BUSINESS UPDATE

DIRECT FOREIGN INVESTMENT: ITS ROLE IN THE FUTURE OF SOUTHERN ARIZONA

A PRELIMINARY ANALYSIS

By: LAWRENCE E. KOSLOW, PhD, JD

NOVEMBER 2007

Copyright © 2007 by Lawrence E. Koslow. All rights reserved.

INDEX

I. OECD’s Definitions of Foreign Direct Investment and Foreign Direct Investor.

II. Doing Business in the United States of America: Its Approach.

III. Foreign Investment in the U.S.A. by Sectors, Geographies and Specific Country Investors.

IV. Benefits of FDI.

V. Strength of and Challenges to Southern Arizona as a Place for FDI.

VI. Goals and Strategies to Attract FDI to Southern Arizona

I. OECD’S DEFINITIONS OF FOREIGN DIRECT INVESTMENT AND FOREIGN DIRECT INVESTOR

FOREIGN DIRECT INVESTMENT: reflects the objective of obtaining a lasting interest by a resident entity in one economy (“direct investor”) in an entity resident in any economy other than that of the investor. The lasting interest implies the existence of a long-term relationship between the investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated companies, both incorporated and unincorporated.

FOREIGN DIRECT INVESTOR: is an individual, an incorporated or unincorporated public enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises, which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating in a country other than the country or countries or residence of the foreign direct investor or investors.

II. Doing Business in the United States of America: Its Approach *

The book was written to look at the U.S. from the point of view of the Foreign Direct Investor. It begins with a discussion of a former client, a PhD in Biology from Italy who had financial success in his home country and now wanted to develop a new implantable device that would hold up to a thirty day supply of medicine and automatically distribute it to the patent as prescribed by the physician. Ultimately, he decided to move to the Twin Cities of Minnesota because it had a business culture that simply did not exist in his native Italy or in most places in Europe. To quote from my book:

“The U.S. offered him the combination of opportunities he needed. Choosing to locate his business in one of the larger cities of the American Midwest, he was close to a number of complementary companies that were willing to assist him in many ways including making investments in his company and, in some cases, serving on his Board of Directors. His lawyers and other professionals found additional funds for the company among selected private investors and venture capitalists.

Additionally, since he was willing to invest a large sum of his own money, he was able to take advantage of one of the categories of lawful permanent residence and also bring in a number of key people from Europe. Finally, the technology-rich local market allowed him to recruit the personnel he needed to run the company.”

In the first Chapter, “Why Do Business In/With The United States,” we look at and discuss eight reasons. These are:

The U.S. is the world’s largest single economy and consumer of a wide variety of goods and services.
In recent years, the U.S. economy has grown steadily with low inflation and interest rates.
U.S. consumers are among the worlds most affluent. Always receptive to foreign products, the U.S. consumer is likely to become an even more avid buyer of imported products and services as the world economy develops.
For investors, the U.S. remains the world’s broadest and deepest financial market, one that is well regulated but runs with few restrictions. It is the best place in the world to increase investment value through the use of capital markets.
Immigration policies favor foreign investors and their families and employees.

The educational system with its strong relationship with the business community continues to develop new technologies and an excellent local workforce.
Foreign investment laws are very liberal and there are few restrictions facing either individuals or companies.
Because the U.S. does not have an extensive network of trade agreements, it is best to approach the market directly.

* A complete PDF file of Doing Business in the United States of America can be downloaded at www.gbcgroup.com

