WTCLA's Foreign Direct Investment Report Shows Global Investors Continue to Select LA

Steve Olson

Thanks to major ports, industry, and a supportive administration, Los Angeles has long been a hub of international trade and global investment. Stephen Cheung and Steve Olson, president and vice president of the World Trade Center LA, join VX News to delve into the WTC’s 2018 Foreign Direct Investment Report and the factors that make LA an attractive place for global companies to locate, manufacture, and hire. They also urge a private-sector response to new tariffs, which could harm California’s international relationships and LA’s regional economy. An excerpt of the report prefaces the interviews. 

Below is an excerpt of the Foreign Direct Investment report:

The economic policy debate between protectionism and global free trade has reached a fever pitch globally, with potential trade skirmishes, battles and wars hanging like a cloud over the global economy. Whether it is rooted in the new populism that gave rise to a new administration in the United States, and Brexit in the European Union, or the growing opposition to multi-national trade agreements – such as the North American Free Trade Agreement (NAFTA) and Trans-Pacific Partnership (TPP) – on the left and right, or the ebbs and flows of various goods around the globe, the potential for threats to historical trade models and routes seem greater than any time in recent history. Southern California is a major hub for the global economy, and as a result, it is a critical bellwether of the state of global trade. Building on the World Trade Center Los Angeles (WTCLA) and the Los Angeles County Economic Development Corporation’s two-year series of publications on foreign direct investment (FDI) in Southern California, this year’s report continues to describe the shifting patterns of trade throughout the six-county Southern California economy (covering Los Angeles, Orange, San Diego, San Bernardino, Riverside, and Ventura counties).

This report supplements those prior reports by providing a deeper understanding of the provenance of the foreign-owned enterprises (FOEs) that comprise the data in this study. It also provides some deeper understanding of the business flows into the mega-region that are impacted by three of the flashpoints in the global discussion around trade and investment flows: (1) the departure of the United Kingdom from the European Union (aka “Brexit”); (2) efforts by the United States to redefine and renegotiate NAFTA; and (3) the escalating trade tensions between the United States and China. There are now an estimated 10,378 foreign-owned firms in Southern California, representing approximately 1.2 percent of all firms in the region. Together, these firms have 427,954 employees, representing 5.4 percent of the region’s workers, with wages of almost $27 billion.

Japan is the leading source-nation for FOEs in the region with 2,541 firms, accounting for more than one-fifth of the total FOE employment with 85,874 employees and $5.4 billion in wages. The United Kingdom remains in second, with 1,167 firms employing 63,739 workers with a total estimated $3.6 billion in wages. Canada, France, and Germany round out the top five source-nations. And the geographic diffusion of these FOEs throughout the region is increasing with a slightly smaller share of these firms located in Los Angeles County this year, dropping from 48.4 percent to 46.9 percent (Table 1). Retail and wholesale trade continue to have the largest number of firms, with 2,404 and 1,704 firms, respectively, and manufacturing places third with 1,588 firms. On the employment and payroll side, however, manufacturing dominates the FOEs, accounting for nearly one-third of all payroll jobs (147,830) and nearly 40 percent of all wages paid ($10.4 billion).

Begin by addressing the priority the World Trade Center LA has given to foreign direct investment in the California & LA regional economy. What incentives does Los Angeles have to encourage the growth of FDI? 

Steve Olson: In 2011, I founded SelectUSA, the first federal investment attraction program, under the Obama administration. Serving as executive director, I learned that attracting foreign investment is not just about tax incentives. I heard over and over again from executives at foreign-based companies—particularly those with less experience investing in the US, such as China, India, and Brazil—that they cared about having strong partnerships, supporters, and guidance in the area they’d be investing in.

When I returned to Los Angeles, it seemed that there was a void in the greater LA area in that space. There were a number of organizations dedicated to trade promotion, but not investment attraction. Following conversations with Mayor Garcetti and several county supervisors, we wanted to create a version of SelectUSA for the greater LA area. 

California has incentives, the federal government has incentives, and the city can make incentives; we guide people to those. But we as an organization don’t hand out tax incentives or free real estate. What we do is help identify opportunities and connect companies with able service providers that can give them advice on legal issues, tax issues, site selection, and the like. We’ve found that to be a very valuable service, and it seems to be working.

