FOREIGN DIRECT INVESTMENT IN THE UNITED STATES: AN ECONOMIC ANALYSIS OF THE DATA AND CURRENT ISSUES
CRS Report for Congress
Foreign Direct Investment in the United States: An
Economic Analysis of the Data and Current Issues
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Foreign investors poured record amounts (in nominal terms) of funds into U.S.
businesses and real estate in 1998 and 1999, continuing the expansion that began in 1993.
British investors lead all others; Europeans as a whole are the largest foreign direct1
investors, both in terms of annual investments and in terms of their cumulative holdings
of investments in the United States. Japanese investors have reduced their annual
investment expenditures in U.S. businesses, although they still rank as the second largest
foreign investors in the U.S. economy. Some Americans believe foreign investments
could eventually have a negative impact on the U.S. economy, but most economic
assessments indicate that foreign direct investment yields net national benefits to both the
recipient and the investing countries. By most measures, foreign investors have become
fully integrated into the U.S. economy and are indistinguishable in many ways from firms
that are wholly-owned by Americans. This report will be updated as events warrant.
Additional information on this and other trade-related issues is available from the CRS
Electronic Briefing Book on Trade at: [http://www.congress.gov/brbk/html/ebtra1.html].
Foreigners invested nearly $300 billion in direct investment, or investment in U. S.
businesses and real estate, in 1999, according to Commerce Department data,2 a three fold
increase over the record amount foreigners invested in 1997. The data for 1999 indicate
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 Bach, Christopher L. U.S. International Transactions, Fourth Quarter and Year 1999. Survey
of Current Business, April 2000. p. 174.
Congressional Research Service ˜ The Library of Congress
that foreigners are investing record sums on acquiring or establishing businesses in the
United States. The cumulative amount of foreign direct investment, or the position,3
increased by nearly $200 billion in 1998 and by close to $300 billion in 1999, when
adjusted for changes in the value of existing investments and currency values. As figure
1 shows, spending by foreigners on businesses and real estate in the United States during
the past two years has grown to levels that far surpass anything experienced previously.
As a share of the total amount of investment spending in the U.S. economy, investment
spending by foreign firms reached 17 % in 1999, exceeding the share such spending
accounted for in the U.S. economy in the late 1980s. Foreign firms' spending is being
sustained by growth in their reinvested earnings and in intercompany debt, but is arising
primarily from equity capital outlays that reflect a sharp increase in corporate merger and4
acquisition activity in the United States.
Figure 1. Foreign Direct Investment in the United States and
U.S. Direct Investment Abroad - Annual Flows, 1980-1999
(in billions of U.S. dollars)
3 The position 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.
4 At the same time, U.S. direct investment abroad rose in 1999 as U.S. parent firms increased their
acquisitions of foreign firms and their overall investment spending abroad. U.S. direct investment
abroad in 1999 totaled $152 billion (in nominal terms), a record for overseas investment by U.S.
With over $150 billion invested in businesses in the United States, Great Britain is
the largest foreign direct investor. Japan, with foreign direct investment of $133 billion
stands as the second largest investor. Sluggish economic growth and other economic
problems in Japan have caused Japanese firms at times to slow down their investment
spending in the United States to shore up their balance sheets back in Japan.5 Losses on
real estate and on parts of their U.S. operations also deterred Japanese investors.
Investment spending by other foreign firms, however, has been especially strong since the
mid-1990s, reflecting the continued fast-paced economic growth in the United States and
increases in U.S. productivity. Besides British and Japanese investors, Dutch, Canadian,
French, German, and Swiss investors have been investing heavily in U.S. businesses and
On a historical cost, or book value basis (value at the time of the initial investment),
foreign direct investment in the United States reached $812 billion in 1998, the latest year
for complete data.. This represents an 17% increase over 1997 in the overall direct
investment position of foreign investors. Table 1 (page 4) shows that investments by
developed economies account for nearly 92% of all foreign direct investment in the United
States. These investments are predominately in the manufacturing sector, which accounts
for about 41% of foreign direct investment in the United States. Another 14% 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. Other
sectors account for modest shares: insurance (10.0%), the petroleum sector (7.0%),
services (6.2%), finance (6.0%), and real estate (5.5%).
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. By year end 1998, 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. Japan is the single largest foreign investor in U.S. real estate, nearly equalling
the value of all European holdings. In addition, the Swiss, the Dutch, and the British are
the largest foreign investors in the insurance sector. Japan's $26 billion investment in the
U.S. banking and finance sectors is more than twice as large as comparable investments
by any European country and means that the Japanese are the single largest foreign
investor in those sectors. Foreign direct investment in the manufacturing sector is also
represented by a relatively small number of countries: investments by the United Kingdom,
the Netherlands, Japan, Germany, and France account for 71% of the total amount of
foreign direct investment in this sector.
