Foreign Direct Investment: Current Issues

This report presents an overview of current issues related to foreign direct investment in the economy and the development of U.S. policy toward inward and outward direct investment. This report also assesses the role of foreign direct investment in the economy and the costs and benefits of direct investment.

Foreign Direct Investment: Current Issues James K. Jackson Specialist in International Trade and Finance February 11, 2010 Congressional Research Service 7-5700 www.crs.gov RL33984 CRS Report for Congress Prepared for Members and Committees of Congress Foreign Direct Investment: Current Issues Summary The United States is the largest recipient of foreign direct investment in the world and the largest investor abroad. As a result of this dual role, the United States has led negotiations in various international forums to remove restrictions on foreign investment and other market-distorting measures to maximize the benefits of such investment. In 2006, foreign investors spent $184 billion investing in U.S. businesses and real estate, the highest amount foreign investors have spent since 2000. Within the economy, foreign direct investment is sparking a mixed reaction. Although the environment for foreign investors is still friendly, some Members of Congress and some in the public argue that the events of September 11, 2001, raise new concerns about the nation’s economic security that challenges the traditionally open policy the United States has had toward foreign investment, particularly foreign investment in critical industries and in sectors that are vital to homeland security. As part of these concerns, Congress is considering legislation that would revamp the Committee on Foreign Investment in the United States (CFIUS), an interagency committee housed in the Treasury Department that has served Presidents since 1975 as the chief federal government organization responsible for overseeing the national security implications of foreign investment in the economy. In contrast to these actions, the International Trade Administration of the Department of Commerce announced on March 7, 2007, that it was creating a new initiative: Invest in America. The initiative appears to depart from the longstanding U.S. policy of official neutrality toward inward and outward direct investment by having the federal government actively internationally promoting the United States as a foreign direct investment destination. It also will serve as the primary U.S. government mechanism responsible for managing inward investment. This report presents an overview of current issues related to foreign direct investment in the economy and the development of U.S. policy toward inward and outward direct investment. This report also assesses the role of foreign direct investment in the economy and the costs and benefits of direct investment. Congressional Research Service Foreign Direct Investment: Current Issues Contents Overview ....................................................................................................................................1 U.S. Policy Toward Direct Investment.........................................................................................3 Exon-Florio Provision...........................................................................................................5 Trade Act of 2002 .................................................................................................................6 September 11, 2001...............................................................................................................6 Special Security Arrangements..............................................................................................7 Strategic Materials Protection Board .....................................................................................7 Administrative Changes ........................................................................................................9 Invest in America ..................................................................................................................9 Congressional Activity ........................................................................................................ 10 Federal-State Relations ....................................................................................................... 11 Model Bilateral Investment Treaty (BIT) Program............................................................... 12 Foreign Direct Investment in the U.S. Economy ........................................................................ 13 The Costs and Benefits of Foreign Direct Investment ................................................................ 14 Conclusions .............................................................................................................................. 21 Figures Figure 1. Foreign Direct Investment in the United States and the U.S. Direct Investment Abroad, Annual Flows, 1990-2008 ...........................................................................................2 Figure 2. U.S. Acquisitions of Foreign Companies .................................................................... 20 Figure 3. Foreign Acquisitions of U.S. Companies .................................................................... 21 Tables Table 1. Foreign Direct Investment Inward Position .................................................................. 