Why Does the US Allow Foreign Real Estate Investment?

Research proposal: Why the U.S. allows
foreign real estate investment and why there is limited regulation in this
regard? 

Chapter one: Introduction

1.1 Background of the Study

Today, investors across the globe pry
on markets that yield higher returns and security of the investments. As the
desire to control diversify investments across countries through the FDI
increase, so are prospective countries liberalizing their policies to allow
influx of these anticipated investment funds (Grant, 1991). On the basis of the
macroeconomic theory, investment flows are enhanced by the theory of
comparative advantage which points to the need to actualize investments in safe
and secure environment which promise higher yields (Carkovic and Levine, 2005).
The high growth rates and strong institutional framework in the US has received
the attention of investors across the globe.

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Concept of International Business

International business refers to
commercial exchanges that occurs across the borders of a country. The
definition includes both small and large corporations that import and export
goods. As internal demand for externally produced goods increase, so are the
commercial transactions expected to rise. The growth of international business
is attributed to market liberalization and increased government policy
implementation to expand its political influence in other economies. As the
growth takes shape, policymakers and legislators have got the regard for
limiting the negative impacts of trade barriers through viable legislation and
policy frameworks (Grant, 1991). 
Regardless of the size of the business that pursues the international
market, the impediments of such a trade are influential in determining the
direction. A country’s policy on international business could either foster to
detriment international engagements. Essentially, the organization has to
consider the prevailing economic and legal issues in the desired trade partner.

1.2 Foreign Direct Investment

The US defines Foreign Direct Investment (FDI) as the ownership or control, which can either be directly or indirectly by a foreigner. The foreigner can be an individual, association, government, partnership, or branch. The crux of FDI is enhanced flow of investments into the country. regardless of the size of the economy, FDI is a crucial aspect in economic growth. The related issues such as technologies, job creation, productivity and increased networks are inevitable in realizing growth in any sector of the economy. FDI contributes to the revenue generation for the economies that accept the investments. The technology and related externalities are critical in determining the growth index of a country. Such issues as employee experience and licensing of organizations are key in fostering a general understanding about external markets and their influence in generating revenues (Ford, Fung, and Gerlowsky, 2014). As a result, government policies will always seek to define capacities for which FDI can be tolerated in the economy.

Foreign Direct Investment Real Estate in the US

The investors involved in the FDIRE
in the US are investors from Japan, Canada, and the United Kingdom. The growth
of FDIRE has been growing in the recent past because the government has created
an enabling environment upon which investors can create funds. However, there
has been loopholes in the policies in real estate in the US has got the
attention of real estate moguls who would wish to take up chances and maximize
incomes (Hampton, 2016). Throughout the Obama administration, several attempts
were made through government ministries such as Commerce and State Departments
to create viable frameworks that spurs growth in FDIRE. According to Jenniges,
Derrick and Fetzer (2016), FDIRE for the US stood at $70.5 billion shared by
European countries, Latin Americas, Asia, Middle East and Africa.

1.3 Research Problem

The role of FDI in the development
process of US is critical. The admissibility of US FDI in other countries is
contingent on how well they accept investors from other countries to invest in
the country. As a result, the two impeccable issue that drive such investments
are policies that bolster the undertaking. Alternatively, the growth of
investments in real estate is attributed to the prevailing economic and policy
decisions about the need to create more jobs in the localities as well as
increase bilateral diffusion of US firms in other countries (Ford et al.,
2014). Moreover, the economic issues that has impacted on the US such as the
financial crisis of 2008, and the rising debt index has limited developments in
the real estate has imperceptibly necessitated increased investments. Also,
FDIRE is estimated to contribute immensely to a country’s growth and
development index. According to Levy, Ralph and Fatheree (2016) FDIRE is
attained through restructuring of the sector achieved by use of modern
technology in building and construction as well as optimizing distribution of
resources across global economies. 

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Research Objective

The objective of the study is to find
out why the U.S. allows foreign real estate investment and why there is limited
policy regulation on these real estate investments.

1.4. Value of the Study

The research findings are believed to
be useful for the government in appreciating the essence of reduced regulation
of the sector for the economic benefits for the economy. As a regulator, the
government will also be able to construct viable policy recommendations that
will improve revenue flows from the sector. Further, the findings will help
real estate investors targeting the US housing market to increase their
investments. Essentially, the finding will also add to the bulk of the recent
literature on real estate investments in US.