Stephen Cheung, summarize the World Trade Center’s 2018 foreign direct investment report.  

Stephen Cheung: The main takeaway is that Los Angeles continues to be a very strong market for foreign investors. Of all the places they could locate in the United States and the world, they continue to select Los Angeles.

We look at investments from a long-term perspective; we don’t track just the day-to-day and year-to-year. Our report also tracks job creation. As an economic development agency, that’s our main concern.

Japan, the UK, Canada, France, and Germany have been here for decades. These international companies have chosen Los Angeles as their new home. They’ve integrated into our community, and they’re hiring locally and creating good-paying jobs here. With more than 2,500 firms located in the Southern California region, Japan is directly contributing more than 85,000 jobs.

Steve Olson, at the World Trade Center’s recent SelectLA conference, new L.A. Times owner Patrick Soon-Shiong assertedthat LA is about to become the leader of the “fourth industrial revolution.” What opportunities for FDI flow from LA’s growing regional economic prominence?

Steve Olson: The SelectLA conference is about highlighting the greater Los Angeles region, and all of Southern California, as an attractive place to invest and do business.

When we talk about tariffs and investments, what we’re really talking about is jobs. LA has a talented workforce. We’ve got a large number of engineers. We’ve got wonderful universities. We are the largest manufacturing county in the country. But many people don’t know these things.

SelectLA highlights all the things that are attractive about Los Angeles on top of our climate and quality of life. It brings together business and government leaders in Los Angeles to talk about their experiences here. This year, we had about 300 investors from around 30 countries come to our one-stop-shop forum.

Patrick sees that our golden era is right now. There are so many exciting things happening in the technology space, the design space, and advanced transportation. We’re investing more as a city in infrastructure than just about anywhere else in the country right now, so there are a lot of opportunities here.

How might the tariffs imposed by President Trump impact WTCLA’s efforts to entice more foreign trade to California and Los Angeles?

Steve Olson: The potential threat is real. The Port of LA and the Port of Long Beach are the two biggest ports in our country, and the many jobs tied to containers passing through those ports will be directly affected by this.

For foreign companies based in the US, imports are where it starts to impact their investment. BYD is a great example. BYD is a Chinese headquartered co which, among other things, manufactures electric buses. They have a substantial investment in California -- they employ approximately 2,000 Americans at a manufacturing facility in north Los Angeles County where they assemble state of the art battery technology for large metro buses and other vehicles.

Some of the materials they use are imported, and they could be affected by the tariffs. BYD also makes other products, like electric trucks, where the market isn’t quite big enough to support manufacturing in the US yet, but some assembly, service and certainly sales are happening here. Those products are being directly affected by the tariff because the parts are becoming more expensive to import and the US market could end up losing this type of advanced green vehicle. 

Granted, there are some things about the China relationship that need to be corrected, and the Trump administration is absolutely right to be looking at that. But overall, we all benefit from this trade. I truly believe that there are enough voices being impacted by this—both here and there—that cooler heads will prevail, and we will come to an arrangement to return to more free and open trade. 

Stephen Cheung: I definitely think there is going to be an impact, because international trade is so closely tied to investments. 

A lot of companies from Asia and Europe are looking to the United States and especially Los Angeles for their investments. Typically, part of their investment strategy is to streamline the supply chain. For example, some are investing in warehouse logistics centers in order to cut out the middle people and be as self-sufficient as possible. If that supply chain were disrupted because tariffs increased the cost of certain products, that might affect their desire to invest in the US and the Los Angeles region. 

Moreover, the tariff discussion was escalating for months before the tariff against China was implemented. Now, we’re hearing rumors that the Chinese government might make things more difficult for certain US companies that are investing in China them in order to make an example of them. If that were to happen, I don’t think our administration here would stand idly by and not retaliate. And in that case, the foreign investors who have already integrated within our community would be at risk. We don’t want them to be punished or suffer in any way, because they’re part of the community now. They’re Angelenos just like the rest of us. 

The tariff and the discussion about protecting our borders are creating quite a negative image for the United States. The World Trade Center has continuously gone around the world to make sure people know that Los Angeles is open for business, has been open for business, and will continue to be open for business in the future.

