© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 6 edition of the Bloomberg Law Reports—Asia Pacific Law. Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P.

The economic down-turn following the sub-prime mortgage crisis resulted in a substantial decrease in foreign direct investment (FDI) worldwide by about 40 percent in 2009, affecting all economies, sectors, and forms of investment.1 The United States faced a dramatic drop of inbound FDI from approximately $328 billion in 2008 to approximately $135 billion in 2009.2 Moreover, the global financial crisis led to liquidity constraints for corporations worldwide, as access to credit tightened and corporate balance sheets deteriorated.3

Investors in Japan and Singapore have wisely capitalized on the need of U.S. businesses for liquidity during the economic down-turn by investing in domestic corporations and projects at a time when such assets were available at bargain prices to investors abroad.4 Indeed, while many investors throughout the world curtailed their investing activity in the United States, investors in Japan and Singapore increased rather than decreased the amount of FDI made in U.S. business concerns during the global financial crisis.5

Japanese banks and financial market players invested around $12 billion during the initial stages of the economic down-turn, which amount represented one half of the value of acquisitions made overseas by the Japanese corporate sector as a whole during that time.6 Japan's largest brokerage bought bankrupt investment bank Lehman Brothers' European division.7 Mizuho Financial Group, Japan's second largest bank by asset size, invested $120 million in Evercore Partners, a U.S. merger advisory firm.8 Having apparently suffered less from the effect of the sub-prime crisis than their counterparts in the United States, Japanese banks and insurance companies were well placed to take advantage of such opportunities.9

Likewise, the Singaporean sovereign fund, the Government of Singapore Investment Corp. (GIC), which manages assets estimated at about $300 billion, also wisely became acquisitive during this time, looking for opportunities to invest in distressed assets in the United States.10 In 2008, GIC committed $300 million to hedge fund Rosen Real Estate Securities to invest in U.S. real estate.11 GIC's view was shared by global investor AMP Capital, whose strategists were noted as saying that U.S. assets had fallen to attractive levels and that the U.S. government's plan to buy toxic assets would remove any uncertainty from the markets during the economic down-turn.12 Notably, between July and September 2009, Singaporean investors were the third-largest investor on the New York Stock Exchange—behind only Britain and France.13 Singaporean investors poured $12 billion in U.S. bound investments by the end of 2009.14

There appear to be several factors driving the demand by Japanese and Singaporean investors for U.S.-based assets. The continuing financial crisis, and with it, the tumbling value of U.S. shares and the U.S. dollar, affords investors excellent value opportunities in both long and short term investments.15 Many Singaporean investors have taken advantage of the economic down-turn to purchase shares in big name companies.16 For example, GIC invested $6.88 billion in Citigroup and state-linked investment firm Temasek Holdings invested $4.4 billion into U.S. brokerage Merrill Lynch.17

Another factor appears to be the desire to protect existing investments in the United States by these investors. Government officials in Japan were quoted as saying, "Japan has far too much invested in the American economy, at this point, to risk upsetting it by slowing down its investments or withdrawing money."18 Such steps could have endangered the value of Japan's foreign assets that remained in the United States.19 Indeed, the Washington Post has reported that "[a]bout $860 billion of a $1 trillion reserve that is controlled by the Bank of Japan and the Finance Ministry is invested in U.S. government securities, most of it in Treasury bonds."20

Another factor impacting the increase in U.S. bound FDI by Japanese and Singaporean investors was the increased ease with which investment funds and individuals alike could buy and sell shares internationally.21 In the past, investors had to go to U.S. brokers to buy shares of U.S. stock. However, more recently, investors abroad have begun to use the internet and other channels to buy shares and take advantage of lower transaction charges.22 In Singapore, while much of the interest in U.S. investments has been from large funds and institutional investors, retail investors also emerged as significant players during the economic down-turn.23 Yet another factor in the push towards FDI in the United States during the economic down-turn was investors seeking to escape low returns and other problems in their own financial markets.24

Initiatives taken by the U.S. State Department have also made domestic investment more attractive to investors in Japan and Singapore. State governments are often the leading promoters of inbound FDI in the United States, by offering a wide variety of services, information and incentives for companies interested in investing in their state.25 Indeed, many states maintain offices abroad to promote trade and inbound FDI to their respective states.26 The American State Offices Association, an entity established in 1980 to promote mutual interests of U.S. state offices, has a branch organization in Japan.27 Since 2001, the Japan-U.S. Investment Initiative working group has worked effectively to identify and remove barriers to cross-border investment flows between the two countries.28

Other restrictions—in particular, concerns that FDI is politically motivated—were allayed in recent years upon Congress's passage of the Foreign Investment and National Security Act (FINSA) in July 2007. FINSA addresses investments made by foreign entities in the United States and establishes a framework for the review of foreign acquisitions of U.S. assets by the Committee on Foreign Investment in the United States (CFIUS). In the case of FDI, CFIUS must consider the relevant country's compliance with U.S. and multilateral counter-terrorism, non-proliferation and export control regimes.29 The United States has made it clear that it remains committed to maintaining an open investment regime while implementing FINSA, and that the aim of the CFIUS review process is not to block transactions but to resolve concerns in a way that allow transactions to proceed.30 Sovereign wealth funds controlled by both the governments of Singapore and United Arab Emirates have adopted FINSA, disavowed political motives in investing, and made commitments to maximize disclosure of investment activities and strong internal controls, including management of risk in investment.31

Opportunistic investors in Japan and Singapore, including investment funds based in these countries, would be wise to follow the lead of their successful counterparts who have been capitalizing on distressed opportunities in the United States during the economic down-turn. Although the U.S. domestic equity markets have enjoyed a healthy rebound, economic woes still persist. In particular, liquidity and access to capital in the United States is still quite constrained (particularly in certain lagging sectors like real estate, finance, retail and entertainment) resulting in significant buy opportunities for opportunistic investors abroad.