Foreign Direct Investment in the Unites States: An Economic Analysis

Foreign Direct Investment in the United
States: An Economic Analysis
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Foreign direct investment in the United States¹ declined sharply after 2000, when
a record $300 billion was invested in U.S. businesses and real estate. In 2007, according
to Department of Commerce data, foreigners invested $237 billion. Foreign direct
investments are highly sought after by many State and local governments that are
struggling to create additional jobs in their localities. While some in Congress
encourage such investment to offset the perceived negative economic effects of U.S.
firms investing abroad, others are concerned about foreign acquisitions of U.S. firms
that are considered essential to U.S. national and economic security. This report will
be updated as events warrant.
Recent Investments
Foreigners invested $237 billion in U.S. businesses and real estate in 2007, according
to data published by the Department of Commerce.² As Figure 1 shows, this represents
a slight decrease from the $241 billion invested in 2006. Investments by U.S. firms
abroad increased by 38% in 2007 to $333 billion, up sharply from the $36 billion they
invested abroad in 2005. The increase in foreign direct investment flows, mirrors a turn-
around in global flows. According to the United Nations’ World Investment Report,
global foreign direct investment inflows increased by 27% in 2005 and 38% in 2006 after
a slight increase in 2004 and three years of declining flows prior to 2004 that arose from

¹ The United States defines foreign direct investment as the ownership or control, directly or
indirectly, by one foreign person (individual, branch, partnership, association, government, etc.)
of 10% or more of the voting securities of an incorporated U.S. business enterprise or an
equivalent interest in an unincorporated U.S. business enterprise. 15 CFR § 806.15 (a)(1).
² Sauers, Renee M. and Kristy L. Howell, U.S. International Transactions: First Quarter of 2008.
Survey of Current Business, July 2008, p. 67. Direct investment data reported in the balance of
payments differ from capital flow data reported elsewhere, because the balance of payments data
have not been adjusted for current cost adjustments to earnings.

competitive international price pressures leading to greater internationalization of
production, rising commodity prices, and increased international merger and acquisition
activity in some areas.
Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows, 1990-2007 (in billions of
dollars)

Billions of dollars
^$350
Foreign Direct Investment in
^$300the United States
^$250
^$200
^$150U.S. Direct Investment
^$100 Abroad
^$50
^$0
¹⁹⁹⁰¹⁹⁹²¹⁹⁹⁴¹⁹⁹⁶¹⁹⁹⁸²⁰⁰⁰²⁰⁰²²⁰⁰⁴²⁰⁰⁶
Year
^S^o^u^{rce: U}^.^S^.^D^e^p^a^rtm^eⁿ^t^o^f^C^o^m^m^erce
The cumulative amount, or stock, of foreign direct investment in the United States
on a historical cost basis³ rose from $1.8 trillion in 2006 to about $2.1 trillion in 2007.
This marked an increase of 14%, slightly more than the increase in such investment in
2006.⁴ The rise in the value of foreign direct includes an upward valuation adjustment of
existing investments and increased investment spending that was driven by a relatively
strong growth rate of the U.S. economy, the world-wide resurgence in cross-border
merger and acquisition activity, and investment in the U.S. manufacturing, chemicals,
utilities, mining, health care, transportation, and the finance and insurance sectors.⁵
³ The position, or stock, is the net book value of foreign direct investors’ equity in, and
outstanding loans to, their affiliates in the United States. A change in the position in a given year
consists of three components: equity and intercompany inflows, reinvested earnings of
incorporated affiliates, and valuation adjustments to account for changes in the value of financial
assets. The Commerce Department also publishes data on the foreign direct investment position
valued on a current-cost and market value bases. These estimates indicate that foreign direct
investment increased by $271 billion and $230 billion in 2007, respectively, to reach $2.4 and
$3.5 trillion.
⁴ Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2007: Country and
Industry Detail, Survey of Current Business, July, 2008. p. 35.
⁵ Ku-Graf, Y. Louise, Foreign Direct Investment in the United States: New Investment in 2007,
Survey of Current Business, June 2008, pp. 33-34.