How do you believe our two large ports are likely to react to the tariffs?

Stephen Cheung: It’s very important for the ports to work with their private sector partners—including manufacturers, exporters and importers, logistics providers, and the entire supply chain—to be vocal to the administration about the negative impact the trade tariff is going to have on their operations and on our local economy.

Los Angeles is home to the largest customs district in the United States, with over $430 billion in two-way trade just last year. These high trade numbers are heavily dependent on the Port of Los Angeles and the Port of Long Beach, as well as LAX. And our No. 1 trading partner is China, with over $170 billion in trade just last year. The combination of a negative impact to that supply chain and a negative impact to that partnership will translate into a negative impact to the ports’ operation.

Since the demise of the Trans-Pacific Partnership in 2016, how are trading relationships different from what they were or what they would have been?

Stephen Cheung: It’s too early to say what the difference would be because TPP was never implemented. But I do think that Los Angeles and California would have benefited greatly from the TPP. Eleven of the Pacific Rim countries are already doing great business with us, and if there’s one region that would benefit from tying them in more closely, it would be Los Angeles because of our customs district. 

However, there’s still a chance that the TPP might return. We’re hoping that our US Trade Representatives and the President will reconsider if the other 11 partners are willing to come back into the conversation.

Steve Olson: I worked on the TPP in the US Commerce Department, and it is critical, not only for Los Angeles, but for the entire United States. If we’re not leading the conversation among counties in that region, then somebody else will absolutely fill that void—probably China. In fact, it’s already happening. 

The leadership of the US on these issues is critical. And it’s not just trade. We want the manufacturing standards being set to be US standards. We want the rule of law and the speed of law around, for example, IP protections, to be on par with what we have in this country. These conversations are continuing without us, so I’m hopeful that we can rejoin the party.  

Come November, there will be a transition in California’s leadership. Will that impact the trade and investment that the World Trade Center has been fostering for so long? Are your clients asking questions about that transition?

Stephen Cheung: People are looking very closely at the next election. Governor Brown has been very vocal internationally, especially in our partnership with China over the last few years. In 2012, Governor Brown signed six different MOUs with Chinese provinces to encourage additional trading partnerships with California. That message has resonated very well with China, and that’s one reason a lot of Chinese investors have looked very closely at California as their investment location. 

Mayor Garcetti has also been very active and aggressive in his approach to building a close trade relationship with China. The combination of the two has created a very open environment for investors, not only from China, but from around the world. Now that there’s going to be a transition, people are wondering whether the next leader is going to have the same stance.

It’s true that not that many state-level programs directly impact trade operations. But the more open and welcoming we are to investors, the more they’re going to look into our region, and start seeing the benefits of being located in Southern California and Los Angeles. A lot of times, people look at Los Angeles and only think about Hollywood. It takes marketing for people to realize that, for example, we’re the No.1 manufacturing center in the United States. We have one of the largest biotech industries in the United States. We have more high-tech jobs than Silicon Valley or Boston. We need our elected officials, like the governor and the mayor, to spread that message.

Steve Olson: I would add that I don’t believe this is a partisan issue. Generally, California governors and mayors have been very supportive of international trade and investment. There are great examples in both parties of governors and mayors who provide their business card to investors and say, “Consider me one of your employees, and let me know when I can help.” Governor Brown was good at this, and I’m hopeful that whoever wins California’s next election will continue to do it.

Lastly, what has WTC-LA learned from BYD’s experience investing in electric transportation in metropolitan LA?

Steve Olson: We learned that for investors, guidance, friendship, and strong arms around them, if you will, makes the difference. That was what sealed the deal for them to come to Los Angeles versus New York, Chicago, Texas, or somewhere else. It was the support they got from city and county leaders, and from organizations like the World Trade Center, that gave them the confidence that they could succeed here.

In terms of benefits, BYD has created close to 2,000 jobs in Los Angeles. They brought world-class, industry-leading technology in electric transportation and batteries to this region. Their suppliers here in the US are benefiting and are starting to locate around them. The benefits are huge. 

“It's the support they get from city and county leaders, and from organizations like the World Trade Center, that gives companies like BYD the confidence that they can succeed in LA.” – Steve Olson