Order Code RS21857
Updated March 19, 2008
Foreign Direct Investment in the United
States: An Economic Analysis
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Foreign direct investment in the United States1 declined sharply after 2000, when
a record $300 billion was invested in U.S. businesses and real estate. In 2006, according
to Department of Commerce data, foreigners invested $184 billion. Foreign direct
investments are highly sought after by many State and local governments that are
struggling to create additional jobs in their localities. While some in Congress
encourage such investment to offset the perceived negative economic effects of U.S.
firms investing abroad, others are concerned about foreign acquisitions of U.S. firms
that are considered essential to U.S. national and economic security. This report will be
updated as events warrant.
Recent Investments
Foreigners invested $180 billion in U.S. businesses and real estate in 2006, according
to data published by the Department of Commerce.2 As Figure 1 shows, this represents
an increase over the amount invested in 2005. Investments by U.S. firms abroad also
rebounded in 2006 to $235 billion, up sharply from the $8 billion net they brought home
in 2005. The increase in foreign direct investment flows, mirrors a turn-around in global
flows. According to the United Nations’ World Investment Report, global foreign direct
investment inflows increased by 29% in 2005 after a slight increase in 2004 and three
years of declining flows prior to 2004 that arose from competitive international price
1 The United States defines foreign direct investment as the ownership or control, directly or
indirectly, by one foreign person (individual, branch, partnership, association, government, etc.)
of 10% or more of the voting securities of an incorporated U.S. business enterprise or an
equivalent interest in an unincorporated U.S. business enterprise. 15 CFR § 806.15 (a)(1).
2 Lowe, Jeffrey H., Foreign Direct Investment in the United States. Survey of Current Business,
September 2007, p. 39. 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.

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pressures leading to greater internationalization of production, rising commodity prices,
and increased international merger and acquisition activity in some areas.
Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows, 1990-2006 (in billions of
dollars)
Billions of dollars
$350
$300
Foreign Direct Investment in
the United States
$250
$200
U.S. Direct Investment
$150
Abroad
$100
$50
$0
-$50
1990
1992
1994
1996
1998
2000
2002
2004
2006
Year
Source: CRS from U.S. Department of Commerce data
The cumulative amount, or stock, of foreign direct investment in the United States
on a historical cost basis3 increased by $175 billion in 2006 to about $1.8 trillion. This
marked an increase of 8% over the previous year and a significant change from the decline
in foreign investment spending that had occurred since 2000.4 The rise in the value of
foreign direct includes an upward valuation adjustment of existing investments and
increased investment spending that was driven by the stronger growth rate of the U.S.
economy, the world-wide resurgence in cross-border merger and acquisition activity, and
investment in the U.S. financial and insurance industries as overseas banks and finance
and insurance companies sought access to the profitable U.S. financial market.5
3 The position, or stock, is the net book value of foreign direct investors’ equity in, and
outstanding loans to, their affiliates in the United States. A change in the position in a given year
consists of three components: equity and intercompany inflows, reinvested earnings of
incorporated affiliates, and valuation adjustments to account for changes in the value of financial
assets. The Commerce Department also publishes data on the foreign direct investment position
valued on a current-cost and market value bases. These estimates indicate that foreign direct
investment increased by $231 billion and $416 billion in 2006, respectively, to reach $2.1 and
$3.2 trillion.
4 Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2006: Country and
Industry Detail, Survey of Current Business, July, 2007. p. 21.
5 McNeil, Lawrence, Foreign Direct Investment in the United States: New Investment in 2006,
Survey of Current Business, June 2007, pp. 44-46.

