Order Code RS21118
Updated August 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 DivisionNovember 5, 2009
Congressional Research Service
7-5700
www.crs.gov
RS21118
CRS Report for Congress
Prepared for Members and Committees of Congress
U.S. Direct Investment Abroad: Trends and Current Issues
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 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
Congressional Research Service
U.S. Direct Investment Abroad: Trends and Current Issues
Contents
Recent Investments .....................................................................................................................1
U.S. Multinationals .....................................................................................................................4
Employment ...............................................................................................................................5
Conclusions ................................................................................................................................6
Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment
Abroad, Annual Flows, 1990-2008 (in billions of dollars).........................................................2
Tables
Table 1. U.S. Direct Investment Position Abroad on a Historical-Cost Basis at Year-End
2008 ........................................................................................................................................3
Contacts
Author Contact Information ........................................................................................................7
Congressional Research Service
U.S. Direct Investment Abroad: Trends and Current Issues
Recent Investments
New spending by U.S. firms on businesses and real estate abroad, or U.S. direct investment
abroad,1 although substantial, fell slightly in 2008 compared to 2007. Net investments fell from
$333 billion in 2007 to $318 billion in 2008, 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.
CRS-2
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
Jobs
Creation Act of 2004 (P.L. 108-357).
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. The drop in U.S. direct investment abroad in 2008
compared with 2007 reflected an increase in equity capital, a decrease in intercompany debt, an
increase in reinvested earnings arising from an increase in distributed earnings, and a large
currency devaluation.. The sharp drop in stock market valuations around the world in 2008
devalued U.S. direct investment abroad, measured at market value, by $2.2 trillion. During the
same period, the market value of foreign firms operating in the United states experienced a loss of
over $1.0 trillion in 2008.
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 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. Data for the first two quarters of
2009 indicate that U.S. direct investment abroad is about half the amount recorded in the
comparable period in 2008. Such investments way well pick up in the second half of the year as
the rate of economic growth improves. On the 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. Foreign Direct Investment in the United States and
U.S. Direct Investment Abroad, Annual Flows, 1990-2007 (in
billions of dollars)
$350
Billions of dollars
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 $2.8 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
(continued...)
CRS-3
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)
All
industries
All countries
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.
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
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
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 2000-2004 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.
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 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 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.
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
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. investors.
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
Weinberg, Douglas B., Erin M. Whitaker, and Gregory A. Tenentes, U.S. International Transactions: Fourth quarter
and Year 2008. Survey of Current Business, April 2009, p. 28. 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
1
U.S. Direct Investment Abroad: Trends and Current Issues
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment
Abroad, Annual Flows, 1990-2008 (in billions of dollars)
$350
Billions of dollars
$300
Foreign Direct Investment in
the United S tates
$250
$200
$150
$100
U.S . Direct Investment
Abroad
$50
$0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Year
Source: U.S. Department of Commerce
Note: The drop in U.S. direct investment abroad 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).
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 $3.2 trillion in 2008, 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 $1.8
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.
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 measured at current
cost increased by $247 billion, but fell when measured by market value by $2.2 trillion in 2008, to reach $3.7 and $3.1
trillion, respectively.
4
Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2008: Country and Industry Detail, Survey of
Current Business, July, 2009. p. 32.
Congressional Research Service
2
U.S. Direct Investment Abroad: Trends and Current Issues
Table 1. U.S. Direct Investment Position Abroad on a Historical-Cost Basis
at Year-End 2008
(in millions of dollars)
Holding
companies
Other
81,242
1,128,538
212,409
32,728
8,164
30,511
33,472
80,823
328,307
53,845
750,883
116,716
-758
(D)
31,434
1,811
2,857
(D)
4,850
2,250
2,059
9,201
2,602
12,398
12,375
33,993
10,501
2,495
2,321
14,441
5,401
32,769
8,450
146,194
19,051
1,249
15,723
10,227
24,235
(D)
27,596
26,588
28,653
11,684
3,153
1,967
412
3,071
1,160
1,925
5,221
Luxemb.
163,167
6,305
2,684
1,734
1,033
30,383
80
120,320
467
Netherl.
442,926
33,026
17,120
8,099
(D)
49,629
(D)
306,257
(D)
Spain
69,649
11,379
3,337
254
986
7,506
2,123
40,850
3,138
Sweden
43,391
3,286
736
749
(D)
15,618
546
19,862
(D)
Switzer.
