MANAGEMENT

INWARD AND OUTWARD FOREIGNDIRECT INVESTMENT: THE CASE

OF U.S. FOREST INDUSTRY

DAOWEI ZHANG

ABSTRACTIn the 13 years preceding 1995, foreign direct investment in the U.S. forest industry

increased 54 percent, but the U.S. direct investment in forest industry abroad nearlydoubled. The forest industry's share of total foreign investment in the U.S. manufacturingsector declined, but its share of foreign investment abroad increased. During the sameperiod, the U.S. forest industry attracted only about one-fourth as much as the foreigndirect investment in the Canadian forest industry, although its size is six times as big asits Canadian counterpart. Foreign investors, both in the United States and other countries,have been attracted to the paper and allied sector much more than the wood productssector. The relatively stable political and economic system and the size of the U.S. marketappear to be the main attractions for foreign investors to invest in the United States. Thecontinuing decline in timber availability may be the main cause for U.S. forest industryfinns to invest abroad, especially in timber-rich countries. Market structure and econo-mies of scale could explain the concentration of investment in the paper and alliedindustry. This pattern of foreign investment has important implications for economicdevelopment and long-term competitiveness of the industry.

T he influence of foreign capital inthe U.S. economy has become controver-sial. It was an issue during the 1988 and1992 presidential elections (11). Since theearly 1980s, the U.S. export-import ac-count has been in deficits. This could bethe result of a lack of private and govern-ment savings and government deficits.Foreign investment inflows balance thedeficits in the export-import account.

Public debate focuses on two aspectsof this issue. One is the trend in foreigninvestment in the United States, espe-cially whether it is increasing or decreas-ing in terms of both its absolute level,and its relative share in particular indus-tries. The other aspect of the issue is theform of the investment, particularlywhether it represents passive portfolioinvestment or control of U.S. firms andresources. A pessimistic view regardssurplus in a capital account as foreign

control of u.s. resources. On the otherhand, some policymakers see this as agood thing, because foreign capital helpsboost the employment and productivityof u.s. industry. The parties in the de-bate tend to be polarized and their argu-ments are political and uncompromis-ing. The only accurate way to evaluatethe issue is through a careful analysis ofthe magnitude and form of foreign in-vestment in particular industries, howforeign investment affects the U.S. po-litical economy, and its related conse-

quences for Americans with reference tothe broad objectives of public policy.

This debate has taken place in somedeveloping countries for many years,mainly about firms from the UnitedStates and other developed countries tak-ing over their resources. This paper ex-amines recent trends in foreign directinvestment in the U.S. forest industry(inward foreign direct investment) andthe U.S. direct investment in the forestindustry abroad (outward foreign directinvestment), and provides an overviewof related issues. This industry histori-cally has not been the focus of much ofthe broader debate about fo~ign invest-ment and control. However, as will beshown, recent developments in publicpolicy, especially spillovers from regula-tions that protect endangered species,have drawn attention to the outflow andthe consequences of foreign investmentby American firms (1,3).

The paper consists of three parts. Thefirst documents trends in foreign directinvestment in the U.S. forest industryand the U.S. direct investment in forestindustry abroad. The amount and pro-portion of foreign investment in recentyears are traced and the trends in each ofthe major sectors of the wood productsindustry and pulp and paper manufactur-ing are analyzed. United States inwardand outward foreign investment in for-~

IS

The author is an Assistant Professor in the School of Forestry, Auburn Univ., Alabama36849-5418. He wishes to thank John Bliss, Warren Flick, Larry Teeter, two anonymousreferees, and one associate editor of this journal for commenting on an earlier draft. This paperwas received for publication in May 1996. Reprint No. 8525.@Forest Products Society 1997.

Forest Prod. J. 47(5):29-35.

FOREST PRODUCTS JOURNAL VOL. 47. No.5 29

Figure 1. - U.S. inward and outward foreign direct investment in the forest industry

(SIC 24 and 26).

as stocks and bonds in amounts consid-ered unlikely to convey a controlling in-fluence in decision making within theenterprise. Portfolio investors are lessconcerned with influencing policy andthe operations of an enterprise. However,it is important to note that under thisclassification, both direct and portfolioinvestors may hold both equity and debtissued by an enterprise. This paper fo-cuses only on direct investment due to itsimportance to foreign control of re-sources and data availability.

