U.S. Direct Investment Abroad: Trends and Current Issues

U.S. Direct Investment Abroad: Trends and
Current Issues
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
The United States is the largest investor abroad and the largest recipient of direct
investment in the world. For some Americans, the national gains attributed to investing
overseas are offset by such perceived losses as displaced U.S. workers and lower wages.
Some observers believe U.S. firms invest abroad to avoid U.S. labor unions or high U.S.
wages, however, 70% of U.S. foreign direct investment is concentrated in high income
developed countries. Even more striking is the fact that the share of investment going
to developing countries has fallen in recent years. Most economists conclude that direct
investment abroad does not lead to fewer jobs or lower incomes overall for Americans
and that the majority of jobs lost among U.S. manufacturing firms over the past decade
reflect a broad restructuring of U.S. manufacturing industries. This report will be
updated as events warrant.
Recent Investments
New spending by U.S. firms on businesses and real estate abroad, or U.S. direct
investment abroad,1 rose sharply in 2007 to $333 billion up from the $241 billion net they
invested in 2006, according to the Department of Commerce.2 A drop in U.S. direct
investment abroad that occurred 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).

1 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 equivalent interest
in an unincorporated business enterprise. 15 CFR § 806.15 (a)(1).
2 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.

Generally, relative rates of growth between U.S. and foreign economies largely
determine the direction and magnitude of direct investment flows. These flows also are
affected by relative rates of inflation, interest rates, and expectations about the
performance of national economies, which means they can be quite erratic at times. Since
the mid-1990s, the combination of strong growth and low inflation in the U.S. economy
attracted foreign investors, as indicated in Figure 1. From 2002 to 2007, U.S. direct
investment abroad averaged more than twice the amount foreigners invested in the U.S.
economy, reflecting the period of slower growth in the economy from 2001-2003. On the
whole, U.S. firms are the most prolific overseas investors: a recent study by the United
Nations indicates that U.S. firms are the largest foreign direct investors in the world and
own as much abroad as the British and Germans combined, the next largest foreign direct
Figure 1. Foreign Direct Investment in the United States and
U.S. Direct Investment Abroad, Annual Flows, 1990-2007 (in
billions of dollars)

$350Billions of dollars
Foreign Direct Investment in
$300the United States
$150U.S. Direct Investment
$100 Abroad
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: U.S. Department of Commerce
Table 1 indicates that the overseas direct investment position of U.S. firms on a
historical-cost basis,3 or the cumulative amount at book value, reached $2.8 trillion in
2007, the latest year for such investment position data.4 More than 70% of these overseas
3 The position, or stock, is the net book value of U.S. parent company’s equity in, and outstanding
loans to, their affiliates abroad. 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 U.S. direct investment position valued on a current-cost
and market value bases. These estimates indicate that U.S. direct investment abroad increased
by $397 billion and $693 billion in 2007, respectively, to reach $3.3 and $5.1 trillion.
4 Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2007: Country and

investments are in developed countries: Europe alone accounts for over half of all U.S.
direct investment abroad, or $1.6 trillion. Europe has been a prime target of U.S.
investment since U.S. firms first invested abroad in the 1860s. American firms began
investing heavily in Europe following World War II as European countries rebuilt their
economies and later when they formed an intra-European economic union.
Table 1. U.S. Direct Investment Position Abroad on a
Historical-Cost Basis at Year-End 2007
(in millions of U.S. dollars)
industries facturing -sa le ation com-
trade panies
All countries2,791,269531,315183,038111,86691,768531,93363,791927,578202,661
Ca na da 257,058 93,516 18,241 4,819 3,130 45,296 4,389 21,798 33,169
Europe 1,551,165 257,397 109,995 73,170 70,728 255,598 37,949 593,837 115,110
Belgium 54,464 17,538 5,222 177 1,652 22,877 2,479 1,753 2,753
France 68,454 25,099 5,868 1,357 2,219 6,299 2,342 12,470 12,703
Germany 107,351 25,593 21,385 2,758 2,614 13,538 4,649 30,128 6,173
Ireland 87,023 19,180 1,370 16,501 (D) 9 ,886 5,267 6,831 21,833
Italy 28,408 11,451 2,649 3,792 -4 2 3 ,561 1,020 3,076 2,866
Lu xemb ou rg 113,611 7,585 3,076 1,802 942 15,612 -2 4 83,595 861
Netherlands 370,160 27,404 17,619 6,694 17,414 37,077 3,023 254,500 3,078
Sp ain 55,894 13,196 3,582 589 1,771 7,145 2,132 24,880 2,530
Swed en 36,372 4,063 1,048 346 0 (D) 447 19,835 (D)
Switzerland 127,709 11,273 22,166 1,267 13,460 12,229 1,631 59,720 5,803
Tu rk ey 4,905 1,382 651 78 2,503 99 29 (*) 167
U. Kingdom398,83670,08315,66036,15515,221114,76413,70780,65646,032
Latin Ameica471,95363,81019,7947,400-6,701139,3452,445196,94221,599
Brazil 41,552 22,111 1,632 525 3,600 5,208 674 4,676 517
Chile 12,632 2,135 904 751 1,456 2,770 129 939 2,087
Venezu ela 9 ,974 4,222 237 179 (D) 358 373 2,624 (D)
Mexico 91,663 22,802 2,761 2,962 (D) 15,420 458 16,157 (D)
Bermuda 148,633 982 2,561 518 (D) 76,741 200 62,770 4,627
U.K. Caribbean90,8031,783(D)579-27,11424,72142278,416(D)
Af rica 27,764 3,187 1,087 286 1,541 1,885 327 6,249 615
Middle East29,37010,7278161,5135473331,3156,625527
Asia 453,959 102,677 33,105 24,678 22,523 89,476 17,365 102,128 31,641
Au stralia 79,027 13,883 3,702 10,239 2,062 11,246 3,822 14,244 6,285
China 28,298 15,007 3,136 645 1,169 794 1,287 1,815 2,317
Hong Kong47,4313,6807,4751,1972,2709,5143,83217,6481,815
Japan 101,607 19,273 8,552 4,554 648 45,874 1,654 11,494 9,553
Korea 27,151 10,930 1,638 721 6,954 4,221 1,265 140 1,282
Singapore 82,623 13,748 3,369 2,535 2,219 4,663 2,579 51,690 1,418
Taiwan 16,374 4,974 2,095 259 968 7,301 229 156 392
OPEC 43,7788,9791,2512581,6311,11877212,5781,813
Source: Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2007: Country and Industry Detail.
Survey of Current Business, July 2008. p.33.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to avoid disclosing the data
of individual companies.