Doing Business In the United States of America

CONTENTS PAGE

1. WHY DO BUSINESS IN/WITH THE UNITED STATES? ......................................................1

2. ESTABLISHING CONTACTS IN THE U.S. MARKET .........................................................11

THE IMPORTANCE OF CONTACTS ...........................................................................11

START AT HOME .....................................................................................................12

CHAMBERS OF COMMERCE ...................................................................................12

INDUSTRY ASSOCIATIONS ......................................................................................14

WORKING WITH U.S. GOVERNMENT SOURCES ......................................................15

BI-NATIONAL CULTURAL ASSOCIATIONS .................................................................15

REFERENCE LIST ....................................................................................................17

3. WORKING SUCCESSFULLY WITH AMERICANS .............................................................22

CULTURAL DIVERSITY .............................................................................................22

COMMERCIAL STANDARDIZATION ...........................................................................23

OPERATING WITHIN THE U.S. BUSINESS CULTURE .................................................23

TIMELINESS: APPOINTMENTS AND DEADLINES ......................................................23

THE IMPORTANCE OF THE WRITTEN WORD ............................................................24

INTERPRETING QUESTIONS AND ANSWERS ...........................................................24

PROPER MEETING BEHAVIOR .................................................................................25

HOW AMERICANS NEGOTIATE: TIME IS MONEY ......................................................25

A BASIC PRIMER ON THE SOCIAL GRACES .............................................................26

WOMEN IN AMERICA ...............................................................................................27

4. BUSINESS IMMIGRATION STRATEGIES .........................................................................28

INTRODUCTION: U.S. IMMIGRATION POLICY .............................................................28

TEMPORARY WORKING VISAS: INVESTMENT AND BUSINESS VISAS.......................29

PERMANENT RESIDENCE IN THE U.S.: CONVERTING THE E AND L VISAS................30

TWO OTHER STRATEGIES FOR OBTAINING PERMANENT RESIDENCE......................31

5. MARKETING AND SALES TO THE U.S. ............................................................................33

PREPARING FOR THE U.S. MARKET ........................................................................33

TARGETING ..............................................................................................................34

BRANDING ................................................................................................................34

ENTERING THE U.S. MARKET: DIRECT MARKETING FROM YOUR HOME BASE ........35

MARKETING TO THE U.S. THROUGH INTERMEDIARIES .............................................38

AGENTS (REPRESENTATIVES) .................................................................................38

DISTRIBUTORS (DEALERS) .......................................................................................39

OEMS AND VARS .....................................................................................................40

FRANCHISES ............................................................................................................40

ESTABLISHING DIRECT RELATIONS IN THE U.S. THROUGH YOUR OWN

OPERATIONS ............................................................................................................41

EQUITY JOINT VENTURE ...........................................................................................41

ACQUISITION OF AN EXISTING COMPANY .................................................................42

CREATING A NEW COMPANY OR SUBSIDIARY .........................................................43

6. INVESTING IN REAL ESTATE IN THE U.S. .......................................................................46

RESTRICTIONS ON FOREIGN OWNERSHIP OF REAL PROPERTY IN THE U.S. ..........47

WHY INVEST IN REAL ESTATE? ...............................................................................49

TAX IMPLICATIONS OF REAL ESTATE INVESTMENT IN THE U.S. ..............................52

7. LEGAL CONSIDERATIONS .............................................................................................53

KEYS TO UNDERSTANDING THE AMERICAN LEGAL SYSTEM ..................................53

CHOOSING YOUR LAW FIRM ...................................................................................55

LEGAL FEES AND COSTS ........................................................................................57

WORKING WITH ATTORNEYS: QUESTIONS AND ANSWERS .....................................57

8. REGULATION OF FOREIGN INVESTMENT AND TAXATION IN THE U.S. ..........................60

REGULATION OF FOREIGN INVESTMENT .................................................................60

U.S. TAXATION .........................................................................................................61

BUSINESS ENTITY TAXATION ...................................................................................62

DOING BUSINESS THROUGH A THIRD PARTY ..........................................................62

AS A GLOBAL CORPORATION WITH A PERMANENT ESTABLISHMENT IN THE U.S. ..63

SETTING UP A U.S. COMPANY (A SUBSIDIARY) TO HANDLE U.S. BUSINESS ...........64

SETTING UP A U.S. BRANCH OF A FOREIGN CORPORATION ...................................65

TAX TREATIES ..........................................................................................................65

COUNTRY TAX TREATIES ..........................................................................................66

INDIVIDUAL TAXATION IN THE U.S. ............................................................................67

RESIDENT ALIENS ....................................................................................................67

NONRESIDENT ALIENS .............................................................................................67

U.S. TAX TREATIES APPLIED TO INDIVIDUALS ..........................................................68

TABLES

TABLE TITLE PAGE

1-1 U.S. INTEREST RATES ..................................................................................................3

1-2 U.S. IMPORTS IN DOLLARS AND PERCENTAGE OF TRADE FROM 1993-2005 ................4

1-3 AREAS OF RAPID GROWTH IN CONSUMER GOODS IN THE U.S. 1995-2005 ..................5

4-1 E TREATY COUNTRIES AS OF 2006 ............................................................................30

6-1 ALIEN OWNERSHIP OF REAL PROPERTY IN THE UNITED STATES .............................48

8-1 COUNTRY TAX TREATIES WITH THE UNITED STATES OF AMERICA ............................66

8-2 COUNTRIES WITH UNITED STATES TAX TREATIES REGARDING TAXATION OF

INDIVIDUALS ................................................................................................................... 69

III. Foreign Investment in the U.S. by Sectors, Geographies and Specific Country Investors (2004)

In 2004, the total accumulated FDI in the U.S. was $1.5 trillion or $2.7 trillion at the market value of that year. Of that total, $96 billion was added in 2004 alone.

This investment accounted for approximately 10% of the total shares of all public ally held companies.

Sectoral Facts:

About one-third of this investment was held in the manufacturing sectors with the Asian and Pacific holdings accounting for about 35% of this investment.
About 14% of FDI was in the financial sector.

