Foreign Direct Investment: Background and Issues





Updated February 21, 2024
Foreign Direct Investment: Background and Issues
Both inward and outward foreign direct investment (FDI)
of employment, 76% of value-added, 79% of capital
are significant to the U.S. economy, international trade, and
expenditures, and 85% of research and development.
global supply chains, and form a key component of U.S.
Figure 1. U.S. Direct Investment Position: Market
trade policy. Traditionally, the United States has supported
Value (Stock), 2005-2022
a rules-based and open investment environment
domestically and internationally to promote U.S. economic
growth and other policy objectives, such as ensuring that
the United States remains a premier destination for FDI and
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.
Source: CRS with data from the U.S. Bureau of Economic Analysis.
What is Foreign Direct Investment (FDI)?
On a historical-cost basis, most USDIA (stock) was in high-
FDI occurs when a resident of one country obtains a lasting
income countries. By region, Europe is the top U.S.
interest in, and a degree of influence over the management, of a
investment partner, accounting for 61% of U.S. outbound
business enterprise in another country (commonly defined as
10% or more of the voting securities or equivalent interest). FDI
investment and 65% of U.S. inbound FDI (Figure 2). By
can take the form of the establishment of new operations
sector, in 2022, USDIA was mainly in holding companies
(“greenfield investments”), the purchase of existing operations
(47%); financial services (14%); and manufacturing (15%),
(mergers and acquisitions, M&As), or the addition of capital to
particularly chemicals. The largest share of U.S. inbound
existing operations. It is distinct from portfolio investment, i.e.,
FDI (42%) was in manufacturing, again mainly chemicals.
ownership of stocks, bonds, or other financial assets.
Figure 2. U.S. Direct Investment Position: Historical-
In June 2021, President Biden reiterated the United States’
Cost Basis (Stock), 2022
commitment to an open investment posture to “treat all
investors fairly and equitably under the law” and “maintain
a level playing field,” while prioritizing review of certain
foreign investments to “protect national security.” Congress
also has enacted laws and considered legislation affecting
U.S. investment policy, driven by the potential security and
competitiveness risks posed by China’s investments in the
United States and overseas, and other policy concerns.
These issues remain actively debated in the 118th Congress.
FDI Trends and Recent Investments
Following a strong recovery from the COVID-19 pandemic,

global FDI flows fell by 12% in 2022 compared to 2021.
Source: CRS with data from the U.S. Bureau of Economic Analysis.
The slowdown was driven primarily by overlapping global
Key Debates and Issues for Congress
crises (e.g., Russia’s war in Ukraine, high food and energy
At the intersection of many competing interests, U.S.
prices, and debt pressures) and lower multinational
investment policy has been the subject of long-standing
enterprise (MNE) financial flows and transactions in
debate. FDI can allow U.S. firms to expand in global
developed economies. FDI fell by 37% in developed
markets, and attract capital and businesses to the United
economies and increased by 4% in developing economies.
States that may support jobs. Some policymakers assert that
The United States is the world’s largest source and recipient
FDI can also advance U.S. foreign policy and other
of direct investment. In 2022, on a market value basis, U.S.
strategic objectives. At the same time, some policymakers
direct investment abroad (USDIA) stock stood at $9.3
argue that U.S. outbound investment may offshore U.S.
trillion, while FDI stock in the United States totaled $12.3
production and jobs. Some contend that certain outbound
trillion (Figure 1). From 2005 to 2022, FDI into the United
investment and related technology transfer may not be
States nearly quadrupled while USDIA more than doubled
market-driven and may undermine U.S. competitiveness.
(not adjusting for inflation). As a share of U.S. MNE global
There are also concerns that China’s FDI in the United
activity, in 2021, U.S. parent companies accounted for 68%
States challenges U.S. economic and national security
https://crsreports.congress.gov

