Foreign Direct Investment in the United
States: An Economic Analysis
James K. Jackson
Specialist in International Trade and Finance
November 5, 2009
Congressional Research Service
7-5700
www.crs.gov
RS21857
CRS Report for Congress
P
repared for Members and Committees of Congress
Foreign Direct Investment in the United States: An Economic Analysis
Summary
Foreign direct investment in the United States declined sharply after 2000, when a record $300
billion was invested in U.S. businesses and real estate. [Note: 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).] In 2008, according to
Department of Commerce data, foreigners invested $325 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.
Congressional Research Service
Foreign Direct Investment in the United States: An Economic Analysis
Contents
Recent Investments ..................................................................................................................... 1
Acquisitions and Establishments ................................................................................................. 4
Economic Performance ............................................................................................................... 4
Conclusions ................................................................................................................................ 5
Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment
Abroad, Annual Flows, 1990-2008 (in billions of dollars)......................................................... 1
Tables
Table 1. Foreign Direct Investment Position in the United States on a Historical-Cost
Basis at Year-End 2008 ............................................................................................................ 3
Contacts
Author Contact Information ........................................................................................................ 6
Congressional Research Service
Foreign Direct Investment in the United States: An Economic Analysis
Recent Investments
Foreigners invested $325 billion in U.S. businesses and real estate in 2008, according to data
published by the Department of Commerce.1 As Figure 1 shows, this represents a sharp increase
over the $237 billion invested in 2007. Investments abroad by U.S. parent firms fell slightly in
2008 to $318 billion, down from the $333 billion they invested abroad in 2007. The increase in
foreign direct investment flows mirrors a turnaround in global flows. According to the United
Nations’ World Investment Report, global foreign direct investment inflows increased by 30% in
2007 and 38% in 2006. The data indicate that global foreign direct investment flows increased
slightly in 2004 after three years of declining flows that arose from competitive international
price 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, 1990-2008 (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
The cumulative amount, or stock, of foreign direct investment in the United States on a historical
cost basis2 rose from $2.1 trillion in 2007 to about $2.3 trillion in 2008. This marked an increase
1 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.
2 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 $197 billion measured at current cost, but that the market value fell by $1.0 trillion in 2008. Both
(continued...)
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Foreign Direct Investment in the United States: An Economic Analysis
of 8.0%, below the 14.6% percent increase experienced in 2007.3 The rise in the value of foreign
direct investment includes a large increase in equity capital that was partially offset by a large
downward valuation adjustment. The downward adjustment reflects the decline in the value of
equities as a result of the decline in stock values. Tightened credit conditions and the slowdown in
the rate of growth in the U.S. economy, however, tended to push down such mainstays of foreign
direct investment activity as mergers and acquisitions. Foreign direct investments in the U.S.
manufacturing sector generally were higher, while investments in banks, finance, and real estate
were down. Data for the first two quarters of 2009 indicate that foreign direct investment in the
United States is about one-third the amount recorded in the comparable period in 2008. Such
investments may well pick up in the second half of the year as the rate of economic growth
improves.
As a share of the total amount of nonresidential investment spending in the U.S. economy,
investment spending by foreign firms was equivalent to 16% in 2008, far below the 27% reached
in 2001. 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 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.4
With over $454 billion invested in the United States, the United Kingdom is the largest foreign
direct investor, as is indicated in Table 1. Japan is the second-largest foreign direct investor in the
U.S. economy with about $259.6 billion in investments. Following the Japanese are the Dutch
($259.4 billion), the Canadians ($222 billion), the Germans ($211 billion), and the French ($163
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 2008, 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 $89 billion
investment in the U.S. banking and finance sectors just surpasses the $74 billion invested by
British firms, followed by Germany ($41 billion) and France ($34 billion). Foreign direct
(...continued)
estimates were valued at $2.6 trillion in 2008.
3 Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2008: Country and Industry Detail, Survey of
Current Business, July, 2009. p. 34.
4 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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Foreign Direct Investment in the United States: An Economic Analysis
investment in the U.S. manufacturing sector is dominated by a number of countries, each with
substantial investments: investments by the Netherlands ($131 billion), Switzerland ($107
billion), the United Kingdom ($103 billion), Japan ($87 billion), France ($76 billion), and
Germany ($56 billion) account for nearly three-fourths 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 35% of foreign direct investment in the United States, a decline from periods
when such investment accounted for a majority share of the total. Another 16% 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 modest shares of 2.7% and 2.3%, respectively. All other industries account for the
remaining 21%.
