Foreign Direct Investment: Current Issues

Foreign Direct Investment:
Current Issues
Updated July 14, 2008
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Foreign Direct Investment: Current Issues
The United States is the largest recipient of foreign direct investment in the
world and the largest investor abroad. As a result of this dual role, the United States
has led negotiations in various international forums to remove restrictions on foreign
investment and other market-distorting measures to maximize the benefits of such
investment. In 2006, foreign investors spent $184 billion investing in U.S.
businesses and real estate, the highest amount foreign investors have spent since


Within the economy, foreign direct investment is sparking a mixed reaction.
Although the environment for foreign investors is still friendly, some Members of
Congress and some in the public argue that the events of September 11, 2001, raise
new concerns about the nation’s economic security that challenges the traditionally
open policy the United States has had toward foreign investment, particularly foreign
investment in critical industries and in sectors that are vital to homeland security. As
part of these concerns, Congress is considering legislation that would revamp the
Committee on Foreign Investment in the United States (CFIUS), an interagency
committee housed in the Treasury Department that has served Presidents since 1975
as the chief federal government organization responsible for overseeing the national
security implications of foreign investment in the economy. In contrast to these
actions, the International Trade Administration of the Department of Commerce
announced on March 7, 2007, that it was creating a new initiative: Invest in America.
The initiative appears to depart from the long-standing U.S. policy of official
neutrality toward inward and outward direct investment by having the federal
government actively internationally promoting the United States as a foreign direct
investment destination. It also will serve as the primary U.S. government mechanism
responsible for managing inward investment.
This report presents an overview of current issues related to foreign direct
investment in the economy and the development of U.S. policy toward inward and
outward direct investment. This report also assesses the role of foreign direct
investment in the economy and the costs and benefits of direct investment. This
report will be updated as events warrant.

Overview ........................................................1
U.S. Policy Toward Direct Investment.................................3
Exon-Florio Provision..........................................6
Trade Act of 2002.............................................6
September 11, 2001............................................7
Special Security Arrangements...................................8
Strategic Materials Protection Board...............................8
Administrative Changes........................................10
Invest in America.............................................10
Legislation in the 110th Congress.................................12
Federal-State Relations........................................13
Foreign Direct Investment in the U.S. Economy.........................13
The Costs and Benefits of Foreign Direct Investment.....................14
Conclusions .....................................................22
List of Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct
Investment Abroad, Annual Flows, 1990-2007.......................2
Figure 2. U.S. Acquisitions of Foreign Companies......................21
Figure 3. Foreign Acquisitions of U.S. Companies......................22
List of Tables
Table 1. Foreign Direct Investment Inward Position.....................15
Table 2. Select Data on U.S. Multinational Companies and on Foreign Firms
Operating in the United States, 2004.............................17
Table 3. U.S. Direct Investment Abroad and Foreign Direct Investment in the
U.S. Economy, Annual Flows 1999-2006.........................19
Table 4. U.S. Businesses Acquired or Established by Foreign Investors......20
Table 5. U.S. and Foreign Acquisition Activity, 1997-2006...............20

Foreign Direct Investment: Current Issues
In 2006, the proposed acquisitions of major operations in six major U.S. ports
by Dubai Ports World (DP World) and of Unocal by the China National Offshore Oil
Corporation (CNOOC) sparked intense concerns among some Members of Congress
and generated a debate over what role foreign investment, particularly foreign
acquisitions of certain types of firms, plays in U.S. national security. The United
States actively promotes the national treatment of foreign investors as an
international standard. This open-door policy stands in marked contrast to several
provisions of law, various Executive Orders, and extensive efforts aimed at limiting
foreign access to the Nation’s industrial base, especially in sectors deemed to be
critical to the economy or to areas of importance to national security. In addition,
some Members of Congress and others are concerned about the extent to which
foreign government-owned companies should be allowed access to the Nation’s
industrial base and technology through foreign direct investment.
The United States is unique in that it is the largest foreign direct investor in the
world and also the largest recipient of foreign direct investment. This dual role
means that globalization, or the spread of economic activity by firms across national
borders, has become a prominent feature of the U.S. economy and that through direct
investment the U.S. economy has become highly enmeshed with the broader global
economy. Foreigners invested $180 billion in U.S. businesses and real estate in 2006
and invested $277 billion in 2007, according to data published by the Department of
Commerce,1 as Figure 1 shows. The rise in the value of foreign direct investment
includes an upward valuation adjustment of existing investments. According to the
United Nation’s World Investment Report,2 global foreign direct investment flows
increased by 38% in 2006, 29% in 2005, and 27% in 2004, after three years of
declining flows.
New spending by U.S. firms on businesses and real estate abroad, or U.S. direct
investment abroad,3 rose sharply in 2006 to $235 billion up from the $8 billion net

1 Bach, Christopher L., U.S. International Transactions in 2007. Survey of Current
Business, April 2008, p. 48. 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.
2 United Nations Conference on Trade and Development, World Investment Report 2007,
United Nations, 2007. P. 3.
3 The 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

in 2005. New investments in 2007 likely exceeded $330 billion, according to
balance of payments data published by the Department of Commerce.4 The drop in
U.S. direct investment abroad in 2005 reflects actions by U.S. parent firms to reduce
the amount of reinvested earnings going to their foreign affiliates for distribution to
the U.S. parent firms in order to take advantage of one-time tax provisions in the
American Jobs Creation Act of 2004 (P.L. 108-357).
Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows, 1990-2007

Billions of dollars
$300Foreign Direct Investment in the United States
$150U.S. Direct InvestmentAbroad
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: CRS from U.S. Department of Commerce data
Note: the drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent
companies to take advantage of a one-time tax provision.
The cumulative amount, or stock, of foreign direct investment in the United
States on a historical cost basis5 increased by $195 billion in 2006 to about $1.8
trillion. This marks an 8% increase over the previous year and a significant change
3 (...continued)
equivalent interest in an unincorporated business enterprise. 15 CFR § 806.15 (a)(1).
4 Bach, Christopher L., U.S. International Transactions in 2007, p. 48.
5 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 $231 billion and $416 billion in 2006,
respectively, to reach $2.1 and $3.2 trillion.

