CRS Report for Congress
Foreign Investment Treaties: Impact
on Direct Investment
January 12, 1998
James K. Jackson
Specialist in International Trade and Finance
Economics Division

Congressional Research Service ˜ The Library of Congress

Foreign Investment Treaties: Impact
on Direct Investment
Congress, through the Senate’s constitutional responsibility to ratify treaties,
plays a central role in U.S. negotiations on multilateral and bilateral investment
treaties (BITs). Bilateral investment treaties are nation-to-nation agreements, which
set out rules governing the mutual treatment of foreign investment. Since the early
1980s, the United States has used BITs as it main international negotiating vehicle
to protect private U.S. investments abroad. This focus reflects U.S. frustration with
international efforts by developed and developing economies to formulate a set of
standards governing the treatment of foreign investment. A burst of foreign
investment in the 1990s, however, spurred the developed economies to renew their
efforts to forge an international set of standards on foreign investment in the form of
a Multilateral Agreement on Investment (MAI). Such an agreement would aim to
reduce the remaining obstacles to foreign investment, to stem the growth of
investment subsidies being offered by many developing economies, and to protect
developed nations’ overseas investments.
As prospects grow for a new multilateral investment agreement, some groups
within the United States are scrutinizing foreign investment agreements to determine
their impact on the domestic economy. In particular, they are concerned that the
current regime of bilateral investment treaties is negatively affecting domestic
investment spending by U.S. firms, the U.S. international trade position, and the
growth of domestic U.S. jobs. Since multilateral and bilateral investment treaties
lower the risks involved for firms that invest abroad, some observers believe these
treaties may encourage firms to invest more overseas, shifting jobs out of the United
States and potentially lowering the firms’ share of traditional investment spending
done in the United States. Eventually, they argue, reduced levels of investment
spending will lead to fewer jobs and lower incomes in the United States relative to
economies abroad.
Analysis to date, however, indicates that foreign investment treaties, by
themselves, have little, if any, influence on foreign investment spending as a whole.
Instead, such treaties may alter the composition of overseas investing by influencing
U.S. firms to increase their investment spending in some developing countries,
particularly those with bilateral investment treaties, at the expense of other
developing economies, but not likely at the expense of domestic investment
spending. Additionally, recent analyses indicate that employment among foreign
subsidiaries, especially among economically developing countries, is not a close
substitute for employment in the United States. In most cases, investment spending
abroad by U.S. multinational firms is due to favorable economic conditions.
Investment treaties apparently shift employment demands within multinational firms
among subsidiary operations in developing nations with similar levels of economic
development and labor skills, but not necessarily at the expense of employment at
the U.S.-based parent firms.

Overview and Summary............................................1
Investment Agreements.............................................2
Multilateral and Regional Agreements.............................2
Bilateral Investment Treaties.........................................3
Bilateral Investment Treaties by Region............................5
Basic Provisions...............................................6
Why Firms Invest Abroad..........................................10
Economic Effects.................................................13
Foreign Investment and International Trade............................16
Foreign Direct Investment and the U.S. Economy.......................18
Conclusions .....................................................20
List of Figures
Figure 1. U.S. Direct Investment in Countries
With Bilateral Investment Treaties, By Area: 1991-1995
(in billions of U.S. dollars)......................................6
Figure 2. Direct Investment Position Abroad of OECD Countries,
1983-1994 (in billions of U.S. dollars)............................15
Figure 3. Shares of U.S. Exports and Imports Accounted for by
Intrafirm Trade (in percent).....................................19
List of Tables
Table 1. United States Bilateral Investment Treaties:
Countries and Treaty Signature Date...............................4
Table 2. Investment Restrictions on Main Industries in
Developed Countries, mid-1992..................................8
Table 3. U. S. Direct Investment Abroad: Countries With
Bilateral Investment Treaties (in millions of dollars)
Table 4. Sales by the Majority-Owned Overseas Affiliates of
U.S. Parent Companies
(in billions of U.S. dollars).....................................17
Table 4 Origin of Output of U.S. Multinational Firms by Industry,

1982 and 1995 (in percent).....................................21

Foreign Investment Treaties: Impact
on Direct Investment
Overview and Summary
Congress, through the Senate’s constitutional responsibility to ratify treaties,
plays an active role in developing and implementing the nation’s policy on direct
investment. Over the last two decades, part of this role involved ratifying bilateral
investment treaties (BITs) as the United States and other developed economies relied
predominantly on such BITs as negotiating tools. Generally speaking, BITs are
nation-to-nation agreements, which set out rules governing the mutual treatment of
foreign investment. The developed economies of the OECD (Organization for
Economic Cooperation and Development) turned to BITs in the 1980s to protect
their direct investments1 abroad after their attempts to develop an international set
of rules on foreign investment through international organizations either failed,
stalled, or delivered meager results. In most cases, these efforts were rebuffed by a
large number of developing countries, which viewed foreign investment with
With capital in short supply in the 1990s, however, many developing economies
dropped their opposition to foreign investment and started offering financial and tax
subsidies to foreign firms willing to invest. This policy shift sparked a surge in
direct investment abroad by the developed countries and a boom in the number of
BITs. As the number of BITs multiplied, the United States and other OECD
countries resolved to develop an international set of rules on foreign investment.
Presently, the OECD countries are engaged in discussions over a proposed
multilateral agreement on investment (MAI).2 According to the Negotiating Group
on the MAI, the MAI is expected to be much broader in scope than most BITs and,
therefore, largely will replace the BITs in practice for relations between countries
that join the MAI. Nevertheless, there may be specific provisions in individual BITs
that are of value to investors. In such cases, the MAI would not prevent investors3

from maintaining those provisions.
1The United States defines direct investment abroad as the ownership or control,
directly or indirectly, by one person (individual, branch, partnership, association,
government, etc.) of 10% or more of the voting securities of an incorporated business
enterprise or an equivalent interest in an unincorporated business enterprise. 15 CFR §

806.15 (a)(1).

