Order Code RS21857
Updated March 23, 2005
CRS Report for Congress
Received through the CRS WebJanuary 2, 2008
Foreign Direct Investment in the United
States: An Economic Analysis
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Foreign direct investment in the United States1 declined sharply after 2000, when
a record $300 billion was invested in U.S. businesses and real estate. In 20042006, according
to preliminaryDepartment of Commerce data, foreigners invested about $100$184 billion. Foreign direct investments
investments are highly sought after by many State and local governments that are
struggling to create
additional jobs in their localities. In addition, manyWhile some in Congress
encourage such
investment to offset the perceived negative economic effects of U.S. firms investing
abroad. On a cumulative basis, the British remain the largest foreign direct investors in
the U.S. economy, with French, Dutch, and Japanese investors trailing behind. This
report will
firms investing abroad, others are concerned about foreign acquisitions of U.S. firms
that are considered essential to U.S. national and economic security. This report will
be updated as events warrant.
Recent Investments
Foreigners invested about $100$184 billion in U.S. businesses and real estate, in 2004,
according to partial-year data in 2006, according
to balance of payments data published by the Department of Commerce.2 As Figure 1 shows, this
represents more than a doubling in the amount invested in 2003, but about half as much
as U.S. firms invested abroad and far below the record $300 billion foreigners invested
in 2000. The decline in foreign direct investment flows, although particularly sharp for
the United States, is not unique. According to the United Nation’s World Investment
Report, global foreign direct investment flows dropped by 41% in 2001 and 21% in 2002
due to slow economic growth in most of the parts of the world, falling xxxFig1stock
market valuations, lower corporate profitability, a slowdown in corporate restructuring,
and a slowdown in privatization efforts in some areas.
shows, this represents an increase over the amount invested in 2005. Investments by U.S.
firms abroad also rebounded in 2006 to $249 billion, up sharply from the $9 billion they
invested abroad in 2005. The increase in foreign direct investment flows, mirrors a turnaround in global flows. According to the United Nations’ World Investment Report,
global foreign direct investment inflows increased by 29% in 2005 after a slight increase
in 2004 and three years of declining flows prior to 2004 that arose from competitive
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
Weinberg, Douglas B., and Kelly K. Pierce
2
Bach, Christopher L., U.S. International Transactions: Third Quarter
2004 in 2006. Survey of Current Business, January 2005, p. 54.
Congressional Research Service ˜ The Library of Congress
CRS-2
The cumulative amount, or stock, of foreign direct investment in the United States
on a historical cost basis3 increased by $38 billion in 2003 to nearly $1.4 trillion. This
marked an increase of less than three percent over the previous year and an improvement
over the decrease the position in the previous year when some affiliates repaid substantial
loans to their foreign parent companies and the foreign parent companies wrote down the
value of acquisitions they had made prior to the slowdown in the U.S. economy.4
As a share of the total amount of investment spending in the U.S. economy,
investment spending by foreign firms fell to 3.5% in 2003, far below the 19 % reached
in 2000. Foreign firms’ spending was sustained by growth in their equity capital position.
Reinvested earnings showed a slight increase over the previous year, but intercompany
debt flows were negative reflecting an increase in payments from the affiliates to the
foreign parent company and a reversal in affiliates’ receivables from their parent
companies.5
With over $230 billion invested in the United States, Great Britain is the largest
foreign direct investor, as is indicated in Table 1. Japan has moved into the position as
the second largest foreign direct investor in the U.S. economy with over $159 billion in
investments. Following the Japanese are the Germans ($149 billion) and Dutch ($146
billion), with the French close behind ($143 billion).
Table 1. Foreign Direct Investment Position in the United States on
a Historical-Cost Basis at Year-End 2003
(in millions of U.S. dollars)
All
WholeOther
ManufacRetail Infor- BankFiReal
SerIndussale
industuring
trade mation
ing
nance estate vices
tries
trade
tries
All countries 1,378,001 475,475 182,176 24,171 120,122 87,537 185,655 46,999 28,358 227,509
Canada
Europe
Belgium
France
Germany
105,255
1,000,532
29,046
376,603
2,640
106,670
1,447
17,950
5,160
97,928
10,535 25,623 4,560 1,405 24,838
61,141 132,400 20,774 24,788 162,277
10,678
143,341
148,774
3,391
54,978
52,514
1,619
12,156
12,589
(D)
380
544
(D)
26,159
21,427
(D)
11,373
18,449
586
26,796
15,069
317
400
5,599
69 1,420
5,741 5,358
433 22,149
April 2007, p. 46. 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.