from the decline in foreign investment spending that has occurred since 2000.6 The
rise in the value of foreign direct investment includes an upward valuation
adjustment of existing investments and increased investment spending that was
driven by the relatively stronger 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, information and depository institutions as overseas banks and finance
and insurance companies sought access to the profitable U.S. financial market.7
U.S. Policy Toward Direct Investment
With some exceptions for national security,8 the United States has long been
considered one of the most receptive economies in the world to foreign direct
investment. Indeed, over the past 50 years, the United States has led efforts to
negotiate internationally for reduced restrictions on foreign direct investment, for
greater controls over incentives offered to foreign investors, and for equal treatment
under law of foreign and domestic investors. In 1977, the Carter Administration
issued a policy statement on foreign direct investment that can be summarized by the
neutrality clause: the United States will neither encourage nor discourage the inflow
or outflow of international investment. The policy statement also indicated that
international investment will generally result in the most efficient allocation of
economic resources if it is allowed to flow according to market forces; there is
no basis for concluding that a general policy of actively promoting or
discouraging international investment would further the U.S. national interest;
unilateral U.S. Government intervention in the international investment process
could prompt counteractions by other governments with adverse effects on the
U.S. economy and U.S. foreign policy; and the United States has an important
interest in seeking to assure that established investors receive equitable and non-9
discriminatory treatment from host governments.
This statement is based on an assessment that the free flow of international
investment generally will result in the most efficient allocation of economic resources
if it is allowed to flow according to market forces. During the Reagan
Administration, the neutrality statement was clarified to include three related
objectives. These objectives include the liberalization of barriers and the reduction
of distortions to international investments abroad, the encouragement of a greater role
for private foreign investment in the economic development of less developed

6 Ibarra, Marilyn, and Jennifer L. Koncz, Direct Investment Positions for 2006: Country and
Industry Detail, Survey of Current Business, July, 2007. p. 21.
7 McNeil, Lawrence R., Foreign Direct Investment in the United States: New Investment in

2006, Survey of Current Business, June 2007, p. 46-48.

8 CRS Report RL33103 Foreign Investment in the United States: Major Federal Statutory
Restrictions, by Michael V. Seitzinger.
9 U.S. Congress. House of Representatives. Committee on Government Operations. The
Operations of Federal Agencies in Monitoring, Reporting on, and Analyzing Foreignthst
Investments in the United States. Hearings. 96 Cong., 1. Sess., Part 3, July 30, 1979.
Washington, U.S. Govt. Print. Off., 1979. p. 60-61.

countries (LDCs), and the maintenance of the maximum degree of openness of the
U.S. economy to the contribution of foreign direct investment.10
The Clinton Administration’s policy toward inward and outward direct
investment can best be characterized by its support for the Multilateral Agreement
on Investment (MAI).11 The Agreement was expected to be a comprehensive
international agreement on foreign investment among the most economically
developed countries in the world, as represented by the Organization for Economic
Cooperation and Development (OECD). In addition, the Agreement was intended
to address various issues, including formal barriers to direct investment,
discriminatory treatment, dispute settlement mechanisms, and legal and regulatory
uncertainties abroad, that hamper the flow of investment funds. Ultimately, a range
of unresolved issues among the OECD Ministers combined with concerns by some
groups in the United States to undermine support for the Agreement. In particular,
some groups were concerned that the requirement for “national treatment” in the
Agreement could have created legal problems for state and local governments that
enforce environmental, labor, and other corporate practices that could have been
considered discriminatory.
On May 10, 2007, President Bush released his policy statement on open
economies.12 The statement offered strong support for the international flow of
direct investment. In part, the statement reads:
A free and open international investment regime is vital for a stable and growing
economy, both here at home and throughout the world. The threat of global
terrorism and other national security challenges have caused the United States
and other countries to focus more intently on the national security dimensions of
foreign investment. While my Administration will continue to take every
necessary step to protect national security, my Administration recognizes that our
prosperity and security are founded on our country’s openness.
As both the world’s largest investor and the world’s largest recipient of
investment, the United States has a key stake in promoting an open investment
regime. The United States unequivocally supports international investment in this
country and is equally committed to securing fair, equitable, and
nondiscriminatory treatment for U.S. investors abroad. Both inbound and
outbound investment benefit our country by stimulating growth, creating jobs,
enhancing productivity, and fostering competitiveness that allows our companies
and their workers to prosper at home and in international markets. My
Administration is committed to ensuring that the United States continues to be
the most attractive place in the world to invest. I urge other nations to join us in
supporting an open investment policy and protecting international investments.

10 Public Papers of the Presidents of the United States. Ronald Reagan, 1983, Book II, p.


11 Economic Report of the President, February 1998. p. 258-260.
12 President Bush’s statement is available at
[ ht t p: / / www.whi t e news/ r el eases/ 2007/ 05/ ml ]

In addition to this statement of general support, the Bush Administration issued a
policy statement that commits the Administration to four objectives:
!Reinforce the principle that a domestic climate conducive to foreign
investment strengthens national security. Meeting the challenges of
a post-9/11 world need not require securing one at the expense of the
other. The United States recognizes that growing inflows of foreign
investment are necessary to expand levels of employment,
innovation, and competitiveness in this country. Only those
safeguards that are clearly necessary to protect our national security
should be maintained.
!Actively target unreasonable and discriminatory barriers to
investment. The United States encourages a broad acceptance of the
national-treatment principle in all countries and places a premium on
the protection of U.S. investments abroad. The United States
opposes measures that distort international investment flows,
including trade-related or other performance requirements,
discriminatory treatment of foreign investment, and expropriation
without compensation. In turn, when countries promise to protect
investment and eliminate such distortions, investors must have the
ability to enforce those binding promises in neutral international
settings that are free from the political intervention of governments.
Further, countries need to be responsive to the needs of investors for
access to innovative cross-border financial services. The United
States will continue to allow foreign investors open and fair access
to investment opportunities under our statutes and regulations and
in accordance with international law, and will continue to welcome
investment through programs such as the Invest in America
!Work with our partners in the WTO to strengthen the rules-based
trading system so that it continues to promote open markets, trade
reform and new opportunities for development and growth. My
Administration is committed to completing the Doha Development
Round with an agreement that opens markets for goods and services,
ensures reform of agriculture and strengthens WTO rules, including
in key areas such as trade facilitation. The predictability, certainty,
and transparency of the system enhance opportunities for
international investment by building investor confidence.
!Promote an international environment in which international
investment can make the greatest contribution to the development
process. The United States has initiated the Millennium Challenge
Account, which assists developing countries that create and maintain
sound policy environments, including governing justly, investing in
people, and encouraging economic freedoms. Through our bilateral
and multilateral economic assistance programs, the United States
will continue to explore ways to increase both public and private
capital flows and support international investment in the developing