Chapter two: Literature Review

2.1 Introduction

The chapter will provide a review of
the documented literature on the research on real estate in the US.
Additionally, it will evaluate the theoretical perspectives as regards the
topic under consideration.

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2.2 Literature Review of Globalization of Real Estate

Loungani (2017) describes argues that
globalization of real estate has been necessitated by increased wealth
accumulation in emerging economies, low-interest rates in the most of the
economies as well as the geopolitical risks enabling a shift to other economies.
Globalization has impacted the prices of assets as well as open up viable
economic conditions upon which investments in the assets has taken shape.
Globalization is associated with increased accessibility of funds, goods and
technical experience that is spurred by the increased mobility of factors of
production. As a result, globalization has impacted immensely on the flow of
goods through manufacturing, distribution, and asset management (Hampton,
2016). Additionally, the relocation of skilled experts to the developed
economies necessitates the investments in assets, with real estate being a key
focus for the immigrants.

2.3. Literature Review of FDIRE in the US

The turbulence in the major global
like Japan and the UK has indicated tendency to favor foreign investments in
the US. The Advent of the Brexit negotiation and its impending implications,
the negative interest rates in Japan, and the China’s macroeconomic policy to
rebalance its economy has seen shifts in the investment in assets in other
countries (Urquhart-Bradley, 2017).  The
increased flow of financial instruments, with many researchers indicating a
convergence of these instruments at New York, London, Singapore, and the Hong
Kong; and the positive economic growth indices in these countries invariable
classify them as the most secure places to invest in for long-term initiatives
(Hampton, 2016). According to Rsmus Report (2017), the US poses as a worthwhile
environment because ‘there is strong rule of law, and a relatively stable
government and strong growth prospects” which are attractive for investments in
assets. The tendency is also aggravated by the presence of highly informed and
strategic decision maker in the asset management. The review of the Foreign
Investment in Real Property Tax Act (FIRPTA) in December 2015 saw a 10%
investment that a foreign investor can invest in the Real Estate Investment
Trust (REIT). Such a step has bolstered cross-border investment in real estate
(Partners Trust Blog, 2018).

2.4. Literature Review of Location Preferences

Changes in the FIRPTA has impacted on
the asset type and geographical location of assets. While the conventional real
estate investments had been widespread in cities like New York, Washington,
D.C. and Boston where office space were of interest. Today the focus is
shifting to secondary markets where the new FIRPTA legislation promises
after-tax-risk-adjusted returns that are associated with increased incomes
(Levy, Ralph and Fatheree George, 2017). Gocial, Boggs and Luskin (2017)
evaluation of the role of CFIUS found out the investments in asset is allowed
as long as it does not appear to breach the internal secrecy of the US. For
instance, the CPIUS reviewed the Chinese acquisition of a mining company
located near a military base.

2.5. Summary of the Literature

The section has explored the critical
issues that determine and contributes to investment in real estate by
foreigners in the US. From the mainstream understanding of FDI as an enhanced
flow of goods, people, and financial resources, investment in real estate is
crucial for the growth of the US.

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Chapter three: Theoretical Framework

3.1. Introduction

This section presents the theories of
FDI that would ensure the objectives of the study is materialized. 

3.2. Theoretical Foundation of the Study

To adequately conceptualize why the
US allows FDIRE and the accompanying legislative issues, it is essential that
the study adopts the neoclassical theory of capital mobility, imperfect market
theory and the internationalization theory.

3.2.1. Imperfect market

The market imperfection theory
described by Hymer, Kindleberger and Caves is based on the assumption that FDI
is necessitated by imperfection in the market of foreign economies. The
imperfection could be as a result of government regulations on tariffs, etc.
that limits efficient resource allocation (Dunning, 1993). As such, for the
foreign investors to control the market, they should demonstrate that they have
adequate technological know-how, cost-effective procedures as well as financial
strengths. Essentially, the theory establishes its influence by internalizing
the multi-dimensional incapability that an economy may have in order to qualify
as a viable FDI destination. 

3.2.2. Eclectic paradigm

The primary hypothesis of the
eclectic theory is that international production occurs due to the interaction
of three basic advantages which include; ownership-specific benefits (O),
location-specific benefits (L), and the market-internalization benefits (I).
The operation of the paradigm is contingent on the internalization and the
market imperfection theories. The propositions of Dunning and Vernon magnifies
the need to serve internal markets because of the associated opportunities and
advantages. The theory further creates a reasonable understanding that it is
the available conditions in a country that will attract foreign investors to
the location.

