Order Code RS21118
Updated January 19, 2007August 15, 2008
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 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 fellrose sharply in 20052007 to $9333 billion, up from the $252241 billion U.S. firmsnet they
invested in 20042006, according to the Department of Commerce.2 This drop in investment
spending contrasts with a slight increase in spending by foreign firms in 2005 to reach
$109 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
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
Argersinger, Matthew J., and Erin M. WhitakerBach, Christopher L., U.S. International Transactions, Third Quarter
of 2006 in 2007. Survey of Current Business, January 2006, p. 19
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.
CRS-2
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). Estimates based on third
quarter data indicate that U.S. direct investment abroad in 2006 could top $150 billion.
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 20052007, 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
investors.
Figure 1. U.S.Foreign Direct Investment Abroad and Foreign Direct
Investment in the United States, Annual Flows 1990-2006in the United States and
U.S. Direct Investment Abroad, Annual Flows, 1990-2007 (in
billions of dollars)
$350
Billions of dollars
$300
Foreign Direct Investment in
the United States
$300
$250
$200
$150
U.S. Direct Investment
Abroad
$100
$50
$0
1990
1992
1994
1996
1998
2000
2002
2004
2006
Year
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 $2.1 trillion in8 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 $55397 billion and $237693 billion in 2005, respectively, to $2.5 and $3.5 trillion.
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2005, the latest year for such investment position data.4 More than 70% of these overseas2007, respectively, to reach $3.3 and $5.1 trillion.
4
Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2007: Country and
(continued...)
CRS-3
investments are in developed countries: Europe alone accounts for over half of all U.S.
direct investment abroad, or $1.16 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 20052007
(in millions of U.S. dollars)
Other
All
Manufac- Wholesale InformaBanking Finance Services
industries
industries turing
trade
tionAll
industries
All countries
2,069,983
451,402
142,960
55,479
70,331
393,723
49,202
792,500
Canada
234,831
86,013
12,663
3,809
3,923
37,860
2,180
54,666
Europe
1,059,443
233,608
86,795
33,514
39,021
176,838
30,052
434,057
Belgium
36,733
12,635
3,895
(517)
829
9,580
4,407
5,892
France
60,860
22,214
5,909
1,559
1,901
4,342
1,909
22,957
Germany
86,319
22,200
18,964
2,818
1,385
13,560
4,235
22,653
Ireland
61,596
22,949
4,109
13,260
(D)
7,002
2,675
8,718
Italy
25,931
15,717
1,810
3,716
(D)
1,207
826
2,742
Luxembourg
61,615
4,921
314
(D)
637
2,236
20
51,418
Netherlands
181,384
29,508
14,152
4,385
49
28,695
2,388
98,189
Spain
43,280
10,286
3,117
1,632
1,617
5,328
295
20,948
Sweden
33,398
2,562
932
250
0
4,388
258
25,009
Switzerland
83,424
13,059
11,306
(2,651)
8,610
11,555
2,426
38,740
United Kingdom
323,796
60,355
13,963
6,937
17,018
85,474
9,863
124,190
Latin America
353,011
42,967
15,408
6,496
11,066
111,883
2,300
145,666
Brazil
32,420
13,486
430
804
3,271
4,412
362
7,614
Chile
9,811
1,683
754
371
1,347
2,472
37
2,106
Mexico
71,423
19,395
2,057
1,089
17,671
13,307
469
15,353
Bermuda
90,358
(199)
3,186
18
(*)
48,533
68
38,634
Caribbean
85,295
(1,620)
4,692
(D) (11,703)
35,437
580
53,497
Africa
24,257
2,364
1,001
174
1,031
341
174
3,865
Middle East
21,591
5,499
723
1,802
277
1,150
981
5,542
Asia
376,849
80,951
26,369
9,684
15,014
65,651
13,514
148,704
Australia
113,385
13,174
2,532
510
2,804
6,455
1,948
80,903
China
16,877
8,840
2,245
772
753
13
285
2,253
Hong Kong
37,884
2,369
6,643
1,594
2,518
10,134
558
14,068
Japan
75,491
15,264
8,024
2,667
156
34,032
6,688
8,647
Singapore
48,051
14,307
1,886
1,608
849
(D)
1,225
685
Source: U.S. Direct Investment Abroad: Detail for Historical-Cost Position and Related Capital and Income Flows,
2003-2005. Survey of Current Business, September 2006. p. 106.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to avoid disclosing the data
of individual companies.