world. As countries continue to adopt free market principles and
democratic reforms, international investment is necessary to nurture
market-oriented development and reduce debt service burdens.
Economic freedom is one of the single greatest antidotes to poverty
worldwide, and a positive link exists between the liberalization of
investment flows and greater international trade.
Exon-Florio Provision
While U.S. policy toward inward and outward direct investment generally has
adhered to the overall objective of treating such investment impartially, there have
been a number of notable exceptions. In 1988, Congress approved the Exon-Florio
provision as part of the Omnibus Trade Act.13 The Exon-Florio provision grants the
President broad discretionary authority to take what action he considers to be
“appropriate” to suspend or prohibit proposed or pending foreign acquisitions,
mergers, or takeovers “of persons engaged in interstate commerce in the United
States” which “threaten to impair the national security.” In this act, national security
was not defined, but was meant to be interpreted broadly. Through Executive Order
12661, President Reagan implemented provisions of the Omnibus Trade Act, and he
delegated his authority to administer the Exon-Florio provision to the Committee on
Foreign Investment in the United States (CFIUS),14 particularly to conduct reviews
of foreign investment, to undertake investigations, and to make recommendations.
The Committee has 30 days to decide whether to investigate a case and an additional
45 days to make its recommendation. Once the recommendation is made, the
President has 15 days to act.
Trade Act of 2002
In the Trade Act of 2002 (P.L. 107-210), U.S. policy toward foreign direct
investment was clarified through a list of objectives that are intended to direct the
work of U.S. trade negotiations on foreign investment. In particular, U.S. negotiators
were directed to “reduce or eliminate artificial or trade-distorting barriers to foreign
investment, while ensuring that foreign investors in the United States are not
accorded greater substantive rights with respect to investment protections than United
States investors in the United States, and to secure for investors important rights
comparable to those that would be available under United States legal principles and
practice.” In order to accomplish these objectives, the act specifies eight issues,
including reducing or eliminating exceptions to the principle of national treatment;
freeing the transfer of funds relating to investments; reducing or eliminating
performance requirements, forced technology transfers, and other unreasonable
barriers to the establishment and operation of investments; establishing standards for
expropriation and compensation for expropriation; establishing standards for fair and
equitable treatment; providing meaningful procedures for resolving investment
disputes; improving mechanisms used to resolve disputes between an investor and

13 P.L. 100-418, title V, Subtitle A, Part II, or 50 U.S.C. app 2170.
14 Executive Order 12661 of December 27, 1988, 54 F.R. 779.

a government; and ensuring the fullest measure of transparency in the dispute
settlement mechanism.
September 11, 2001
Arguably, the events of September 11, 2001, have reshaped Congressional
attitudes toward the Exon-Florio provision that became apparent in 2006 as a result
of the public disclosure that Dubai Ports World15 was attempting to purchase the
British-owned P&O Ports,16 with operations in various U.S. ports. After the
September 11th terrorist attacks Congress passed and President Bush signed the USA
PATRIOT Act of 2001 (Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism).17 In this act,
Congress provided for special support for “critical industries,” which it defined as:
systems and assets, whether physical or virtual, so vital to the United States that
the incapacity or destruction of such systems and assets would have a debilitating
impact on security, national economic security, national public health or safety,18
or any combination of those matters.
This broad definition is enhanced to some degree by other provisions of the act,
which specifically identify certain sectors of the economy that are likely candidates
for consideration as critical infrastructure. These sectors include
telecommunications, energy, financial services, water, transportation sectors,19 and
the “cyber and physical infrastructure services critical to maintaining the national
defense, continuity of government, economic prosperity, and quality of life in the20
United States.” The following year, Congress adopted the language in the Patriot
Act on critical infrastructure into The Homeland Security Act of 2002.21
By adopting the terms “critical infrastructure” and “homeland security,”
following the events of September 11, 2001, Congress demonstrated that the attacks
fundamentally altered the way many policymakers view the concept of national
security. As a result, many policymakers have concluded that economic activities are
a separately identifiable component of national security. In addition, many
policymakers apparently perceive greater risks to the economy rising from foreign

15 Dubai Ports World was created in November 2005 by integrating Dubai Ports Authority
and Dubai Ports International. It is one of the largest commercial port operators in the world
with operations in the Middle East, India, Europe, Asia, Latin America, the Carribean, and
North America.
16 Peninsular and Oriental Steam Company is a leading ports operator and transport
company with operations in ports, ferries, and property development. It operates container
terminals and logistics operations in over 100 ports and has a presence in 18 countries.
17 P.L. 107-56, title X, Sec. 1014, October 26, 2001; 42 U.S.C. Sec. 5195c(e).
18 Ibid.
19 42 U.S.C. Sec. 5195c(b)(2).
20 42 U.S.C. Sec. 5195c(b)(3).
21 6 U.S.C. Sec. 101(4).

investments in which the foreign investor is owned or controlled by foreign
governments as a result of the terrorist attacks. The Dubai Ports World case, in
particular, demonstrated that there was a difference between the post-September 11
expectations held by many in Congress about the role of foreign investment in the
economy and of economic infrastructure issues as a component of national security
and the operations of CFIUS. For some Members of Congress, CFIUS seemed to be
out of touch with the post-September 11, 2001 view of national security, because it
remains founded in the late 1980s orientation of the Exon-Florio provision, which
views national security primarily in terms of national defense and downplays or even
excludes a broader notion of economic national security.
Special Security Arrangements
Much of the recent debate concerning foreign direct investment in the U.S.
economy has focused on the activities of the Committee on Foreign Investment in the
United States and on the Exon-Florio provision. The CFIUS process, however, is
just one of three major provisions of law that authorize the review of foreign direct
investment transactions for their impact on the economy. The National Industrial
Security Program and the critical industries provisions of various statutes also require
that foreign direct investment transactions be reviewed. Generally, the reviews
mandated by these three provisions operate independently, although at times they
have overlapped. The provisions illustrate the complexities involved in defining
most economic activities, which can span a broad range of economic activities and
fields. Most economic activities affect various sectors and segments of the economy
in ways that defy a narrow definition and complicate efforts to distinguish those
economic activities that are related to the broad rubric of national security or to
national economic security, which is even less clearly defined.
Strategic Materials Protection Board
Creation of the Strategic Materials Protection Board in 2006 could restrict other
foreign investment transactions, although this likely will affect a small group of such
transactions. In retrospect, some observers hope this provision will prevent future
transactions similar to the merger between Magnequench International and the
Canadian-owned firm AMR Technologies, Inc., which shifted ownership of the
world’s largest producer of Neo powder (composed of neodymium, iron, and boron)
to produce Neo magnets.22 The Strategic Materials Protection Board was mandated
by Title VIII of the John Warner National Defense Authorization Act for FY2007,
signed October 17, 2006 and designated as P.L. 109-364. The act established that the
Strategic Materials Protection Board would be composed of representatives from: the
Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology,