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As a share of the total amount of nonresidential investment spending in the U.S.
economy, investment spending by foreign firms accounted for 9% in 2005, far below the
19% reached in 2000. Foreign firms’ spending was sustained by a large increase in
intercompany debt flows as U.S. affiliates turned to net borrowing from their foreign
parent companies. Direct investment was also financed through reinvested earnings and
an increase in equity capital, although the increase in the amount of equity capital was the
lowest amount since the 1995. The lower amount of equity capital represents the
relatively slower rate of economic growth in Europe that reduced the amount of funds
European parent firms had available to invest and the higher rate of economic growth
among the U.S. affiliates which improved their profit position.6
With over $303 billion invested in the United States, Great Britain is the largest
foreign direct investor, as is indicated in Table 1. Japan has moved into the position as
the second largest foreign direct investor in the U.S. economy with about $211 billion in
investments. Following the Japanese are the Germans ($203 billion), the Dutch ($189
billion), and the French ($159 billion).
In some cases, investments by one or two countries dominate certain industrial
sectors, suggesting that there is a rough form of international specialization present in the
investment patterns of foreign multinational firms. At year end 2006, the Netherlands and
the United Kingdom accounted for the bulk of foreign investments in the U.S. petroleum
sector, reflecting investments by two giant companies: Royal Dutch Shell and British
Petroleum. Japanese investments in the U.S. wholesale trade sector are also substantial,
followed by British investments, and European investors account for the bulk of foreign
investments in the retail trade sector. German investors are the largest investors in the
information sector as a result of a number of large media company acquisitions. French,
German, and British investments dominate other foreign investments in the banking
sector, while Dutch, Canadian, British, and French investments account for over half of
the investments in the finance sector. Canada’s $68 billion investment in the U.S.
banking and finance sectors is nearly matched by the investments by British firms,
followed by France ($49 billion) and Germany ($39 billion). Foreign direct investment
in the manufacturing sector is represented by a number of countries, each with substantial
investments: investments by Switzerland ($79 billion), Germany ($77 billion), the United
Kingdom ($77 billion), France ($70 billion), the Netherlands ($70 billion) account for
two-thirds of the total amount of foreign direct investment in this sector.
Investment spending by developed economies accounts for 95% of all foreign direct
investment in the United States. These investments are predominately in the
manufacturing sector, which accounts for about 33% of foreign direct investment in the
United States, a decline from periods when such investment accounted for a majority
share of the total. Another 23% is in the banking and finance sectors, and 16% is in the
retail and wholesale trade sectors, reflecting purchases of department stores and other
investments to assist foreign firms in marketing and distributing their products. The fast-
growing information sector accounts for 7.0%, while services and real estate account for
6 At the same time, U.S. direct investment abroad plummeted in 2005 as U.S. parent firms
reduced the amount of reinvested earnings in their foreign affiliates for distribution to the U.S.
parent firms to take advantage of one-time tax provisions. U.S. direct investment abroad in 2005
totaled $21 billion (in nominal terms).

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modest shares of 3.5% and 2.4%, respectively. All other industries account for the
remaining 15%.
Table 1. Foreign Direct Investment Position in the United States on
a Historical-Cost Basis at Year-End 2006
(in millions of U.S. dollars)
All
Manufac-
Wholesale
Retail
Infor-
Banking
Finance
Real
Services
Other
industries
turing
trade
trade
mation
Estate
indus-
tries
All countries
1,789,087
593,759
252,028
32,898
125,963
148,981
257,677
43,295
62,262 272,225
Canada
158,979
31,315
14,204
5,648
5,365
16,906
51,775
3,040
1,076
29,650
Europe
1,270,570
454,879
121,169
20,399
111,841
113,698
173,087
21,791
54,509 199,197
Belgium
12,590
