April 17, 2017
Foreign Direct Investment: Overview and Issues
Overview
high income developed countries where consumer tastes are
The growing prominence of foreign direct investment raises
similar to those in the United States: investments in Europe
questions about its costs and benefits to the U.S. economy.
alone account for 60% of all USDIA, or $2.9 trillion.
Traditionally, the United States has supported a rules-based
Similarly, direct investments by European firms account for
open and liberalized investment environment
70% of FDIUS. U.S. firms have placed a slightly larger
internationally as a key to promoting economic growth,
share of their investments in Latin America than in Asia,
including by negotiating investment provisions in free trade
while Asian firms are investing more in the United States
agreements (FTAs) and bilateral investment treaties (BITs).
than are Latin American firms.
It also has included administering investment promotion
Figure 2. Share of U.S. Direct Investment Position
programs. All of these efforts have been debated. For some
Abroad and Foreign Direct Investment Position in the
policymakers, foreign investment expands markets abroad
United States by Region, Historical Cost, 2015
for U.S. firms and draws in capital and businesses that
support local jobs. Others argue that U.S. direct investment
(in percent)
abroad (USDIA) contributes to slow growth in U.S. jobs
and wages and outsources U.S. jobs. Other policymakers
argue that certain foreign direct investment in the United
States (FDIUS), particularly by entities owned or controlled
by a foreign government, compromises U.S. national
security. In response, some policymakers argue that U.S.
national security reviews of foreign investment transactions
should be reformed, for example, to protect and promote
certain industrial sectors in the economy.
FDI Trends and Recent Investments

With $7 trillion in total outward investment (USDIA), and
Source: Department of Commerce
$6.5 trillion in inward investment (FDIUS), the United