CRS-2
international price pressures leading to greater internationalization of production, rising
commodity prices, and increased international merger and acquisition activity in some
areas.
Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows, 1990-2006
$350
Billions of dollars
$300
$250
Foreign Direct Investment in
the United States
$200
$150
$100
U.S. Direct Investment
Abroad
$50
$0
1990
1992
1994
1996
1998
2000
2002
2004
2006
Year
Source: CRS from U.S. Department of Commerce data
The cumulative amount, or stock, of foreign direct investment in the United States
on a historical cost basis3 increased by $115 billion in 2005 to over $1.6 trillion. This
marked an increase of 8% over the previous year and a significant change from the decline
in foreign investment spending that had occurred since 2000.4 The rise in the value of
foreign direct includes an upward valuation adjustment of existing investments and
increased investment spending that was driven by the 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. financial and insurance industries as overseas banks and finance
and insurance companies sought access to the profitable U.S. financial market.5
As a share of the total amount of nonresidential investment spending in the U.S.
economy, investment spending by foreign firms accounted for 9% in 2005, far below the
3
The position, or stock, is the net book value of foreign direct investors’ equity in, and
outstanding loans to, their affiliates in the United States. A change in the position in a given year
consists of three components: equity and intercompany inflows, reinvested earnings of
incorporated affiliates, and valuation adjustments to account for changes in the value of financial
assets. The Commerce Department also publishes data on the foreign direct investment position
valued on a current-cost and market value bases. These estimates indicate that foreign direct
investment increased by $49147 billion and $41093 billion in 20032005, respectively, to $1.59 and $2.48
trillion.
4
Borga, MariaKoncz, Jennifer L., and Daniel R. Yorgason, Direct Investment Position for 2003Positions for 2005: Country and
Industry Detail, Survey of Current Business, July, 2004. P. 40.
5
At the same time, U.S. direct investment abroad rose in 2003 as U.S. parent firms increased
their acquisitions of foreign firms and their overall investment spending abroad. U.S. direct
investment abroad in 2003 totaled $174 billion (in nominal terms).
CRS-3
Ireland
Italy
Luxembourg
Netherlands
Sweden
Switzerland
U. Kingdom
L. America
Africa
Middle East
Asia
Australia
Japan
All
WholeManufacRetail Infor- BankFiIndussale
turing
trade mation
ing
nance
tries
trade
26,793
2,711
3,186
(D)
(D)
(D)
2,900
6,695
1,047
1,043
1,189
(D)
1,217
(D)
104,452
23,940
1,373
(D)
4,012
0
(D)
146,117
63,608
7,882
(D)
7,426
(D) 34,264
19,823
8,092
5,295
(D)
76
(D)
64
112,856
72,274
4,013
292 11,715
(D) 23,005
230,374
70,795
55,723
2,257 16,909 18,357 27,429
69,557
8,302
9,669
1,719
3,443
2,988 15,622
2,187
653
448
(D)
(D)
(D)
(D)
7,931
1,518
2,889
(D)
(D)
(D)
(D)
192,539
59,353
59,860
3,011 13,222 11,282 11,910
24,652
3,665
515
-4
(D)
(D)
3,551
159,258
54,293
56,625
(D)
(D)
8,187
8,191
Real
estate
Services
601
(D)
85
(D)
152
(D)
4,562 2,681
(D)
339
600
531
4,629 12,312
4,921
753
(D)
(D)
(D)
(D)
15,345 1,370
3,296
(D)
11,012 1,136
Other
industries
12,541
1,301
74,489
12,770
3,679
(D)
21,963
22,138
614
455
17,186
2,571
13,250
Source: Foreign Direct Investment in the United States: Detail for Historical-Cost Position and Related Capital and
Income Flows, 2003. Survey of Current Business, September, 2004. p. 78.
Note: The position is the stock, or cumulative, 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.
2006. p. 20.
5
McNeil, Lawrence, Foreign Direct Investment in the United States: New Investment in 2005,
Survey of Current Business, June 2006, pp. 33-34.
CRS-3
19% reached in 2000. Foreign firms’ spending was sustained by a large increase in
intercompany debt flows as U.S. affiliates turned to net borrowing from their foreign
parent companies. Direct investment was also financed through reinvested earnings and
an increase in equity capital, although the increase in the amount of equity capital was the
lowest amount since the 1995. The lower amount of equity capital represents the
relatively slower rate of economic growth in Europe that reduced the amount of funds
European parent firms had available to invest and the higher rate of economic growth
among the U.S. affiliates which improved their profit position.6
With over $303 billion invested in the United States, Great Britain is the largest
foreign direct investor, as is indicated in Table 1. Japan has moved into the position as
the second largest foreign direct investor in the U.S. economy with about $211 billion in
investments. Following the Japanese are the Germans ($203 billion), the Dutch ($189
billion), and the French ($159 billion).