2For additional information, see CRS Report 97-469, Multilateral Agreement on
Investment: Implications for the United States, by James K. Jackson, updated October 7,


3Ley, Robert. The Scope of the MAI. Available at the OECD site on the Internet:

Regional trade agreements, such as the North American Free Trade Agreement
(NAFTA), and the growth of the European Union have boosted the number of
investment treaties. Moreover, the favorable treatment developed countries have
accorded investment provisions in regional trade agreements and the growing
number of bilateral investment treaties between developed and developing countries
have encouraged the developed economies to push once again for a comprehensive
international investment agreement. These efforts, however, concern some
Americans who believe international investment treaties will raise U.S. firms’
overseas investments at the expense of investments in the domestic U.S. economy,
which they claim will negatively affect the long term rate of growth of the U.S.
economy. In particular, some observers question whether such treaties stimulate
growth in the overall level of direct investment internationally, assuming U.S. and
overseas investments are substitutes, or whether they merely shift the composition
of investment among countries, leaving the overall amount of foreign investment, as
well as investment in the United States, unchanged.
Some Members of Congress and other observers also are scrutinizing foreign
investment (both inward and outward) to determine the role it plays in the U.S.
economy. Some of these observers view overseas investment as an expression of the
strength of U.S.-style free market capitalism, while others believe it robs American
workers of jobs and reduces workers’ income while enriching corporate managers.
Within Congress, some Members are challenging the policy of providing
government-backed insurance for U.S. firms that invest abroad, because they view4
such insurance as “corporate welfare.” Others question the wisdom of engaging in
another broad-based international treaty that will affect direct investment and trade
flows until the economic effects of the North American Free Trade Agreement
(NAFTA) are more clearly understood. Still other observers question the impact
broad, regional treaties, such as the MAI, will have on the present regime of bilateral
investment treaties.
Investment Agreements
The United States and other developed economies have sought through
bilateral, multilateral, and regional agreements to achieve conformity across
countries in the treatment of foreign investment. This goal is being pursued through
the OECD, where developed countries are negotiating the Multilateral Agreement
on Investment (MAI).
Multilateral and Regional Agreements
At the multilateral, or multi-nation, level, there are at least two major types of
arrangements, or agreements, on foreign investment. One type of arrangement is an
investment treaty that is part of broader set of treaties, which aims to integrate rules

3(...continued) s/mai/ley 1 .htm
4For additional information, see CRS Report 97-565, OPIC: Employment and Other
Economic Effects, by James K. Jackson, May 23, 1997.

on foreign investment into a framework of rules geared toward economic cooperation
and integration. Such arrangements include the treaties establishing the European
Community and the North American Free Trade Agreement.
The second type of arrangement, such as the MAI currently being negotiated,
covers only the issue of foreign investment. Of particular prominence among this
group are the OECD Code of Liberalization of Capital Movements, the Code of
Liberalization of Current Invisible Operations, and The Declaration on International
Investment and Multinational Enterprises.5 In 1961, the United States adopted the
Code of Liberalization of Capital Movements and the Code of Liberalization of
Current Invisible Operations.
The two OECD codes are legally binding on those OECD members who have6
voted to accept them, although there is no enforcement mechanism. As a result, the
codes serve primarily to provide a framework of notification, examination, and
consultation among the signatory countries. The code on liberalization and its
companion code on current invisible operations are meant to promote the removal
of restrictions on capital movements, including foreign investment, and to promote
the repatriation of profits. The declaration on investment is not a legally binding
treaty, but is a general statement of policy regarding foreign investment. Member
countries are expected to accord multinational enterprises national treatment, or
treatment that is no less favorable than that accorded to domestic investors, and to
assure that this treatment is followed at the sub-national level. Generally, such7
agreements also grant most-favored-nation (MFN) status, which also denotes an
equality of treatment.
Bilateral Investment Treaties
Since multilateral arrangements on foreign investment lack enforcement
provisions, the United States and other developed economies have felt it was
necessary to look at other ways to protect their foreign investments. Encouraged by
the success of European countries, which were negotiating bilateral treaties that dealt
exclusively with foreign investment and with protecting those investments in a
particular foreign country, the United States began fashioning its own bilateral
investment treaties in the 1980s. These treaties require each party to extend MFN,
or non-discriminatory, treatment and to observe national treatment with respect to
both the admission and the subsequent treatment of foreign direct investment.
Exceptions are made for industries or areas reserved for national security, or for
other national objectives. As one lawyer wrote about this time period:

5The members of the OECD adopted this Declaration on June 21, 1976, and updated
it in 1979, 1984, and 1991.
6Jackson, John H., William J. Davey, and Alan O. Sykes, Jr. Legal Problems of
International Economic Relations: Cases, Materials and Text on the National and
International Regulation of Transnational Economic Relations, Third Edition. St. Paul,
West Publishing Co., 1995. P. 275.
7See: CRS Issue Brief 93107, Most-Favored-Nation Policy of the United States, by
Vladimir N. Pregelj.