States is the largest source and the largest recipient of FDI.
By sector, U.S. direct investment abroad is concentrated in
Figure 1. U.S. Direct Investment Position Abroad and
high technology, finance, and services industries located in
Foreign Direct Investment Position in the United
highly developed countries with advanced infrastructure
States at Market Value (Cumulative Amount)
and communications systems. The largest share of inward
(dollars in trillions)
foreign investment (40%) is in the U.S. manufacturing
sector, primarily in chemicals and transport industries.
Issues for Congress
Foreign Investment and Outsourcing
For some, USDIA contributes to slow growth in jobs and
wages in the U.S. economy because U.S. firms are seen as
outsourcing jobs, particularly manufacturing jobs, to lower
wage countries. There are examples of U.S. firms closing a
plant in the United States and opening a similar plant
abroad, but there are no official sources that track such
activities. Most USDIA, however, is in developed
economies that are similar to the United States and most of
Source: Department of Commerce.
this production is consumed where it is produced.
Economists generally argue that the loss of jobs in the U.S.
For U.S. multinational firms (combined U.S. parent
manufacturing sector can be traced to a number of factors,
companies and foreign affiliates), activities of the U.S
including two economic recessions (1999-2000, and 2008-
parent company accounted for more than two-thirds of
2009) and improvements in productivity that have allowed
world-wide value added, capital expenditures, and research
the manufacturing sector to produce more goods with fewer
and development. By geographic area, about 74% of the
workers: since 1980, employment in the U.S.
U.S. direct investment position abroad is concentrated in
manufacturing sector has fallen by one-third, while output
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Foreign Direct Investment: Overview and Issues
has doubled. Also, foreign affiliates on average sell most of
In the global context, the possible need for additional rules,
their output in the foreign country in which they are located
such as in the WTO, could be examined.
or to neighboring countries; about 10% of foreign affiliate
sales is to their U.S. parent companies.
U.S. Investment Negotiations: State of Play
Foreign Investment and National Security
In January 2016, President Trump withdrew the United States
from the Trans-Pacific Partnership (TPP). The TPP investment
Foreign investment, particularly by firms that are owned or
chapter, the most recent set of investment rules negotiated by
controlled by a foreign government (state-owned
the United States, built on prior U.S. investment agreements,
enterprises, or SOEs), raise concerns about U.S. national
including clarifying that TPP investment obligations apply to
security. Such national security-related issues are reviewed
SOEs. Certain provisions, such as on ISDS, have been
by the Committee on Foreign Investment in the United
controversial. Congress could revisit TPP provisions in possibly
States (CFIUS), an interagency committee that serves the
renegotiating existing FTAs, or pursuing new FTAs. If the
President. The Committee reviews foreign investment
Administration resumes Transatlantic Trade and Investment
transactions to determine if: (1) they threaten to impair the
Partnership (T-TIP) negotiations with the European Union (EU),
national security; (2) the foreign investor is controlled by a
questions could re-emerge over competing U.S. and EU
foreign government; or (3) the transaction could affect
approaches to ISDS. The United Stated previously also engaged
homeland security or would result in control of any critical
in BIT discussions with China and India, which, if resumed, could
infrastructure that could impair national security. Presidents
lead to enhanced commercial relations but also raise questions
have rarely used this authority to block an investment
about whether these countries would uphold their
transaction.
commitments.
Some policymakers argue that the rise of SOEs and other
factors require a more proactive approach that reviews
Investment Promotion Programs
foreign investments holistically, rather than on a case-by-
The United States promotes both USDIA and FDIUS. The
case basis. Some policymakers also argue that the review
Overseas Private Investment Corporation (OPIC) seeks
process should be expanded to encompass the concept of
to support economic growth in developing and emerging
national economic security and reviews should be
economies by providing political risk insurance, financing,
reoriented toward restricting investments in certain
and other services for qualifying U.S. private investments
economic sectors and to promote U.S. firms in a type of
overseas. Operating under the Foreign Assistance Act of
national industrial policy. Others argue, however, that the
1961, as amended, it aims to mitigate the political risks of
current system works well, although resource constraints
investing overseas. Differing views in Congress about the
are challenging the ability of the system to keep up with
role of the U.S. government, the effectiveness of trade
demands.
promotion, and outsourcing concerns fuel debate over
OPIC. This debate could intensify as Congress considers
U.S. Investment Agreements
the President’s FY2018 budget proposal, which proposes
The United States is party to BITs or FTAs with investment
eliminating OPIC funding. SelectUSA is a Department of
chapters with over 50 countries. These agreements
Commerce program established by a 2011 executive order
generally aim to reduce FDI restrictions and ensure
to coordinate federal efforts to attract and retain investment
nondiscriminatory treatment of investors and investment,
in the United States, complementing state-level investment
subject to national security and other exceptions, while
attraction programs. It aims to provide information on
balancing other policy interests. They typically are enforced
investment, help resolve investment issues involving
through binding arbitration under investor-state dispute
federal programs and activities, and advocate for FDIUS. A
settlement (ISDS). Some World Trade Organization (WTO)
permanent authorization for SelectUSA could affirm U.S.
agreements address investment issues in a limited manner,
interest in competing for FDI; yet, overlap concerns may
but FTA investment chapters and BITs have been the
arise due to existing sub-federal investment attraction
primary tools for establishing investment rules
programs.
internationally.
Outlook
BITs require two-thirds Senate approval and FTAs require
approval by both Chambers to enter into force in the United
The 115th Congress may be confronted with a range of FDI
States. Congress sets U.S. investment negotiating
issues. It could examine the impacts on USDIA and FDIUS
objectives, most recently in the 2015 Trade Promotion
on the U.S. economy and jobs, potential changes to CFIUS,
Authority (TPA) (P.L. 114-26). One of the most important
the U.S. approach to investment rules in trade negotiations,
is to reduce or eliminate foreign investment barriers and
and the status of investment promotion and attraction
ensure that foreign investors do not receive “greater
programs.
substantive rights” for investment protections than US.
investors in the United States. Recent investment
James K. Jackson, Specialist in International Trade and
negotiations have sharpened debates in Congress about the
Finance
U.S. approach to investment, including on protections for
Shayerah Ilias Akhtar, Specialist in International Trade
investors and governments’ regulatory ability, as well as
and Finance
other issues, such as the fairness and transparency of ISDS.
IF10636
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Foreign Direct Investment: Overview and Issues


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