Order Code RS21857
March 23, 2005
CRS Report for Congress
Received through the CRS Web
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
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 2004, according
to preliminary data, foreigners invested about $100 billion. Foreign direct investments
are highly sought after by State and local governments that are struggling to create
additional jobs in their localities. In addition, many 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 be updated as events warrant.
Foreigners invested about $100 billion in U.S. businesses and real estate , in 2004,
according to partial-year data 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.
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).
Weinberg, Douglas B., and Kelly K. Pierce U.S. International Transactions : Third Quarter
2004. Survey of Current Business, January 2005, p. 54.
Congressional Research Service ˜ The Library of Congress
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
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)
ManufacRetail Infor- BankFiReal
nance estate vices
All countries 1,378,001 475,475 182,176 24,171 120,122 87,537 185,655 46,999 28,358 227,509
10,535 25,623 4,560 1,405 24,838
61,141 132,400 20,774 24,788 162,277
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 $ 49 billion and $ 410 billion in 2003, respectively, to $1. 5 and $2. 4
Borga, Maria, and Daniel R. Yorgason, Direct Investment Position for 2003: Country and
Industry Detail, Survey of Current Business, July, 2004. P. 40.
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).
WholeManufacRetail Infor- BankFiIndussale
2,257 16,909 18,357 27,429
3,011 13,222 11,282 11,910
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.
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 2003, 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 French are the largest investors in the
information sector as a result of a number of large media company acquisitions. German
and British investments dominate other foreign investments in the banking sector, while
Dutch, British, French, and Canadian investments account for over half of the investments
in the finance sector. Canada’s $ 36 billion investment in the U.S. banking and finance
sectors is matched by the $35 billion invested by British firms, followed by France ($ 28
billion) and Germany ($ 23 billion). Foreign direct investment in the manufacturing sector
is represented by a number of countries, each with substantial investments: investments
by Switzerland ($ 72 billion), the United Kingdom ($71 billion), the Netherlands ($64
billion), France ($ 55 billion), and Germany ($53 billion) account for 70% 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 35% of foreign direct investment in the
United States, a decline from periods when such investment accounted for a majority
share of the total. Another 18% 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 services account for
modest shares of 3. 8% and 3.0%, respectively. All other industries account for the
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 2003, 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.
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.
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
Anderson, Thomas W., Foreign Direct Investment in the United States: New Investment in
2003. Survey of Current Business, June 2004. P. 59.
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.
accounts for another 13% of total affiliate employment. Average employee compensation
is highest in the finance sector — $ 158,000 — 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 $ 127 billion in the United States in 2002 on new
plant and equipment, imported $ 337 billion in goods and services and exported $ 146
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
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.
These 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.
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
in check, foreign direct investment in the United States likely will grow in nominal terms
from the low levels experienced recently. In addition, public concerns seem to be focused
on the overall phenomenon referred to as “globalization,” and how it affects jobs in the
economy. Concerns over foreign direct investment, where it exists, stem not so much
from 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
With concerns over job security emerging as 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 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 U.S. operations.