U.S. Direct Investment Abroad: Trends and Current Issues

Contents

• Recent Investments
• U.S. Multinationals
• Employment
• Conclusions

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, 74% of the accumulated U.S. foreign direct investment is concentrated in high income developed countries, who are members of the Organization for Economic Cooperation and Development (OECD). 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 as a whole 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 responding primarily to domestic economic forces.

In the 115^th Congress, Members introduced a number of measures that would affect U.S. multinational companies in their foreign investment activities: (1) H.R. 685 and S. 247 (Bring Jobs Home Act) that would provide certain tax exemptions to U.S. multinational firms to induce them to redirect economic activity from a foreign subsidiary to a domestic U.S. operation. In the 114^th Congress, Members also introduced similar measures, including: H.R. 297, Stop Tax Haven Abuse Act of 2015, introduced by Representative Lloyd Doggett on January 13, 2015, and companion measure S. 174, introduced by Senator Sheldon Whitehouse; and H.R. 415, Stop Corporate Inversions Act of 2015, introduced by Representative Sander Levin on January 20, 2015, and companion measure S. 198, introduced by Senator Richard Durbin. While H.R. 415 and S. 198 are directed at tax inversions, H.R. 297 and S. 174 address a number of tax and financial issues relative to U.S. multinational firms, including: the use of foreign tax havens to evade U.S. taxes; money laundering; corporate offshore tax avoidance; and corporate tax inversions.

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U.S. Direct Investment Abroad: Trends and Current Issues

Recent Investments

The United States occupies a unique position in the global economy as the largest foreign direct investor and as the largest recipient of foreign direct investment, as indicated in Figure 1. According to the United Nations,¹ the U.S. direct investment position, or the cumulative amount, was recorded at around $6 trillion in 2015, with global direct investment position recorded at around $25 trillion. Germany ranks as the next largest foreign direct investor, with inward and outward investment positions about one-fifth that of the United States. For the United States, the Commerce Department publishes data on the U.S. direct investment position using three different measures: historical cost, current-cost, and market value.² These estimates indicate that in 2015 U.S. direct investment abroad measured at current cost increased by $311 billion and by $1,079 billion when measured by market value, to reach $5.3 trillion and $6.3 trillion, respectively. Based on historical cost, U.S. direct investment abroad was valued at $5.0 trillion in 2015.

Figure 1. Inward and Outward Stock of Foreign Direct Investment by Major Country or Region, 2015

Source: World Investment Report 2016, United Nations, 2016.

U.S. direct investment abroad,³ or new spending by U.S. firms on businesses and real estate abroad, rose by 1.5% in 2015 to reach $349 billion, compared with a decline of nearly 14% in investment spending in 2014, according to balance of payments data by the Department of Commerce.⁴ According to third quarter 2016 data, U.S. direct investment abroad is projected to rise by 2.4% over that invested in 2015, or reach $357 billion. A sharp 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). Both U.S. and global foreign direct investment flows have not regained the amounts recorded in 2007, prior to the global financial crisis. Foreign direct investment in the United States fell by a fourth from $287 billion in 2013 to $207 billion in 2014. In part, the drop in foreign direct investment reflected a $130 billion stock buyback between Verizon and France's Vodafone. 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, tax rates, and expectations about the performance of national economies, which means the investment flows can be quite erratic at times in response to various economic forces.

According to balance of payments data, U.S. direct investment abroad in 2015 was comprised 87% of reinvested earnings, 9.7% of intercompany debt, or transactions between the parent firm and foreign affiliates, and 3.4% of equity capital, as indicated in Figure 2. In comparison, equity capital accounted for $57.5% of foreign direct investment in the United States, with reinvested earnings and intercompany debt accounting for over 20% each. An increase in stock market valuations around the world from 2012 to 2014 increased the overall value of U.S. direct investment abroad by nearly $2 trillion, measured at market value, but then declined in value in both 2014 and 2015, as indicated in Figure 3. During the same period, the market value of foreign firms operating in the United States experienced an increase of $1.6 trillion from 2012 to 2014, but then experienced annual increases of $500 billion in 2014 and $200 billion in 2015.⁵

Figure 2. Composition of Financial Sources of U.S. Direct Investment Abroad and Foreign Direct Investment in the United States (Percent shares of direct investment by financial source)

Source: Department of Commerce.

