Why Does the US Allow Foreign Real Estate Investment?

2854 words (11 pages) Essay

1st Apr 2019 Finance Reference this


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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.

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. 

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.

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.

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.

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.

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