In some cases, investments by one or two countries dominate certain industrial
sectors, suggesting that there is a rough form of international specialization present in the
investment patterns of foreign multinational firms. At year end 20032006, the Netherlands and
the United Kingdom accounted for the bulk of foreign investments in the U.S. petroleum
sector, reflecting investments by two giant companies: Royal Dutch Shell and British
Petroleum. Japanese investments in the U.S. wholesale trade sector are also substantial,
followed by British investments, and European investors account for the bulk of foreign
investments in the retail trade sector. The FrenchGerman investors are the largest investors in the
information sector as a result of a number of large media company acquisitions. German
French,
German, and British investments dominate other foreign investments in the banking
sector, while
Dutch, British, French, and CanadianCanadian, British, and French investments account for over half of
the investments
in the finance sector. Canada’s $3668 billion investment in the U.S.
banking and finance
sectors is nearly matched by the $35 billion investedinvestments by British firms,
followed by France ($28
49 billion) and Germany ($2339 billion). Foreign direct investment
in the manufacturing sector
is represented by a number of countries, each with substantial
investments: investments
by Switzerland ($7279 billion), the United Kingdom ($71Germany ($77 billion), the Netherlands ($64
United
Kingdom ($77 billion), France ($5570 billion), and Germany ($53the Netherlands ($70 billion) account for 70%
two-thirds of the total
amount of foreign direct investment in this sector.
Investment spending by developed economies accounts for 95% of all foreign direct
investment in the United States. These investments are predominately in the
manufacturing sector, which accounts for about 3533% of foreign direct investment in the
United States, a decline from periods when such investment accounted for a majority
share of the total. Another 1823% is in the banking and finance sectors, and 16% is in the
retail and wholesale trade sectors, reflecting purchases of department stores and other
investments to assist foreign firms in marketing and distributing their products. The fastgrowing information sector accounts for 14%, while real estate and services7.0%, while services and real estate account for
modest shares of 3.85% and 3.02.4%, respectively. All other industries account for the
remaining 10%.
CRS-415%.
6
5 At the same time, U.S. direct investment abroad plummeted in 2005 as U.S. parent firms
reduced the amount of reinvested earnings in their foreign affiliates for distribution to the U.S.
parent firms to take advantage of one-time tax provisions. U.S. direct investment abroad in 2005
totaled $21 billion (in nominal terms).
CRS-4
Table 1. Foreign Direct Investment Position in the United States on
a Historical-Cost Basis at Year-End 2006
(in millions of U.S. dollars)
All countries
Canada
Europe
Belgium
France
Germany
Ireland
Italy
Luxembourg
Netherlands
Sweden
Switzerland
U. Kingdom
Latin America
Africa
Middle East
Asia and Pacific
Australia
Japan
OPEC
All
Manufacindusturing
tries
1,789,087
593,759
158,979
31,315
1,270,570
454,879
12,590
2,977
158,830
69,857
202,581
77,510
28,551
11,132
11,883
986
130,925
30,153
189,293
69,775
22,287
10,591
140,259
78,843
303,232
76,805
79,845
23,520
2,244
-38
17,639
(D)
259,810
(D)
25,727
5,721
210,996
65,866
12,391
21
Wholesale
trade
252,028
14,204
121,169
1,817
7,788
12,284
241
1,174
1,186
15,208
7,037
(D)
61,287
11,732
(D)
(D)
99,974
1,974
86,977
(D)
Retail
trade
32,898
5,648
20,399
(D)
921
2,450
(D)
1,785
0
(D)
(D)
399
3,299
970
(D)
(D)
5,837
2
5,706
(*)
Information
125,963
5,365
111,841
-2
17,037
38,788
540
(D)
5,765
12,044
290
(D)
19,453
4,914
(D)
814
(D)
(D)
2,323
2
Banking
Finance
Real
estate
Services
148,981
16,906
113,698
(D)
20,177
18,975
(D)
1,383
0
(D)
(D)
(D)
(D)
4,118
(D)
1,684
(D)
(D)
8,324
1,431
257,677
51,775
173,087
1,156
28,941
20,425
3,851
(D)
(D)
54,290
245
37,454
(D)
11,612
(D)
(D)
21,074
2,610
16,799
(D)
43,295
3,040
21,791
(D)
396
7,017
(D)
46
(D)
1,866
1,423
1,864
4,892
5,337
265
828
12,034
5,844
5,420
831
62,262
1,076
54,509
-32
3,747
256
(D)
(D)
(D)
9,548
55
520
27,722
109
(D)
(D)
6,447
(D)
4,753
-3
Other
indus
tries
272,225
29,650
199,197
2,283
9,967
24,876
7,242
2,426
83,338
11,909
(D)
7,522
32,364
17,533
1,282
927
23,637
7,550
14,830
(D)
Source: Foreign Direct Investment in the United States: Detail for Historical-Cost Position and Related
Capital and Income Flows, 2004-2006. Survey of Current Business, September, 2007. p. 52.