22 Neo magnets have a broad range of uses in products where strong magnetic properties are
required in conjunction with small size and weight, including hard disk drives, optical disk
drives, printers, faxes, scanners, camcorders, game consoles, pagers, PDA’s, mobile phones,
mp3 players, video recorders, transmission speed sensors in automobiles, airbag sensors,
instrument gauges, bearings, generators, cordless power tools, refrigerators, air conditioners,
and such military applications as magnets in the motors of the U.S. Joint Direct Attack
Munition, or smart bombs.

and Logistics; the Under Secretary of Defense for Intelligence; the Secretary of the
Army; the Secretary of the Navy; the Secretary of the Air Force. The Board is
required to meet at least once every two years to make recommendations regarding
materials critical to national security and to report to Congress on the results of
meetings and on the recommendations of the Board. In addition, the act prohibits the
Department of Defense from buying “strategic materials critical to national security”
unless the metals are reprocessed, reused, or produced in the United States, except
under a number of conditions, including the lack of availability of speciality metals.
The Board is directed in the statute to undertake four activities:
1) Determine the need to provide a long term domestic supply of materials
designated as critical to national security to ensure that national defense needs
are met.
2) Analyze the risk associated with each material designated as critical to
national security and the effect on national defense that the non-availability of
such material from a domestic source would have.
3) Recommend a strategy to the President to ensure the domestic availability of
materials designated as critical to national security.
4) Recommend such other strategies to the President as the board considers
appropriate to strengthen the industrial base with respect to materials critical to
national security.
The Strategic Materials Protection Board met on July 17, 2007 and published
a report in September 2007 of that meeting. At that meeting, the Board determined
that the term “materials critical to national security” would mean “strategic materials
critical to national security” as specified in the statute and would include those metals
listed in Section 842 of P.L. 109-364 (10 U.S.C. 2533b). In this section, speciality
metals are defined as:
1) Steel
A) with a maximum alloy content exceeding one of more of the following
limits: manganese, 1.65 percent; silicon, 0.60; or copper, 0.60 percent; or
B) containing more than 0.25 percent of any of the following elements;
aluminum, chromium, cobalt, columbium, molybdenum, nickel, titanium,
tungsten, or vanadium,
2) Metal alloys consisting of nickel, iron-nickel, and cobalt base alloys
containing a total of other alloying metals (except iron) in excess of 10 percent.

3) Titanium and titanium alloys.

4) Zirconium and zirconium base alloys.

As indicated from this list of speciality metals, the Strategic Materials Protection
Board has not listed Neo magnets as a strategic material critical to national defense

because the key ingredients in such magnets, neodymium, iron, and boron are not
listed as strategic materials in the statute.
Administrative Changes
Activity within Congress and the intense public and congressional reaction that
arose from the proposed Dubai Ports World acquisition spurred the Bush
Administration in late 2006 to make an important administrative change in the way
CFIUS reviews foreign investment transactions. CFIUS and President Bush
approved the acquisition of Lucent Technologies, Inc. by the French-based Alcatel
SA, which was completed on December 1, 2006. Before the transaction was
approved by CFIUS, however, Alcatel-Lucent was required to agree to a national
security arrangement, known as a Special Security Arrangement, or SSA, that
restricts Alcatel’s access to sensitive work done by Lucent’s research arm, Bell Labs,
and the communications infrastructure in the United States.
The most controversial feature of this arrangement is that it allows CFIUS to
reopen a review of the deal and to overturn its approval at any time if CFIUS believes
the companies “materially fail to comply” with the terms of the arrangement. This
marks a significant change in the CFIUS process. Prior to this transaction, a CFIUS
review or investigation had been portrayed, and had been considered, to be final. As
a result, firms were willing to subject themselves voluntarily to a CFIUS review,
because they believed that once an investment transaction was scrutinized and
approved by the members of CFIUS the firms could be assured that the investment
transaction would be exempt from any future reviews or actions. This administrative
change, however, means that a CFIUS determination may no longer be a final
decision and it adds a new level of uncertainty to foreign investors seeking to acquire
U.S. firms. A broad range of U.S. and international business groups are objecting to
this change in the Bush Administration’s policy.23
Invest in America
On March 7, 2007, the International Trade Administration (ITA) announced that
it will undertake a new Invest in America initiative aimed at attracting foreign direct
investment.24 In making this announcement, ITA officials argued that:
...the United States does not have a federal government program to attract or
retain inward foreign investment. All other major economies have mechanisms
such as investment boards and investment promotion activities to encourage

23 Kirchgaessner, Stephanie, US Threat to Reopen Terms of Lucent and Alcatel Deal
Mergers, Financial Times, December 1, 2006. p. 19; Pelofsky, Jeremy, Businesses Object
to US Move on Foreign Investment, Reuters News, December 5, 2006.
24 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).

FDI... This historically passive role toward FDI is increasingly anachronistic.25
These officials also indicated that:
...if we do not play an active role in promoting inward investment, we are at risk
of having our investment climate perceived around the world only by the
occasional difficulty...The United States Government needs to take the role of
FDI seriously. We need to make clear that as a matter of policy, we welcome
foreign investment in the United States.
According to the ITA announcement, the initiative will have three key
responsibilities: (1) outreach to the international investment community; (2) serve as
an ombudsman in Washington, DC, for the concerns of the international investment
community as well as work on policy issues that affect the attractiveness of the
United States to foreign investment; and (3) supporting state and local governments
engaged in foreign investment promotion. In addition to these responsibilities the
initiative is to create a task force within the International Trade Administration to
educate and coordinate the efforts of ITA employees in offices around the world on
foreign investment. There is no indication so far if any additional budgetary
resources may be necessary to accomplish the goals of this initiative.
According to the ITA, attracting foreign direct investment to the U.S. economy
is important for the following reasons.
!Foreign direct investment creates jobs in the economy: the U.S.
affiliates of foreign companies employ 5.5 million U.S. workers.
!It boosts wages because the U.S. affiliates of foreign companies tend
to pay higher wages than U.S. companies.
!Foreign direct investment strengthens U.S. manufacturing: 41
percent of the jobs related to U.S. affiliates of foreign companies are
in the manufacturing sector.
!Foreign direct investment brings in new research, which often is
adopted by locally-owned companies.
!Such investment contributes to rising U.S. productivity:
!Foreign direct investment contributes to U.S. tax revenues In 2004,
foreign affiliates paid $44 billion in taxes.
!Foreign direct investment can help U.S. companies penetrate foreign
markets and increase U.S. exports.