14 Table 2. Select Data on U.S. Multinational Companies and on Foreign Firms Operating in the United States, 2007........................................................................................................... 16 Table 3. U.S. Direct Investment Abroad and Foreign Direct Investment in the U.S. Economy, Annual Flows 1999-2006 ....................................................................................... 17 Table 4. U.S. Businesses Acquired or Established by Foreign Investors ..................................... 18 Table 5. U.S. and Foreign Acquisition Activity, 1997-2006........................................................ 19 Contacts Author Contact Information ...................................................................................................... 22 Congressional Research Service Foreign Direct Investment: Current Issues Overview In 2006, the proposed acquisitions of major operations in six major U.S. ports by Dubai Ports World (DP World) and of Unocal by the China National Offshore Oil Corporation (CNOOC) sparked intense concerns among some Members of Congress and generated a debate over what role foreign investment, particularly foreign acquisitions of certain types of firms, plays in U.S. national security. The United States actively promotes the national treatment of foreign investors as an international standard. This open-door policy stands in marked contrast to several provisions of law, various Executive Orders, and extensive efforts aimed at limiting foreign access to the Nation’s industrial base, especially in sectors deemed to be critical to the economy or to areas of importance to national security. In addition, some Members of Congress and others are concerned about the extent to which foreign government-owned companies should be allowed access to the Nation’s industrial base and technology through foreign direct investment. The United States is unique in that it is the largest foreign direct investor in the world and also the largest recipient of foreign direct investment. This dual role means that globalization, or the spread of economic activity by firms across national borders, has become a prominent feature of the U.S. economy and that through direct investment the U.S. economy has become highly enmeshed with the broader global economy. Foreigners invested $180 billion in U.S. businesses and real estate in 2006 and invested $277 billion in 2007, according to data published by the Department of Commerce, 1 as Figure 1 shows. The rise in the value of foreign direct investment includes an upward valuation adjustment of existing investments. According to the United Nation’s World Investment Report,2 global foreign direct investment flows increased by 38% in 2006, 29% in 2005, and 27% in 2004, after three years of declining flows. New spending by U.S. firms on businesses and real estate abroad, or U.S. direct investment abroad,3 rose sharply in 2006 to $235 billion up from the $8 billion net in 2005. New investments in 2007 likely exceeded $330 billion, according to balance of payments data published by the Department of Commerce. 4 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). 1 Bach, Christopher L., U.S. International Transactions in 2007. Survey of Current Business, April 2008, p. 48. 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 United Nations Conference on Trade and Development, World Investment Report 2007, United Nations, 2007. P. 3. 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 CFR § 806.15 (a)(1). 4 Bach, Christopher L., U.S. International Transactions in 2007, p. 48. Congressional Research Service 1 Foreign Direct Investment: Current Issues Figure 1. Foreign Direct Investment in the United States and the U.S. Direct Investment Abroad, Annual Flows, 1990-2008 $350 Billions of dollars $300 Foreign Direct Investment in the United S tates $250 $200 $150 $100 U.S. Direct Investment Abroad $50 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Year Source: CRS from U.S. Department of Commerce data Notes: The drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent companies to take advantage of a one-time provision. The cumulative amount, or stock, of foreign direct investment in the United States on a historical cost basis5 increased by $195 billion in 2006 to about $1.8 trillion. This marks an 8% increase over the previous year and a significant change from the decline in foreign investment spending that has occurred since 2000.6 The rise in the value of foreign direct investment includes an upward valuation adjustment of existing investments and increased investment spending that was driven by the relatively stronger growth rate of the U.S. economy, the world-wide resurgence in cross-border merger and acquisition activity, and investment in the U.S. manufacturing, information and depository institutions as overseas banks and finance and insurance companies sought access to the profitable U.S. financial market.7 5 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 $231 billion and $416 billion in 2006, respectively, to reach $2.1 and $3.2 trillion. 6 Ibarra, Marilyn, and Jennifer L. Koncz, Direct Investment Positions for 2006: Country and Industry Detail, Survey of Current Business, July, 2007. p. 21. 