The inauguration of President Joe Biden will undoubtedly mark the start of a new era in foreign direct investment in the United States. The U.S. has for a long time been the world’s largest recipient of foreign direct investment (FDI), but the unpredictable legislative and regulatory environment of the past four years (see here, here, here and here) have seen many investors hit “pause” in their plans to establish or expand U.S. business operations.
Above all, investors want predictability, and though the foundations of the U.S. economic, political, and regulatory environment are familiar and reassuring to investors, deviations from established practice in the areas of immigration and trade policy have caused many business leaders to postpone plans to acquire, establish, or expand U.S. operations during the Trump Administration.
Attractions of the U.S. Market for Foreign Investors
A combination of factors makes the United States attractive to foreign investors, chief among them the country’s large consumer base, productive workforce, and a business and legal environment that encourages innovation.
With a population of 325 million and a GDP of $20 trillion, the United States remains the world’s largest consumer market. Household spending is the highest in the world, accounting for more than a quarter of global household consumption, and free trade agreements with 20 countries provide streamlined access to hundreds of millions of additional consumers.
The United States offers investors a regulatory environment in which it is easy to establish and operate a business, and in which competition is protected and prized. The transparent American legal system allows foreign business owners to compete on a level playing field, and the U.S. workforce is skilled, innovative, mobile, and productive, with output per hour more than 30 percent above the OECD member country average.
Access to capital is another important reason businesses choose to invest in the U.S., where a wide range of funding sources – from banks and investment firms to venture capitalists and angel investors – enable business innovation and expansion.
It is worth noting that although the United States is generally open to foreign investment, as is true in many countries, some sectors are subject to government restrictions.
Understanding the Ground Rules
Though the United States is inarguably an attractive market, it is also a complex and highly regulated place to do business. See our Primer on Doing Business in the United States. Companies looking to establish operations in the United States need to abide by federal, state and local laws and regulations governing licensing, marketing, employment, the environment, safety, (employee and consumer) privacy, taxation and more.
As an example, the U.S. Department of Labor (DOL) administers and enforces more than 175 employment-related federal laws in areas such as recruiting, hiring, background checks, compensation and benefits, workplace conduct and termination.
Companies entering the U.S. market for the first time must consider the legal structure of their operations, a consideration that should take into account the differences in state laws as well as federal law. The most common types of U.S. business entities are corporations, limited liability companies (LLCs), and partnerships, each of which has benefits (and liabilities) depending on case-specific business objectives.
Business contracts are governed by state law. All 50 states have adopted some variation of the Uniform Commercial Code (UCC), which generally applies to any contract for the sale of goods over $500, but in the case of a dispute, courts generally will interpret written agreements based on the plain language of the writing, the parties’ conduct, industry custom, and applicable laws, with the UCC used to fill in any gaps not addressed by the contract. It is worth noting also that because U.S. contracts are governed by state rather than federal laws, all contracts should include a “choice of law” clause that designates which state’s laws to use in interpreting the agreement. Similarly, a contract may include a “choice of venue” clause that designates the state in which a lawsuit may be brought to enforce the contract. Making these selections allows for predictability and avoids litigation in unfamiliar or distant jurisdictions.
Similarly, given the complexity of US tax law, careful tax planning and counsel is important for all companies doing business in the U.S. Companies operating in the U.S. are subject to separate federal, state, and local taxes. The United States is also party to bilateral tax treaties with numerous foreign countries; these treaties aim to prevent double taxation and tax evasion, as well as facilitate commerce between countries, and the relevant tax treaties should be consulted as primary tax planning tools.
U.S. corporations are subject to taxation on their worldwide net taxable income, which is gross income less allowable deductions, and foreign individuals and companies doing business in the U.S. are also subject to the Foreign Investment in Real Property Tax Act (FIRPTA), which applies a tax to the disposition of any interest in real property in the U.S., regardless of the taxpayer’s residency.
There are many, many more laws and regulations governing business operations in the U.S., and again, our primer on U.S. FDI is worth reading if you’re a newcomer to this area. What’s most important is to be as informed as possible about the operational and legal contexts relevant to your business, and to get sound legal advice every step of the way when you’re making investment and business decisions.
Harris Bricken provides strategic legal solutions for domestic and international companies doing business and facing legal disputes on four continents, and we have supported hundreds of European, Asian and Latin American companies with their U.S.-bound FDI. Our Foreign Direct Investment Practice Group includes lawyers fluent in Chinese, German, Spanish and French who are experts in U.S. laws, regulatory environments and the broader global trade context, and our advice takes into account all these elements as we help our clients develop winning strategies.