4 (...continued)
Industry Detail, Survey of Current Business, July, 2008. p. 33.

Typically, U.S. firms have placed the largest share of their annual investments in
developed countries, primarily in Western Europe, but this tendency has increased since
the mid-1990s. In the last half of the 1990s, U.S. direct investment abroad experienced
a dramatic shift from developing countries to the richest developed economies: the share
of U.S. direct investment going to developing countries fell from 37% in 1996 to 21% in
2000. In 2006, U.S. firms focused a slightly greater percent of their investment funds on
developing countries, which received 28% of the investment funds of U.S. multinational
Patterns in U.S. direct investment abroad generally reflect fundamental changes
that occur in the U.S. economy during the same period. As investment funds in the U.S.
economy shifted from extractive, processing, and manufacturing industries toward high
technology services and financial industries, U.S. investment abroad mirrored these
changes. As a result, U.S. direct investment abroad focused less on the extractive,
processing, and basic manufacturing industries in developing countries and more on high
technology, finance, and services industries located in highly-developed countries with
advanced infrastructure and communications systems. U.S. direct investment abroad
during the 2000-2004 period increased about 56%. Investments in the finance and
services sectors grew twice as fast, on the whole, as direct investment abroad overall
during the 1996-2000 period. Within the manufacturing sector, food processing,
chemicals, and metals lagged in growth behind the industrial machinery, electronic, and
transportation sectors.
U.S. Multinationals
Nations once hostile to American direct investment now compete aggressively by
offering incentives to U.S. firms. A debate continues within the United States, however,
over the relative merits of U.S. direct investment abroad. Some Americans believe that
U.S. direct investment abroad, directly or indirectly, shifts some jobs to low wage
countries. They argue that such shifts reduce employment in the United States and
increase imports, thereby affecting negatively both U.S. employment and economic
growth. Economists generally believe that firms invest abroad because those firms
possess some special process or product knowledge or because they possess special
managerial abilities which give them an advantage over other firms. On the whole, U.S.
firms invest abroad to serve the foreign local market, rather than to produce goods to
export to the United States, although some firms do establish overseas operations to
replace U.S. exports or production, or to gain access to raw materials, cheap labor, or
other markets. On average, about 8% of affiliate sales are to the U.S. parent companies.5
U.S. multinational corporations (MNCs) rank among the largest U.S. firms.
According to data collected by the Commerce Department’s Bureau of Economic
Analysis (BEA), when American parent companies and their foreign affiliates are
compared by the size structure of employment classes, 40% of the more than 2,000 U.S.
parent companies employ more than 2,499 persons. These large parent firms account for

95% of the total number of people employed by U.S. MNCs. Employment abroad is even

5 U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign
Affiliates, Preliminary 2004 Estimates, October 2006. Table III. F. 1.

more concentrated among the largest foreign affiliates of U.S. parent firms: the largest