As a share of the total amount of nonresidential investment spending in the U.S.
economy, investment spending by foreign firms was equivalent to 12% in 2007, far below
the 27% reached in 2001. Foreign firms’ spending was sustained by a large increase in
intercompany debt flows as U.S. affiliates turned to net borrowing from their foreign
parent companies. Direct investment was also financed through reinvested earnings and
an increase in equity capital, although the increase in the amount of equity capital was the
lowest amount since the 1995. The lower amount of equity capital represents the
relatively slower rate of economic growth in Europe that reduced the amount of funds
European parent firms had available to invest and the higher rate of economic growth
among the U.S. affiliates which improved their profit position.⁶
With over $410 billion invested in the United States, Great Britain is the largest
foreign direct investor, as is indicated in Table 1. Japan has moved into the position as
second largest foreign direct investor in the U.S. economy with about $233 billion in
investments. Following the Japanese are the Canadians ($213), the Dutch ($209 billion),
Germans ($202 billion), and the French ($169 billion).
In some cases, investments by one or two countries dominate certain industrial
sectors, suggesting that there is a rough form of international specialization present in the
investment patterns of foreign multinational firms. At year end 2006, the Netherlands and
the United Kingdom accounted for the bulk of foreign investments in the U.S. petroleum
sector, reflecting investments by two giant companies: Royal Dutch Shell and British
Petroleum. Japanese investments in the U.S. wholesale trade sector are also substantial,
followed by British investments, and European investors account for the bulk of foreign
investments in the retail trade sector. German investors are the largest investors in the
information sector as a result of a number of large media company acquisitions. French,
German, and British investments dominate other foreign investments in the banking
sector, while Dutch, Canadian, British, and French investments account for over half of
the investments in the finance sector. Canada’s $93 billion investment in the U.S.
banking and finance sectors far surpasses the $55 billion invested by British firms,
followed by Germany ($50 billion) and France ($47 billion). Foreign direct investment
in the manufacturing sector is represented by a number of countries, each with substantial
investments: investments by Switzerland ($99 billion), the Netherlands ($95 billion). the
United Kingdom ($93 billion), France ($80 billion), and Germany ($62 billion) account
for two-thirds of the total amount of foreign direct investment in this sector.
Investment spending by developed economies accounts for 95% of all foreign direct
investment in the United States. These investments are predominately in the
manufacturing sector, which accounts for about 34% of foreign direct investment in the
United States, a decline from periods when such investment accounted for a majority
share of the total. Another 19% is in the banking and finance sectors, and 15% is in the
retail and wholesale trade sectors, reflecting purchases of department stores and other
investments to assist foreign firms in marketing and distributing their products. The fast-
growing information sector accounts for 7.0%, while services and real estate account for

⁶ At the same time, U.S. direct investment abroad plummeted in 2005 as U.S. parent firms
reduced the amount of reinvested earnings in their foreign affiliates for distribution to the U.S.
parent firms to take advantage of one-time tax provisions. U.S. direct investment abroad in 2005
totaled $21 billion (in nominal terms).