25 Lavin, Frank L., Role of Foreign Investment in U.S. Economic Growth, March 7, 2007.
P. 1. Available at [].

!Inward investment helps keep U.S. interest rates low, because the
inflow of foreign capital decreases the cost of borrowing money for
domestic firms.
Legislation in the 110th Congress
During the 109th Congress, Members introduced over two dozen measures26 to
address various issues with foreign direct investment in the United States following
the proposed acquisition by Dubai Ports World. Of the measures that were
introduced, H.R. 5337 and S. 3549 from the House and Senate, respectively,
garnered significant support and passed their respective bodies on July 26, 2006. Theth
109 Congress ended before a Conference Committee was convened on H.R. 5337
or S. 3549 and both measures lapsed. In the 1st session of the 110th Congress,
Congresswoman Maloney introduced H.R. 556, the National Security Foreign
Investment Reform and Strengthened Transparency Act of 2007, on January 18,
2007. The measure was approved by the House Financial Services Committee on
February 13, 2007 with amendments, and was approved with amendments by the full
House on February 28, 2007 by a vote of 423 to 0. On June 13, 2007, Senator Dodd
introduced S. 1610, the Foreign Investment and National security Act of 2007. On
June 29, 2007, the Senate adopted S. 1610 in lieu of H.R. 556 by unanimous consent.
On July 11, 2007, the House accepted the Senate’s version of H.R. 556 by a vote of
370-45 and sent the measure to the President, who signed it on July 26, 2007. It is
designated as P.L. 110-49.
The measure changes current procedures by requiring CFIUS to investigate all
foreign investment transactions in which the foreign person is owned or controlled
by a foreign government, regardless of the nature of the business. Foreign investors
may regard this approach as an important policy change by the United States toward
foreign investment. Previously, foreign investment transactions were presumed to
be acceptable and to provide a positive contribution to the economy. As a result of
this presumption, the burden was on the members of CFIUS to prove that particular
transactions threaten national security. Foreign investors, however, might view P.L.
110-49 as reversing previous policy, because it shifts the burden onto firms to prove
that they are not a threat to national security because they are owned or controlled by
a foreign government. Although the number of investment transactions a year in
which the foreign investor is associated with a foreign government is small compared
with the total number of foreign investment transactions, foreign investors and
foreign governments likely will view this as a significant change in the traditional
U.S. approach to foreign investment.
P.L. 110-49 also increases the role of congressional oversight by requiring
greater reporting by CFIUS on its actions either during or after it completes reviews
and investigations and by increasing reporting requirements on CFIUS. The measure
requires CFIUS to provide Congress with a greater amount of detailed information
about its operations and it amended the CFIUS statute regarding the meaning of
national security. The law requires the Director of National Intelligence to conduct

26 CRS Report RL33312, The Exon-Florio National Security Test for Foreign Investment,
by James K. Jackson.

reviews of any investment that poses a threat to the national security. The law also
provides for additional factors the President and CFIUS are required to use in
assessing foreign investments. In particular, the bill added implications for the
nation’s critical infrastructure as a factor for reviewing or investigating an investment
Federal-State Relations
U.S. policy toward foreign direct investment also has been complicated by the
interplay between state and local governments and the federal government. Since the
end of World War II, U.S. policy toward direct investment has been one of neutrality
by the federal government, while leading international negotiations to reduce
restrictions by other countries on U.S. direct investment abroad. At home, the federal
government has taken no role in coordinating or regulating the activities of state and
local governments as they have developed and carried out their individual approaches
toward attracting foreign direct investment to their jurisdictions.
More than two-thirds of state government and numerous local governments have
developed their own initiatives to attract foreign investors to their jurisdictions.
Indeed, numerous jurisdictions have offered foreign firms tax and financial incentives
and they have competed against other jurisdictions for the investment dollars and
jobs that accompany such foreign investment. This conflict between the federal
government’s stance of neutrality relative to the aggressive actions of state and local
governments in attracting foreign investment has been criticized by other foreign
governments that question the value of entering into agreements with the federal
government without being guaranteed that the federal government will exercise
control over the activities of state and local governments.
In addition, various foreign governments have questioned the motives of U.S.
negotiators who have pressed them in international forums to eliminate the various
tax and financial benefits they offer multinational firms to locate within their
jurisdictions, because they argue that such incentives distort the investment market.
At the same time, they argue that the U.S. federal government seemingly makes no
effort to curtail the considerable tax and financial incentives many state and local
governments offer to win foreign investment commitments. It is unclear how the
Invest in America initiative will coordinate with state and local governments that are
accustomed to operating on their own and to competing fiercely with one another in
attracting foreign investors.
Foreign Direct Investment in the U.S. Economy
Foreigners invest in the U.S. economy in a number of ways and for a number
of reasons. These investments can be divided roughly into two broad categories,
portfolio investments, or investments in corporate stocks and bonds and U.S.
government securities, and direct investment, or investments in U.S. businesses and
real estate. In 2006, foreigners invested nearly $1.8 trillion dollars in the U.S.
economy, $184 billion of which was in direct investment, with the rest of the funds
invested in the broader category of portfolio investment. Typically, the Department

of the Treasury tracks portfolio investments since a substantial part of these
investments is in U.S. Treasury securities. The Treasury Department has shared
responsibilities for tracking direct investment with the Department of Commerce,
because the Commerce Department’s Bureau of Economic Analysis conducts surveys
of direct investment that provide the basic data on such investments. The Treasury
Department, however, takes the lead in negotiating international agreements on the
treatment of direct investment and it chairs the inter-agency Committee on Foreign
Investment in the United States, which represents the President as the chief federal
government organization responsible for overseeing the national security
implications of foreign investment in the economy.27
The United States is widely recognized as the premier location for foreign firms
to invest, as evidenced by the data in Table 1. According to the United Nation’s
World Investment Report, the United States had received a cumulative amount of
$1.8 trillion in foreign direct investment by year-end 2006, 40% more than the $1.1
trillion invested in the United Kingdom, the next single largest host to foreign direct
investment, and it accounted for 15% of the total cumulative amount of foreign direct
investment among all nations. The United States is also the largest foreign investor
in the world, with over $2.4 trillion invested aborad. According to the U.N. report,
of the $12.5 trillion in the total cumulative amount of foreign direct investment
among all nations, the most economically advanced developed economies were host
to 70% of this amount. From 1980 to 1990, this share increased sharply from 560%
of total amount of foreign direct investment to 79%. From 1990 to 1995, the
developed country share fell slightly to about 70%, where it has stayed relatively
stable over the past decade.
The Costs and Benefits of Foreign Direct
Generally, economists conclude that direct investment benefits both the home
and the host country and that the benefits of such investment outweigh the costs.
Some groups within the U.S. economy, however, are concerned about the potentially
negative effects of inward and outward direct investment. Most economists argue
that free and unimpeded international flows of capital, such as direct investment,
positively affect both the domestic (home) and foreign (host) economies. For the
home country, direct investment abroad benefits individual firms, because firms that
invest abroad are better able to exploit their existing competitive advantages and are
able to acquire additional skills and advantages. This tends to further enhance the
competitive position of these firms both at home and abroad and shifts the
composition and distribution of employment within the economy toward the most
productive and efficient firms and away from the less productive firms.