Foreign Direct Investment: Background and Issues
interests. Possible FDI policy issues facing Congress
chapters with over 50 countries. These agreements aim to
include the effects of FDI on the U.S. economy, firms,
reduce FDI restrictions and ensure nondiscriminatory
workers, and U.S. supply chains; further reforms to foreign
treatment of investors and investment, subject to national
investment review and whether to require greater
security and other exceptions, balancing other policy
transparency and oversight of certain U.S. outbound
interests—typically enforced through investor-state dispute
investments; U.S. investment policy aims and commitments
settlement (ISDS). BITs require two-thirds Senate approval;
in trade deals and new initiatives; trading partners’ FDI
FTAs require approval by both Chambers to enter into
policies; and the effectiveness of U.S. investment financing.
force. The U.S.-Mexico-Canada Agreement (USMCA)
contains the most recent set of U.S. investor protections and
Foreign Investment and Outsourcing. Some observers
notably limits recourse to ISDS. See CRS In Focus
are concerned that U.S. investment abroad contributes to
IF10052, U.S. International Investment Agreements (IIAs).
slow growth in domestic jobs and wages, viewing firms as
The United States also has cooperative dialogues on
outsourcing jobs, particularly in manufacturing, to lower
investment policy through Trade and Investment
wage countries. There are examples of U.S. firms closing a
Framework Agreements (TIFAs) and other executive
U.S. plant and opening one abroad, but there are no official
initiatives (see below).
sources that track such activities. Most USDIA, however, is
in developed economies, and most production by foreign
Congress set U.S. negotiating objectives for foreign
affiliates is consumed where it is produced and is part of a
investment most recently in the 2015 Trade Promotion
strategy to access markets abroad. Foreign affiliates on
Authority (TPA) (P.L. 114-26), which expired in 2021.
average sell most of their output in the country in which
Congress may seek to set new objectives as part of potential
they are located or to neighboring countries; about 12% of
consideration of TPA renewal, or separate authorities.
foreign affiliate sales was to their U.S. parent companies in
Congress may also monitor investment components of
2021 (latest data). Economists generally attribute the
Biden Administration initiatives, such as the U.S.-EU Trade
decline of manufacturing jobs to broader factors, including
and Technology Council (TTC), which aims to promote
economic recessions and improvements in productivity that
cooperation on investment screening, and Indo-Pacific
have allowed the sector to produce more with less labor.
Economic Framework for Prosperity (IPEF), which aims to
Foreign Investment and National Security. A key issue
facilitate clean energy and infrastructure investments.
for some policymakers is that certain foreign investments
Investment Financing and Promotion. Federal programs
by firms directed, controlled, or funded by a foreign
seek to facilitate FDI. The U.S. International Development
government may raise national security concerns. Some
Finance Corporation (DFC) aims to promote private
argue that the rise of China’s state-directed investments
investment generally in less-developed countries, to support
requires a more proactive, strategic approach to screening
economic development and advance U.S. economic
investments. The interagency Committee on Foreign
interests and foreign policy. Created in 2018 (P.L. 115-254)
Investment in the United States (CFIUS) reviews such
in part to respond to China’s “One Belt, One Road”
risks, and the President has authority to block or suspend
initiative, DFC provides financing, political risk insurance,
transactions that threaten U.S. national security. In 2018,
equity, and technical assistance for investment projects.
Congress updated laws governing CFIUS in the Foreign
SelectUSA, a Commerce Department program established
Investment Risk Review Modernization Act (FIRRMA,
by E.O. 13577 in 2011, aims to coordinate federal efforts to
P.L. 115-232), as well as export controls laws. FIRRMA
attract and retain foreign investment, on top of state and
expanded CFIUS’s jurisdiction to review non-controlling
local-level efforts. It provides information and counseling,
investments that involve critical technologies, critical
business connection and promotion platforms, and
infrastructure, and sensitive personal data, and some real
advocacy services.
estate transactions. Some are concerned that despite
DFC’s authorities are to expire in October 2025. Whether in
reforms, certain transactions such as in greenfield and in
a potential DFC reauthorization debate or separately,
emerging technologies, may evade or fall outside current
Congress may examine DFC’s: effectiveness in countering
U.S. authorities and review. See CRS In Focus IF10177,
China; impact on U.S. firms’ competitiveness globally; and
The Committee on Foreign Investment in the United States.
international standard-setting role (e.g., for infrastructure).
Congress is considering legislation to expand U.S. foreign
Congress also may examine SelectUSA’s: potential
investment review and to address outbound investments of
codification, role in U.S. competition for FDI, and
concern. In August 2023, President Biden issued Executive
relationship to existing sub-federal FDI attraction efforts.
Order (E.O.) 14105 to establish a new program that would:
Other issues include DFC and SelectUSA’s roles in
(1) prohibit certain U.S. investments in “countries of
facilitating FDI for critical U.S. supply chains. For more,
concern” involving sensitive technologies that pose acute
see CRS In Focus IF11436, U.S. International Development
national security risks, and (2) require notification for other
Finance Corporation (DFC) and CRS In Focus IF10674,
investments. Proposed approaches to an outbound regime
SelectUSA: U.S. Inbound Investment Promotion.
differ on the countries, sectors, and investments covered,
and debate over the scope of restrictions remains ongoing.
Shayerah I. Akhtar, Specialist in International Trade and
Investment Agreements and Other Initiatives. As World
Finance
Trade Organization (WTO) agreements address investment
Cathleen D. Cimino-Isaacs, Specialist in International
in a limited manner, BITs and FTAs provide the key tools
Trade and Finance
for establishing investment rules globally.
Andres B. Schwarzenberg, Analyst in International Trade

and Finance
The United States has BITs or FTAs with investment
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Foreign Direct Investment: Background and Issues

IF10636


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https://crsreports.congress.gov | IF10636 · VERSION 10 · UPDATED