modest shares of 3.0% and 2.6%, respectively. All other industries account for the
remaining 19%.
Table 1. Foreign Direct Investment Position in the United States on
a Historical-Cost Basis at Year-End 2007
(in millions of U.S. dollars)
^Al^l^Ma^nuf^a^c^-^Wh^o^l^e^-^Re^taⁱ^l^Inf^o^r-^Ban^kⁱⁿ^g^Fⁱⁿ^an^ce^R^e^al^S^erv^ices^O^t^h^e^r
ⁱ^ndus-^trⁱ^e^s^turⁱ^ng^sa^l^e^tr^a^d^e^tr^a^d^e^ma^tⁱ^oⁿ^e^s^ta^teⁱ^ndus-^trⁱ^e^s
^A^{ll cou}ⁿ^t^ries^2,093,049^709,545^278,353^41,⁵⁹¹^146,428^141,033^263,993^55,277^62,956^393,873
^C^aⁿ^a^d^a^213,224^43,118^10,177^7,797^7,⁰⁸¹^22,022^71,218^2,744^1,690^47,378
^Eu^rop^e^1,482,978^557,115^139,133^26,505^133,039^100,392^160,130^25,797^53,500^287,368
^A^u^s^t^rⁱ^{a 2,512}^1,711⁽^D⁾⁽^D⁾^–6⁽^D⁾⁽^D⁾⁷⁴⁽^D⁾¹⁹
^Be^l^g^ium^19,520^9,369^1,881⁽^D⁾²⁽^D⁾¹^,248²³⁰^–42^3,231
^F^r^ance^168,576^79,636^8,999⁹³²^11,⁸⁰²^17,709^29,144⁴³⁴^6,663^13,257
^G^e^r^m^any^202,648^61,901^10,772^3,995^48,585^16,406^34,148^8,110¹⁹⁷^18,533
^I^r^e^l^{and 33,557}^15,742¹⁷⁴⁽^D⁾⁽^D⁾⁽^D⁾²^,691⁽^D⁾^–36^7,058
^I^t^al^y^15,482^2,766^1,511^2,371²⁵⁶⁴⁹⁽^D⁾⁵²⁽^D⁾⁽^D⁾
^L^u^x^e^m^b^o^u^r^g^134,310^61,886^1,296⁽^D⁾⁷^,048⁰⁶^,884²⁸²⁽^D⁾^49,297
^N^e^the^r^l^a^nds^209,449^94,998^21,444⁽^D⁾^16,815⁽^D⁾^36,766^3,484^6,742^20,213
^S^w^e^d^eⁿ^31,857^12,878^7,442⁽^D⁾⁸⁴⁷^–254²⁶⁴⁽^D⁾⁵⁴⁽^D⁾
^S^w^itz^e^r^l^a^{nd 155,696}^98,672^7,865⁽^D⁾^12,064⁽^D⁾^29,388⁽^D⁾⁴⁷⁴^8,130
^Uⁿ^ite^{d K}ⁱ^ng^do^m^410,787^92,682^72,240^2,⁶⁴¹^22,264^49,118^16,023^5,267^28,616^121,936
^Latⁱⁿ^A^m^erica^62,955^9,694^8,687^1,⁴⁸⁰^2,536^4,243^7,479^9,720³⁰⁷^18,811
^A^f^{rica 1,124}^–450⁵⁹²⁽^D⁾⁽^D⁾⁽^D⁾⁽^D⁾²⁶⁴^–2⁴⁸⁴
^Mⁱ^d^d^l^{e Eas}^t^12,937^2,028^5,908⁽^D⁾⁽^D⁾^1,305⁽^D⁾⁶⁴⁰¹⁰⁹^2,090
^A^s^{ia an}^d^P^a^cific^319,832^98,040^113,⁸⁵⁷^5,735⁽^D⁾⁽^D⁾^24,916^16,113^7,353^37,742
^A^u^s^t^r^a^lⁱ^a^49,100^4,656^2,349⁽^D⁾¹^,023^1,762^4,605^9,190⁽^D⁾^25,047
^J^a^pan^233,148^79,951^97,827^5,699^1,⁸²¹^8,273^17,753^6,073^4,685^11,066
^O^P^E^C^13,589⁴⁷^10,351⁽^*⁾^–³¹^,383^–9⁽^D⁾^–⁹⁽^D⁾
^Source:^{Ibarra, Marily}ⁿ^,^an^d^J^eⁿⁿⁱ^f^e^r^Kon^cz,^{Direct In}^v^e^s^t^m^eⁿ^t^P^o^s^ition^s^f^o^{r 2007: C}^o^uⁿ^t^ry^an^{d In}^du^s^t^ry
^Detail.^Sur^{vey of C}^u^r^r^e^{nt Bus}ⁱ^nes^s^{, Ju}^l^y^{, 2008. p. 35.}
^No^te:^T^h^{e pos}^ition^is^th^{e s}^t^ock^,^{or cu}^m^u^lativ^{e, book}^va^l^u^e^o^f^fo^r^e^igⁿ^{direct in}^v^e^s^t^ors^’^equ^ityⁱⁿ^{, an}^{d n}^e^t
^o^u^tstan^dⁱⁿ^g^lo^an^{s to}^{, th}^eir^{U.S. af}^f^{iliates. A}ⁿ^e^g^a^tiv^e^p^o^s^itioⁿ^m^a^y^r^e^su^{lt as U.S. af}^f^iliates^r^e^p^a^y^d^e^b^t^s^to
^th^eir^f^o^r^e^igⁿ^p^a^r^eⁿ^t^{s, an}^d^{as f}^o^r^e^igⁿ^p^a^r^eⁿ^t^{s b}^o^r^r^o^w^f^uⁿ^d^{s f}^r^o^m^th^eir^{U.S. af}^f^{iliates. D in}^dⁱ^{cates th}^{at d}^a^ta
^h^a^ve^b^e^eⁿ^s^u^ppres^s^e^{d by}^t^h^{e D}^e^part^m^eⁿ^t^of^C^o^m^m^e^{rce t}^o^av^oi^{d t}^h^{e di}^s^c^l^o^s^u^{re of}^dat^a^ofⁱⁿ^di^vⁱ^du^al
^com^p^an^ies^.^Aⁿ^as^teris^k^(*⁾ ⁱⁿ^di^cat^es^t^h^at^t^h^{e v}^a^l^u^{e of}^t^h^{e cel}^lⁱ^s^l^e^s^s^t^h^an^$500,000.
Acquisitions and Establishments
Another way of looking at foreign direct investment is by distinguishing between
transactions in which foreigners acquire existing U.S. firms and those in which foreigners
establish new firms — termed “greenfield” investments. New investments are often
preferred at the local level because they are thought to add to local employment, whereas
a foreign acquisition itself may add little, if any, new employment. In 2007, outlays for
new investments, which include investments made directly by foreign investors and those
made by existing U.S. affiliates, were $277 billion, a 67%increase over the $166 billion
invested in 2006. According to the Department of Commerce, the increase in new
investments reflected faster economic growth in the United States and an increase in