123,358
8,996
21,423
2,649
7,240
4,844
632
70,100
7,284
6,089
1,507
1,749
-42
2,703
65
20
-4
93
420,873
56,685
17,689
42,867
19,727
122,854
13,913
101,062
37,060
563,809
60,709
24,265
8,609
12,699
195,083
2,078
204,950
24,724
Brazil
45,500
20,357
980
2,210
3,096
9,286
616
6,287
444
Chile
12,613
2,238
968
127
1,394
3,978
129
617
2,104
Venez’
17,332
3,951
263
81
(D)
3,057
206
7,610
(D)
Mexico
95,618
21,821
2,361
2,758
(D)
15,736
460
16,865
(D)
Bermuda
165,857
1,303
3,790
632
(D)
81,179
272
72,566
(D)
Dom.
Republic
960
599
137
(D)
(D)
1
1
(*)
10
UK Car.
139,290
695
10,699
436
-16,963
(D)
98
(D)
1,716
Africa
36,640
2,856
1,157
128
1,899
1,814
372
8,664
1,375
Middle
East
32,488
11,763
2,145
1,447
720
569
933
7,594
799
491,910
104,598
32,334
26,596
41,740
75,544
15,850
125,935
35,324
Austral.
88,549
12,743
3,856
13,100
2,285
11,275
3,762
13,875
7,310
China
45,695
21,428
3,219
223
(D)
1,895
773
1,556
(D)
HK
51,505
3,742
6,858
833
3,694
11,535
2,931
19,552
2,360
Japan
79,235
17,380
9,036
5,609
1,144
28,032
2,806
5,911
9,316
Korea
27,673
9,165
1,812
448
(D)
3,625
332
(D)
(D)
All
industries
Manufacturing
Wholesale
trade
Information
Banking
Finance
Services
3,162,021
512,293
178,213
121,864
141,557
634,046
227,298
72,523
18,332
4,113
3,676
Europe
1,809,876
259,844
99,980
80,971
Belgium
65,054
20,058
6,234
France
75,040
29,207
Germany
110,784
Ireland
All
Canada
Italy
Turkey
UK
LAmerica
Asia
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All
industries
Sing.
Manufacturing
Wholesale
trade
Information
Banking
Finance
Services
Holding
companies
Other
106,529
16,544
3,322
2,130
(D)
6,782
1,329
71,250
(D)
Taiwan
16,604
3,816
2,018
310
(D)
7,141
295
102
(D)
OPEC
69,299
9,879
1,909
146
(D)
4,206
828
29,774
(D)
Source: Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2008: Country and Industry Detail.
Survey of Current Business, July 2009. p.32.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to avoid disclosing
the data of individual companies.
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 2008, U.S. firms focused
a slightly greater percent of their investment funds in Europe and Latin America, while scaling
down the share of their investment spending in Canada. Developed countries received 70% of the
investment funds of U.S. multinational firms, while developing countries received 30%.
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. The total
amount of U.S. direct investment abroad, or the position, during the 2000-2008 period more than
doubled, rising from $920 billion to $2.4 trillion. Investments in the banking, finance, and
insurance sectors all fell in 2008, reflecting the financial crisis. Generally, service-oriented sectors
continued to grow through 2008. Within the manufacturing sector, the direct investment position
fell in most sectors in 2008, reflecting the economic recession that had started earlier in that year.
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
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U.S. Direct Investment Abroad: Trends and Current Issues
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
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 1989.7 In 2007 (the latest year for which estimates are available), U.S.
parent companies accounted for about 21% of total U.S. business activity. These MNC parent
companies accounted for about 41% of total U.S. manufacturing activity, down from 46% in
2000.
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 2000 to 2007, 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 30%.8
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 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 22 million in 2007 as U.S. economic growth picked up.
Employment among foreign affiliates also rose in 2007 by 4.0% to 10.0 million, from 9.6 million
in 2006.
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 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.
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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. Both the U.S.
parent companies and the foreign affiliates lost employment during the first part of the 2000s as
the U.S. economy recovered from a period of slow growth. During such downturns, U.S. parent
firms and their foreign affiliates often lose or gain 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.
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 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,9 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.10 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.
9
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.
10
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Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
Congressional Research Service
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