2,977
1,817
(D)
-2
(D)
1,156
(D)
-32
2,283
France
158,830
69,857
7,788
921
17,037
20,177
28,941
396
3,747
9,967
Germany
202,581
77,510
12,284
2,450
38,788
18,975
20,425
7,017
256
24,876
Ireland
28,551
11,132
241
(D)
540
(D)
3,851
(D)
(D)
7,242
Italy
11,883
986
1,174
1,785
(D)
1,383
(D)
46
(D)
2,426
Luxembourg
130,925
30,153
1,186
0
5,765
0
(D)
(D)
(D)
83,338
Netherlands
189,293
69,775
15,208
(D)
12,044
(D)
54,290
1,866
9,548
11,909
Sweden
22,287
10,591
7,037
(D)
290
(D)
245
1,423
55
(D)
Switzerland
140,259
78,843
(D)
399
(D)
(D)
37,454
1,864
520
7,522
U. Kingdom
303,232
76,805
61,287
3,299
19,453
(D)
(D)
4,892
27,722
32,364
Latin America
79,845
23,520
11,732
970
4,914
4,118
11,612
5,337
109
17,533
Africa
2,244
-38
(D)
(D)
(D)
(D)
(D)
265
(D)
1,282
Middle East
17,639
(D)
(D)
(D)
814
1,684
(D)
828
(D)
927
Asia and Pacific
259,810
(D)
99,974
5,837
(D)
(D)
21,074
12,034
6,447
23,637
Australia
25,727
5,721
1,974
2
(D)
(D)
2,610
5,844
(D)
7,550
Japan
210,996
65,866
86,977
5,706
2,323
8,324
16,799
5,420
4,753
14,830
OPEC
12,391
21
(D)
(*)
2
1,431
(D)
831
-3
(D)
Source: Foreign Direct Investment in the United States: Detail for Historical-Cost Position and Related
Capital and Income Flows, 2004-2006. Survey of Current Business, September, 2007. p. 52.
Note: The position is the stock, or cumulative, book value of foreign direct investors’ equity in, and net
outstanding loans to, their U.S. affiliates. A negative position may result as U.S. affiliates repay debts to
their foreign parents, and as foreign parents borrow funds from their U.S. affiliates. D indicates that data
have been suppressed by the Department of Commerce to avoid the disclosure of data of individual
companies.
Acquisitions and Establishments
Another way of looking at foreign direct investment is by distinguishing between
transactions in which foreigners acquire existing U.S. firms and those in which foreigners
establish new firms — termed “greenfield” investments. New investments are often
preferred at the local level because they are thought to add to local employment, whereas
a foreign acquisition itself may add little, if any, new employment. In 2006, outlays for
new investments, which include investments made directly by foreign investors and those
made by existing U.S. affiliates, were $161.5 billion, a 77%increase over the $91.4 billion
invested in 2005. According to the Department of Commerce, the increase in new
investments reflected faster economic growth in the United States and an increase in
merger and acquisition activity.7 Acquisitions of existing U.S. firms accounted for 92%
of the new investments by value. Investments by the existing U.S. affiliates of foreign
firms accounted for 68% of the total transactions by investor, while other foreign direct
7 McNeil, Lawrence R., Foreign Direct Investment in the United States: New Investment in 2006.
Survey of Current Business, June 2007. p. 44.

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investors accounted for the remaining 32% of transactions. Investment outlays by foreign
firms increased from 2005 in all major sectors, except retail trade and services.
Investment in finance increased by 360% to manufacturing, information and banking.
Investment outlays decreased in the finance and insurance sectors.
Economic Performance
By year-end 2005, the latest year for which detailed data are available, foreign firms
employed 5.5 million Americans, less than 4% of the U.S. civilian labor force, and owned
over 30 thousand individual business establishments.8 Foreign firms have a direct
investment presence in every state. Employment of these firms ranges from over 543
thousand in California, to about 7 thousand in North Dakota. Following California, New
York (378 thousand), Texas (345 thousand), Pennsylvania (232), Illinois (226 thousand),
and Florida (226 thousand), and have the largest numbers of residents employed by
foreign firms. In 2005, 40% of the foreign firms’ employment was in the manufacturing
sector, more than twice the share of manufacturing employment in the U.S. economy as
a whole, with average annual compensation (wages and benefits) per worker of about
$63,000.
Retail and wholesale trade accounted for another 22% of total affiliate employment.
Dutch-affiliated firms are the largest single employers in the retail trade sector and
account for nearly one-third of total affiliate employment in this sector, while Japanese
and British firms account for over half of the employment in the wholesale trade sector.