The u.s. Department of Commercehas provided detailed information re-garding foreign direct investment in theU.S. forest industry since 1980 and theU.S. investment in forest industry abroadsince 1982 (19). Figure 1 shows foreigndirect investment in the U.S. forest indus-try over the last 15 years and the U.S.direct investment in forest industryabroad over the last 13 years, measuredin current dollars. It suggests that thelevel of foreign direct investment in theU.S. forest industry and U.S. direct in-vestment in forest industry abroad rosefairly steadily during the study period,and that U.S. direct investment in theforest industry abroad is roughly threetimes that of foreign direct investment inthe U.S. forest industry. During the pe-riod from 1980 to 1994, foreign invest-ment increased from $1.2 billion to $4.1billion and U.S. overseas investment in-creased from $4.2 billion in 1982 to$13.0 billion in 1994 (19).

To illustrate the real trend in foreigninvestment, adjusted for inflation, Figure1 also shows these annual flows ex-pressed in constant 1982-1984 dollars.This shows that one-third of the apparentincrease over the study period is attribut-able to inflation, and that the real value offoreign investment in the United Statesactually only increased 54 percent in 13years. However, the U.S. investmentabroad rose steadily until 1988, then ac-celerated, and increased 86 percent dur-ing the same time. As a result, the netoutflow of capital from the forest indus-try (i.e., the difference between the U.S.direct investment in forest industryabroad and foreign direct investment inthe U.S. forest industry) increased 178percent in the last 13 years, from $2.98billion in 1982 to $5.98 billion in 1994,all in constant 1982-1984 dollars. (Forthe purpose of comparison, this paperwill use the 1982 figures as baseline for

Share of forest industry in U.S. manufacturing sector.Figure 2.

able the foreign investor to influence themanagement of the enterprise (21). In-vestment is classified as direct when theinvestor owns at least 10 percent of thevoting securities of an incorporated busi-ness enterprise, an equivalent interest inan unincorporated business enterprise, ora 10 percent or more interest in real prop-erty transaction (16,21). However, in ad-dition to the equity owned, it includesany other long-term claims against theenterprise in such forms as bonds, deben-tures, loans, and advances. This is in con-trast with portfolio investment, whichusually consists of financial assets such

estry is also briefly mentioned. The sec-ond part offers an explanation of the ob-served trends in terms of changing inter-national circumstances in forest productsproduction and marketing and the incen-tives of foreign investors. The final sec-tion discusses the policy implications ofthe observed trends.

RECENT TRENDS IN FOREIGNINVESTMENT

LEVEL AND FORM OF FOREIGNINVESTMENT

Foreign direct investment means di-rect or indirect ownership of foreign en-terprises in amounts or in kinds that en-

MAY 199730

250

both foreign investment in the UnitedStates and U.S. investment abroad.)

SHARE OF FOREIGN DIRECTINVESTMENT

These trends in foreign investmentwere undoubtedly influenced by a vari-ety of factors in addition to governmentpolicies. One is the pattern of overallinvestment in the U.S. manufacturingsector, which is highly correlated withthe overall health of the U.S. economy.This can be traced with the help of U.S.Department of Commerce data, by com-paring the share of forest industry overthe U.S. manufacturing sector as awhole. These are shown in Figure 2.

. Figure 2 reveals that the U.S. forestindustry's share in the U.S. manufactur-ing sector's outward direct investmentincreased about 0.5 percent during the 13years, while the industry's share in thesector's inward foreign investment de-clined by about 1.5 percent. This hap-pened during the period when the indus-try's contribution to total manufacturingoutput in the U.S. increased slightly,from 6.3 percent in 1982 to 7.3 percent in1994 (20). This means that while theU.S. forest industry is getting a largershare in the manufacturing sector's out-put, its share in inward direct foreigninvestment is declining and outward for-eign direct investment is increasing.

Another interesting finding is re-vealed by comparing foreign direct in-vestment in the U.S. forest industry withthat in the Canadian forest industry, us-ing data from a different source (12).1While the size of the U.S. forest industryis about six times as large as its Canadiancounterpart, it only receives about one-fourth of the foreign direct investmentthat the Canadian forest industry re-ceives (Fig. 3). This suggests that theU.S. forest industry is not as competitiveas the Canadian forest industry as far asforeign investors are concerned. More-over, a significant portion of foreign in-vestment in the Canadian forest industryhas .originated from the United States(12). Because data for the Canadian for-est industry's investment abroad are not

200

'"

s. 150"0"0'-0'"

~ 100:E

50

0

Figure 3.industry.

