Order Code RS21118
Updated April 29, 200526, 2006
CRS Report for Congress
Received through the CRS Web
U.S. Direct Investment Abroad: Trends and
Current Issues
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
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 economic analystseconomists conclude that
direct direct
investment abroad overall does not lead to fewer jobs or lower incomes overall
for for
Americans and that the majority of jobs lost among U.S. manufacturing firms over
the the
past decade reflect a broad restructuring of U.S. manufacturing industries. This
report 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 abroad1, reached $248 billion in 2004, a 40% increase from the amount
invested in 2003 and more than twice the amount foreign firms invested in the United
States, according to the Department of Commerce.2 This level of investment spending
sets a new record in nominal terms (not accounting for inflation) that U.S. firms invested
abroad during a year. The spending on foreign investment stems from a number of
factors, including equity capital outflows associated with a number of large U.S.
acquisitions of foreign firms. Reinvested earnings also increased as economic activityfell sharply in 2005 to $21 billion, or less than one-tenth of the $252
billion U.S. firms invested in 2004, according to the Department of Commerce.2 This
drop in investment spending contrasts with a 20% increase in spending by foreign firms
in 2005 to reach $129 billion. The drop in U.S. direct investment abroad 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
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, 2004 in 2005. Survey of Current Business, April
2005, p. 46.
Congressional Research Service ˜ The Library of Congress
CRS-2
picked up in some European countries and in the petroleum industry. Foreign direct
investment in the United States also increased in 2004, chalking up $113 billion in new
investment, nearly triple the $40 billion invested in 2003.
Relative rates of growth between U.S. and foreign economies largely determine the
April 2005, p. 468. 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.
Congressional Research Service ˜ The Library of Congress
CRS-2
tax provisions in the American Jobs Creation Act of 2004 (P.L. 108-357). Foreign direct
investment in the United States increased by 20% in 2005, chalking up $129 billion in
new investment.
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. Since 2002From 2002 to 2005, U.S. direct
investment abroad has been
was more than twice the amount foreigners have invested in the U.S.
economy, reflecting the
period of slower growth in the economy from 2001-2003. On the
whole, U.S. firms continue to beare 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 investors.
Table 1 indicates that the overseas direct investment position of U.S. firms on a
investors.
Figure 1. U.S. Direct Investment Abroad and Foreign Direct
Direct Investment in the U.S. Economy, annual Flows 1982-2004Annual Flows
1990-2005 (in billions
of dollars)
$350
Billions of dollars
$350
$300
Foreign Direct Investment in the
the United States
$250
$200
$150
$100
U.S. Direct Investment
Abroad
$100
$50
$0
1982
1984
1986
1988
50
$0
1990
1992
1994
1996
1998
2000
2002
2004
Year
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 $1.82.1 trillion in
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
(continued...)
CRS-3
2003Department 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 $304 billion and $569 billion in 2004, respectively, to $2.4 and $3.3 trillion.
CRS-3
2004, the latest year for such investment position data.4 More than 70% of these overseas
investments are in developed countries: Europe alone accounts for over half of all U.S.
direct investment abroad, or $963 billion1.1 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 2003
(in millions of U.S. dollars)
All countries
Canada
Europe
Belgium
France
Germany
Ireland
Italy
Luxembourg
Netherlands
Spain
Sweden
Switzerland
United Kingdom
Latin America
Brazil
Venezuela
Mexico
Bermuda
Africa
Middle East
Asia
Australia
China
Hong Kong
Indonesia
Japan
Korea
Singapore
All
indusManutries
facturing
1,788,911
378,033
192,409
963,087
25,804
47,914
80,163
55,463
30,417
66,919
178,933
38,215
28,905
86,435
272,640
304,023
29,915
10,859
61,526
84,609
18,960
16,942
293,490
40,985
11,877
44,323
10,387
73,435
13,318
57,589
74,878
177,951
8,230
19,942
18,985
15,002
18,159
2,796
21,060
8,707
1,024
8,721
40,548
46,775
10,326
2,698
20,089
648
1,266
4,537
72,625
10,841
6,791
4,045
470
14,422
6,842
13,394
Wholesale
Infortrade
mation
140,579
47,525
12,653
89,467
2,708
4,016
20,878
2,998
2,593
(D)
21,016
2,849
1,079
11,882
9,901
12,120
1,460
253
2,030
2,417
598
8
25,734
2,664
1,332
8,201
(D)
6,544
827
(D)
2,194
30,328
201
-146
3,347
14,048
1,884
(D)
3,470
874
166
-2,711
7,675
5,963
415
(D)
1,230
362
1,196
1,535
6,310
334
115
849
-189
3,179
98
1,462
Banking
Finance Services
63,655 299,805
40,599
2,661
38,142
638
2,908
1,412
445
239
575
29
1,665
(D)
7,103
18,596
9,086
1,948
(D)
16,867
0
618
846
12,303
2,284
413
1,983
406
609
2,021
843
34,181
116,384
7,437
3,798
11,644
8,681
1,831
79
9,277
3,249
384
3,264
62,359
81,722
4,406
337
7,193
45,222
605
1,015
65,899
5,028
-49
14,951
(D)
34,215
1,583
2,912
2,035
21,051
1,434
1,277
2,027
1,655
734
(D)
1,408
274
183
534
9,794
1,555