7 McNeil, Lawrence R., Foreign Direct Investment in the United States: New Investment in 2006, Survey of Current Business, June 2007, p. 46-48. Congressional Research Service 2 Foreign Direct Investment: Current Issues U.S. Policy Toward Direct Investment With some exceptions for national security,8 the United States has long been considered one of the most receptive economies in the world to foreign direct investment. Indeed, over the past 50 years, the United States has led efforts to negotiate internationally for reduced restrictions on foreign direct investment, for greater controls over incentives offered to foreign investors, and for equal treatment under law of foreign and domestic investors. In 1977, the Carter Administration issued a policy statement on foreign direct investment that can be summarized by the neutrality clause: the United States will neither encourage nor discourage the inflow or outflow of international investment. The policy statement also indicated that international investment will generally result in the most efficient allocation of economic resources if it is allowed to flow according to market forces; there is no basis for concluding that a general policy of actively promoting or discouraging international investment would further the U.S. national interest; unilateral U.S. Government intervention in the international investment process could prompt counteractions by other governments with adverse effects on the U.S. economy and U.S. foreign policy; and the United States has an important interest in seeking to assure that established investors receive equitable and non-discriminatory treatment from host governments.9 This statement is based on an assessment that the free flow of international investment generally will result in the most efficient allocation of economic resources if it is allowed to flow according to market forces. During the Reagan Administration, the neutrality statement was clarified to include three related objectives. These objectives include the liberalization of barriers and the reduction of distortions to international investments abroad, the encouragement of a greater role for private foreign investment in the economic development of less developed countries (LDCs), and the maintenance of the maximum degree of openness of the U.S. economy to the contribution of foreign direct investment. 10 The Clinton Administration’s policy toward inward and outward direct investment can best be characterized by its support for the Multilateral Agreement on Investment (MAI).11 The Agreement was expected to be a comprehensive international agreement on foreign investment among the most economically developed countries in the world, as represented by the Organization for Economic Cooperation and Development (OECD). In addition, the Agreement was intended to address various issues, including formal barriers to direct investment, discriminatory treatment, dispute settlement mechanisms, and legal and regulatory uncertainties abroad, that hamper the flow of investment funds. Ultimately, a range of unresolved issues among the OECD Ministers combined with concerns by some groups in the United States to undermine support for the Agreement. In particular, some groups were concerned that the requirement for “national treatment” in the Agreement could have created legal problems for state and local 8 CRS Report RL33103, Foreign Investment in the United States: Major Federal Statutory Restrictions, by Michael V. Seitzinger. 9 U.S. Congress. House of Representatives. Committee on Government Operations. The Operations of Federal Agencies in Monitoring, Reporting on, and Analyzing Foreign Investments in the United States. Hearings. 96th Cong., 1st. Sess., Part 3, July 30, 1979. Washington, U.S. Govt. Print. Off., 1979. p. 60-61. 10 Public Papers of the Presidents of the United States. Ronald Reagan, 1983, Book II, p. 1243-1248. 11 Economic Report of the President, February 1998. p. 258-260. Congressional Research Service 3 Foreign Direct Investment: Current Issues governments that enforce environmental, labor, and other corporate practices that could have been considered discriminatory. On May 10, 2007, President Bush released his policy statement on open economies.12 The statement offered strong support for the international flow of direct investment. In part, the statement reads: A free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world. The threat of global terrorism and other national security challenges have caused the United States and other countries to focus more intently on the national security dimensions of foreign investment. While my Administration will continue to take every necessary step to protect national security, my Administration recognizes that our prosperity and security are founded on our country’s openness. As both the world’s largest investor and the world’s largest recipient of investment, the United States has a key stake in promoting an open investment regime. The United States unequivocally supports international investment in this country and is equally committed to securing fair, equitable, and nondiscriminatory treatment for U.S. investors abroad. Both inbound and outbound investment benefit our country by stimulating growth, creating jobs, enhancing productivity, and fostering competitiveness that allows our companies and their workers to prosper at home and in international markets. My Administration is committed to ensuring that the United States continues to be the most attractive place in the world to invest. I urge other nations to join us in supporting an open investment policy and protecting international investments. In addition to this statement of general support, the Bush Administration