merger and acquisition activity.⁷ Acquisitions of existing U.S. firms accounted for 92%
of the new investments by value. Investments by the existing U.S. affiliates of foreign
firms accounted for 63% of the total transactions by investor, while other foreign direct
investors accounted for the remaining 37% of transactions. Investment outlays by foreign
firms increased from 2006 to 2007 in all major sectors, except wholesale trade,
information, and finance. Investment in retail trade, manufacturing, and services all
posted substantial increases.
Economic Performance
By year-end 2005, the latest year for which detailed data are available, foreign firms
employed 5.5 million Americans, less than 4% of the U.S. civilian labor force, and owned
over 30 thousand individual business establishments.⁸ Foreign firms have a direct
investment presence in every state. Employment of these firms ranges from over 543
thousand in California, to about 7 thousand in North Dakota. Following California, New
York (378 thousand), Texas (345 thousand), Pennsylvania (232), Illinois (226 thousand),
and Florida (226 thousand), and have the largest numbers of residents employed by
foreign firms. In 2005, 40% of the foreign firms’ employment was in the manufacturing
sector, more than twice the share of manufacturing employment in the U.S. economy as
a whole, with average annual compensation (wages and benefits) per worker of about
$63,000.
Retail and wholesale trade accounted for another 22% of total affiliate employment.
Dutch-affiliated firms are the largest single employers in the retail trade sector and
account for nearly one-third of total affiliate employment in this sector, while Japanese
and British firms account for over half of the employment in the wholesale trade sector.
Employment in the information, finance, real estate and technical services sectors
accounts for another 13% of total affiliate employment. Average employee compensation
is highest in the finance sector — $229,000 — where Swiss, Canadian, Japanese, and
British account for three-fourths of the employment. The rest of the affiliate employment
is spread among a large number of other industries.
The affiliates of foreign firms spent $140 billion in the United States in 2005 on new
plant and equipment, imported $468 billion in goods and services and exported $181
billion in goods and services. Since 1980, the total amount of foreign direct investment
in the economy has increased eight-fold and nearly doubled as a share of U.S. gross
domestic product (GDP) from 3.4% to 6.4%. It is important to note, however, that these
data do not imply anything in particular about the role foreign direct investment has
played in the rate of growth of U.S. GDP.
Foreign-owned establishments, on average, are far outperforming their U.S.-owned
counterparts. Although foreign-owned firms account for less than 4% of all U.S.
manufacturing establishments, they have 14% more value added on average and 15%