Employment in the information, finance, real estate and technical services sectors
accounts for another 13% of total affiliate employment. Average employee compensation
is highest in the finance sector — $229,000 — where Swiss, Canadian, Japanese, and
British account for three-fourths of the employment. The rest of the affiliate employment
is spread among a large number of other industries.
The affiliates of foreign firms spent $140 billion in the United States in 2005 on new
plant and equipment, imported $468 billion in goods and services and exported $181
billion in goods and services. Since 1980, the total amount of foreign direct investment
in the economy has increased eight-fold and nearly doubled as a share of U.S. gross
domestic product (GDP) from 3.4% to 6.4%. It is important to note, however, that these
data do not imply anything in particular about the role foreign direct investment has
played in the rate of growth of U.S. GDP.
Foreign-owned establishments, on average, are far outperforming their U.S.-owned
counterparts. Although foreign-owned firms account for less than 4% of all U.S.
manufacturing establishments, they have 14% more value added on average and 15%
higher value of shipments than other manufacturers. The average plant size for foreign-
owned firms is much larger — five times — than for U.S. firms, on average, in similar
industries. This difference in plant size apparently rises from an absence of small plants
among those that are foreign-owned. As a result of the larger plant scale and newer plant
age, foreign-owned firms paid wages on average that were 14% higher than all U.S.
manufacturing firms, had 40% higher productivity per worker, and 50% greater output per
8 Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign
Companies, Preliminary 2005 Estimates
. Bureau of Economic Analysis, 2007, Table 2A-1.

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worker than the average of comparable U.S.-owned manufacturing plants. Foreign-owned
firms also display higher capital intensity in a larger number of industries than all U.S.
establishments.
These differences between foreign-owned firms and all U.S. firms should be viewed
with some caution. First, the two groups of firms are not strictly comparable: the group
of foreign-owned firms comprises a subset of all foreign firms, which includes primarily
very large firms; the group of U.S. firms includes all firms, spanning a broader range of
sizes. Secondly, the differences reflect a range of additional factors, including the
prospect that foreign firms which invest in the United States likely are large firms with
proven technologies or techniques they have successfully transferred to the United States.
Small foreign ventures, experimenting with unproven technologies, are unlikely to want
the added risk of investing overseas. Foreign investors also tend to opt for larger scale
and higher capital-intensity plants than the average U.S. firm to offset the risks inherent
in investing abroad and to generate higher profits to make it economical to manage an
operation far removed from the parent firm.
Conclusions
Foreign direct investment in the United States in 2005 rose slightly, but still equaled
far less than the record amount recorded in 2000. Other countries have experienced a
similar turn-around in foreign direct investment inflows, especially to some of the less
developed economies where there is a great potential for investment. As the rate of
growth of the U.S. economy rises, interest rates stay low, and the rate of price inflation
stays in check, foreign direct investment in the United States likely will continue the
rebound. Of particular importance will be public concerns over foreign direct investment
in the economy as a whole and on the overall phenomenon referred to as “globalization,”
with its impact on jobs in the economy. Concerns over foreign direct investment, where
they exist, stem not so much from the perceived potential losses of international
competitiveness that characterized similar concerns in the 1980s, but from potential job
losses that could result from mergers and acquisitions, although such losses could occur
whether the acquiring company is foreign- or U.S.-owned. Such concerns are offset, at
least in part, by the benefits that are perceived to be derived from the inflow of capital and
the potential for new jobs being created in local areas.
Although job security is an important public issue, opposition to some types of
foreign direct investment stem from concerns about the impact of such investment on U.S.
economic and security interests, particularly in light of the terrorist attacks of September
11, 2001. The U.S. economy, however, remains a prime destination for foreign direct
investment. As the pace of economic growth in the Nation increases relative to that of
foreign economies, foreign direct investment likely will increase as new investments are
attracted to the United States and existing firms are encouraged to reinvest profits in their
U.S. operations.