issued a policy statement that commits the Administration to four objectives: • Reinforce the principle that a domestic climate conducive to foreign investment strengthens national security. Meeting the challenges of a post-9/11 world need not require securing one at the expense of the other. The United States recognizes that growing inflows of foreign investment are necessary to expand levels of employment, innovation, and competitiveness in this country. Only those safeguards that are clearly necessary to protect our national security should be maintained. • Actively target unreasonable and discriminatory barriers to investment. The United States encourages a broad acceptance of the national-treatment principle in all countries and places a premium on the protection of U.S. investments abroad. The United States opposes measures that distort international investment flows, including trade-related or other performance requirements, discriminatory treatment of foreign investment, and expropriation without compensation. In turn, when countries promise to protect investment and eliminate such distortions, investors must have the ability to enforce those binding promises in neutral international settings that are free from the political intervention of governments. Further, countries need to be responsive to the needs of investors for access to innovative cross-border financial services. The United States will continue to allow foreign investors open and fair access to investment 12 President Bush’s statement is available at http://www.whitehouse.gov/news/releases/2007/05/20070510-3.html Congressional Research Service 4 Foreign Direct Investment: Current Issues opportunities under our statutes and regulations and in accordance with international law, and will continue to welcome investment through programs such as the Invest in America initiative. • Work with our partners in the WTO to strengthen the rules-based trading system so that it continues to promote open markets, trade reform and new opportunities for development and growth. My Administration is committed to completing the Doha Development Round with an agreement that opens markets for goods and services, ensures reform of agriculture and strengthens WTO rules, including in key areas such as trade facilitation. The predictability, certainty, and transparency of the system enhance opportunities for international investment by building investor confidence. • Promote an international environment in which international investment can make the greatest contribution to the development process. The United States has initiated the Millennium Challenge Account, which assists developing countries that create and maintain sound policy environments, including governing justly, investing in people, and encouraging economic freedoms. Through our bilateral and multilateral economic assistance programs, the United States will continue to explore ways to increase both public and private capital flows and support international investment in the developing world. As countries continue to adopt free market principles and democratic reforms, international investment is necessary to nurture market-oriented development and reduce debt service burdens. Economic freedom is one of the single greatest antidotes to poverty worldwide, and a positive link exists between the liberalization of investment flows and greater international trade. Exon-Florio Provision While U.S. policy toward inward and outward direct investment generally has adhered to the overall objective of treating such investment impartially, there have been a number of notable exceptions. In 1988, Congress approved the Exon-Florio provision as part of the Omnibus Trade Act. 13 The Exon-Florio provision grants the President broad discretionary authority to take what action he considers to be “appropriate” to suspend or prohibit proposed or pending foreign acquisitions, mergers, or takeovers “of persons engaged in interstate commerce in the United States” which “threaten to impair the national security.” In this act, national security was not defined, but was meant to be interpreted broadly. Through Executive Order 12661, President Reagan implemented provisions of the Omnibus Trade Act, and he delegated his authority to administer the Exon-Florio provision to the Committee on Foreign Investment in the United States (CFIUS),14 particularly to conduct reviews of foreign investment, to undertake investigations, and to make recommendations. The Committee has 30 days to decide whether to investigate a case and an additional 45 days to make its recommendation. Once the recommendation is made, the President has 15 days to act. 13 14 P.L. 100-418, title V, Subtitle A, Part II, or 50 U.S.C. app 2170. Executive Order 12661 of December 27, 1988, 54 F.R. 779. Congressional Research Service 5 Foreign Direct Investment: Current Issues Trade Act of 2002 In the Trade Act of 2002 (P.L. 107-210), U.S. policy toward foreign direct investment was clarified through a list of objectives that are intended to direct the work of U.S. trade negotiations on foreign investment. In particular, U.S. negotiators were directed to “reduce or eliminate artificial or trade-distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors important rights comparable to those that would be available under United States legal principles and practice.” In order to accomplish these objectives, the act specifies eight issues, including reducing or eliminating exceptions