Foreign direct investment in and the size of U.S. and Canadian forest

U.S. investment abroad

c"u~0.

Figure 4.and 26).

Share of paper and allied industry in the U.S. forest industry (SIC 24

the relative size of foreign investment inthe United States and U.S. direct invest-ment abroad in the pulp and paper indus-try and the wood products industry(mainly sawmilling).2 It shows that thepaper and allied industry dominates for-eign investment in the United States andabroad, even though it only representssome 60 percent of the value of ship-ments of the forest industry as a whole.

Table 1 shows the limited informa-tion available on U.S. direct investmentabroad in paper and allied industry, bycountries, that has been provided by the

available, no comparison is made for thedirect investment abroad from the twocountries.

FOREIGN INVESTMENT BYINDUSTRY SECTOR

The U.S. Department of Commercealso provides data that enable trackingcertain trends in foreign investment inthe United States and the U.S. directinvestment abroad within the principalsectors of the forest industry: lumber andwood products (Standard IndustrialClassification (SIC) 24), and paper andallied industry (SIC 26). Figure 4 shows

1 The definition of foreign direct investment is con-sistent in Canada and the United States (17,18).

2 Among wood products there are also chemical de-

rived from wood (SIC 2861 - gum and woodchemicals).However, the U.S. Dept. of Commercedoes not ideutify investments in this specialty indus-

try category.

31VOL 47 NoS,,"n~,,"qT p~nnllrTq 1m I~NAI

TABLE 1. - U.S. direct investment abroad in paper and allied industry by country: 1989 to 1994 (nominal value!.-Year Canada

-Brazil

-Mexico Total

(million $)

9,4199,95410,93611,2829,86911942

(million $)

4,7205,0804,7434,7953,393.1 ?O£i

-(%)

50.1251.0343.3742.5034.38'I~ ??

(million $)

1,0401,0311,0741,1171,038n,,'

-(%)

11.0410.369.829.9010.52"SO

(million $)478594637667638622

-(%)

5.085.975.825.916.46521

19891990199119921993lQQ4 .

a n.a. = not available. (Supressed to avoid disclosure of data of individual company.)

TABLE 2. - Foreignforestry (SIC 08) investmentin the United States and U.S. forestry investmentabroad: 1980 to 1994.

(million $, nominal value)

588995 69132 70144 77145 70169 5782 63-5 n.a.a64 n.a.278 7781 n.a.

Iin.a. n.a.25 n.a.25 na

198019811982198319841985198619871988198919901991199219931994

cation Manual (7) and foreign forestryinvestment has not been included in allfigures used in this paper, foreign for-estry investment is nevertheless closelyrelated to the theme of this paper.3 Invest-ment in forestry represents some degreeof control of raw material supply. It in-cludes timber and land acquisition, im-provement, and management. Thus, thedifference in forestry direct investmentinside and outside the United States,which we intend to reveal here, is a goodindicator of resource availability in the

country.Unfortunately, the data on foreign for-

estry investment in the United States andU.S. forestry investment abroad are in-complete because the reports suppressdata to avoid disclosure about informa-tion of individual companies for 7 years.The data problem is more serious forU.S. investment abroad (lacking data for6 of the 13 years) than foreign investmentin the United States (lack of data in 1992only). However, based on the limited in-formation, it is observed that U.S. for-estry investment abroad has increasedslightly over the 13 years (Table 2). Onthe other hand, foreign forestry invest-ment in the United States increasedsharply until 1986, then plunged for 3years, before reaching a historical high of$278 million in 1990. In the last 3 yearsprior to 1995 it declined dramatically.

INTERPRETATION OF TRENDSThe forces shaping these changes in

foreign participation in the U.S. forestindustry and the industry's engagementoverseas are inevitably varied and com-plicated. However, it is possible to ex-plain the main trends in terms of thedeterminants of international capitalmovement generally, developments in re-gional patterns of supply and demand forforest products, the structural characterof the forest industry, and governmentalpolicies. A review of these influences fol-low.

a n.a. = not available. (Suppressed to avoid disclo-

sure of data of individual company.)