2,791,269
Manufacturing
531,315
Whole
-sale
trade
183,038
Information
111,866
Banking
Finance
91,768
531,933
Services
Holding
companies
63,791
927,578
Other
202,661
Canada
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
107,351
25,593
21,385
2,758
2,614
13,538
4,649
30,128
6,173
87,023
19,180
1,370
16,501
(D)
9,886
5,267
6,831
21,833
2,866
Germany
Ireland
Italy
28,408
11,451
2,649
3,792
-42
3,561
1,020
3,076
Luxembourg
113,611
7,585
3,076
1,802
942
15,612
-24
83,595
861
Netherlands
370,160
27,404
17,619
6,694
17,414
37,077
3,023
254,500
3,078
Spain
55,894
13,196
3,582
589
1,771
7,145
2,132
24,880
2,530
Sweden
36,372
4,063
1,048
346
0
(D)
447
19,835
(D)
127,709
11,273
22,166
1,267
13,460
12,229
1,631
59,720
5,803
4,905
1,382
651
78
2,503
99
29
(*)
167
U. Kingdom
398,836
70,083
15,660
36,155
15,221
114,764
13,707
80,656
46,032
Latin Ameica
471,953
63,810
19,794
7,400
-6,701
139,345
2,445
196,942
21,599
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
Switzerland
Turkey
Venezuela
Mexico
Bermuda
U.K. Caribbean
Africa
Middle East
9,974
4,222
237
179
(D)
358
373
2,624
(D)
91,663
22,802
2,761
2,962
(D)
15,420
458
16,157
(D)
148,633
982
2,561
518
(D)
76,741
200
62,770
4,627
90,803
27,764
1,783
3,187
(D)
1,087
579
286
-27,114
1,541
24,721
1,885
422
327
78,416
6,249
(D)
615
29,370
10,727
816
1,513
547
333
1,315
6,625
527
453,959
102,677
33,105
24,678
22,523
89,476
17,365
102,128
31,641
Australia
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 Kong
47,431
3,680
7,475
1,197
2,270
9,514
3,832
17,648
1,815
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
43,778
8,979
1,251
258
1,631
1,118
772
12,578
1,813
Asia
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.
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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
4
Koncz, Jennifer L., and Daniel R. Yorgason, Direct Investment Positions for 2005: Country and
Industry Detail, Survey of Current Business, July, 2006. p. 20.
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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 20042006, U.S. firms focused a slightly greater percent of their investment funds on
developing countries, which received 2928% of the investment funds of U.S. multinational
firms.
Patterns in U.S. direct investment abroad generally reflect fundamental changes that
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
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 2004 Estimates, October 2006. Table III. F. 1.
6
Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of
(continued...)
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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.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
companies to the foreign affiliates. During the period from 1977 to 1997, the foreign affiliates
affiliates increased their share of the total economic activity within U.S. MNCs — the combined
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
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
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
From 2000 to 2003, however, employment among U.S. parent companies fell by 12% to
21.1
million, before rising in 2004 to 21.4 million after 2003 to reach 21.8 million in 2005 as U.S. economic
growth picked up.
Employment among foreign affiliates also rose in 2004 by nearly 4% to 102005 by 2.6% to
10.3 million, from
9.7 10.0 million in 20032004.
After employment losses in the early 1980s, employment at both the parent firms and
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.
CRS-6
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
(...continued)
Current Business, July 2000. p. 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.
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 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
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.