The impetus for this flurry of treaty-making activity over the last
thirty years has been the strong drive by nationals and companies of
certain states to undertake direct foreign investments in other countries and
the consequent need to create a stable international legal framework to
facilitate and protect those investments. These investors felt that relying
on host country law alone subjected foreign investment capital to a variety
of risks. Host countries may easily change the law after an investment is
made, and host government officials responsible for applying local law
may not always act impartially toward foreign investors and their
enterprises. Moreover, investors and their home country governments
believed that local law in some countries impeded the entry of foreign
capital, treated foreign investments in an arbitrary and discriminatory
manner, and imposed onerous conditions on the operation of privately
owned foreign enterprises. These concerns proved to be more than
theoretical, for the 1960s and 1970s witnessed numerous interferences by
host governments with foreign investments in their territories.8
The United States began negotiating Bilateral Investment Treaties in 1982 after
other forms of bilateral and multilateral arrangements proved too limited in removing
barriers to foreign investment. By this time, developing countries had turned
skeptical of the benefits of foreign investment and were reluctant to offer the types
of guarantees the United States government was requesting through more
encompassing agreements. Since 1982, the United States has signed 38 BITs, of
which 27 are now in force. The other 11 await legislative action in the United States
or in the other country, as indicated in Table 1.
Table 1. United States Bilateral Investment Treaties:
Countries and Treaty Signature Date
Country Date Country Date
Albania1/10/95 Kyrgyzstan1/19/93*
Argentina 11/4/91* Latvia 1/13/95*
Arme nia 9 /23/92* Moldova 4/21/93*
Azerbaijan 8/1/97* Mongolia 10/6/94*
Bangladesh 3/12/86* Morocco 7/22/85*
Belarus1/15/94 Nicaragua7/1/95
Bulgaria 9/23/92* Panama 10/27/82*
Came roon 2/26/86* Poland 3/21/90*

8Salacuse, Jeswald W. BIT by BIT: The Growth of Bilateral Investment Treaties and
Their Impact on Foreign Investment in Developing Countries. International Lawyer, Fall

1990. p. 659.

Table 1. United States Bilateral Investment Treaties - continued
Country Date Country Date
Congo 2/12/90* Roma nia 5/28/92*
Croatia7/13/96 Russian Fed.6/17/92
Czech Republ.10/22/91 Senegal12/6/83*
Ecuador8/27/93 Slovakia10/22/91*
Egypt3/11/86*Sri Lanka9/20/91*
Estonia 4 /19/94* Trinidad/Tobago 9/26/94*
Georgia3/7/94 Tunisia5/15/90*
Grenada 5/2/86* Turkey 12/3/85*
Haiti12/13/83 Ukraine3/4/94*
Honduras7/1/95 Uzbekistan12/16/94
Jama ica 2/4/94* Zaire 8/3/84*
Kazakstan 5/19/92*
* Indicates the Bilateral Investment Treaty has entered into force.
Source: Economic Perspectives. USIA Electronic Journal, Vol. 2, No. 2, April 1997. United
States Information Agency, Washington, 1997. (http://usiahg/
One important factor behind the rush to form BITs was the explosion in
overseas investment in the 1980s and 1990s by American, European, and Japanese
firms. Between 1991 and 1995 alone, American direct investment in countries
covered by a BIT nearly doubled, rising from $17 billion to $32 billion. This boost
in investment spending compares well with total U.S. direct investment abroad,
which increased by slightly less in percentage terms over the same period. As a
result, U.S. investment in BIT countries increased from 3.7% to 4.6% of total U.S.
direct investment abroad over the 1991-1995 period.
Bilateral Investment Treaties by Region
U.S. direct investment in BIT countries, however, has not been consistent across
all countries. As Figure 1 shows, the U.S. direct investment position, or the
cumulative amount of U.S. direct investment, in Latin American BIT countries far
exceeds similar investment in developing countries in other parts of the world. In
terms of the rate of growth, however, U.S. direct investment in Latin America nearly
doubled during the 1991-1995 period, a rate of growth that was slower than among
other regional areas, but at about the same pace as the rate of growth of U.S. direct
investment abroad as a whole. While a number of factors likely account for the
growth in the U.S. direct investment position in Latin American BIT countries, the
economic recovery of the region from the debt crises of the 1980s likely is the most

Figure 1. U.S. Direct Investment in Countries
With Bilateral Investment Treaties, By Area: 1991-1995
(in billions of U.S. dollars)
1991 1992 1993 1994 1995
E.Europe Africa L.America
Source: Survey of Current Business
In percentage terms, the largest growth in the U.S. direct investment position
in BIT countries is in the economies of Eastern European countries. Since 1991,
U.S. direct investment in these countries has increased five times from $600 million
to $3 billion. During this same period, U.S. direct investment in Africa increased by
Basic Provisions
While bilateral investment treaties can differ from one country to another, the
United States seeks to include six basic guarantees in the treaties for American firms:
!Receive the better of national or most-favored-nation (MFN) treatment not
only when they seek the initial investment, but throughout the life of the
!Establish clear limits on the expropriation of investments and ensure that
investors covered by the treaty will be fairly compensated. Expropriation
can occur only for a public purpose, in a nondiscriminatory manner, under
due process of law, and accompanied by payment of prompt, adequate, and
effective compensation;
!Guarantee that investors have the right to transfer funds into and out of the
country without delay using a market rate of exchange;

9Survey of Current Business, September 1997. p. 144-145.

!Limit the ability of host governments to require investors to adopt such
trade distorting practices as performance requirements;
!Establish the right to submit an investment dispute with the foreign
government to international arbitration; and
!Give investors the right to engage the top managerial personnel of their10
choice regardless of nationality.
Legal ambiguities abroad concerning the treatment of foreign investors also
have prompted the United States to negotiate bilateral investment treaties as a means
of protecting the foreign affiliates of American firms from arbitrary foreign
government regulations and interference. In particular, the United States has
negotiated BITs to protect U.S. firms from performance requirements imposed as11
conditions of investment establishment. Performance requirements are market-
distorting conditions imposed by a foreign government on non-domestic firms which
attempt to establish new facilities, expand existing facilities, or even to maintain
existing facilities. Prior to 1980, developing countries imposed performance
requirements on foreign firms 60% of the time, according to a study by the12
Department of Commerce. Recent studies by the United Nations indicate that most
developing countries are liberalizing, or reducing, government restrictions that are
applied specifically to foreign investors and that grant or withhold incentives or
subsidies which discriminate against foreign investors.13
The wide spread movement toward greater openness regarding foreign
investment has not progressed without impediments. A broad range of restrictions
on foreign investment still exist at the national level. A report by the World Trade
Organization (WTO) concludes:
...there are several qualifications to this liberalization trend. First, the
trend has not been homogeneous and significant differences between
foreign investment regimes persist. Second, virtually all countries
maintain some restrictions, often of a sectoral nature, on the entry of
foreign investment.14

