Foreign Direct Investment in Los Angeles
In recent times, Los Angeles stands tall as the cultural capital of the world, glittering in the public eye for its warm Mediterranean weather, iconic entertainment industries, and high-end fashion. To Marrow Mayo, the City of Angels was beyond ordinary; it was a “commodity,” meant to be marketed to citizens as if it were commonplace as groceries (Davis, 17). Over the years, the dominating free market approach invited a plethora of businesses into the area – a small part of these included investments by multinational companies. The increasing influx of finance, technology, and manpower functioned as more than tools for creating employment and wealth in the United States. As Foreign Direct Investments (FDIs) by nature are known for building long-term ties between distant and distinct economies, analyses have usually been limited to the national level; however, deeply examining subnational entities, such as Toronto and Chicago, would not only provide insight on how FDIs help create employment, but also help better comprehend how they have done so at greater heights of the local production chain. Investors bring along opportunities for the United States to sell its produce to larger international markets, where there exists an ever-growing network of connections and distributions. Capital injection is integral to progress in today’s weakened economy – Los Angeles is expected to have an institution implementing FDI specific tactics for sustainable development of foreign investment (Kondic and Guan, 4). The following illustrations draw one closer to cognizance of how immigrants, and their ideas, constantly strive for general positive socioeconomic change in the local scenario.
So, why do the investors come to the United States? Motivational drivers, primarily political instability, led to exodus in domestic countries; immigrants from across the Atlantic and the Pacific fled to the New World to rebuild their lives. For the vast majority, societal integration was anything but smooth; numbers eventually grew exponentially and in certain areas, even caused shifts in population power. During the end of 1994, California was still recovering from the economic downturn. Interestingly, the San Gabriel Valley, in the east of the Los Angeles County, escaped from the worst effects through a simultaneous economic boom in East Asia. Opulent businessmen from Taiwan, Hong Kong, China, and Southeast Asia flooded the local market with their large-scale investments in secure assets as diverse as banks, warehouses, housing buildings, retail malls, and supermarkets. Through the 1980s, statistics show that the Asian inundation of neighborhoods in the San Gabriel Valley to such an extent that the city became the first Asian majority in the country – the decade brought in $27 billion from Asia alone. Geographical location was of paramount importance: the region had a predominant Asian community and allowed mobility through well-connected highways and proximate airports, and access to the Port of Los Angeles. Unlike the Japanese who flaunted skyscrapers such as the Rockefeller Center, the Chinese treaded with subtlety; their style achieved complexity through joint ventures and secure investments in silence. The trade of businesses transgressed locational borders as companies in United States began franchising in China, while the Taiwanese opened up shop in the West Coast. Cases similar to the latter occurred at increasingly high frequencies; this should come as no shock as the 1980s saw Monterey Park undergo an Asian population increase by 137 percent, with the average immigrant bringing in $200,000. Matters deteriorated when the Asians took over the scene with the locals adjusting to the culture of Asia in America; the region practically implanted itself across the Pacific as shops exclusively carried Chinese signs. Non-Asians rose in resistance, and eventually the constituent City Council reminded the city that the nation officiated in English (Mydans, 12).
A few years later, the real estate industry of Los Angeles felt the resonance of the powerhouses in Asia. Multinational companies acquired a minimum of fifteen buildings, with each a price floor of $10 million, in the years 1994 to 1996. While the rest of Southern California also suffered from horrendous property prices, Los Angeles salvaged pride with investors taking advantage of the ongoing hospitality trend. Luxury hotels, such as the Regent Beverly Wilshire, were acquired for hundreds of millions of dollars with renovations in plan. The increasing confidence in the recovering market reflected the Asian advancement to large-scale investment, whilst keeping the Chinese style in check through countless property bargains. This arose because of the main attraction of Los Angeles – property prices cost only a fraction of what they did in the Far East. For example, a square foot in Taipei cost $2000, compared to a meagre $300 a square foot in Los Angeles; this meant properties in the latter subjected themselves to low returns and low increases in value. The factor of political uncertainty being absent in the West Coast, unlike Asia, brought in stability to the annual earnings in the West Coast, and in turn often American companies managed these investors’ properties. They targeted the major cities in the Pacific rim, which could be easily reached from Asia and thus, had already established predominant Asian communities – Los Angeles alone had an estimated 907,000 Asians in 1995 (Kopytoff, 7).