Note: The position is the stock, or cumulative, 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.
Acquisitions and Establishments
Another way of looking at foreign direct investment is by distinguishing between
transactions in which foreigners acquire existing U.S. firms and those in which foreigners
establish new firms — termed “greenfield” investments. New investments are often
preferred at the local level because they are thought to add to local employment, whereas
a foreign acquisition itself may add little, if any, new employment. In 20032006, outlays for
new investments, which include investments made directly by foreign investors and those
made by existing U.S. affiliates, were $60 billion, slightly above the $54 billion invested
in 2002, the lowest amount since 1994, reflecting continuing weakness in the U.S.
economy. According to the Department of Commerce, the low level of acquisitions and
investments also reflected a weak market in some industries in which foreign direct
investment had been active in previous years and a general fall off in merger and
acquisition activity in a number of countries.6 Acquisitions of existing U.S. firms
accounted for 87% of the new investments by value, while investments by U.S. affiliates
accounted for 55% of the transactions by investor. Investment outlays by foreign affiliates
declined in a number of sectors, including manufacturing, wholesale trade, information,
real estate, and services. Investment outlays increased sharply in the finance sector and
modestly in the retail trade sector. There were two investments over $5 billion in 2003,
double the number in 2002, but down sharply from the12 recorded in 2000.
Economic Performance
By year-end 2002, the latest year for which detailed data are available, foreign firms
employed 5.4 million Americans, less than 4% of the U.S. civilian labor force, and owned
over 9 thousand business establishments.7 Foreign firms have a direct investment
presence in every state. Employment of these firms ranges from over 700 thousand in
California, to less than 7 thousand in South Dakota. Following California, New York
(480 thousand), Texas (428 thousand), Illinois (321 thousand), and Florida (303 thousand)
have are the largest numbers of residents employed by foreign firms. In 2002, 40% of the
foreign firms’ employment was in the manufacturing sector, about twice the share of
manufacturing employment in the U.S. economy as a whole, with average annual
compensation (wages and benefits) per worker of about $63,000. The largest share of
these employees -18% - worked for British-owned affiliates. An additional 13% of the
employees worked for affiliates owned by Japanese firms with employment shares of
German (12%), French (9%), Dutch (9%), Canadian (9%) and Swiss (8.6%) close behind.
Retail and wholesale trade accounted for another 20% of total affiliate employment.
161.5 billion, a 77%increase over the $91.4 billion
invested in 2005. According to the Department of Commerce, the increase in new
investments reflected faster economic growth in the United States and an increase in
merger and acquisition activity.7 Acquisitions of existing U.S. firms accounted for 92%
of the new investments by value. Investments by the existing U.S. affiliates of foreign
firms accounted for 68% of the total transactions by investor, while other foreign direct
investors accounted for the remaining 32% of transactions. Investment outlays by foreign
firms increased from 2005 in all major sectors, except retail trade and services.
7
McNeil, Lawrence R., Foreign Direct Investment in the United States: New Investment in 2006.
Survey of Current Business, June 2007. p. 44.
CRS-5
Investment in finance increased by 360% to manufacturing, information and banking.
Investment outlays decreased in the finance and insurance sectors.
Economic Performance
By year-end 2005, the latest year for which detailed data are available, foreign
firms employed 5.5 million Americans, less than 4% of the U.S. civilian labor force, and
owned over 30 thousand individual business establishments.8 Foreign firms have a direct
investment presence in every state. Employment of these firms ranges from over 543
thousand in California, to about 7 thousand in North Dakota. Following California, New
York (378 thousand), Texas (345 thousand), Pennsylvania (232), Illinois (226 thousand),
and Florida (226 thousand), and have the largest numbers of residents employed by
foreign firms. In 2005, 40% of the foreign firms’ employment was in the manufacturing
sector, more than twice the share of manufacturing employment in the U.S. economy as
a whole, with average annual compensation (wages and benefits) per worker of about
$63,000.