27 The focus of this report is on direct investment. For information about portfolio
investment in the economy, see CRS Report RL32462, Foreign Investment in U.S.
Securities, by James K. Jackson.

Table 1. Foreign Direct Investment Inward Position
(in billions of U.S. dollars)
1980 1985 1990 1995 2000 2006
Worl d $692.7 $972.2 $1,789.3 $2,992.1 $5,810.1 $11,998.8
Developed Economies390.7569.71,416.92,035.84,031.38,453.8
Western Europe231.5285.0815.21,213.02,293.85,717.2
European Union216.3267.1768.21,136.02,180.75,434.3
France 25.9 36.7 86.8 191.4 259.8 782.8
Germany 36.6 36.9 111.2 192.9 271.6 502.4
United Kingdom63.064.0203.9199.8438.61,135.3
United States83.0184.6394.9535.51,256.91,789.1
Canada 54.2 64.7 112.8 123.3 212.7 385.2
Developing Economies302.0402.5370.3916.71,707.63,155.9
Africa 32.0 33.8 58.4 77.3 153.2 315.1
Latin America50.480.1118.1200.1481.0908.6
Asia 219.5 288.5 380.2 636.5 1,073.4 1,932.2
Source: World Investment Report, United Nations Council on Trade and Development, various issues.
Some observers argue that U.S. direct investment abroad supplants U.S. exports,
jobs, and research and development funds, thereby reducing employment and wages
in the U.S. economy. Others are concerned that outward direct investment alters the
industrial composition of domestic production and trade flows, which can affect the
sectoral and regional distribution of employment and the relative demand for skilled
and unskilled labor.28 For the home country, overseas investment may lead some
firms to shift parts of their production abroad, thereby supplanting some domestic
production with imports from abroad, but most studies indicate that, on balance,
direct investment abroad increases U.S. exports and helps sustain employment and
wages at home.29 Intra-company trade is a relatively new feature of the U.S.
economy, but can be expected to increase as the economy becomes even more
globalized. In 2004, U.S. parent companies accounted for more than half of all U.S.
exports and more than one-third of U.S. imports. Furthermore, about half of the
exports by U.S. parent companies was to their foreign affiliates. At the same time,
the U.S. affiliates of foreign firms accounted for 20% of U.S. exports and 25% of
U.S. imports.
Globally, a relatively small share of the production of U.S. foreign affiliates
makes its way back into the U.S. economy. In 2004 the foreign affiliates of U.S.
multinational firms exported about 10% of their production back to the United States,
but two-thirds of their production was sold within the host country and the rest was

28 International Investment Perspectives: 2006 Edition, the Organization for Economic
Cooperation and Development. p. 99.
29 Ibid., p. 101; Brainard, S. Lael, and David A. Riker, Are U.S. Multinationals Exporting
U.S. Jobs? NBER Working Paper 5958, National Bureau of Economic Research, March


exported to other foreign countries.30 Foreign direct investment also supports U.S.
exports to areas where formal restrictions to exports exist. In addition, by expanding
and supporting development in foreign markets, direct investment spurs
improvements in foreign economies, which in turn, creates new markets for U.S.
goods. Direct investment also seems to be associated with a strengthened
competitive position, a higher level of skills of the employees, and higher incomes
of firms that invest abroad.
As a host country, the United States benefits from inward direct investment
because the investment adds permanently to the Nation’s capital stock and skill set.
Direct investment also brings technological advances, since firms that invest abroad
generally possess advanced technology, processes, and other economic advantages.
Such investment also boosts capital formation, contributes to a growth in a
competitive business environment and to productivity. In addition, direct investment
contributes to international trade and integration into the global trading community,
since most firms that invest abroad are established multinational firms.31
On the cost side, critics of foreign investment argue that some U.S. firms may
invest abroad, and thereby shift some resources from activities within the United
States, in order to take advantage of abundant natural resources, low-cost labor, or
relaxed environmental and labor laws.32 Indeed, about one-third of U.S. direct
investment abroad is in developing countries, where economic conditions are
markedly different from those in the United States or in many parts of Europe. In
some cases, firms that invest abroad may shift production from the United States to
a foreign location from which it might export back to the United States products that
it previously had produced in the United States, but this does not seem to be a major
activity of the foreign affiliates of U.S. firms. Such offshoring of production, or
globalization, has grown over the last decade as many developing economies have
dropped formal restrictions on foreign investment, but much of this investment seems
to be geared toward producing for the local market, or for exports to neighboring
The data in Table 2 show the extent and influence of U.S. and foreign
multinational firms in the U.S. economy. In 2004, the latest year for which
comprehensive data are available, foreign firms had a total of 5,270 affiliates
operating in the United States. These affiliates were present in every State and in
every economic activity, where such activity is not prohibited by law. Foreign firms
employed 5.6 million U.S. workers and paid $350 billion in wages and compensation
for an average of $63,000 per worker, nearly twice as much as the average

30 Bureau of Economic Analysis, U.S. Direct Investment Abroad: Preliminary Results of the

2004 Benchmark Survey, August 2006. Table III.F1.

31 Such linkages appear to be important factors for both developed and developing host
countries, see Alfaro, Laura, Areendum Chanda, Sebnem Kalemli-Ozcam, and Selin Sayek,
How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects
of Financial Markets on linkages. Working Paper 12522, September 2006, National Bureau
of Economic Research.
32 World Investment Report: 2006, United Nations Council on Trade and Development. p.