FINANCIAL RETURNS

In making investment decisions, in-vestors, foreign or domestic, can be as-sumed to be guided in the first instanceby their expectations about returns andrisks on capital invested in alternativeways. Many also seek to diversify risk inwhole portfolios of investments. Inves-tors' decisions about foreign investmentin a country's forest industry are thusguided primarily by the expected finan-cial performance of the industry relativeto other possible investments. In compar-ing forest products companies in theUnited States and Canada, Swindt (15)found that "...financial performance,both in aggregate, and by product spe-cialization group, is roughly similaracross countries." However, he furtherconcluded that although Canadian com-panies lagged slightly in return on equity,they performed slightly better in returnon total capital employed. This is consis-tent with the finding of this paper thatforeign investors have found the Cana-

u.s. Department of Commerce since1989. Three timber-rich countries (Can-ada, Brazil, and Mexico) accounted formore than 50 percent of U.S. foreigninvestment in the paper and allied indus-try abroad from 1989 to 1993. Manycountry-specific data on the wood prod-ucts industry were suppressed, and nodata are available on the origins of for-eign countries investing in the UnitedStates.

Data from the U.S. Department ofCommerce also reveal that while foreigninvestment in the U.S. wood productsindustry stayed roughly the same overthe 13-yearperiod, the U.S. investment inthe overseas wood products industry in-creased 72 percent during the same pe-riod. However, foreign investment in theU.S. paper and allied industry and U.S.overseas investment in the paper and al-lied industry nearly doubled. This indi-cates that both foreign and U.S. investorsappeared to have preferred to invest in thepaper and allied sector over the woodproducts sector. Moreover, foreign in-vestment in the paper and allied sector isof a much larger magnitude than theoverall size of the industry implied. Moreanalysis of this is warranted.

Inward and outward foreign direct in-vestment in forestry (SIC 08) providesadditional information. Although for-estry (SIC 08) is classified as part of theagriculture, forestry, and fishing divisionin the 1987 Standard Industrial Classifi-

Despite its standard industrial classification, manyconsider forestry a part of the forest industry. Onemight argue that the figures used in this papershould include the foreign forestry investment.However, unavailability of data makes it impossibleto do so. Moreover, it is obvious from Figure I andTable 2 that forestry investment represents only lessthan I percent of foreign investment in the U.S.forest industry and the U.S. investment in the forestindustry abroad. Therefore, excluding foreign for-estry investment does not affect any conclusions ofthis paper. This practice has been used by otherresearchers (12).

MAY 1997~.,

dian forest industry more attractive thanthe U.S. counterpart in terms of foreigndirect investment.

THE POLICY ENVIRONMENT

When considering investments in for-eign countries, direct investors also lookcarefully for political stability, soundeconomic and trade policies, favorabletax policies, the availability of a compe-tent labor force, secure supplies of en-ergy and raw materials, and suitable in-frastructures (13). In these respects,broadly referred to as the "investmentclimate," the United States is generallyconsidered to offer an attractive environ-ment for foreign investors.

However, a governmental policy,such as protection of endangered spe-cies, can be expected to affect direct in-vestment. The case in the United Statesis unique in this respect because the con-troversy regarding northern spotted owlshas reduced timber supply from federaland state lands in the Pacific Northwestby 80 percent (4). In fact, the spurt ofU.S. forest industry investment abroadcoincides with the court challenge andsubsequent listing of the owls as endan-gered species in the late 1980s, suggest-ing that this policy may have contributedto the increase of foreign investment byU.S. firms to secure raw material supplyand maintain market shares through pro-duction in foreign countries (3). Thislllay also explain, at least partly, the de-cline in foreign direct investment in theU.S. forest industry by foreign firms inthe early 1990s.

REGIONAL SUPPLY AND DEMAND

The disparity between demand forforest products and resource supplyamong world regions is significant andincreasing. While demand has continuedto grow in the traditional consuming ar-eas of Europe and the United States,consumption has expanded vigorouslyin the Asia/Pacific region in recent years.On the supply side, the scope for ex-panded production of timber, particu-larly softwoods, is limited mainly toCanada, potentially Russia, and thecountries with expanding plantation for-estry such as New Zealand and Chile(4,12). The imbalance between regionalsupplies and demands has been aggra-

vated by the elimination of some tradi-tional sources of supply for industrial-

ized countries of the Asia/Pacific region.Prohibitions on log exports have beenadopted in countries such as Indonesia,Malaysia, and Thailand (10).