Figure 3. U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the United States at Market Value (Cumulative Amount) (Trillions of dollars)

Source: Department of Commerce.

Since the mid-1990s, the combination of strong growth and low inflation in the U.S. economy has attracted foreign investors, as indicated in Figure 4. From 2006 to 2010, U.S. direct investment abroad was about a third more than the amount foreigners invested in the U.S. economy, based on balance of payments data. In 2015, U.S. direct investment increased slightly over that recorded in 2014, but foreign direct investment in the United States increased by nearly 90% over the values recorded in the previous year. Estimates for 2016 indicate that both U.S. direct investment abroad and foreign direct investment in the United States rose slightly over the values reached in 2015, although foreign direct investment in the United States was greater than U.S. direct investment abroad for a second year in a row, something that has not happened since the early 2000s.

Figure 4. Foreign Direct Investment in the United States and U.S. Direct Investment Abroad, Annual Flows, 1990-2016 (Billions of dollars)

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,⁶ or the cumulative amount at book value, reached $5.0 trillion in 2015, the latest year for such detailed investment position data.⁷ The Department of Commerce does not attempt to deflate the annual nominal amounts for direct investment with a specific price deflator. Instead, the department publishes alternative estimates based on current cost and market value to provide other measures of the value of direct investment. About 74% of the accumulated U.S. foreign direct investment is concentrated in high income developed countries, who are members of the Organization for Economic Cooperation and Development (OECD): investments in Europe alone account for over half of all U.S. direct investment abroad, or $2.9 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.

Typically, U.S. firms have placed the largest share of their annual investments in developed countries, primarily in Western Europe where consumer tastes are similar to those in the United States, but this tendency increased after 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. By location, in 2015, U.S. firms focused 71% of their direct investments, or their total accumulative position, in developed economies, including 59% of their investments in the highly developed economies of Europe. Another 17% of the U.S. direct investment position abroad was located in Latin America and 15% of investment was located in Asia, including Australia, Japan, New Zealand, and South Korea. Direct investments in Africa accounted for about 1.3% of total U.S. direct investment abroad in 2015, with investments in the Middle East accounting for about 1% of the total.

Patterns in U.S. direct investment abroad often 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 2000-2015 period grew by five times, rising from $920 billion to $5.0 trillion. Annual investments in most sectors increased in 2015 over the amount invested in 2014, except for investment in the banking, finance, and insurance sectors. Generally, service-oriented sectors, particularly computer systems design and technical consulting, continued to grow through 2015.

U.S. Multinationals

Nations once hostile to American direct investment now compete aggressively for U.S. direct investment 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 U.S. employment, the trade deficit, 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 foreign firms. On the whole, U.S. firms invest abroad to serve the foreign local market, rather than to produce goods to export back 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. In 2014, the latest year for which U.S. direct investment abroad data are available, 10.0% of foreign affiliate sales were to U.S. parent companies, as indicated in Figure 5.⁸ The intra-firm share of U.S. trade is higher than the average for Mexico and Canada (20.0% and 27%, respectively) in part due to formal trade agreements and the close physical proximity of the trading partners. U.S. firms operating in China had 82% of their sales in China and 6% of their sales back to the United States.

Figure 5. Sales by Destination of the Foreign Affiliates of U.S. Parent Firms, 2014 (shares in percent)

Source: Department of Commerce.

U.S. Trade also is characterized by the extensive amount of intra-firm trade, or trade between units of the same company. As indicated in Table 2, U.S. total trade in 2014 was $1.6 trillion in exports and $2.3 trillion in imports. Of this amount, trade between U.S. parent companies and their foreign affiliates accounted for $315 billion in both exports and imports, while the affiliates of foreign firms operating in the United States accounted for $189 billion in exports and $521 billion in imports. In total, intra-firm trade, or the sum of 1) trade between U.S. parent companies and their foreign affiliates and 2) the U.S. affiliates of foreign firms and their foreign parent companies, accounted for 31% of exports and 35% of imports.