5 U.S. Library of Congress. Congressional Research Service. Japan's Economy: From Bubble
to Bust. CRS Report 94-226 E, by James K. Jackson.
Table 1. Foreign Direct Investment Position in the United States on a
Historical-Cost Basis at Year-end 1998 (in millions of U.S. dollars)
AllPetro- Manufac-Whole-RetailBank-Fin-Insur-RealServi- Other
Indust-leumturing sale tradeinganceanceestatecesindus-
All countries 811,75653,254329,34696,26118,77844,78550,85880,37844,43650,25243,409
U. K. 151,33526,27764,02210,0993,8943,2101,95714,2651,80112,05813,752
Africa 884 -4 -90 21 17 47 432 0 116 234 111
Asia 156,085 2,720 45,096 45,598 1,954 10,988 19,307 1,416 13,101 9,469 6,436
Note: The position is the book value of foreign direct investors' equity in, and net outstanding loans to, their
U.S. affiliates. A negative position may result as U.S. affiliates repay debts to their foreign parents, and as foreign
parents borrow funds from their U.S. affiliates. D indicates that data have been suppressed by the Department of
Commerce to avoid the disclosure of data of individual companies.
Source: Lowe, Jeffrey H. Foreign Direct Investment in the United States: Detail for Historical-Cost Position
and Related Capital and Income Flows, 1998. Survey of Current Business, September, 1999. p. 37.
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 adds little, if any, new employment. In 1998, outlays for new
investments, which include investments made directly by foreign investors and those made
by existing U.S. affiliates, rose by 250% from the amount invested in 1997 to $200 billion
(in nominal terms). Acquisitions of existing U.S. firms accounted for 62% of the new
investments by number and 90% by value, while investments by U.S. affiliates accounted
for 78% of the transactions by investor.6 Part of the increase in foreign investment to
acquire or establish new establishments can be traced to a substantial increase in very large
investments. The number of investments over $2 billion rose from 3 in 1997 to 12 in
6 Fahim-Nader, Mahnaze. Foreign Direct Investment in the United States: New Investments in 1998.
Survey of Current Business, June 1999. p. 16-23.
Included among these investments are the purchase of Amoco Corporation by British
Petroleum PLC. for $55 billion and Daimler-Benz AG’s acquisition of the Chrysler
Corporation for $40 billion.
By year-end1997, the latest year for which detailed data are available, foreign firms
employed 5 million Americans, about 5% of U.S. employment, and owned over 9
thousand business establishments.7 In 1997, 45% 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. The affiliates of foreign firms spent $100 billion in the
United States in 1997 on new plant and equipment and $20 billion on research and
development. 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 6.0%. 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 only 3.4% of all U.S.
manufacturing establishments, they have 14% more value added on average and 15%
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 the fact that there are no
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.
The 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.
7 Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign
Companies, Preliminary 1997 Estimates. Bureau of Economic Analysis, 1999, Table A-1.
Foreign direct investment in the United States far surpasses the record-breaking
amounts set in the 19890s, when both Congress and the American public expressed
concerns over the potential economic impact of such investments. Presently, public
concerns seem to be focused not so much on foreign direct investment per se, but on the
overall phenomenon referred to as”globalization.” Within this context, these concerns
seem not to stem from potential losses of international competitiveness that characterized
similar concerns in the 1980s. Instead, concerns over foreign direct investment seem to
arise from potential job losses that could result from mergers and acquisitions, although
such losses could occur wether the acquiring company was foreign- or U.S.-owned.
Looking ahead, the pace of economic growth in U.S. and foreign economies and the
resultant pull between domestic sources of and demands for capital determine the role and
amount of foreign capital in the economy. Within this broader context, the federal
government's budget deficits or surpluses relative to the credit conditions in the rest of the
economy also influence capital conditions in the economy and the importance of foreign
capital. In addition to credit conditions, foreign direct investment seems to be tied closely
to the overall performance of the economy and will rise and fall with economic conditions.
Strong economic growth, such as the United States has experienced over the last six years,
increases direct investment by attracting new investments and by encouraging firms to
reinvest profits in their U.S. operations.
As long as the U.S. economy continues growing at favorable rates and the rate of
price inflation stays in check, foreign direct investment in the United States likely will grow
in nominal terms as it has since 1992. It seems unlikely, however, that the pace set over
the last two years can be sustained. Additional increases in interest rates by the Federal
Reserve could restrain corporate profits, reducing somewhat the attractiveness of
additional large-scale investments. Moreover, a slow pick-up in economic growth in
Europe could make investments there more attractive and compete for funds that
European investors have been placing in investments in the U.S. economy. Additionally,
a long-expected slow down in the annual growth rate of the U.S. economy likely would
reduce activity in the mergers and acquisitions market as well and, thereby, reduce the
pace of foreign direct investment.