Updated April 13, 2022
Foreign Direct Investment: Background and Issues
Both inward and outward foreign direct investment (FDI)
the United States nearly quadrupled (not adjusting for
are significant to the U.S. economy, international trade, and
inflation). U.S. multinational firms (combined U.S. parent
global supply chains, and form a key component of U.S.
companies and foreign affiliates), in 2019, accounted for
trade policy. Traditionally, the United States has supported
67% of global employment, 75% of worldwide value-
a rules-based and open investment environment
added, 78% of capital expenditures, and 86% of research
domestically and internationally to promote U.S. economic
and development.
growth and other policy objectives, such as ensuring that
Figure 1. U.S. Direct Investment Position: Market
the United States remains a premier destination for FDI and
Value (Stock), 2005-2021
ensuring the competitiveness of U.S companies overseas.
U.S. investment policy includes negotiating rules and
market access commitments concerning FDI in free trade
agreements (FTAs) and bilateral investment treaties (BITs),
and administering investment promotion programs. At the
same time, the United States maintains a foreign investment
review regime to review a small share of inbound
transactions that may pose a risk to U.S. national security;
many other countries have such policies in place.
What is Foreign Direct Investment (FDI)?
FDI occurs when a resident of one country obtains a lasting
interest in, and a degree of influence over the management, of a
business enterprise in another country (commonly defined as
10% or more of the voting securities or equivalent interest). FDI
Source: Department of Commerce, Bureau of Economic Analysis.
can take the form of the establishment of new operations
(“greenfield investments”), the purchase of existing operations
On a historical-cost basis, 75% of USDIA (stock) was in
(mergers and acquisitions, M&As), or the addition of capital to
high-income countries. By region, Europe is the top U.S.
existing operations. It is distinct from portfolio investment, i.e.,
investment partner, accounting for 59% of U.S. outbound
ownership of stocks, bonds, or other financial assets.
investment and 64% of U.S. inbound FDI (Figure 2). By
sector, in 2020, USDIA was mainly in holding companies
In June 2021, President Biden reflected these policy aims,
(47%); manufacturing (16%), particularly chemicals; and
reiterating the U.S. commitment to an open investment
posture to “treat all investors fairly and equitably under the
financial services (14%). The largest share of U.S. inbound
law” and “maintain a level playing field,” w
FDI (40%) was in manufacturing, again mainly chemicals.
hile
acknowledging that the government would review certain
Figure 2. U.S. Direct Investment Position: Historical-
foreign investments to “protect national security.” In recent
Cost Basis (Stock), 2020
years, Congress has enacted laws affecting U.S. investment
policy, driven by a number of policy concerns, including
the potential security and competiveness risks posed by
China’s investments in the United States and overseas.
There is ongoing debate among various stakeholders about
policies governing foreign investment and certain investor
protections in U.S. trade agreements.
FDI Trends and Recent Investments
Globally, FDI flows rebounded in 2021, surpassing pre-
Coronavirus Disease 2019 (COVID-19) pandemic levels.
Recovery, however, was uneven; developed economies
attracted more FDI than developing economies, and flows
were concentrated in international project finance deals.
Source: Department of Commerce, Bureau of Economic Analysis.
Cross-border M&As were a big driver of U.S. FDI inflows.
Key Debates and Issues for Congress
The United States is the world’s largest source and recipient
At the intersection of many competing interests, U.S.
of direct investment. In 2021, U.S. direct investment abroad
investment policy has been the subject of longstanding
(USDIA) stock stood at $14.8 trillion, while FDI stock in
debate. According to some policymakers, foreign
the United States totaled $11.0 trillion (Figure 1). From
investment allows U.S. firms to expand in global markets,
2005 to 2020, USDIA more than doubled, while FDI into
and attracts capital and businesses to the United States that
https://crsreports.congress.gov
Foreign Direct Investment: Background and Issues
support jobs. Others also assert that FDI can advance U.S.
certain U.S. outbound investment involving “national
foreign policy and other strategic objectives. At the same
critical capabilities” in “countries of concern.”
time, there are policymakers who argue that U.S. outbound
U.S. International Investment Agreements. As World
investment may offshore U.S. production and jobs. Some
Trade Organization (WTO) agreements address investment
also contend that certain outbound investment and related
in a limited manner, BITs and FTAs provide the primary
technology transfer may not be market-driven and may
tools for establishing investment rules globally. The United
undermine U.S. competiveness. There are also concerns
States is party to BITs or FTAs with investment chapters
that Chinese investment challenges U.S. economic and
with over 50 countries. These agreements aim to reduce
national security interests. Congress could examine several
FDI restrictions and ensure nondiscriminatory treatment of
aspects of U.S. FDI policy, including the effects of FDI on
investors and investment, subject to national security and
the U.S. economy, firms, workers, and U.S. supply chains;
other exceptions, balancing other policy interests—typically
further reforms to foreign investment reviews and whether
enforced through binding arbitration under investor-state
to require greater transparency and oversight of U.S
dispute settlement (ISDS). BITs require two-thirds Senate
outbound investment; U.S. investment policy objectives and
approval; FTAs require approval by both Chambers to enter
commitments in FTAs and BITs, and new initiatives;
into force. The U.S.-Mexico-Canada Agreement (USMCA)
trading partner FDI policies and trade barriers; and the
contains the most recent set of U.S. investor protections. It
effectiveness of investment promotion programs.
varies in key respects from other U.S. FTAs, notably
limiting recourse to ISDS. See CRS In Focus IF10052.