to the principle of national treatment; freeing the transfer of funds relating to investments; reducing or eliminating performance requirements, forced technology transfers, and other unreasonable barriers to the establishment and operation of investments; establishing standards for expropriation and compensation for expropriation; establishing standards for fair and equitable treatment; providing meaningful procedures for resolving investment disputes; improving mechanisms used to resolve disputes between an investor and a government; and ensuring the fullest measure of transparency in the dispute settlement mechanism. September 11, 2001 Arguably, the events of September 11, 2001, have reshaped Congressional attitudes toward the Exon-Florio provision that became apparent in 2006 as a result of the public disclosure that Dubai Ports World15 was attempting to purchase the British-owned P&O Ports,16 with operations in various U.S. ports. After the September 11th terrorist attacks Congress passed and President Bush signed the USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism).17 In this act, Congress provided for special support for “critical industries,” which it defined as: systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.18 This broad definition is enhanced to some degree by other provisions of the act, which specifically identify certain sectors of the economy that are likely candidates for consideration as critical infrastructure. These sectors include telecommunications, energy, financial services, water, transportation sectors,19 and the “cyber and physical infrastructure services critical to maintaining the national defense, continuity of government, economic prosperity, and quality of 15 Dubai Ports World was created in November 2005 by integrating Dubai Ports Authority and Dubai Ports International. It is one of the largest commercial port operators in the world with operations in the Middle East, India, Europe, Asia, Latin America, the Carribean, and North America. 16 Peninsular and Oriental Steam Company is a leading ports operator and transport company with operations in ports, ferries, and property development. It operates container terminals and logistics operations in over 100 ports and has a presence in 18 countries. 17 P.L. 107-56, title X, Sec. 1014, October 26, 2001; 42 U.S.C. Sec. 5195c(e). 18 Ibid. 19 42 U.S.C. Sec. 5195c(b)(2). Congressional Research Service 6 Foreign Direct Investment: Current Issues life in the United States.”20 The following year, Congress adopted the language in the Patriot Act on critical infrastructure into The Homeland Security Act of 2002.21 By adopting the terms “critical infrastructure” and “homeland security,” following the events of September 11, 2001, Congress demonstrated that the attacks fundamentally altered the way many policymakers view the concept of national security. As a result, many policymakers have concluded that economic activities are a separately identifiable component of national security. In addition, many policymakers apparently perceive greater risks to the economy rising from foreign investments in which the foreign investor is owned or controlled by foreign governments as a result of the terrorist attacks. The Dubai Ports World case, in particular, demonstrated that there was a difference between the post-September 11 expectations held by many in Congress about the role of foreign investment in the economy and of economic infrastructure issues as a component of national security and the operations of CFIUS. For some Members of Congress, CFIUS seemed to be out of touch with the post-September 11, 2001, view of national security, because it remains founded in the late 1980s orientation of the Exon-Florio provision, which views national security primarily in terms of national defense and downplays or even excludes a broader notion of economic national security. Special Security Arrangements Much of the recent debate concerning foreign direct investment in the U.S. economy has focused on the activities of the Committee on Foreign Investment in the United States and on the ExonFlorio provision. The CFIUS process, however, is just one of three major provisions of law that authorize the review of foreign direct investment transactions for their impact on the economy. The National Industrial Security Program and the critical industries provisions of various statutes also require that foreign direct investment transactions be reviewed. Generally, the reviews mandated by these three provisions operate independently, although at times they have overlapped. The provisions illustrate the complexities involved in defining most economic activities, which can span a broad range of economic activities and fields. Most economic activities affect various sectors and segments of the economy in ways that defy a narrow definition and complicate efforts to distinguish those economic activities that are related to the broad rubric of national security or to national economic security, which is even less clearly defined. Strategic Materials Protection Board Creation of the Strategic Materials Protection Board in 2006 could restrict other foreign investment transactions, although this likely will affect a small group of such transactions. In retrospect, some observers hope this provision will prevent future transactions similar to the merger between Magnequench International and the Canadian-owned firm AMR Technologies, Inc., which shifted ownership of the world’s largest producer of Neo powder (composed of neodymium, iron, and boron) to produce Neo magnets.22 The Strategic Materials Protection 20 21 42 U.S.C. Sec. 5195c(b)(3). 