10U.S. Bilateral Investment Treaty Program. Available at the following site on the
World Wide Web:
11Shenkin, Todd S. Trade-Related Investment Measures in Bilateral Investment
Treaties and The GATT: Moving Toward a Multilateral Investment Treaty. University of
Pittsburgh Law Review, Winter 1994. p. 579-582.
12Zakour, Charlotte A. The Use of Investment Incentives and Performance
Requirements by Foreign Governments. The United States Department of Commerce,
October 1981. p. 1-3.
13World Investment Report, 1994: Transnational Corporations, Employment and the
Workplace. New York, United Nations, 1994. p. 278-312; Incentives and Foreign Direct
Investment. New York, United Nations, April 1995.
14Trade and Foreign Direct Investment. Annual Report 1996. Geneva, World Trade
Organization, 1996. p. 61-62.

A study by the United Nations concluded that no nation grants unrestricted15
access to all sectors and activities in its economy. While generalizations are hard
to make, the study determined that developed countries blocked access most often
to natural resources sectors and to services sectors associated with national security,
such as telecommunications, maritime, land and air transport, and media activities,
as indicated in Table 2, which shows sectors that allow limited or reciprocal
investment, or are closed to foreign investment.
Table 2. Investment Restrictions on Main Industries in
Developed Countries, mid-1992
Bank- Insur- Radio Tele- Road Rail Air Marine
Country ing ance com. trans. trans. trans. trans.
Australia LR L L C L
Austria R R C C C C C L
Belgium R R L C C L L
Canada LR RL L L C C L L
Denmark R R L L C C L L
Finland LR R C L R C L L
France LR LR L L R C L L
Germany LR L L C C LR L
Greece LR LR C C C C C L
Iceland L L L C C L
Ireland LR LR C C LR
Italy LR LR C C C LR L
Japan LR L L L L L L
Luxembourg C C L L L
Netherlands LR L L L C C L L
New ZealandLLCLL
Norway LR LR C L C C L L
Portugal LR L L C C C R
Spain R R L L C L L
Sweden L L L C C L L
Switzerland R L L C C L L
Turkey LR LR C C C L L
United KingdomRRLLCLL
United StatesRRLLCLL

15World Investment Report, 1994, p. 294.

Table 2 Investment Restrictions on Main Industries — continued
Min- Oil Fish- Real Tour- Audio- Pub- Pub- Gam-
ing and ing estate ism visual lish- lic ing
Country or ing utili-
gas ties
Australia L C L L L L L C L
Austria L L L L LR L L C
Belgium C L R C
Canada L L L L L L L
Denmark L C
Finland L L C C
France L R L R R LR L L
Germany C
Greece L C L L R C C
Iceland C C L L C
Ireland C C
Italy R L R C C
Japan C C L L
Luxembourg C
Netherlands L C
New ZealandL
Norway L L C C
Portugal L C
Spain L C
Switzerland L C L
Turkey L L C
United KingdomLLLC
United StatesLLRL
Source: World Investment Report, 1994: Transnational Corporations, Employment and the
Workplace. New York, the United Nations, 1994. P. 295.
Note: L = Limited; R = Reciprocity; C = Closed.
In the developing countries, the major investment liberalizing activities have
focused on export-oriented manufacturing industries, or projects involving advanced
technology, according to the United Nations. Access to services industries is more
available, although the United Nations determined that by 1992 such access had not
reached the levels of openness generally found in the developed countries.
Developing countries also are more prone toward using restrictions that affect the
structure of control in foreign affiliates. Typically, such restrictions allow the host
government to own or control a certain amount or a certain number of shares in the
venture, control over appointing members on the board of directors, or the national16

composition of the management of the company.
16World Investment Report, 1994, p. 300.

Recipient and investing countries may also have a very different set of
objectives in mind when they negotiate a BIT. For developed economies, which
dominate the sources of foreign investment, the major objective is to protect the
foreign investments of their domestic firms. Most developing countries, however,
negotiate a BIT to encourage, or even to promote, foreign investment, often in
certain specified industries or sectors. Activities such as these, which are designed
to channel foreign investment into specified could easily obscure the impact a BIT
has on the foreign investment process.
Why Firms Invest Abroad
Most economic analyses indicate that multilateral or bilateral investment
treaties have not had a measurable impact on firms’ decisions to invest abroad. Such
treaties, though, may affect the composition of a firms overseas investments. Firms
weigh a broad range of issues, only one of which is a multilateral or bilateral
investment treaty, before they commit their resources. After all, the challenges
facing a firm that is operating a plant abroad, far from the home office, compound
the everyday problems that arise in operating any business. Moreover, while it
seems obvious that firms invest abroad to increase their profits, what is less obvious
is which factors trigger the initial investment decision, or why firms choose to invest
where they do in the first place, and what distinguishes multinational firms from17
those that remain purely domestic.
Most economists believe that foreign direct investment offers positive
benefits to both the investing and the recipient countries. These benefits include an
increase in competition and consumers’ choices and gains in productivity and
efficiency. While such actions likely benefit or harm individual plants and localities
differently, economic theory and a preponderance of studies indicate that they likely
enhance the performance and long-term growth rate of the economy. Nevertheless,
some Americans argue that the national gains attributed to investing overseas are
offset by perceived local losses, which can include displaced U.S. workers and lost
economic growth. A broad assortment of economic studies generally agree that
investors consider a range of factors before they decide to invest abroad and that they
have an array of options available to them which allows them to craft their
investments in ways that suit their specific purposes and corporate requirements. For
instance, firms can export to overseas markets instead of operating abroad, or they
can arrange licensing agreements to lessen the burden of managing overseas
subsidiaries. Firms can also establish joint ventures to take advantage of the
experience of foreign firms, or they can invest directly by establishing a wholly
owned subsidiary, acquire an existing facility, or be a minority partner with another
foreign investor.
According to a number of economic analyses, the relative rates of economic
growth between the United States and other foreign countries largely determine the