Geographic Facts:

European firms accounted for approximately 70% of all FDI with the U.K. first with 16% or about $252 billion invested.
Asia Pacific accounted for approximately 14% of FDI or about $219 billion invested. Japan accounted for 12% of the 14%.
The Top 5 Investors: UK, Japan, The Netherlands, Germany and France.
Direct investment from Latin America accounted for $86 billion or 5.6%.
Investments from the Middle East and Africa accounted for only 0.6% of the total or about $10 billion.

Specific Countries:

The $100 billion Club includes the Top 5 plus Luxembourg and Switzerland (both financial centers).
Taiwan accounted for $3.2 billion while China’s investment was minimal.
Israel accounted for $4.1 billion; Kuwait $1.3 billion.
From the Americas, Panama was first with $11 billion followed by Mexico with $7.9 billion, Venezuela with $5.5 billion and Brazil with $1.3 billion.

Source: U.S. Department of State, Fact Sheet, March 22, 2006

IV. Benefits of FDI

FDI companies concentrate on the more capital-intensive industries therefore creating more opportunities for better-trained workers and a higher level of employee skills.
Tend to offer better compensation packages.
Have better labor-management relations.
The conventional wisdom that foreign investors keep good jobs and high value activities at home has not been proven to be true in the case of the U.S.
Spend more money on capital equipment, especially when the plant(s) are transplanted.
Transfer new management methods and practices.
Force U.S. owned plants to improve themselves to remain competitive.
Contribute significant R&D and technology.
Have contributed to “Rustbelt Reindustrialization.”
Stop the brain drain and contribute to the strengthening of the “creative class.”

Source: Florida, Richard, “Foreign Direct Investment and the Economy,” Chapter 8 in Cynthia A. Beltz, (editor), The Foreign Investment Debate, Washington, D.C., The AEI Press, 1995, pp.63-123

V. STRENGTHS OF AND CHALLENGES TO SOUTHERN ARIZONA: AS A PLACE FOR DFI

STRENGTHS:

Climate and Quality of Life
Diverse Population.
Among the top 10 cities in the U.S. for job growth and high-tech industry concentration. (Source: Global Advantage website)
Centers for Higher Learning and Training. University of Arizona and Pima College.
Geographical Location (crossroads) strategically favorable to the markets of California, Texas, Mexico and Latin America. Location on the major rail lines and highways to establish it as a candidate for a major inland port.
Ahead of most Sunbelt cities in Sustainability Planning. Tucson was #20 of the 50 largest cities in the U.S. in SustainLane 2006. (Phoenix #22 and Mesa #47)
- In was in the top 10 in Natural Disaster Risk (#3) and City Innovation (#4)
- In was in the top 20 in Knowledge Base (#11); Local Food and Agriculture (#15); Air Quality (#16); City Commuting and Metro Congestion (#19); and Green Economy (#20)
Creative Class Group. MSA of 500k to 1Million –Tucson Metro ranks 51^st in Population and it the top 50 in the Tech Index #15; Creativity Index #16; Tolerance Index #28^th.

CHALLENGES:

Lack of a Diversified Economy: Land development and defense.
Commitment of the public and private sector to DFI is undetermined.
Limited international service from the airport.
Mariposa Entry point on the Mexican border.
Need improvement at the primary and secondary school levels.
Continued Commitment to car-dependent development.
Lack of political commitment to a statewide or development corridor strategy.
Border Issues. (Flag controversy at the Desert Museum)
Long term water concerns.
SustainLane 2006 rankings Bottom #10 cities (Metro Public Transportation; #40; Solid Waste Dispersion #41; and Planning and Land Use #42).
Creative Class—Tucson ranks 129^th in Inequality; 207^th in Brain Drain; and 267^th in Integration Index that is defined as the score of racial/ethnic mix of population segment.

VI: GOALS AND STRATEGIES TO ATTRACT AND MAINTAIN FDI IN THE REGION

GOAL: Increase regional prosperity by seeking and acquiring Direct Foreign Investment (FDI) opportunities.

STRATEGIES:

Review the Tucson’s region strengths and weaknesses in attracting and maintaining FDI.
Identify and develop FDI opportunities in target industries (e.g. Logistics and Optics).
Identify and develop programs and practices to increase the competitive position of the Tucson region in attracting and maintaining FDI.
Develop and implement marketing strategies to attract and maintain FDI.
Determine and advance the programs necessary to attract and maintain FDI in Higher Education and related Economic Development agencies.
Develop programs and practices that will advance human diversity and human integration in the Tucson region.
Develop and implement program with the State of Arizona, other regions within the State, and with Mexico and Canada to jointly develop and market FDI.