Order Code RS21118
Updated April 29, 2005
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 analysts conclude that
direct investment abroad overall 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 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 activity
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. 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
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 2002, U.S. direct investment abroad has been
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. U.S. firms continue to be 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
Figure 1. U.S. Direct Investment Abroad and Foreign Direct
Investment in the U.S. Economy, annual Flows 1982-2004 (in billions
of dollars)
Billions of dollars
$350
$300
Foreign Direct Investment in the
United States
$250
$200
$150
U.S. Direct Investment
Abroad
$100
$50
$0
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
U.S. Department of Commerce
historical-cost basis,3 or the cumulative amount at book value, reached $1.8 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
2003, 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 billion. 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
Whole-
Other
indus-
Manu-
sale
Infor-
Bank-
indus-
tries
facturing
trade
mation
ing
Finance
Services
tries
All countries
1,788,911
378,033
140,579
47,525
63,655
299,805
40,599
693,138

Canada
192,409
74,878
12,653
2,194
2,661
34,181
2,035
38,528
Europe
963,087
177,951
89,467
30,328
38,142
116,384
21,051
460,508
Belgium
25,804
8,230
2,708
201
638
7,437
1,434
5,151
France
47,914
19,942
4,016
-146
2,908
3,798
1,277
15,988
Germany
80,163
18,985
20,878
3,347
1,412
11,644
2,027
21,783
Ireland
55,463
15,002
2,998
14,048
445
8,681
1,655
(D)
Italy
30,417
18,159
2,593
1,884
239
1,831
734
4,963
Luxembourg
66,919
2,796
(D)
(D)
575
79
(D)
60,093
Netherlands
178,933
21,060
21,016
3,470
29
9,277
1,408
118,857
Spain
38,215
8,707
2,849
874
1,665
3,249
274
20,511
Sweden
28,905
1,024
1,079
166
(D)
384
183
(D)
Switzerland
86,435
8,721
11,882
-2,711
7,103
3,264
534
57,631
United Kingdom
272,640
40,548
9,901
7,675
18,596
62,359
9,794
108,158
Latin America
304,023
46,775
12,120
5,963
9,086
81,722
1,555
121,983
Brazil
29,915
10,326
1,460
415
1,948
4,406
615
7,086
Venezuela
10,859
2,698
253
(D)
(D)
337
-88
1,176
Mexico
61,526
20,089
2,030
1,230
16,867
7,193
442
12,581
Bermuda
84,609
648
2,417
362
0
45,222
20
35,708
Africa
18,960
1,266
598
1,196
618
605
121
2,458
Middle East
16,942
4,537
8
1,535
846
1,015
1,092
3,102
Asia
293,490
72,625
25,734
6,310
12,303
65,899
14,744
66,559
Australia
40,985
10,841
2,664
334
2,284
5,028
1,730
7,404
China
11,877
6,791
1,332
115
413
-49
93
1,375
Hong Kong
44,323
4,045
8,201
849
1,983
14,951
1,122
10,001
Indonesia
10,387
470
(D)
-189
406
(D)
90
541
Japan
73,435
14,422
6,544
3,179
609
34,215
9,101
5,349
Korea
13,318
6,842
827
98
2,021
1,583
559
1,386
Singapore
57,589
13,394
(D)
1,462
843
2,912
(D)
(D)
Source: U.S. Direct Investment Abroad: Detail for Historical-Cost Position and Related Capital and Income Flows,
2003. Survey of Current Business, September 2004. p. 90.
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
2000. In 2003, U.S. firms focused a slightly greater percent of their investment funds on
developing countries, which received 25% 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 2000-2003 period increased about 36%. 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 9% 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 2002 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.6
While U.S. MNCs used their economic strengths to expand abroad during the 1980s
and 1990s, 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 did fall during the
early 1980s, although it increased in the 1992-2002 period, from 17.5 million to 22.4
million.
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 Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of
Current Business, July 2000. pp. 26-45.
7 Mataloni, Operations of U.S. Multinational Companies. p. 31.
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 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 2001, about 9% 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 Mataloni, Operations of U.S. Multinational Companies. p. 41.
11 CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based
on Foreign Investment Data, by James K. Jackson.

---