compensation of $37,000 paid by the foreign affiliates of U.S. multinational firms
and higher than the average of $58,000 paid by U.S. parent companies operating in
the United States. In 2004, 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. By comparison, U.S. multinational companies employed
over 21 million workers in the U.S. economy and the foreign affiliates of these U.S.
parent companies employed over 10 million workers in 24 thousand firms abroad.
The foreign affiliates of U.S. firms had 60% more in the value of their gross product,
had a greater value of assets, higher sales, and paid three time s as much in taxes.
Table 2. Select Data on U.S. Multinational Companies and on
Foreign Firms Operating in the United States, 2004
(in millions of dollars unless otherwise indicated)
U.S. Multinational CompaniesU.S. Affiliates of
Foreign FirmsParentCompaniesForeignaffiliates
Number of firms3,34823,9285,270
Employment (thousands)21,377.310,028.05,562.3
Employee compensation$1,236,060$372,050$350,197
Gross product$2,215,800$824,336$514,957
Total assets$15,777,761$8,757,063$6,384,667
Sales $6,948,995 $3,768,733 $2,521,353
T a xes $153,487 $161,253 $49,223
R&D ExpendituresN.A.N.A.$33,102
Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign
Affiliates, Preliminary 2004 Estimates; and Foreign Direct Investment in the United States:
Operations of U.S. Affiliates of Foreign Companies, Preliminary 2004 Estimates. Bureau of
Economic Analysis, 2006.
The affiliates of foreign firms spent $124 billion in the United States in 2004 on
new plant and equipment, imported $393 billion in goods and services and exported
$164 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% 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.
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.
Most economists conclude that foreign investment benefits the host economy
because such investment adds permanently to the capital stock of the economy and
increases the total amount of capital in the economy. While these conclusions seem
generally to be true, they probably should be tempered somewhat relative to foreign
direct investment in the United States. The data in Table 3 show the inflows and
outflows of capital in the U.S. economy over the past eight years that are associated
with direct investment. The data indicate that firms can raise funds in three different
ways: they can borrow it from the parent company as an intercompany debt transfer;
they can raise the funds in the domestic economy in the form of equity capital, or
they can raise their funds internally from profits generated by the firm and used as
reinvested earnings.
The data in Table 3 indicate that over the eight-year period 1999-2006, 8% of
the funds foreign firms used to invest in U.S. businesses came from the foreign
parent company in the form of intercompany debt. The rest of the funds foreign
investors used to invest in U.S. businesses was raised in the United States, not
imported from abroad. Equity capital raised in the U.S. capital markets accounted
for 77% of the share of the funds foreign firms used to invest, with the rest, 15%,
generated from the reinvested earnings of the foreign firms. In comparison, the
overseas affiliates of U.S. parent firms raised the largest part of their funds — 72%
— from the reinvested earnings of the affiliates, partly reflecting the older, more
mature nature of the investments. Of the rest of the funds, 42% was raised through
the equity capital markets in the host country, and 6% was raised through
intercompany debt.

Table 3. U.S. Direct Investment Abroad and Foreign Direct
Investment in the U.S. Economy, Annual Flows 1999-2006
(in billions of U.S. dollars)
1999 2000 2001 2002 2003 2004 2005 2006
U.S. direct investment abroad
Capital $224.9 $-59.2 $142.3 $154.5 $149.6 $279.1 $7.7 $235.4
Equity capital98.978.060.942.735.5110.043.430.2
Reinvested earnings64.293.669.885.3121.0165.6-20.4220.1
Intercompany debt61.8-12.411.626.5-6.63.4-30.7-15.0
Foreign direct investment in the United States
Capital $289.4 $321.3 $167.0 $84.4 $64.0 $145.8 $109.0 $180.6
Equity capital221.6259.6140.9105.393.492.956.698.0
Reinvested earnings4.1-0.3-33.91.614.549.447.770.6
Intercompany debt63.861.960.0-22.6-
Source: U.S. Department of Commerce.
Supporters of foreign direct investment also highlight the number of jobs
created by foreign investment in the economy. In the case of foreign direct
investment n the U.S. economy, however, the employment picture is somewhat
unclear. While foreign direct investment on the whole does support and contribute
to existing employment in the economy, the particular nature of the investment
makes it difficult to assess the full contribution of this investment to the overall
employment picture. Foreign firms can invest in the U.S. economy in three ways: by
adding to current investments; by establishing a new venture, termed, a “greenfield”
investment; or by acquiring an existing U.S. business. The data in Table 4 exclude
additions to employment that can be accounted for by on-going foreign-owned firms
and focus on U.S. businesses that are acquired or are newly established by foreign
The data in Table 4 also indicate that during the 1998-2006 period, acquisitions
of existing U.S. firms accounted for nearly 90% of the assets of the businesses that
were either newly established or acquired by foreign investors, 95% of the increases
in employment, 92 % of the sales, and 91% of the investment outlays. As a result,
employment associated with acquisitions of established U.S. firms accounts for a
large part of the total number of employees of foreign firms that currently are
operating in the United States. It is likely that such acquisitions help to sustain the
level of employment of the acquired firms, but it is difficult to estimate how much
new employment is added to the economy as a result of the extensive role foreign
acquisitions play in the economy. It also is unclear what long-term impact these
acquisitions are having on employment among the acquired firms. In some cases,
foreign firms may use their acquisitions as a springboard to expand their operations
and, therefore, their employment in the United States, in other circumstances, they
may use an acquisition to consolidate or to streamline other operations, which may
result in reducing their level of employment.

Table 4. U.S. Businesses Acquired or Established by Foreign
(in millions of dollars, unless otherwise indicated)
U.S. business enterprises acquiredU.S. business enterprises established
To t a l To t a l Number Inv e st - To t a l Number Inv e st -
assetsassetsSales ofmentAssetsSalesofment
empl. outlays empl. outlays
1998 $274,349 $218,483 $147,434 603,385 $182,357 $55,866 $17,471 21,199 $32,899
1999 454,012 430,226 115,534 589,311 265,127 23,786 8,718 13,368 9,829
2000 482,021 463,142 153,525 748,952 322,703 18,879 7,204 21,068 12,926
2001 382,308 311,220 90,778 335,088 138,091 71,087 18,131 74,879 9,017
2002 105,516 92,800 51,945 211,679 43, 442 12,716 3,735 6,808 11,077
2003 219,072 198,474 51,376 161,607 50, 212 20,598 3,173 4,449 13,379
2004 308,638 252,481 60,592 199,227 72, 738 56,127 6,744 12,366 13,481
2005 181,846 148,695 65,188 230,825 73, 997 33,151 1,953 5,045 17,393
2006 356,541 343,454 78,395 214,660 147,827 13,086 868 686 13,706
Source: McNeil, Lawrence R., Foreign Direct Investment in the United States: New Investment in
2006. Survey of Current Business, June 2007. p. 32.
As Table 5 shows, acquisition activity is not limited to foreign firms, but is a
well-established feature of the overall business climate in the United States. In terms
of the number of acquisitions that were completed, 1998 stands out as the most active
year, with over 10,000 deals completed. As the U.S. economy posted strong
economic growth through the later 1990s and into the early 2000s, such acquisition
activity remained strong among all three groups: U.S. firms acquiring U.S. firms;
foreign firms acquiring U.S. firms and U.S. firms acquiring foreign firms. On
average over the 10-year period, nearly 8,000 acquisitions were completed each year
among the three types of investments. The share of these transactions accounted for
by foreign acquisitions of U.S. firms grew by 50% over the 1998-2007 period, rising
from 8% of all acquisition transactions in 1998 to nearly 15% of all transactions in


