U.S. Direct Investment Abroad:
Trends and Current Issues
James K. Jackson
Specialist in International Trade and Finance
November 5, 2009
Congressional Research Service
7-5700
www.crs.gov
RS21118
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repared 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.
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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
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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).
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
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 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.
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.
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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)
Billions of dollars
$350
Foreign Direct Investment in
$300
the United S tates
$250
$200
$150
U.S . Direct Investment
Abroad
$100
$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.
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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)
Hold-
Manu-
Whole-
ing
All
factur-
sale
Informa-
Bank-
comp-
industries
ing
trade
tion
ing
Finance Services anies
Other
All
3,162,021 512,293 178,213 121,864 141,557 634,046 81,242
1,128,538 212,409
Canada
227,298 72,523 18,332 4,113 3,676 32,728 8,164 30,511 33,472
Europe 1,809,876 259,844 99,980 80,971 80,823 328,307 53,845 750,883 116,716
Belgium
65,054 20,058 6,234 -758
(D) 31,434 1,811 2,857
(D)
France
75,040 29,207 4,850 2,250 2,059 9,201 2,602 12,398 12,375
Germany 110,784 33,993 10,501 2,495 2,321 14,441 5,401 32,769 8,450
Ireland
146,194 19,051 1,249 15,723 10,227 24,235
(D) 27,596 26,588
Italy
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
Turkey 6,089
1,507
1,749 -42
2,703 65 20 -4 93
UK
420,873 56,685 17,689 42,867 19,727 122,854 13,913 101,062 37,060
LAmerica 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
Asia
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)
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U.S. Direct Investment Abroad: Trends and Current Issues
Hold-
Manu-
Whole-
ing
All
factur-
sale
Informa-
Bank-
comp-
industries
ing
trade
tion
ing Finance
Services
anies Other
Sing.
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.
10 CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign
Investment Data, by James K. Jackson.
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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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