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3.2.3. Macroeconomic approach

The proposition of Kojima gained
repute in understanding the necessity of FDI. The analogy of the comparative
advantage in internalizing investment initiatives between countries creates the
need for investment flows. The macroeconomic fashion of analysis integrates the
reason for international trade and subsequent impacts of FDI. It borrows from a
comparative reasoning between countries, and countries with sufficient
investment needs usually create viable conditions upon which FDI is pursued.
The approach illuminates the function of FDI under different economic
conditions and establishes a future rationale for the present investment.

3.3. Summary of the Theoretical Framework

The theoretical framework for the
paper illuminates the intriguing issues that necessitates FDI. It is from these
theoretical frameworks the study will develop to present findings about the
crucial factors that allows US to pursue FDIRE.

4. Conclusion

To this end, the proposal has
enlightened a reasonable understanding about the topic as well as described the
process through which the study will develop its findings. The review of
literature perceptibly described the scope and depth of analysis of the topic
as anticipated to yield best results.

Works cited

• Carkovic, M., and R Levine, (2005). “Does Foreign Direct Investment Accelerate Economic Growth?” In: Moran, T. H., E. M. Graham and M. Blomström. Does Foreign Direct Investment Promote Development? Institute of International Economics, Washington DC.
• “Changes to FIRTPA Open Doors to More Foreign Investment in U.S. Real Estate – Partners Trust Blog”. Partners Trust Blog, 2018, http://www.thepartnerstrust.com/blog/changes-to-firtpa-open-doors-to-more-foreign-investment-in-u-s-real-estate/.  Accessed 3 June 2018
• Grant Robert, M (1991), ‘The Resource Based Theory of Competitive Advantage: Implications for the Strategy Formulation’. California Management Review, 33, Issue 3, p.114-135 1991.
• Gocial Brian, Boggs George, and Luskin Martin. Understanding the Role of CFIUS in Real Estate Transactions with Foreign Buyers and Lenders. 2017. https://www.blankrome.com/siteFiles/publications//3E4AA1FB258FA72C23E7B82A2366FE67.pdf. Accessed 2 June 2018.
• Hampton Paul “Three Ways Globalization Impacts Your Real Estate Portfolio Strategy | NKF Global Corporate Services”. Ngkfgcs.Com, 2016, http://www.ngkfgcs.com/Blog/June-2017/Three-Ways-Globalization-Impacts-Your-Real-Estate.  Accessed 31 May 2018.
• John H. Dunning, ed. The Theory of Transnational Production, (London, 1993),
• Kiyoshi Kojima, Direct Foreign Investment: A Japanese Model of Multinational Business Operation, (London, 1982).
• Levy David, Ralph Sarah and Fatheree George. Skadden Arps Slate Meagher & Flom LLP, 2016 “FIRPTA Reform Impacts Investment Opportunities in US Real Estate” https://www.lexology.com/library/detail.aspx?g=44967242-1168-4708-8395-82a4e4051794. Accessed 2 June 2018.
• Loungani, Prakash. “The Unassuming Economist | On the Globalization of Real Estate And Its Consequences”. Unassumingeconomist.Com, 2017, http://unassumingeconomist.com/2015/07/on-globalization-of-real-estate-and-its/.  Accessed 3 June 2018.
• Peter J. Buckley, International Investment, (England, 1990).
• Rsmus.Com, 2018, https://rsmus.com/content/dam/mcgladrey/pdf_download/br_nt_all_re_1017_globalizationofrealestate.pdf.  Accessed 3 June 2018.
• Urquhart-Bradley Nicole, “Foreign Investors Will Continue to Favor U.S. Assets”. National Real Estate Investor, 2017, http://www.nreionline.com/finance-investment/foreign-investors-will-continue-favor-us-assets.  Accessed 1 June 2018.
•  “US enacts legislation with implications for certain foreign pension funds and FIRPTA”. Global Tax Alert, 2016. http://www.ey.com/gl/en/services/tax/international-tax/alert–us-enacts-legislation-with-implications-for-certain-foreign-pension-funds-and-firpta. Accessed 2 June 2018.