Table 1. Foreign Direct Investment Position in the United States on a Historical-
Cost Basis at Year-End 2008
(in millions of U.S. dollars)
All
Wholesale
Retail
Real
Other
All
industries Manufacturing
trade
trade
Information Banking Finance estate
Services industries
All
2,278,892 795,336
312,583
44,062 157,973
119,124 248,888 51,995 62,118 486,813
countries
Canada
221,870 42,851
4,758
7,415 11,808
27,780 62,132 4,128 2,248 58,750
Europe
1,622,911 617,579
167,610
28,276 142,042
71,284 177,827 19,956 49,379 348,958
Austria 2,406
1,323
263 (D) -6
(D) 1 83 (D) 97
Belgium
18,580 2,245
6,147
(D)
4
(D) 1,005 (D) 343 4,687
France
163,430 75,973
10,710
353 16,798
7,559 27,114
385 5,562 18,977
Germany 211,521 55,598
16,415
4,390 50,652
4,677 36,254 6,302
850 36,384
Ireland
34,094 16,514
187
(D) 1,630
(D) 6,644
91 (D) 7,136
Italy
17,575 5,923
1,677 1,641 87
(D) (D) (D) (D)
6,351
Luxembourg
113,248 48,364
1,204
(D) 9,481
0 2,586 (D) (D) 49,101
Netherlands 259,385 131,423
23,486
4,874 20,133
-760 39,865 3,287 6,980 30,097
Sweden 35,020
24,660
8,070
95 612
(D) 248 (D) (D)
1,228
Switzerland 165,697 107,154
7,184 4,050
(D) (D) 31,522 2,351 687 9,324
UK
454,123 102,800
78,758
2,809 21,033
47,882 26,420 5,153 28,805 140,462
L.America 49,233 25,421
8,069
2,100
664
4,115 -19,829 10,261 1,766 16,664
Africa 2,002
427
493 -1 8 (D)
(D)
(D)
(D)
878
Mid. East
14,676
2,747
5,868
(D)
952
(D)
(D)
(D)
(D)
4,354
Asia
368,200 106,312
125,785
(D) 2,499
(D) 28,501 17,084 8,660 57,208
Australia 64,316 5,224
1,469
1
(D) 3,055
4,922 (D) 593
41,094
Japan
259,569 86,952
108,278 6,108 1,814 10,344 21,690 6,918 4,957 12,509
Korea 15,632
(D) (D)
(D) (D)
212
152
78
-4
(D)
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Foreign Direct Investment in the United States: An Economic Analysis
All
Wholesale
Retail
Real
Other
All
industries Manufacturing
trade
trade
Information Banking Finance estate
Services industries
OPEC 13,345
-177 9,026 (*)
11 1,258
(D)
255
(D)
2,960
Source: Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2008: Country and Industry Detail.
Survey of Current Business, July, 2009. p. 34.
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. An asterisk (*) indicates that the
value of the cel is less than $500,000.
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 2008, outlays for new investments, which include investments made
directly by foreign investors and those made by existing U.S. affiliates, were $260 billion, a 3.0%
increase over the $252 billion invested in 2007. According to the Department of Commerce, the
increase in new investments reflected several large transactions.5 These transactions include the
acquisition of Anheuser-Busch Cos. Inc., by Stichting Interbrew SA for $52 billion, the
acquisition of Alcon Inc., by Novartis AG for $10.8 billion and large investments in Commerce
Bancorp, New Jersey, Morgan Stanley, and Citigroup. Acquisitions of existing U.S. firms
accounted for 93% of the new investments by value. Investments by the existing U.S. affiliates of
foreign firms accounted for 82% of the total transactions by investor, while other foreign direct
investors accounted for the remaining 18% of transactions. Investment outlays by foreign firms
increased from 2007 to 2008 in all major sectors, except wholesale trade, retail trade, and real
estate. Investment in information, manufacturing, and services all posted increases.
Economic Performance
By year-end 2006, the latest year for which detailed data are available, foreign firms employed
5.8 million Americans, less than 4% of the U.S. civilian labor force, and owned over 30,000
individual business establishments.6 Foreign firms have a direct investment presence in every
state. Employment of these firms ranges from over 573,000 in California, to about 7,000 in North
Dakota. Following California, New York (389,000), Texas (368,000), Pennsylvania (249,000),
Florida (248,000), Illinois (243,000), and New Jersey (230,000) have the largest numbers of
residents employed by foreign firms. In 2006, 40% of the foreign firms’ employment was in the
manufacturing sector, more than twice the share of manufacturing employment in the U.S.
5 Anderson, Thomas, Foreign Direct Investment in the United States: New Investment in 2008. Survey of Current
Business, June 2009. p. 34.
6 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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Foreign Direct Investment in the United States: An Economic Analysis
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 firms 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 $187 billion in the United States in 2007 on new plants and
equipment, imported $494 billion in goods and services and exported $205 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 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 that 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 2008 rose slightly over the amount invested in
2007, but set a record in nominal terms for the most amount of foreign direct investment in the
economy in a year. Other countries have experienced a similar turnaround in foreign direct
investment inflows, especially some of the less developed economies where there is a great
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Foreign Direct Investment in the United States: An Economic Analysis
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 to increase. 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 stems 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.
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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