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 U.S. parent companies 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.⁹

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. In addition, U.S. multinational companies were disproportionately negatively affected in 2008 and 2009 by the global economic recession as a result of the geographic distribution of the multinational firms' activities and the industrial composition of their operations. 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 1989.¹⁰ 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%.¹¹

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, no U.S. government agency collects data on U.S. firms in such a way that it is possible to track a plant closing in the United States with a comparable plant opening in a foreign country. As a result, most data on the activity of U.S. firms shifting plants or jobs abroad are anecdotal. 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 patterns, however, are determined by a broad range of factors, and shifts in plant locations by U.S. multinational firms likely represent a small part, at best, of the overall pattern of employment in the United States.

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, reflecting the economic downturn at the time, but then rose after 2003 to reach 22 million in 2007. Employment fell again in 2008 to 21 million as the rate of U.S. economic growth slowed. In 2014, employment among U.S. parent companies expanded by nearly 14% over that in 2013 to reach 26.6 million, as indicated in Figure 6. During this period, employment among the foreign affiliates of U.S. firms rose to 13.8 million in 2014, accounting for 34.4% of total U.S. multinational company employment, up from 29% in 2000. During economic downturns, U.S. parent firms and their foreign affiliates have gained or lost employment in many of the same industries, reflecting the growing interconnected nature of the global and U.S. economies. Such interconnections also complicate efforts to establish major trends in outsourcing. During recent economic downturns, both U.S. parent firms and their foreign 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.

Figure 6. Employment of U.S. Parent Firms and Their Foreign Affiliates, 1982-2014 (in millions of employees)

Source: Department of Commerce.

Employment trends among foreign affiliates also reflect growing trade links between the United States and other areas, particularly Asia, as indicated in Figure 7. Between 2000 and 2014, employment among the foreign affiliates of U.S. parent firms tripled in Latin America, and nearly tripled among affiliates located in Asia, particularly in China. In other geographical regions, employment gains were less robust. Affiliates in Europe, for instance, which had been the largest employer, fell to second place behind affiliates in Asia. In addition, affiliates in Canada and Mexico experienced relatively modest increases in employment.

Figure 7. Employment of Foreign Affiliates by Major Region or Country, 2000 and 2014 (in millions of employees)

Source: Department of Commerce.

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 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.

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.¹² 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. In the 114^th and 115^th Congresses, Members of Congress expressed concerns over U.S. direct investment abroad through measures that would offer certain tax advantages to U.S. firms that shifted parts of their operations back to the United States and through measures that are directed at curbing tax havens and tax inversions and other practices that shift taxes from the United States to foreign locations.¹³

Author Contact Information

Footnotes

1.	World Investment Report 2016, United Nations, 2016.
2.	U.S. Net International Investment Position, Third Quarter 2016, Bureau of Economic Analysis, BEA16-73, December 29, 2016; and CRS Report RL32964, The United States as a Net Debtor Nation: Overview of the International Investment Position, by [author name scrubbed].
3.	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 C.F.R. §806.15 (a)(1).
4.	U.S. Net International Investment Position, Third Quarter 2016, Bureau of Economic Analysis, BEA16-73, December 29, 2016; Annual Revision of the U.S. International Transactions Accounts, Bureau of Economic Analysis, July, 2016. 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.
5.	Westmoreland, Kyle L., The International Investment Position of the United States at the End of the Fourth Quarter of 2014 and Year 2014, Survey of Current Business, April 2015, p. 1.
6.	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.
7.	Jenniges, Derrick T. and James J. Fetzer, Direct Investment Positions for 2015: Country and Industry Detail, Survey of Current Business, July, 2016.
8.	U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 2014 Estimates, October 2016. Table II. E. 1.
9.	Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of Current Business, July 2000. pp. 24-45.
10.	Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 2003. Survey of Current Business, July 2005. p. 15.
11.	Ibid., p. 31.
12.	CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data, by [author name scrubbed].
13.	See CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by [author name scrubbed], and CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by [author name scrubbed].