17For additional information, see: CRS Report 90-569, Foreign Direct Investment:
Why Companies Invest Abroad, by James K. Jackson, December 7, 1990.

direction and magnitude of direct investment flows.18 This means that changes in
national economic growth rates can, and do, alter directly foreign investment flows
from year to year. Historically, U.S. firms have been the most prolific overseas
investors. A 1994 study by the United Nations19 indicates that U.S. firms are the
largest foreign direct investors in the world and own twice as much abroad as the
Japanese or the British, the next largest foreign direct investors. By year end 1996,
U.S. firms had accumulated, or had a position20 of, $797 billion in overseas2122
investments, based on historical cost, or the book value of the investments.
Firms that invest abroad are predominantly large, multinational corporations
that possess economic strengths — managerial ability and technological leadership
— that set them apart from their competitors. Such advantages are generally thought
to be necessary to allow firms to overcome the disadvantages of operating in a
foreign market — the additional costs associated with managing an enterprise from
some distance, and added political and economic risks. While there are always
exceptions, the largest share of U.S. direct23 investment abroad is geared toward
serving local foreign markets rather than toward shifting production abroad in order
to reexport lower priced goods back to the United States. Such investments seem to
be more profitable than exporting finished goods24 to foreign markets for a number
of reasons:
!They enable firms to avoid trade barriers by producing inside the
country imposing the trade barrier;

18For instance, see: Jackson, Sharon, and Stefan Markowski. The Attractiveness of
Countries to Foreign Direct Investment: Implications for the Asia-Pacific Region. Journal
of World Trade, October 1995. p. 159-179.
19World Investment Report: Transnational Corporations, Employment and the
Workplace. New York, United Nations. 1994. p. 419-420.
20The position is the net book value of U.S. parent firms’ equity in, and outstanding
loans to, their foreign affiliates. It is distinguished from total assets, which are the sum of
total owner’s equity held by, and total liabilities owed to, both foreign investors and all other
persons. A change in the position in a given year consists of three components: equity and
intercompany outflows, reinvested earnings of affiliates, and valuation adjustments to
account for changes in the value of financial assets. Whichard, Obie. Trends in U.S. Direct
Investment Position Abroad, 1950-79. Survey of Current Business, February 1981. p. 39.
21In 1991, the Department of Commerce began publishing two alternative measures
of direct investment: current cost and market value. Historical cost is used in this report
instead of the other two measures because of the detailed country- and industry-level
information that is available only on a historical cost basis. According to the current cost
and market value measures, U.S. direct investment abroad reached $971 billion and $1,535
billion, respectively, in 1996. For additional information about the two alternative measures,
see CRS Report 91-865, Foreign Investments: How Much Are They Worth?, by James K.
Jackson, December 9, 1991.
22Survey of Current Business, September 1997, p. 128.
23See table 3.
24International Direct Investment: Global Trends and the U.S. Role. U.S. Department
of Commerce. International Trade Administration. Washington, U.S. Govt. Print. Off.,
1984. p. 3

!They improve the firm’s ability to serve a foreign market through
products designed specifically for, and manufactured in, the foreign
market area, which allows for better relations with distributors and
better service to customers;
!They provide for the defense of foreign markets from actual or
potential competition;
!They lower the cost of the product for foreign markets through lower
costs of production;
!They help firms accomplish international diversification of holdings
and production capacity; and,
!They help firms react to host government policies which affect direct
A range of factors also influence where U.S. firms choose to invest abroad.
At the very least, the overseas investment decision is based on differences in national
economic growth rates, exchange rate movements, productivity, wage levels, trade
restraints, and overall corporate strategic business objectives, such as gaining access
to markets, resources, or technology. Firms that have established operations abroad
apparently consider a group of factors separate from those just listed when they
decide to continue investing in existing facilities or to invest in new projects.
Economic conditions abroad and in the United States may encourage firms to enlarge
their existing overseas investment or to alter their year-to-year flows of capital
between the parent firm and the foreign affiliates through reinvested earnings or
intercompany account transfers to shift investment funds between the parent and the
affiliate(s) depending on market conditions.
American direct investment abroad in 1996, or investment in businesses and
real estate, increased slightly in nominal terms (not adjusted for inflation) over the25
amount invested in 1995. In total, U.S. direct investment abroad in 1996 reached
$86 billion, a 1.0% increase over the amount invested in 1995. In nominal terms,
this is the largest amount U.S. firms have invested abroad during a one-year period.
This direct investment abroad reflects reinvested earnings, which arise from the
strong growth in the profits of the foreign affiliates of U.S. multinational firms. In
1995, American firms invested $85 billion abroad in nominal terms, also due to
reinvested earnings and equity capital outflows from U.S. parent firms to their26

foreign affiliates, reflecting strong merger and acquisition activity abroad.
25CRS Report 97-328, U.S. Direct Investment Abroad: The Pace of Growth Slows, by
James K. Jackson, updated September 29, 1997
26Bargas, Sylvia E.. Direct Investment Positions for 1996: Country and Industry
Detail. Survey of Current Business, July 1997. p. 34-41.