In recent times, Los Angeles tied New York as the best city in the country for foreign investment in a survey published in January 2018 by the Association of Foreign Investors in Real Estate. The past seven years showed how the West Coast gained ground on its Eastern counterpart as New York had led by substantial margins; however, in 2016 an outpour of Chinese money catalyzed Los Angeles’s meteoric soar to the world stage. It did not take much longer for it to be ranked fourth globally for investment. The foreign investment portfolio boasts both trending and traditional industries – biotechnology, aerospace, defense, and financial services thrive within a scene dominated usually by the entertainment industries. Technology undergoes constant growth and development, and Los Angeles now holds enough footing in the sector to be comparable to the mighty Silicon Valley up north. Online shopping is the top opportunity for foreign nationals as they invest in industrial-logistics properties – more than two fifths of the country’s cargo comes through the Port of Los Angeles. The economy is inextricably linked, and this case exemplifies how two disparate sectors such as technology and real estate undoubtedly influence each other, especially under the encompassing investment. Entrepreneurs come from all over the world, including nations such as Canada, Germany, and Qatar, for good reason – Los Angeles is still seen as a haven for safe investment. A majority would agree that the nation is the most stable for real estate investment internationally. The city retained its status from decades ago; property prices have not yet peaked in real estate markets unlike San Francisco or Washington D.C., where prices can be one and a half times more based on square footage. Local Glendale and Downtown office markets in the Los Angeles Central Business District offer heavy deductions to prior peak pricing and replacement cost even late in the cycle. During recessions, Los Angeles continues to avoid total catastrophe primarily through FDIs. This has not only diminished the risk factor, but also helped reel in investors one after the other: Los Angeles steadily gains momentum in the world market (Ryan).
Each component of the Los Angeles FDI sector is intricately involved with one another, and all combine to create a significant impact on global economics. The World Trade Center Los Angeles’s report “Foreign Direct Investment in Southern California, 2017” examines closely the factors that make up the current foreign market in all of the six counties in Southern California. Close inspection of the multidimensional analyses of the Los Angeles County allows the economic components to provide intuition on the current trends and help integrate diverse concepts into a logical cyclical process. As of 2016, Los Angeles provided 212,512 jobs, up by 35,085 jobs in 2015. Number of firms increased by 315 to 4,682 firms respectively, paying $13.2 billion in wages in 2016. Japan topped the number of Foreign Owned Enterprises (FOEs) by source nation accounting for over a fifth of all the jobs. Followed United Kingdom, Sweden, Canada, Germany, Switzerland, and France with 12.7, 8.4, 8.3, 7.5, 7.4, and 7.2 percent of all FOE jobs respectively. Japan dominated the scene for a long time after suffering immensely during the recessions while its geographical neighbors patiently rose, but never truly comparable to its height. Most Japanese jobs involve manufacturing and wholesale trade, with 1,233 firms paying approximately $2.8 billion. Sweden, with major corporations such as Hennes & Mauritz AB, had only 54 firms but employed 17,818 jobs. Overall, by industry sector, the manufacturing industry paid the most in wages at an estimated $3.1 billion, while public administration paid the least at about $58.5 million. Other significant contributors include wholesale trade, transportation, warehousing, utilities, financial activities, professional and business services.
The report features clustering analyses showing the variation in spatial agglomeration in Los Angeles. Spatial agglomeration refers to the gathering of enterprises in a particular region – this occurs because of numerous reasons. Firms such as car dealerships, jewelry boutiques, furniture stores, and fashion outlets, enjoy a range of benefits such as customer supply, common infrastructure, and supply chain synergies. It also allows firms to be attractive to customers and workers from ethnically familiar neighborhoods, which usually holds significant importance in determining an investor’s confidence in practicing business in a foreign country as it allows access to backgrounds and resources. The modern age relies heavily on a multitude of transactions within an inextricably linked system which is constantly changing.
According to empirical studies, regional economic growth and industrial spatial agglomeration share a positive relationship. Spatial proximity reduces costs and intensifies localized positive externalities; therefore, a FOE has three main choices – cluster with firms in their own sector or cluster with firms from the same source country or both. The last option also helps as businesses often share similar experiences locating, competing, and expanding in Los Angeles and beyond. The H-indexes are ratios of all FOEs in Los Angeles by sector and by source nation. The computed proportions are then squared and added to produce values ranging from zero to one, meaning they could represent all activity spread almost equally among many cities to all activity located in one city respectively. In 2016 public administration was the sector with the highest spatial agglomeration, with a H-Index of 0.503. Examining and analyzing statistics helps illustrate a clearer picture: wholesale trade had more than twice the average number of FOEs from the same sector and source nation within a five-kilometer radius compared to retail trade in Los Angeles, 13 to 6. Limiting this statistic to the average number of FOEs from the same source nation, but not necessarily the same sector, within a five-kilometer radius holds as empirical evidence of international firms setting up in ethnically similar regions because of all the positive spillovers. Wholesale trade topped the list with an average of 42, with construction and leisure both coming close at 37. The sectors with the least number of firms featured natural resources, education and healthcare, and public administration at averages of 16, 14, and 9 respectively. This shines light onto the relative concentration of firms in Los Angeles. For example, the report can help draw the conclusion that generally, spatial agglomeration tends to be at higher levels on the basis of sector rather than the country of origin. In broader terms, this means that foreign firms are more likely to locate themselves close to firms of their own industry over firms from the same source nation. The underlying reason behind this can be seen using the statistics: using the same tactic shows higher 3-year growth rates in sales volume and employment in cities with high levels of spatial agglomeration by sector than by same country of origin. These analyses may help new investors make data driven decisions when setting up businesses in the city, tangibly visualizing both long and short-term goals. The regional economic development is correlated to the levels of spatial proximity firm as previously mentioned; there exists statistical proof that cities with greater spatial agglomeration tend to have larger workforces and lower degrees of unemployment. Prospective FOEs act with a better understanding of the market and come to realize that not only Los Angeles, but all of Southern California, holds great potential for relatively risk-free stable investment (LACEDC, 50).