Foreign Investment and Outsourcing. Some observers
are concerned that U.S. investment abroad contributes to
Congress set U.S. investment policy negotiating objectives
slow growth in jobs and wages in the United States as firms
most recently in the 2015 Trade Promotion Authority
are seen as outsourcing jobs, particularly in manufacturing,
(TPA) (P.L. 114-26), which expired in July 2021. Congress
to lower wage countries. There are examples of U.S. firms
may seek to set new objectives as part of potential
closing a U.S. plant and opening one abroad, but there are
consideration of TPA renewal, or separately. It also may
no official sources that track such activities. Most USDIA,
consider investor protections in potential future FTA or BIT
however, is in developed economies that are similar to the
talks, as well as examine the possible need for multilateral
United States, and most production by foreign affiliates is
investment rules, such as in the WTO. Additionally,
consumed where it is produced and is part of a strategy to
Congress may monitor investment components of new U.S.
access markets abroad. Foreign affiliates on average sell
initiatives, such as the U.S.-EU Trade and Technology
most of their output in the country in which they are located
Council (TTC), which aims to promote cooperation on
or to neighboring countries; about 10% of foreign affiliate
investment screening, and the proposed Indo-Pacific
sales is to their U.S. parent companies. Economists
Economic Framework (IPEF), which aims to promote
generally attribute the decline of manufacturing jobs to
infrastructure and clean energy investment.
broader factors, including economic recessions and
Investment Promotion Programs. The U.S. government
improvements in productivity (e.g., technology) that have
maintains programs both to facilitate U.S. outbound and
allowed the sector to produce more with fewer workers.
inbound FDI. The U.S. International Development Finance
Foreign Investment and National Security. There is
Corporation (DFC) aims to promote private investment in
growing concern among some that certain foreign
less-developed countries. DFC’s establishment in the
investments by firms that are directed, controlled, or funded
BUILD Act of 2018 (P.L. 115-254) was part of the U.S.
by a foreign government, may raise national security
policy response to China’s “One Belt, One Road” initiative.
concerns. Such risks are reviewed by the Committee on
DFC provides financing, political risk insurance, equity,
Foreign Investment in the United States (CFIUS), an
and technical assistance for investment projects. In contrast,
interagency committee that serves the President, who has
SelectUSA, a Department of Commerce program
authority to block or suspend transactions that threaten to
established by a 2011 executive order, aims to coordinate
impair U.S. national security. In 2018, Congress updated
federal efforts to attract and retain foreign investment, on
laws governing CFIUS reviews with the Foreign
top of state-level efforts. It provides information on
Investment Risk Review Modernization Act (FIRRMA,
investment, and aims to help resolve issues involving
P.L. 115-232), as well as export controls. See CRS In Focus
federal programs and activities and to advocate for FDI.
IF10177.
Congress may examine DFC’s effectiveness in supporting
Some policymakers argue that the rise of Chinese state-
U.S. commercial and policy interests to expand overseas
directed investments requires a more proactive and strategic
and compete with China. It also may examine whether
approach that considers foreign investments in aggregate
potential codification of SelectUSA would affirm U.S.
terms, instead of on a case-by-case basis. FIRRMA
interest in competing for FDI or raise overlap concerns due
expanded CFIUS’s jurisdiction to review transactions,
to existing sub-federal investment attraction programs.
including non-controlling investments and acquisitions that
Other issues include DFC and SelectUSA’s roles in
involve critical technologies, critical infrastructure, and
facilitating FDI to support critical U.S. supply chains.
sensitive personal data, and some real estate transactions.
Shayerah I. Akhtar, Specialist in International Trade and
Some are concerned that even with recent reforms certain
transactions, particularly in greenfield, emerging
Finance
technologies, and private equity, may evade or fall outside
Cathleen D. Cimino-Isaacs, Specialist in International
current U.S. authorities and review. Revisiting past debates,
Trade and Finance
some pending bills would create a new committee to review
https://crsreports.congress.gov
Foreign Direct Investment: Background and Issues
IF10636
Andres B. Schwarzenberg, Analyst in International Trade
and Finance
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