Two people looking out over a residential area in San Francisco, their backs to the camera
Looking ahead: San Francisco fell slightly in the FT-Nikkei ranking © David Paul Morris/Bloomberg

California’s largest cities plunged in popularity with foreign direct investors last year as an uncertain global economic outlook, high taxes, and Chinese restrictions on outbound deals squeezed capital flows into the Golden State.

Los Angeles slumped 10 places in the annual FT-Nikkei ranking of the best cities for foreign businesses, coming 37th out of the 91 largest US cities in this year’s ranking. The largest city in California attracted 51 investment projects by foreign-owned enterprises last year, the lowest figure in five years. In the first seven months of 2023, only 20 such projects were announced, according to fDi Markets data.

The state, if it were a country, would be the world’s fifth-largest economy. Yet no major Californian city was ranked among the top 20 US hubs for luring foreign businesses in our listing. A handful of notable deals, such as by Beijing-based TikTok owner ByteDance, which leased premises for its new headquarters in San Jose, and an announcement by Italian electric vehicle battery maker Italvolt that it would build a gigafactory in southern California’s Imperial Valley, failed to energise dealmaking by foreign investors in some of the bigger cities.

The state has been criticised for its high cost of living and tax rates, as well as its more demanding regulatory environment and social policies that, in some cases, have pushed businesses elsewhere, notably Texas and Florida. 

On a statewide basis, however, California recovered some of the pandemic hit to foreign direct investment (FDI) inflows in 2022, gaining 271 foreign-owned enterprises, compared with a drop of 500 the year before. The bulk of investment into the state has come from Japan, the UK, France and Canada, as well as an in­creasing sum from Germany. In August, German auto parts maker Bosch acquired the chipmaking facilities of TSI Semiconductors in Roseville, a suburb of Sacramento, and said it planned to invest $1.5bn in the site.

The FT-Nikkei ranking showed that investor sentiment had soured for some Californian cities. San Francisco was ranked the 31st most attractive city in the US for foreign investment, down three spots on the previous year. FDI in the wider Bay Area fell sharply in the wake of the Covid-19 pandemic, plunging from 98 deals in 2019 to around 47 in 2021, according to fDi Markets.

Meanwhile, San Diego, in southern California, fell four places to 29th in the ranking. Other Californian cities, such as Sacramento (the state capital), Irvine and Anaheim, improved their scores last year, but all still lingered in the bottom half of the ranking overall.

This ranking is a compilation of data on the economic, regulatory and social characteristics of US cities with more than 250,000 citizens, using more than four dozen metrics, including business environment, workforce and talent, and quality of life. 

Los Angeles suffered a sharp drop after a decade-long boom in its economy during which Asian and European capital flooded into its entertainment, aerospace and tourism industries. Chinese companies were some of the biggest investors in LA hotels, office buildings and other commercial real estate in the past decade. However, China has limited outflows of investor cash in recent years and growing geopolitical tensions between Washington and Beijing have halted even more deals.

The number of Chinese foreign-owned-enterprises in California has fallen 14 per cent since 2021, according to the World Trade Center Los Angeles, a body that supports business between LA and foreign companies.

“After 2008, LA became a primary destination for multibillion-dollar investments from China,” says Stephen Cheung, chief executive of the LA Economic Development Corporation. “Now, we’re definitely seeing the fluctuation. When the Chinese government switched its policy to capital flow restriction, we saw a sharp decline.” Investment from Chinese businesses is still happening, Cheung adds, but at far lower values.

A string of Chinese property developers, which had invested heavily in the city, defaulted on loans in the past two years, forcing them to halt developments and put land up for sale. China Oceanwide spent $1.1bn on a project downtown LA where it planned to build a Park Hyatt hotel and 500 condos, but ran out of cash and needed to stop construction in 2019.

A view of the unfinished Oceanwide Plaza in Los Angeles,  January 25, 2019
A view of the unfinished Oceanwide Plaza in Los Angeles in 2019 © Frederic J. Brown/AFP/Getty Images

Far smaller deals have been signed in the past two years. A subsidiary of Sichuan Xinglida Group purchased the LA Airport Marriott hotel for $160mn in 2021, the largest hotel sale of that year.

The Chinese retreat means LA is more reliant on Japan than ever for investment as the city prepares its technological infrastructure for two major events: the 2026 Fifa World Cup and the 2028 summer Olympics.

“There is a huge demand [in LA] for connectivity and smart cities [technology],” Cheung says. “Japan has that expertise . . . and we are depending on some of this innovative tech.”

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