Retail and wholesale trade accounted for another 22% of total affiliate employment. Dutch-affiliated firms are the largest single employers in the retail trade sector and
account for nearly one-third of total affiliate employment in this sector, while Japanese
and British firms account for over half of the employment in the wholesale trade sector.
Employment in the information, insurance, real estate and technical services sectors
6
Anderson, Thomas W., Foreign Direct Investment in the United States: New Investment in
2003. Survey of Current Business, June 2004. P. 59.
7
Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign
Companies, Preliminary 2002 Estimates. Bureau of Economic Analysis, 2003, Table A-1.
CRS-5finance, real estate and technical services sectors
accounts for another 13% of total affiliate employment. Average employee compensation
is highest in the finance sector — $158229,000 — where Swiss, Canadian, Japanese, and
British account for three-fourths of the employment. The rest of the affiliate employment
is spread among a large number of other industries.
The affiliates of foreign firms spent $127140 billion in the United States in 2002 on new
2005 on
new plant and equipment, imported $337468 billion in goods and services and exported $146181
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 foreignowned 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
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
8
Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign
Companies, Preliminary 2005 Estimates. Bureau of Economic Analysis, 2007, Table 2A-1.
CRS-6
firms also display higher capital intensity in a larger number of industries
than all U.S.
establishments.
These differences between foreign-owned firms and all U.S. firms should be viewed
viewed with some caution. First, the two groups of firms are not strictly comparable: the group
group of foreign-owned firms comprises a subset of all foreign firms, which includes primarily
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
the prospect that foreign firms which invest in the United States likely are large firms with
proven technologies or techniques they have successfully transferred to the United States.
Small foreign ventures, experimenting with unproven technologies, are unlikely to want
the added risk of investing overseas. Foreign investors also tend to opt for larger scale
and higher capital-intensity plants than the average U.S. firm to offset the risks inherent
in investing abroad and to generate higher profits to make it economical to manage an
operation far removed from the parent firm.
Conclusions
Foreign direct investment in the United States in 2002 fell to levels not experienced
since 1994 as foreign investors faced a number of uncertainties. Other countries have
seen investment inflows increase markedly. Direct investment inflows going to China,
for instance, were $70 billion in 2002. In 2003, preliminary data indicate that foreign
direct inflows to the United States likely doubled from $40 billion to about $80 billion.
As the U.S. economy recovers, interest rates stay low, and the rate of price inflation stays
2005 rose slightly, but still
equaled far less than the record amount recorded in 2000. Other countries have
experienced a similar turn-around in foreign direct investment inflows, especially to some
of the less developed economies where there is a great potential for investment. As the
rate of growth of the U.S. economy rises, interest rates stay low, and the rate of price
inflation stays in check, foreign direct investment in the United States likely will grow in nominal terms
CRS-6
from the low levels experienced recently. In addition, public concerns seem to be focused
continue
the rebound. Of particular importance will be public concerns over foreign direct
investment in the economy as a whole and on the overall phenomenon referred to as
“globalization,” and how it affectswith its impact on jobs in the
economy. Concerns over foreign direct
investment, where it existsthey exist, stem not so much
from from the perceived potential losses of
international competitiveness that characterized similar concerns
in the 1980s, but from
potential job losses that could result from mergers and acquisitions,
although such losses
could occur whether the acquiring company is foreign- or U.S.-owned. Such concerns are
offset, at least in part, by the benefits that are perceived to be
derived from the inflow of
capital and the potential for new jobs being created in local
areas.
With concerns over areas.
Although job security emerging asis an important public issue, opposition
to foreign direct investment has dissipated. Indeed, nations and sub-national jurisdictions
expend considerable resources vying for foreign investment projects with the capital,
technology, and jobs that accompany them. The U.S. economy remains a prime
destination for foreign direct to some types of
foreign direct investment stem from concerns about the impact of such investment on U.S.
economic and security interests, particularly in light of the terrorist attacks of September
11, 2001. The U.S. economy, however, remains a prime destination for foreign direct
investment. As the pace of economic growth in the Nation
increases relative to that of
foreign economies, foreign direct investment likely will
increase as new investments are
attracted to the United States and existing firms are
encouraged to reinvest profits in their
crsphpgw
U.S. operations.