So, what is the proper way to ensure a steady flow of foreign capital in the city? Other leading North American examples are aforementioned Toronto and Chicago, cities which have already established longer standing regimes of FDI engagement. Chicago and its vicinity would be a close substitute for Los Angeles in terms of economic development and population – thus, lessons learnt from studying the Chicago model could possibly be implemented into Los Angeles’s economy. The city and its administration planned for a myriad of activities in early 2012 under World Business Chicago, a public-private partnership targeting economic development. The plan “Economic Growth and Jobs” outlined various tactics to incubate a more suitable business climate; it included goals spread across all sectors – from becoming a leading advanced manufacturing, transport, and logistics hubs, increasing affinity for business organizations and headquarters to promoting development in sophisticated and rising industries alike through entrepreneurship. A large capital inflow of FDIs undoubtedly helped Chicago in accomplishing these goals and thus, the city’s leadership tailored comprehensive FDI tactics specifically for Chicago. It believed in establishing a lead investment promotion institution that operated as “a one-stop shop for foreign businesses,” for creating a stronger network between management with public officials and work resources. These organizations would be mechanically researching markets and identifying the key industries its city had the most potential in. Toronto also stood out as a North American role model for attracting FDIs – it becomes more relevant to this case as it shares many similarities with Los Angeles. The relatively high standards of living, diverse and developed economy due to the large immigrant populations feature prominently on both cities’ outlooks. Invest Toronto, which showcases local business options on the global stage, accelerates the city’s competitiveness worldwide through foreign investors. It stands as the materialized concept of the Chicago model, catering towards businesses and their needs up, down, and across all private, public, and non-profit sectors. The agency promotes Toronto’s stable business climate, low costs, and locational benefits. Services to foreign clients include guidance and analyses on current market conditions, connecting relevant organizations concerning the city’s investment options, and even complimentary business concierges. Strong political support accounts for a considerable amount of Invest Toronto’s success – every new mayor of the city becomes a prominent board member of the institution. Investors prefer having a general body that can provide valuable economic information as well as redirect to better channels if available. These not only help reinforce foreign investment into the economy, but also ensure continual streams of capital as well (Kondic and Guan, 40).
The World Trade Center Los Angeles now serves as the aforementioned model for the one-stop shop for foreign investors in the region. It pulls in businesses and provides them with statistics and data that allows them to grow profits, hold current market shares, and improve conditions to diversify risks across borders. It showcases all of Los Angeles and the immense investment opportunities it has to offer, long-term especially. Assessing existing resources and considering the historical context of foreign investment in Los Angeles, it only makes sense to utilize the opportunities available to both sides in the market and initiate sustainable development in curated as well as emerging industries. The future for the city of Los Angeles looks brighter with each passing innovation and through greater awareness, incredible socioeconomic advancements can take the stage.
Written By Raad Sarwar, UCLA Undergraduate Student
Sources:
Los Angeles County Economic Development Corporation. “Foreign Direct Investment in Southern California, 2017.” World Trade Center Los Angeles, 12 June 2017.
Kopytoff, Verne G. “Asian Investment Is on the Rise in Los Angeles.” The New York Times, 22 Sept. 1996, Vol. 146 Issue 50558, Real Estate p7.
Mydans, Seth. “Asian Investors Create a Pocket of Prosperity.” The New York Times, 17 Oct. 1994, Vol. 144 Issue 49852, pA12.
Ryan, Jacquelyn. “Los Angeles Ties for Top US City for Foreign Investment.” CoStar, 9 Jan. 2018. Web. 14 Feb 2018. http://gateway.costar.com/home/news/shared/186362
Davis, Mike. City of Quartz, Verso, 1990. Print.
Kondic, Milan, and Hauzhen “Molly” Guan. “Building A FDI Task Force in Los Angeles: Assessing Existing Resources and Proposing Strategy for the Future. Harvard Kennedy School, 26 Mar 2013.