As a source of supply of raw materialfor Asia/Pacific countries for manyyears, U.S. export of forest products tothat region has dramatically declined(22). Although the timber supply in Can-ada has been reduced in recent years, itsmagnitude is much smaller than in theUnited States (12,14). Therefore, inves-tors from the Asia/Pacific region and theUnited States continue to increase theirinvestment in Canada. Although dis-putes about lumber subsidies occur be-tween Canadian and American lumberproducers and the newly signed UnitedStates-Canada lumber agreement forcesthe Canadian government to tax its soft-wood lumber export to the United Statesbeyond a certain quota, the North Ameri-

can Free Trade Agreement generallygives producers in Canada access to theU.S. market. Thus, it is not necessary forCanadian producers to invest in the

United States in order to secure theirshare of U.S. markets and avoid tariffs.Again, government policies have influ-enced foreign investment decisions.

No data are available on the sourcesof foreign investment in the UnitedStates and the host countries of U.S. for-eign investment. Information is limitedto a few, casual observations and conver-sations with industry executives, which

suggest that the U.S. forest industry'sforeign investment is concentrated inrelatively timber-rich countries such asCanada, Brazil, Argentina, Mexico, andRussia.4 This is understandable for firmsthat seek to secure their raw materialsupply for U.S. mills and for firms thatlook for new opportunities to apply theirtechnical, financial, managerial, or mar-

keting skills to maintain and expandtheir market share by producing forestproducts in other countries if their op-portunity in the United States is limited.

CAPITAL INTENSITY AND MARKETSTRUCTURE

An earlier analysis of trends revealsthat foreign investment in the U.S. paperand allied industry has greatly exceededthat in the wood products industry. TheU.S. investment overseas shows thesame trends. These reflect, in part, the

fact that the paper and allied industryaccounts for many more assets than the

wood product sector, the former beingboth larger and more capital intensive.

A conspicuous characteristic of thepaper and allied industry is its economyof scale. The combination of scale econ-omy and capital intensity means thatpulp and paper ventures involve hugeamounts of capital and large plant size- much more and larger than solid

wood processing ventures. Foreign-owned plants are larger and more capitalintensive than U.S.-owned plants in theUnited States, because the income andother benefits that normally accrue tolarge plants are sought out to offset theinherent disadvantages foreign investorstend to face when investing and sub-sequently operating their businesses inthe United States (9). The preference offoreign investors to invest in a capital-in-tensive industry means that the paper andallied industry is naturally more attrac-tive than the wood products industry.

The scale economy and capital inten-sity of the pulp and paper sector alsoserve as barriers to new entrants in theindustry, and contribute to its charac-teristic oligopolistic industrial structure(2). Moreover, paper consists of highlyvaried products, lending itself to the de-velopment of market imperfection. Onthe other hand, the bulk of lumber is ahomogeneous commodity and woodproducts industries are relatively com-petitive, at least in North America. In thismore highly competitive internationallumber industry, monopolistic rents can-not be gained, nor can market share besecured. These differences undoubtedlyhelp to explain the much greater activityof foreign investors in the paper and al-lied industry than in the wood productsindustry, both in and outside of theUnited States

Another factor contributing to thepreference for the paper and allied indus-try may be the expectation of fastergrowth in this sector. Pulp and paperconsumption is considerably more re-sponsive to rising incomes than is thedemand for solid wood products (5,6).Because of expected higher incomes, theFood and Agriculture Organization ofthe United Nations (8) predicts relativelystrong growth in pulp and paper demandin the near future.

SUMMARY AND POLICYIMPLICATIONS

Measured in constant dollars, foreigninvestment in the U.S. forest industry

Bond, Steve. Personal communication. ChampionInternational Corp., Courtland, Ala.

