with an OECD average of more than 8.0% (OECD 1996). Because the private savings rate is linked to capital investment and economic growth, the U.S. consequently experienced slow growth rates in the 1980s. This led to fiscal policies aimed at spurring capital formation (Chirinko and Morris 1992). International capital inflow, which in the past supplemented domestic sources, has been diminishing; it is now 1.5% of GDP.

For more than 350 years, from the first English settlements until World War I, foreigners invested more in the location that became the U.S. than Americans invested in other countries (Niskanen 1992). For the past 70 years, the U.S. was a net exporter of capital, due to the higher rates of return on capital investment in Europe and Asia. In the 1980s the U.S. experienced again a net inflow of capital. In 1989, gross foreign investment in the U.S. was $214.7 billion (Ulan 1991). Between 1985 and 1989, the cumulative U.S. current--account deficit net capital inflow--was $668.9 billion, equal to 19.0% of U.S. gross private domestic investment over the period. Niskanen summarized the reasons for this capital inflow as high economic growth, U.S. fiscal policies, U.S. budget deficit, and foreign economic policies.

During this same period, foreign capital was encouraged in the U.S., but as investment grew, it attracted public attention. Many Americans became concerned not only about the total value of foreign holdings, but about the extent of foreign participation in particular sectors, especially manufacturing and services. They advocated restraints on foreign investments because they feared that foreigners who own large shares of capital investment in the country will dominate the policy decision-making process (Ulan). Secondly since capital investment depends on rates of return, investors who find a falling rate of investment in one country are likely to move their capital to another country with higher rates of return on capital. …

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