Table 5. U.S. and Foreign Acquisition Activity, 1997-2006
U.S. AcquisitionsForeign AcquisitionsU.S. Acquisitions of
Total Acquisitionsof U.S.of U.S. CompaniesForeign Companies
Yea r Co mpa nies
Number $ Number $ Number $ Number $
of DealsBillionsof DealsBillionsof DealsBillions of DealsBillions
1997 8,479 $771.0 6 ,317 $606.3 775 $84.9 1 ,387 $80.3
1998 10,193 1,373.8 7 ,575 1,019.6 971 227.0 1 ,647 127.2
1999 9,173 1,422.9 6 ,449 1,005.1 1 ,148 264.0 1 ,576 153.8
2000 8,853 1,781.6 6 ,032 1,304.6 1 ,264 338.0 1 ,557 139.0
2001 6,296 1,155.8 4 ,269 838.3 923 204.3 1 ,104 113.2
2002 5,497 625.0 3 ,989 450.4 700 85.5 808 89.1
2003 6,169 525.5 4 ,539 352.8 750 82.0 880 90.7
2004 7,102 855.3 5 ,140 628.6 822 104.1 1 ,140 122.6
2005 7,600 996.9 5 ,463 733.9 977 112.7 1 ,160 150.3
2006 8,621 1,434.4 6 ,105 1,015.5 1 ,142 200.9 1 ,374 218.0
2007 9,167 1,737.8 6 ,343 1,151.0 1 ,343 321.2 1 ,481 265.5
Source: Mergers & Acquisitions, February 2007. p. 69.

Another notable feature of the data is the way in which foreign acquisitions of
U.S. firms and U.S. acquisitions of foreign firms seem to rise and fall in tandem. As
the rate of U.S. economic growth slowed in the early 2000s, acquisition activity
slowed not only in the United States, but for U.S. acquisitions abroad as well.
Figures 2 and 3 show the number of deals and the value of those deals for U.S.
acquisitions of foreign firms and foreign acquisitions of U.S. firms, respectively. In
both cases, the number of deals and the value of those deals dropped between 2000
and 2002 for both U.S. and foreign firms before activity rebounded after 2002. Such
similarities in the acquisition activity of U.S. and foreign firms seem to be counter-
intuitive in that those forces that draw U.S. firms to invest abroad should
theoretically be separate from those factors that draw foreign firms to invest in the
United States.
Figure 2. U.S. Acquisitions of Foreign Companies

Number of Deals$Billions
2000 $200
1700 $150
1400$100Value ($bil.)
1000$50No. of deals
700 $0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Mergers and Acquisitions
In some respects, foreign investment in the United States and U.S. investment
abroad should operate as substitutes, so that both U.S. and foreign firms would be
expected to invest in the United States when the U.S. economic growth rate was
strong relative to other advanced economies and both U.S. and foreign firms would
be expected to invest elsewhere when the relative rate of U.S. economic growth was
weak. Instead U.S. investment abroad is strong when foreign investment in the
United States is strong and U.S. investment abroad is weak when foreign investment
in the United States is weak. The two trends likely reflect the impact the U.S.
economy has on the global economy and particularly on Western Europe, where
much of the U.S. overseas investment and acquisition activity is concentrated. As
a result, when the rate of economic growth in the United States is strong, foreign
firms are drawn to invest in U.S. businesses. In addition, the stronger rate of
economic growth in the United States enhances the profit position of U.S. firms
which encourages them to increase their investments both at home and abroad as
U.S. economic activity also boosts economic performance in Western Europe and
among other developed economies that have become increasingly linked with the
U.S. economy.

Figure 3. Foreign Acquisitions of U.S. Companies

Number of Deals$Billions
1300 $350
1200 $300
$200Value ($bil.)
900 $100
No. of deals
800 $50
700 $0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Mergers and Acquisitions
The terrorist attacks of September 11, 2001, have affected the perception of
many policymakers and elements of the public about the role and the risks of foreign
investment in the economy. As a result, some Members of Congress are calling for
changes in U.S. investment laws and U.S. investment policies that will increase the
federal government’s scrutiny over foreign investment in critical industries and in
sectors essential to national security and to homeland security. In addition, Congress
may broaden its oversight over the activities of federal agencies that are involved in
administering U.S. direct investment policies. Economic studies generally conclude
that the U.S. economy as a whole is benefitting from inward and outward direct
investment. That is not to say that such investment does not bring costs as well as
benefits. Indeed, some groups within the economy and some regions within the
country likely benefit more than others. While dislocations likely are resolved
eventually, they potentially can cause disruptions for some producers and some
workers, especially those at the margins of the economy and struggling to remain
While Congress is grappling to sort out conflicting viewpoints and policies
concerning the role and impact of foreign direct investment in the economy in a
world of heightened security concerns, the recently announced Invest in America
initiative stands out. The stated objective of the initiative is to promote the United
States as a foreign investment location, which likely is aimed at assuaging foreign
concerns about the course and direction of U.S. policies toward foreign direct
investment. Although such a policy is not necessarily at odds with actions within
Congress, it does seem to be a major shift in the traditional U.S. policy of neither
helping nor hindering foreign direct investment. The initiative also raises questions
concerning the cost of the initiative, how funds will be appropriated, and the role of
congressional oversight. It is also unclear what role the initiative will have in

coordinating the investment promotion activities of state and local governments that
are accustomed to operating on their own and often compete against other localities
for foreign investment commitments. In addition, while foreign direct investment
does have positive net benefits for the economy as a whole, empirical research has
not established that such benefits remain unambiguously positive when tax and
financial incentives are offered as inducements.