33FORE:STPRODUCTSJOURNAL VOL. 47. No.5

increased 54 percent between 1982 and1994. However, the U.S. direct invest-ment in forest industry abroad was evengreater, with the result that its share inoutward direct investment in the manu-facturing sector increased. On the otherhand, the industry's share in inward for-eign direct investment in the U.S. manu-facturing sector declined. Compared toCanada's forest industry, the U.S. forestindustry only received about one-fourththe inward foreign investments in spite ofits much larger size. Foreigners and U.S.investors both preferred to invest in thepaper and allied industry over the wood

products industry.

POLICY SPILLOVER

These trends suggest that the forestindustry, unlike other industries, does nothave much foreign investment, and for-eigninvestors have not "taken over" U.S.forest resources. On the contrary, the in-dustry has increased its investmentabroad. The net outflow of capital maydraw attention to the adequacy of its do-mestic investment.

These trends have important implica-tions for several public policy issues.Most apparent are the impacts of protect-ing endangered species on timber supplyand foreign investment. It is not the posi-tion of this paper to deliberate the meritsand costs of the Endangered Species Actor establishment of critical habitats forendangered species. It is noticeable,however, that the listing of several endan-gered species such as the northern spot-ted owl has had a negative impact ontimber supply and sent investors away toother countries (3). Moreover, the NorthAmerican Free Trade Agreement andproliferations of international trade andcapital movement might have contrib-uted to these impacts.

PROMOTION OF U.S.COMPETITIVENESS

Attracting foreign and domestic in-vestment is one element in a broader eco-nomic policy aimed at promoting U.S.competitiveness in the emerging globaleconomic order. This objective has domi-nated the economic agendas of federaland state governments in recent years,evidenced by attention to free trade, taxreform, and the "incentive legislation."Promoting the United States has becomemore urgent because of the decline inproductivity growth in the 1980s, espe-cially in manufacturing, relative to otherindustrial countries (21).

and diversification. International capitalflows can accelerate this process. Thecurrent globalization is characterized bymultinational enterprises that link invest-ment and trade. A growing proportion oftrade is intra-enterprise, resulting fromforeign investment. Investment abroadby U.S. companies may generate a posi-tive increase in the export of U.S. equip-ment, technology, and products. How-ever, U.S. investment in foreign forestindustries is unlikely to bring more U.S.exports of forest products.

Because foreign-owned plants tend tobe larger and concentrated in the capital-intensive paper and allied industry, thesecurity of the timber supply is a biggerconcern for foreign investors than do-mestic investors. Increases in environ-mental regulations have decreased tim-ber removals from public lands and maylimit timber removals from private lands.Considerable efforts have been made byfederal and state legislatures to protectprivate property rights from governmentregulatory takings in recent years (23).These efforts in defining the boundary ofgovernment power and private propertyrights may make private landowners feelthey are secure to grow and harvest tim-ber on their land and, therefore, may pro-vide more timber in the future.

LITERATURE ~ITED1. American Forest & Paper Association. 1994.

Agenda 2020: A technology vision and re-search agenda for America's forest, woodand paper industry. AFPA, Washington,D.C.

2. Booth, D.L. 1990. A strategic capacity plan-ning tool for a firm in the newsprint industry.Unpublished Ph.D. diss. Univ. of BritishColumbia, Vancouver, B.C., Canada.

3. Berman, P. and P. Spiegel. 1995. Viva St.spotted owl! Forbes Feb. 12:44-45.

4. Bowyer, J. 1995. Wood and other raw mate-rials for the 21st century. Forest Prod. J.45(2):17-24.

5. Buongiomo, J. 1978. Income and price elas-ticities in the world demand for paper andpaperboard. Forest Sci. 24 (2):231-46.

6. . 1979. Income and price elas-ticities of demand for sawnwood and wood-based panels: a pooled cross section and timeseries analysis. Canadian J. of Forest Res. 9(2):141-48.

7. Executive Office of the President of theUnited States. 1987. Standard IndustrialClassification Manual. Washington, D.C.

8. Food and Agriculture Organization of theUnited Nations. 1991. Forest products:world outlook projections. FAO, Rome, It-aly.

9. Howenstine, N.G. and W.J. Zeile. 1994.Characteristics of foreign-owned U.S.manufacturing establishments. Survey ofCurrent Business 74 (Jan.):34-59.

