Uncertainty: America’s competitive disadvantage

David Sampson CEO, Property Casualty Insurers Association
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President Obama was criticized recently for suggesting the United States had become “lazy” in our efforts to attract foreign direct investment. I believe it is not an issue of our ability to sell America, but the advent of political risk in the U.S. that is impacting investment.

Before companies enter an emerging market, they typically conduct an extensive market analysis regarding the potential for their products or services. However, this analysis is not usually the determining factor. No matter how attractive the market, companies carefully evaluate the “political risk factor” of the prospective country.

In my previous job, I regularly saw these scenarios in emerging market countries. As deputy secretary of the U.S. Department of Commerce, I traveled to Russia, China, the Middle East and Eastern Europe to encourage leaders to take steps to attract foreign direct investment and create economic opportunity for their citizens. I regularly spoke to my counterparts in these regions about the concerns of U.S. companies that were being hurt by cronyism, the rampant theft of intellectual property, the seizure of plants and equipment without due process, the political allocation of capital and governments picking winners and losers.

Today, investors must contemplate if investing in our country is worth the risk.

It is hard to believe this could happen in a country like the United States, but how else can we describe it? When the EPA revokes previously issued permits for mining in West Virginia, or the National Labor Relations Board sues Boeing for building a plant in South Carolina, or more than a century’s worth of established legal precedent regarding the position of secured creditors and bond holders gets set aside in the GM-Chrysler bankruptcy, it’s hard to dispute that there are now serious political risks within our very borders.

As President Obama correctly points out, the United States is still a great place to do business because of our stability, openness and innovative free-market culture. But there are some red flags we cannot ignore.

Each year, the Organization for International Investment releases the U.S. Economy Confidence Rating — a survey of 100 CFOs of U.S. subsidiaries of foreign companies. This is a particularly meaningful report, as the executives polled are the very people who must justify to their parent companies why U.S. investment and employment should be expanded.

This year’s study revealed that on a scale of 1 to 25, lowest to highest, the CFOs’ confidence in investing in the United States scored just above 14. Only 23 percent ranked the U.S. business environment stronger than other countries’ business environments, down from 39 percent last year.

According to the study, the biggest factor affecting new investment is uncertainty. A disturbing 82 percent of CFOs surveyed said uncertainty is greater compared to prior years, and 95 percent said uncertainty is primarily due to current federal government policies.

In my experience, businesses are quite willing to take market risks and go head-to-head against competitors. What they typically avoid are political risks, which cannot easily be mitigated, hedged or forecasted.

Fear of political retaliation. Disregard for the sanctity of legal contracts. Cronyism in place of competition. This may sound like a rallying cry from Cairo’s Tahrir Square, but today companies must consider these political risk factors when making investment decisions in the U.S.

This lack of certainty in the business community — fueled by policies coming out of Washington — is a major inhibitor of economic growth and development in the U.S. Until our elected leaders provide clarity on these drivers of uncertainty, we will continue to face a competitive disadvantage here at home.

David Sampson served in the George W. Bush Administration as Assistant Secretary of Commerce for Economic Development and Deputy Secretary of the U.S. Department of Commerce, respectively. Sampson is currently president and CEO of the Property Casualty Insurers Association (PCI). PCI represents more than 1,000 homeowners, auto and business insurance companies that write over $180 billion in annual premium and 37.4 percent of the nation’s property and casualty insurance.

David Sampson