Economic Effects
One of the most important economic issues that arise concerning BITs and
other officially sponsored actions is how these actions affect the flows of spending
on foreign direct investment. Whether intended or not, investment treaties may well
promote foreign investment to a particular country, potentially at the expense of
other countries without such a treaty, because investment treaties reduce some of the
uncertainty firms face when they are investing abroad. While this and any number
of other developments seem plausible, it has not been proven conclusively that
investment treaties promote overseas investments overall above the levels that would
have existed without such treaties. In most cases, economists contend that actions,
such as an investment treaty, which reduce investors’ risks tend to induce investors
to shift their investments, in this case, from one country to another. Investments
could be shifted among countries, or a change in the composition of investment
spending, without this leading to a net increase in the overall level of foreign direct
These and other complications further compound the problems analysts face
in attempting to assess the impact investment treaties have on foreign direct
investment. So far, analysts have not discovered a clear pattern from the available
data that offers any indication of how investment treaties may affect the flow of
investment funds to a particular country. This ambiguity arises in part from the fact
that any number of factors could account for an increase in direct investment
spending, including the national rate of economic growth. Also, a BIT may promote
foreign investment by signaling foreign firms that the BIT signatory country has
changed its policies and has become more receptive to foreign firms. As a group, the
BIT signatory countries increased their share of U.S. direct investment funds by 27%
over the 1991 to 1995 period. The U.S. direct investment position in the 38 BIT
signatory countries reached $32 billion in 1995, accounting for 4.6% of the total U.S.
direct investment position abroad, up from 3.6% in 1991, as indicated in Table 3.

Table 3. U. S. Direct Investment Abroad: Countries With
Bilateral Investment Treaties (in millions of dollars)
1991 1992 1993 1994 1995 1991 1992 1993 1994 1995
Cumulative PositionAnnual Flows
All countries 467,844502,063564,283621,044711,6232,69642,64777,24753,07893,406
BIT countries17,24919,18322,80926,91332,4771,1351,7442,9893,4074,485
Albania 0006400018-2
Argentina 2,8313,3274,4425,9457,9623675581,0791,4192,107
Bangladesh (D)(D)(D)(D)(D)(D)(D)(D)(D)(D)
Cameroon (D)263253228258(D)-5210-1923
Congo -13 ( D) (D) 226 (D) - 34 (D) ( D) 25 (D)
Croati NA (*) 0 55NA0041
Czech RepublicNANA157271366NANA217851
Ecuador 3212955557368304912253184126
Egypt 1,2461,3341,5101,4121,409-2865-32-97-24
Estonia 000(D)(D)000(D)(D)
Grenada 12233(*)(*)1(*)(*)
Haiti 1831303336-1610331
Honduras 255239159186236-2-16-514056
Jamaica 7638921,0491,2591,400144137173253146
Kazakhstan (D)(D)(D)(D)(D)(D)(D)(D)(D)(D)
Ky rgy z stan NA NA NA NA NA NA NA NA NA NA
Latvia 000(D)(D)000(D)(D)
Morocco 577781901118719612
Nicaragua 80(D)(D)(D)(D)-32(D)(D)(D)(D)
Panama 10,48411,03812,04313,53815,9005276776689481,006
Poland 3219142754578729178195118232
Romania 8162549498917283
Russia NA 9 4 280 408 954 NA 19 222 142 525
Senegal 1913131622-1-6-251
Slovakia NANA(D)(D)(D)NANA(D)(D)(D)
Sri Lanka 791014131113-1
Trinidad and Tobago510565691771813-2551229344
Tunisia 4630333564-37-36-138-6
Turkey 5457329951,0791,167144134279140163
Ukraine NA00(D)(D)NA00(D)(D)
Uzbekistan NA0(D)(D)(D)NA0(D)(D)(D)
Zaire 393554588010-824821
Note: A (D) indicates that data have been suppressed by the Department of Commerce to
protect the identity of the individual investor; an asterisk (*) indicates values between -500,000 and 500,000.
Source: Survey of Current Business, September 1996. p. 124-125.

Since the early 1990s, the developed economies of the OECD have shown
heightened interest in an international agreement on investment rules. Such interest
likely stems from the rapid growth in overseas investment many developed
economies experienced during the 1980s and 1990s. As Figure 2 shows, foreign
direct investment by the OECD countries more than quadrupled over the 1983-1994
period, rising from $447 billion in 1983 to $2.1 trillion in 1994.27 This growth in
foreign investment likely reflects the view of many firms that investing overseas is
an essential component of their overall business strategy and that it is a complement
to their export efforts. As one OECD official states:
.... Although investments abroad by the largest firms are by no means
a new phenomenon, a growing number of firms now view overseas
expansion through direct investment as a necessity, with the aim
often being to achieve more effective access in markets where the
investor is presently under represented. In many cases these
investments have the effect of leading to increased trade flows as

Figure 2. Direct Investment Position Abroad of OECD Countries,

1983-1994 (in billions of U.S. dollars)

Direct investment position abroad
1983 1985 1987 1989 1991 1993
Source: Organization for Economic Cooperation and Development
27International Direct Investment Statistics Yearbook 1996. Paris, Organization for
Economic Cooperation and Development. 1996. Table 8, various countries.

well, demonstrating that investment and trade flows very often interact in a28
complementary manner.
Economists have considered for some time the impact foreign direct
investment has on the economies of the host and recipient countries and the
conditions that spur firms to invest beyond their own national borders. There is little
evidence to date that BITs, by themselves, influence firms’ investment decisions. A29
study completed by the Multilateral Investment Guarantee Agency (MIGA)
concluded that a country’s macroeconomic policies are the main factors that
influence foreign investment flows, while such factors as BITs have almost no30
measurable impact on foreign direct investment flows.
Foreign Investment and International Trade
One issue many in Congress and among the public share is concern over the
ways U.S. direct investment abroad affects the Nation’s trade performance and jobs
situation. Such concerns were heightened during the debate over the North
American Free Trade Agreement, or NAFTA. Some observers believe that
liberalized trade and investment with developing economies, either through a
bilateral investment treaty or a multilateral investment agreement, spurs a shift in
manufacturing production from the United States with its higher paid American
workers to developing countries with low-wage workers. Some critics argue that
such a shift in production would worsen the U.S. trade deficit with developing
economies, because U.S. multinational firms will substitute foreign-made goods for
goods they previously had manufactured in the United States.
Contrary to these impressions, a broad range of economic analyses conclude
that U.S. direct investment abroad, on the whole, helps sustain U.S. exports.
Commerce Department data through 1993 indicate that American subsidiary firms
operating abroad generally produced for the foreign local market. Invariably, some
firms do invest abroad specifically to export low-priced goods back to the United
States, but this is by no means the dominant, or even a substantial, practice. The
largest share of the production of American foreign subsidiaries in 1993 was sold in
the local market, with about 10% of world wide production shipped back to the
United States, as Table 4 indicates. BITs and multinational investment treaties
likely affect the composition of foreign investment among countries, but exchange