In this context, new capital is seen as akey to improved competitiveness of U.S.industry through its effect in enhancingthe productivity of labor and other inputsin production. For the longer term, newcapital investment (both domestic andforeign) is regarded as a means of intro-ducing the advanced equipment, newproduction technologies, and researchand development needed to build astronger and more diversified economy(21). To attract this investment capital,the United States needs a favorable in-vestment climate. Among other condi-tions that contribute to the perception thatthe United States is a good place to invest(such as political and economic stability,skilled labor, good infrastructures, socialsecurity, etc.) is a hospitable policy to-ward domestic and foreign investment.

These issues were analyzed in an eco-nomic model for competitiveness in anincreasingly global world economy byPorter (13). In Porter's model, the con-tinued growth of a competitive industryor economy depends on the strength ofthe interconnected elements in his "dia-mond," which includes factor endow-ments, domestic demand, support indus-tries and competition, as well asgovernment policy. Although a rich natu-ral resource base is not sufficient to sus-tain international competitive advantage,resources are still a necessity for devel-opment. Facing a tight supply of rawmaterials, the forest industry has to relyon strengthening the other elements ofthe diamond and continuing to advancetechnology and innovation. Having re-alized this, the industry has set a re-search agenda and called for a govern-ment-industry partnership to upgradeits competitive advantage in sustain-able forest management and capital ef-fectiveness (1).

FOREIGN INVESTMENT ANDECONOMIC DEVELOPMENT

Investment also relates to economicdevelopment. More U.S. firms and indi-viduals investing abroad means less capi-tal available for economic developmentin the United States. For this reason, stategovernments may find it harder to recruitforest industry, thus affecting economicdevelopment of forest resource-depend-ent regions and communities.

Resource-based economic progressdepends on the development of linkagesfrom the resource sectors forward andbackward to other industries to generatea process of continuing economic growth

MAY 1qq7~A

years. Survey of current business. U.S. Dept.of Commerce, Washington, D.C.

20. . Various years. Annua] surveyof manufactures. U.S. Dept. of Commerce,Washington, D.C.

21. .1994. Foreign direct invest-ment in the United States: 1993 Transac-tions. U.S. Dept. of Commerce, Washing-ton, D.C.

22. Warren, D. ]995. Production, prices, em-p]oyment and trade in Northwest forest in-dustries, fourth quarter 1994. Res. Bull.PNW-RB-209. USDA Forest Serv., PacificNorthwest Res. Sta. Corvallis, Oreg.

23. Zhang, D. ]995. State property rights laws:why, where and how? J. of Forestry94(4):10-15.

integration and diversification strategies inthe Canadian forest sector. Info. Rept. 85-5.Forest Economics and Policy Analysis Pro-ject. Univ. of British Columbia, Vancouver,B.C., Canada.

16. Slernrod, J. 1989. Tax effects on foreigndirect investment in the U.S.: evidence froma cross-country comparison. National Bu-reau of Econ. Res., Dept. of CommerceWorking Pap No. 3042. Dept. of Commerce,Washington, D.C.

17. Statistics Canada. Various years. Corpora-tions and labor returns act report. Part I.Catalog 61-210. Statistics Canada, Ottawa,Ont., Canada.

18. . Various years. Canada's in-ternational investment position. Catalog 67-202. Statistics Canada, Ottawa, Ont., Can-ada.

19. U.S. Department of Commerce. Various

10 Marchak, M.P. 1991. For whom the tree falls:restructuring of the global forest industry.B.C. Studies 90:3-24.

11. Ondrich, J. and M. Wasylenko. 1993. For-eign direct investment in the United States.W.E. Upjohn Institute for Employment Re-search, Kalamazoo, Mich.

12. Pearse, P.H., D. Zhang, and J. Leitch. 1995.Trends in foreign investment in Canada'sforest industry. Canadian Business Econom-ics 3 (3):54-68.

13. Porter, M.E. 1991. Canada at the crossroads:the reality of the new competitive environ-ment. A study prepared for the BusinessCouncil on National Issues and the Govern-ment of Canada Minister of Supply andServices, Ottawa, Ont., Canada.

14. Reed, F.L.C. 1986. Canada's timber supply.Forestry Chronicle 64:335-38.

15. Schwindt,R.W.1985.Anana1ysisofvertical

35VOL. 47. No.5FOREST PRODUCTS JOURNAL