⁷ Ku-Graf, Louise, Foreign Direct Investment in the United States: New Investment in 2007.
Survey of Current Business, June 2008. p. 33.
⁸ Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign
Companies, Preliminary 2005 Estimates. Bureau of Economic Analysis, 2007, Table 2A-1.

higher value of shipments than other manufacturers. The average plant size for foreign-
owned firms is much larger — five times — than for U.S. firms, on average, in similar
industries. This difference in plant size apparently rises from an absence of small plants
among those that are foreign-owned. As a result of the larger plant scale and newer plant
age, foreign-owned firms paid wages on average that were 14% higher than all U.S.
manufacturing firms, had 40% higher productivity per worker, and 50% greater output per
worker than the average of comparable U.S.-owned manufacturing plants. Foreign-owned
firms also display higher capital intensity in a larger number of industries than all U.S.
establishments.
These differences between foreign-owned firms and all U.S. firms should be viewed
with some caution. First, the two groups of firms are not strictly comparable: the group
of foreign-owned firms comprises a subset of all foreign firms, which includes primarily
very large firms; the group of U.S. firms includes all firms, spanning a broader range of
sizes. Secondly, the differences reflect a range of additional factors, including the
prospect that foreign firms which invest in the United States likely are large firms with
proven technologies or techniques they have successfully transferred to the United States.
Small foreign ventures, experimenting with unproven technologies, are unlikely to want
the added risk of investing overseas. Foreign investors also tend to opt for larger scale
and higher capital-intensity plants than the average U.S. firm to offset the risks inherent
in investing abroad and to generate higher profits to make it economical to manage an
operation far removed from the parent firm.
Conclusions
Foreign direct investment in the United States in 2005 rose slightly, but still equaled
far less than the record amount recorded in 2000. Other countries have experienced a
similar turn-around in foreign direct investment inflows, especially to some of the less
developed economies where there is a great potential for investment. As the rate of
growth of the U.S. economy rises, interest rates stay low, and the rate of price inflation
stays in check, foreign direct investment in the United States likely will continue the
rebound. Of particular importance will be public concerns over foreign direct investment
in the economy as a whole and on the overall phenomenon referred to as “globalization,”
with its impact on jobs in the economy. Concerns over foreign direct investment, where
they exist, stem not so much from the perceived potential losses of international
competitiveness that characterized similar concerns in the 1980s, but from potential job
losses that could result from mergers and acquisitions, although such losses could occur
whether the acquiring company is foreign- or U.S.-owned. Such concerns are offset, at
least in part, by the benefits that are perceived to be derived from the inflow of capital and
the potential for new jobs being created in local areas.
Although job security is an important public issue, opposition to some types of
foreign direct investment stem from concerns about the impact of such investment on U.S.
economic and security interests, particularly in light of the terrorist attacks of September
11, 2001. The U.S. economy, however, remains a prime destination for foreign direct
investment. As the pace of economic growth in the Nation increases relative to that of
foreign economies, foreign direct investment likely will increase as new investments are
attracted to the United States and existing firms are encouraged to reinvest profits in their
U.S. operations.