28Witherell, William H. Developing International Rules For Foreign Investment:
OECD’s Multilateral Agreement on Investment. Business Economics, January, 1997. p. 33.
29The Multilateral Investment Guarantee Agency was created in 1988 as part of the
World Bank Group to encourage the flow of foreign direct investment to its developing
member countries for economic development. It accomplishes this goal by providing
investment guarantees against the risks of currency transfer, expropriation, war, and civil
30Shenkin, Todd S. Trade-Related Investment Measures in Bilateral Investment
Treaties and the GATT: Moving Toward a Multilateral Investment Treaty. University of
Pittsburgh Law Review, Winter 1994. p. 577.

rates and national economic conditions likely set the overall pattern of foreign
investment and trade.
Trade associated with the overseas investments of U.S. multinational firms
grew smartly in nominal terms during the 1982-1994 period, but still plays a small
role in the U.S. economy and in the activities of U.S. multinational firms. As Figure

3 shows, intrafirm trade, or trade between a parent firm and its foreign subsidiaries,

of U.S. parent companies has grown as a share of both U.S. exports and imports
since 1990. 31 Despite the impressions these data may give that foreign investment
spurs parent firms to increase their intrafirm imports, the data also indicate that
exports from U.S. parent firms to their foreign subsidiaries outpaces imports from
the subsidiaries both as a share of U.S. trade and in nominal terms. In 1994, the
latest year for which data are available, U.S. intrafirm exports totaled $134 billion
compared with intrafirm imports of $119 billion. Also, both intrafirm exports and
imports appear to be growing generally in tandem, offering some support to those
who contend that foreign investment and trade are complimentary, rather than
substitute, economic activities.
Table 4. Sales by the Majority-Owned Overseas Affiliates of
U.S. Parent Companies
(in billions of U.S. dollars)
1987 1988 1989 1990 1991 1992 1993 1994
All Affiliates
Total Sales815.5927.91,020.01,208.31,242.61,291.61,276.01,432.4
Sales to the U.S.88.9101.4114.7123.9125.5129.2136.7150.1
Sales in local market539.4606.3690.5809.5824.5856.7837.7958.4
Sales to other foreign countries187.2220.1214.7275.0292.6305.7301.4323.9
Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign
Affiliates, various issues. U.S. Department of Commerce. Bureau of Economic Analysis. Washington, U.S.
Govt. Print. Off.
While intrafirm trade among U.S. parent firms and their foreign affiliates
appears to be growing as a share of U.S. exports and imports, similar trade among
the U.S. affiliates of foreign firms and their foreign parents is declining. Figure 3
(page 18) shows that imports by the U.S. affiliates from their foreign parent firms
increased sharply in the 1980s as foreign investors poured billions of dollars into the
U.S. economy to establish new businesses and to acquire existing U.S. businesses.
During the 1990s, however, imports by the U.S. affiliates has trailed off by 13% as
a share of U.S. trade, while exports from these affiliates has shown little growth as

31Zeile, William J. U.S. Intrafirm Trade in Goods. Survey of Current Business,
February 1997. P. 24-29.

Figure 3. Shares of U.S. Exports and Imports Accounted for by
Intrafirm Trade (in percent)
Imports by U.S. affiliates from
their foreign parent group
Exports from U.S. parent companies
20to their foreign affiliates
15Imports by U.S. parent companies
from their foreign affiliates
Exports from U.S. affiliates to
their foreign parent group
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Source: Survey of Current Business
a share of U.S. trade since 1990, after growing by 45% between 1987 and 1992.32
By 1994, such exports accounted for 10% of U.S. trade.
Foreign Direct Investment and the U.S. Economy
Although the U.S.-based parent firms still comprise the largest share of
economic activity among U.S. multinational corporations (MNC), they have lost
shares both within the MNC and within the U.S. economy. Recent data indicate that
the foreign affiliates of U.S. parent firms increased their share of economic activity
within the whole multinational enterprise relative to that of the parent firm during the
1977-1995 period, when total U.S. direct investment abroad, or the U.S. direct
investment position, grew more than four times, from $146 billion to $797 billion.
During this same time period, the foreign affiliates’ share of total economic activity
within U.S. multinational corporations (MNCs), or their share of the combined
economic output of the U.S. parent and the foreign affiliates, increased by 13 %,33
rising from 22% to 25% of the firms’ total economic activity.