6 U.S.C. Sec. 101(4). 22 Neo magnets have a broad range of uses in products where strong magnetic properties are required in conjunction with small size and weight, including hard disk drives, optical disk drives, printers, faxes, scanners, camcorders, game consoles, pagers, PDA’s, mobile phones, mp3 players, video recorders, transmission speed sensors in automobiles, (continued...) Congressional Research Service 7 Foreign Direct Investment: Current Issues Board was mandated by Title VIII of the John Warner National Defense Authorization Act for FY2007, signed October 17, 2006 and designated as P.L. 109-364. The act established that the Strategic Materials Protection Board would be composed of representatives from: the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Under Secretary of Defense for Intelligence; the Secretary of the Army; the Secretary of the Navy; the Secretary of the Air Force. The Board is required to meet at least once every two years to make recommendations regarding materials critical to national security and to report to Congress on the results of meetings and on the recommendations of the Board. In addition, the act prohibits the Department of Defense from buying “strategic materials critical to national security” unless the metals are reprocessed, reused, or produced in the United States, except under a number of conditions, including the lack of availability of specialty metals. The Board is directed in the statute to undertake four activities: 1. Determine the need to provide a long term domestic supply of materials designated as critical to national security to ensure that national defense needs are met. 2. Analyze the risk associated with each material designated as critical to national security and the effect on national defense that the non-availability of such material from a domestic source would have. 3. Recommend a strategy to the President to ensure the domestic availability of materials designated as critical to national security. 4. Recommend such other strategies to the President as the board considers appropriate to strengthen the industrial base with respect to materials critical to national security. The Strategic Materials Protection Board met on July 17, 2007 and published a report in September 2007 of that meeting. At that meeting, the Board determined that the term “materials critical to national security” would mean “strategic materials critical to national security” as specified in the statute and would include those metals listed in Section 842 of P.L. 109-364 (10 U.S.C. 2533b). In this section, specialty metals are defined as: 1. Steel A) with a maximum alloy content exceeding one of more of the following limits: manganese, 1.65 percent; silicon, 0.60; or copper, 0.60 percent; or B) containing more than 0.25 percent of any of the following elements; aluminum, chromium, cobalt, columbium, molybdenum, nickel, titanium, tungsten, or vanadium, 2. Metal alloys consisting of nickel, iron-nickel, and cobalt base alloys containing a total of other alloying metals (except iron) in excess of 10 percent. 3. Titanium and titanium alloys. 4. Zirconium and zirconium base alloys. (...continued) airbag sensors, instrument gauges, bearings, generators, cordless power tools, refrigerators, air conditioners, and such military applications as magnets in the motors of the U.S. Joint Direct Attack Munition, or smart bombs. Congressional Research Service 8 Foreign Direct Investment: Current Issues As indicated from this list of specialty metals, the Strategic Materials Protection Board has not listed Neo magnets as a strategic material critical to national defense because the key ingredients in such magnets, neodymium, iron, and boron are not listed as strategic materials in the statute. Administrative Changes Activity within Congress and the intense public and congressional reaction that arose from the proposed Dubai Ports World acquisition spurred the Bush Administration in late 2006 to make an important administrative change in the way CFIUS reviews foreign investment transactions. CFIUS and President Bush approved the acquisition of Lucent Technologies, Inc. by the Frenchbased Alcatel SA, which was completed on December 1, 2006. Before the transaction was approved by CFIUS, however, Alcatel-Lucent was required to agree to a national security arrangement, known as a Special Security Arrangement, or SSA, that restricts Alcatel’s access to sensitive work done by Lucent’s research arm, Bell Labs, and the communications infrastructure in the United States. The most controversial feature of this arrangement is that it allows CFIUS to reopen a review of the deal and to overturn its approval at any time if CFIUS believes the companies “materially fail to comply” with the terms of the arrangement. This marks a significant change in the CFIUS process. Prior to this transaction, a CFIUS review or investigation had been portrayed, and had been considered, to be final. As a result, firms were willing to subject themselves voluntarily to a CFIUS review, because they believed that once an investment transaction was scrutinized and approved by the members of CFIUS the firms could be assured that the investment transaction would be exempt from any future reviews or actions. This administrative change, however, means that a CFIUS determination may no longer be a final decision and it adds a new level of uncertainty to foreign investors seeking to acquire U.S. firms. A broad range of U.S. and international business groups are objecting to this change in the Bush Administration’s policy. 