2% of the affiliates account for 90% of affiliate employment.6

While U.S. MNCs used their economic strengths to expand abroad between the
1980s and early 2000s, the U.S.-based parent firms lost market positions at home, in large
part due to corporate downsizing efforts to improve profits. U.S. MNC parent companies’
share of all U.S. business gross domestic product (GDP) — the broadest measure of
economic activity — declined from 32% to 25% from 1977 to 1989, comprising 24%
of total U.S. private business output in 1998 (the latest year for which estimates are
available).7 These MNC parent companies increased their share of all U.S. business GDP
in the services sector, which rose from 6% to 8% of U.S. GDP during the period from
1989 to 1998. The MNC share of all other industries rose from 16% to 18% during the
10-year period, but they lost shares in the manufacturing sector (from 62% to 58%) at a
time when the U.S. manufacturing sector as a whole was shrinking as a share of national
GDP (from 20% to 16%).8
As U.S. MNC parent companies were losing their relative market positions at
home, their cumulative amount of direct investment abroad doubled. This increase did
spur a shift in some economic activity among the U.S. MNCs from the U.S. parent
companies to the foreign affiliates. During the period from 1977 to 1997, the foreign
affiliates increased their share of the total economic activity within U.S. MNCs — the
combined economic output of the U.S. parent and the foreign affiliates — from 22% to

24%. 9

One of the most commonly expressed concerns about U.S. direct investment
abroad is that U.S. parent companies invest abroad in order to send low-wage jobs
overseas. Such effects are difficult to measure because they are small compared with
much larger changes occurring within the U.S. economy. In addition, a cursory
examination of the data seems to indicate that employment losses among parent firms
occurred simultaneously with gains in foreign subsidiaries, thereby giving the impression
that jobs are being shifted abroad. Employment among U.S. parent companies fell during
the early 1980s, but increased in the 1992-2000 period, from 17.5 million to 23.9 million.
From 2000 to 2003, however, employment among U.S. parent companies fell by 12% to
21.1 million, before rising after 2003 to reach 21.8 million in 2005 as U.S. economic
growth picked up. Employment among foreign affiliates also rose in 2005 by 2.6% to

10.3 million, from 10.0 million in 2004.

After employment losses in the early 1980s, employment at both the parent firms
and the foreign affiliates increased after 1992, although at different rates and in different

6 Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of
Current Business, July 2000. pp. 24-45.
7 Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 2003. Survey of
Current Business, July 2005. p. 15.
8 Ibid., p. 31.
9 Ibid., p. 31.

industries. In a number of cases, U.S. parent firms and their foreign affiliates lost or
gained employment in many of the same industries. Both the parent firms and the
affiliates lost employment in the petroleum and finance sectors, although both gained
employment in the services and wholesale trade sectors. Furthermore, employment gains
and losses among MNCs more likely reflect fundamental shifts within the U.S. economy,
than any formal or informal efforts to shift employment abroad.
Some observers also contend that U.S. direct investment abroad supplants U.S.
exports, thereby worsening the U.S. trade deficit and eliminating some U.S. jobs. Most
analyses indicate, however, that intra-company trade, or trade between the U.S. parent
company and its foreign subsidiaries, represents a large share of U.S. trade and that
foreign investment typically boosts U.S. exports more than it contributes to a rise in
imports or to a loss of exports. For instance, American multinational corporations
account for over 60% of U.S. exports and 40% of U.S. imports, indicating that U.S. parent
firms tend to be a more important source of supply to their affiliates than the affiliates are
to their parent companies.
American direct investment abroad has grown sharply since the mid-1990s, raising
questions for many observers about the effects of such investment on the U.S. economy.
These questions seem pertinent since American multinational corporations lost shares of
U.S. GDP over the last decade and their domestic employment had declined until the mid-
1990s. Increased economic activity abroad relative to that in the United States increased
overseas affiliate employment in some industries, including manufacturing. Most of this
affiliate activity, however, is geared toward supplying the local markets in which they are
located. In 2004, 9.5% of the sales of the foreign affiliates of U.S. firms was accounted
for by exports back to the United States,10 although this share is nonetheless substantial.
Some observers believe U.S. direct investment abroad is harmful to U.S. workers
because it shifts jobs abroad. There is no conclusive evidence in the data collected to date
to indicate that current investment trends are substantially different from those of previous
periods or that jobs are moving offshore at a rate that is significantly different from
previous periods.11 There are instances when firms shift activities abroad to take
advantage of lower labor costs. However, it is clear from the data that the majority of
U.S. direct investment abroad is in developed countries where wages, markets, industries,
and consumers’ tastes are similar to those in the United States. U.S. direct investment in
these developed countries is oriented toward serving the markets where the affiliates are
located and they tend, in the aggregate, to boost exports from the United States. In
addition, foreign firms have been pouring record amounts of money into the United States
to acquire existing U.S. firms, to expand existing subsidiaries, or to establish “greenfield”
or new investments.

10 Mataloni, Operations of U.S. Multinational Companies. p. 41.
11 CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based
on Foreign Investment Data, by James K. Jackson.