32Ibid., p. 27.
33Mataloni, Raymond J., Jr., and Mahnaz Fahim-Nader. Operations of U.S.
Multinational Companies: Preliminary Results From the 1994 Benchmark Survey. Survey

More significantly, the parent firms of U.S. multinational corporations, which
are predominantly manufacturing firms, lost market positions at home during the
1980s due in large part to the downsizing efforts of corporations as they sought to
improve their profits. The parent companies’ share of all U.S. business gross
domestic product (GDP), the broadest measure of total domestic economic activity,
declined from 32% in 1977 to 26% in 1989, where the share has remained constant.
The U.S.-based parent firms increased their shares of all private U.S. business GDP
in the petroleum industries, but they lost shares in the manufacturing sector at the
same time as the U.S. manufacturing sector declined from 30% of total private U.S.
business GDP in 1977 to 24% in 1989, where the share has remained constant34
through 1994, according to the latest data.
The relationship between overseas investment and domestic employment,
however, is less clear. There is no conclusive evidence that U.S.-based parent firms
shifted parts of their operations abroad specifically to reduce domestic employment
by replacing domestic production with imports. Indeed, given the tight U.S. labor
markets during much of the 1990s, some firms may have shifted operations abroad
in search of available labor. Commerce Department data indicate that imports have
doubled as a share of the output35 of U.S. multinational corporations between 1982
and 1995, as indicated in Table 4 (page 20), but imports from foreign affiliates still
account for only 3% of the total output of U.S. MNCs (the combined output of the
U.S. parents and the foreign affiliates). During the same period, local, or domestic,
content of U.S. MNC output fell 1%, from 95% to 94%.
In addition, employment among U.S. MNCs does not indicate a significant
shift of jobs, on the whole, from the U.S. parent firms to the offshore affiliates. This
lack of statistical support persists despite changes in the shares of economic activity
between parent firms and overseas affiliates, the relative decline of the domestic
manufacturing sector, and the rise in imports as a share of MNC output.
Employment at home and worldwide among U.S. MNCs over the 1982-1995 period
increased slightly, reflecting the corporate downsizing of many large U.S. parent
firms, which held down employment gains during much of the period. Employment
data also indicate that U.S. parent firms and their foreign affiliates lost or gained
employment in roughly the same industries.36
Recent analyses by several economists indicate that foreign subsidiary
employment in developing economies is not a substitute for employment at the U.S.-
based parent firm, but is a complement. Under these circumstances, employment in
both the parent and the subsidiary firms moves in the same direction. Employment
among foreign subsidiaries in developing countries, however, appears to be a

of Current Business, December 1996. P. 24.
34Mataloni, Raymond J., Jr. U.S. Multinational Companies: Operations in 1995.
Survey of Current Business, October 1997. P. 52.
35The output of U.S. MNCs reflects both gross product originating within the MNCs
(both U.S. parents and foreign affiliates) and gross product that originates elsewhere and is
embodied in intermediate inputs purchased from outside suppliers. Ibid., p. 48.
36Ibid, P. 47.

substitute for employment in countries with similar types of economies and skill
Table 4 Origin of Output of U.S. Multinational Firms by Industry,

1982 and 1995 (in percent)

1982 1995
Share of total output accounted for by:Share of total output accounted for by:
U.S.ImportsPur- U.S.ImportsPur-
parentof goodschases parentof goodschases
gross from from Local gross from from Local
product foreign outside content product foreign outside content
affiliates MNC affiliates MNC
All Indust. 34 2 64 95 32 3 65 94
Petroleum 24 2 74 91 29 2 69 90
Manufact. 42 2 56 96 35 5 60 92
Food 30 1 69 97 31 1 67 97
Chem. 39 1 60 97 38 2 60 94
Metals 38 1 61 97 34 2 64 95
Ind. mach. 53 2 45 97 30 11 59 85
Elect. 47 3 50 94 34 5 61 88
Trans. 39 7 54 92 34 11 55 88
Other 45 1 54 97 40 2 58 96
Wholesale11 1 89 93 11 1 88 86
Finance12 *DD11 *DD
Services 56 *DD50 *DD
Other 46 1 54 99 41 1 58 98
Source: Mataloni, Raymond J., Jr. U.S. Multinational Companies: Operations in 1995. Survey of Current Business,
October 1997, p. 49.
Despite the proliferation of bilateral investment treaties since the early 1980s,
there is little empirical evidence to date which offers conclusive evidence that such
treaties, by themselves, have a measurable impact on U.S. direct investment abroad
or on U.S. domestic business investment spending and employment. Concerns
persist among some groups, however, that bilateral investment treaties, or a new
multilateral investment agreement, could provide a strong impetus for U.S. firms to
shift major parts of their operations or employment abroad. No doubt, investment
treaties may influence some firms in some states or cities to shift parts of their
operations abroad, but the preponderance of analyses to date indicate that the overall

37Riker, David A., and S. Lael Brainard. U.S. Multinationals and Competition From
Low Wage Countries. NBER Working Paper 5959, National Bureau of Economic Research,
Cambridge, Ma. P. 18-20.

effects of inward and outward direct investment on the U.S. economy are positive.
This dichotomy between public concerns and empirical evidence may well stem from
the fact that the empirical evidence is generally not well known outside a relatively
small group of analysts and the public has arrived at some conclusions on its own
based on local, rather than on economy-wide, effects.
Indeed, at the local level, overseas investments by U.S. firms may well affect
jobs at a particular location or plant, upsetting communities dependent on such jobs.
For the U.S. economy as a whole, however, such job shifting ultimately will improve
workers’ jobs and incomes, as well as other economic choices. In an economy, such
as the U.S. economy, that has operated for some time at full employment beyond the
levels economists once thought of as the outmost limits, some firms may well search
overseas for workers not easily recruited at home. The range of factors firms
consider when they look overseas to invest is broad enough to encompass almost any
possibility, but the existence of investment treaties does not seem to rank very high
on the list.
A new multilateral agreement on investment will not necessarily replace all
of the existing bilateral investment agreements. Depending on how the MAI
negotiations proceed, the bilateral treaties may, in fact, be preferred to a multilateral
agreement that has jettisoned many of the provisions desired by the United States,
because the provisions proved to be too divisive on a multilateral basis. Regardless
of the form of any final multilateral agreement, bilateral and multilateral investment
treaties have not been shown to be major forces propelling U.S. direct investment
abroad. Such investment treaties, however, do reduce the risks for firms looking to
invest abroad and likely would be one factor that could encourage them to do so.
Under these circumstances, investment treaties likely alter the composition of direct
investment spending flowing to developing countries, particularly among those with
similar levels of economic development or similar levels of labor force skills.