615
-88
442
20
121
1,092
14,744
1,730
93
1,122
90
9,101
559
(D)
Other
industries
693,138
38,528
460,508
5,151
15,988
21,783
(D)
4,963
60,093
118,857
20,511
(D)
57,631
108,158
121,983
7,086
1,176
12,581
35,708
2,458
3,102
66,559
7,404
1,375
10,001
541
5,349
1,386
(D)
End 2004
(in millions of U.S. dollars)
All
Manufac- Wholesale
Other
Information Banking Finance Services
industries turing
trade
industries
All countries
2,063,998
428,235
136,949
56,422
68,100 370,965
42,110
840,755
Canada
216,571
76,786
11,797
3,485
2,981
36,889
2,281
50,085
Europe
1,089,941
217,088
81,805
34,849
40,293 163,393
21,987
503,346
Belgium
27,761
8,912
4,085
-306
809
8,240
1,129
4,880
France
58,927
21,330
5,778
1,238
3,269
4,407
1,724
21,122
Germany
79,579
20,147
16,406
2,216
1,674
10,518
3,646
24,371
Ireland
73,153
21,290
4,598
17,029
(D)
11,101
1,968
16,094
Italy
33,378
22,039
2,664
2,862
-26
2,135
969
(D)
Luxembourg
74,902
6,632
179
(D)
667
2,083
29
(D)
Netherlands
201,918
24,977
13,397
4,431
34
22,495
1,573
131,059
Spain
45,251
11,359
2,933
1,295
1,861
4,672
(D)
22,751
Sweden
36,399
1,435
1,100
227
(D)
4,344
243
(D)
Switzerland
100,727
10,785
10,083
-2,373
7,920
4,528
513
(D)
United Kingdom
302,523
52,295
14,146
6,217
18,009
84,475
8,772
108,230
Latin America
325,891
46,913
11,118
7,061
8,555
98,998
2,194
128,622
Brazil
33,267
12,220
755
732
2,433
4,688
378
7,654
Chile
10,196
1,767
693
522
1,184
2,329
38
(D)
Mexico
66,554
19,438
1,954
1,495
16,811
11,160
567
12,858
Bermuda
91,265
-42
1,691
487
0
50,960
111
37,953
Caribbean
63,066
1,255
2,337
668
-12,452
22,881
479
46,221
Africa
22,259
2,255
1,116
1,273
797
141
141
3,459
Middle East
19,235
4,657
581
1,745
237
1,064
852
4,280
Asia
390,101
80,537
30,531
8,010
15,237
70,480
14,654
150,963
China
15,430
8,222
1,825
368
534
-2
688
(D)
Hong Kong
43,743
3,608
8,625
927
2,178
12,291
1,451
14,614
Japan
80,246
14,598
8,242
3,701
244
39,189
7,697
6,565
Korea
17,332
7,826
1,089
211
3,833
2,062
781
1,529
Singapore
56,900
14,435
(D)
1,383
835
2,529
425
(D)
Source: U.S. Direct Investment Abroad: Detail for Historical-Cost Position and Related Capital and Income Flows,
2003. Survey of Current Business, September 20042005. p. 90136.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to avoid disclosing the data
of individual companies.
3
(...continued)
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 $229 billion and $690 billion in 2003, respectively, to $2.1 and $2.7 trillion.
4
Borga, Maria, and Daniel R. Yorgason, Direct Investment Positions for 2003: Country and
Industry Detail, Survey of Current Business, July, 2004. P. 40.
CRS-4
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
4
Koncz, Jennifer L., and Daniel R. Yorgason, Direct Investment Positions for 2003: Country and
Industry Detail, Survey of Current Business, July, 2005. P. 53.
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2000. In 20042000. In 2003, U.S. firms focused a slightly greater percent of their investment funds on
developing countries, which received 2529% of the investment funds of U.S. multinational
firms.
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 2000-20032004 period increased about 3656%. 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 98% 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
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
5
U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign
Affiliates, Preliminary 20022003 Estimates, October 2004. Table III. F. 1.
CRS-5
more concentrated among the largest foreign affiliates of U.S. parent firms: the largest
2% of the affiliates account for 90% of affiliate employment.62005. Table III. F. 1.
6
Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of
Current Business, July 2000. pp. 24-45.
CRS-5
While U.S. MNCs used their economic strengths to expand abroad during the 1980s
and 1990sbetween 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
share of all U.S. business gross domestic product (GDP) — the broadest measure of economic
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
Employment
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 did fallfell during the
early 1980s, although it early
1980s, but increased in the 1992-20022000 period, from 17.5 million to 22.4
million23.9 million. From
2000 to 2003, however, employment among U.S. parent companies fell by 9% to 21.7
million in 2003 during the slowdown in the rate of U.S. economic growth.
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
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
6
and losses among MNCs more likely reflect fundamental shifts within the U.S. economy,
than any formal or informal efforts to shift employment abroad.
7
Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 19982003. Survey of
Current Business, July 2000. pp. 26-45.
7
Mataloni, Operations of U.S. Multinational Companies. p. 31.
2005. p. 15.
8
Ibid., p. 31.
9
Ibid., p. 31.
CRS-6
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.
Conclusions
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 mid1990s. 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 20012003, about 98% 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
11
Mataloni, Operations of U.S. Multinational Companies. p. 41.
CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based
on Foreign Investment Data, by James K. Jackson.