23 Invest in America On March 7, 2007, the International Trade Administration (ITA) announced that it had began a new Invest in America initiative aimed at attracting foreign direct investment.24 In making this announcement, ITA officials argued that: ...the United States does not have a federal government program to attract or retain inward foreign investment. All other major economies have mechanisms such as investment boards and investment promotion activities to encourage FDI... This historically passive role toward FDI is increasingly anachronistic.25 23 Kirchgaessner, Stephanie, US Threat to Reopen Terms of Lucent and Alcatel Deal Mergers, Financial Times, December 1, 2006. p. 19; Pelofsky, Jeremy, Businesses Object to US Move on Foreign Investment, Reuters News, December 5, 2006. 24 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). 25 Lavin, Frank L., Role of Foreign Investment in U.S. Economic Growth, March 7, 2007. P. 1. Available at http://trade.gov/press/speeches/lavin_030707.asp. Congressional Research Service 9 Foreign Direct Investment: Current Issues These officials also indicated that: ...if we do not play an active role in promoting inward investment, we are at risk of having our investment climate perceived around the world only by the occasional difficulty...The United States Government needs to take the role of FDI seriously. We need to make clear that as a matter of policy, we welcome foreign investment in the United States. According to the ITA announcement, the initiative has three key responsibilities: (1) outreach to the international investment community; (2) serve as an ombudsman in Washington, DC, for the concerns of the international investment community as well as work on policy issues that affect the attractiveness of the United States to foreign investment; and (3) supporting state and local governments engaged in foreign investment promotion. In addition to these responsibilities the initiative is to create a task force within the International Trade Administration to educate and coordinate the efforts of ITA employees in offices around the world on foreign investment. There is no indication if any additional budgetary resources have been necessary to accomplish the goals of this initiative. According to the ITA, attracting foreign direct investment to the U.S. economy is important for the following reasons. • Foreign direct investment creates jobs in the economy: the U.S. affiliates of foreign companies employ 5.5 million U.S. workers. • It boosts wages because the U.S. affiliates of foreign companies tend to pay higher wages than U.S. companies. • Foreign direct investment strengthens U.S. manufacturing: 41 percent of the jobs related to U.S. affiliates of foreign companies are in the manufacturing sector. • Foreign direct investment brings in new research, which often is adopted by locally-owned companies. • Such investment contributes to rising U.S. productivity: • Foreign direct investment contributes to U.S. tax revenues In 2004, foreign affiliates paid $44 billion in taxes. • Foreign direct investment can help U.S. companies penetrate foreign markets and increase U.S. exports. • Inward investment helps keep U.S. interest rates low, because the inflow of foreign capital decreases the cost of borrowing money for domestic firms. Congressional Activity During the 109th Congress, Members introduced over two dozen measures26 to address various issues with foreign direct investment in the United States following the proposed acquisition by Dubai Ports World. Of the measures that were introduced, H.R. 5337 and S. 3549 from the House and Senate, respectively, garnered significant support and passed their respective bodies on July 26, 2006. The 109th Congress ended before a Conference Committee was convened on H.R. 5337 26 CRS Report RL33312, The Exon-Florio National Security Test for Foreign Investment, by James K. Jackson. Congressional Research Service 10 Foreign Direct Investment: Current Issues or S. 3549 and both measures lapsed. In the 1st session of the 110th Congress, Congresswoman Maloney introduced H.R. 556, the National Security Foreign Investment Reform and Strengthened Transparency Act of 2007, on January 18, 2007. The measure was approved by the House Financial Services Committee on February 13, 2007 with amendments, and was approved with amendments by the full House on February 28, 2007 by a vote of 423 to 0. On June 13, 2007, Senator Dodd introduced S. 1610, the Foreign Investment and National security Act of 2007. On June 29, 2007, the Senate adopted S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the House accepted the Senate’s version of H.R. 556 by a vote of 370-45 and sent the measure to the President, who signed it on July 26, 2007. It is designated as P.L. 110-49. The measure changed the then existing procedures by requiring CFIUS to investigate all foreign investment transactions in which the foreign person is owned or controlled by a foreign government, regardless of the nature of the business. Foreign investors may regard this approach as an important policy change by the United States toward foreign investment. Prior to this change, foreign investment transactions were presumed to be acceptable and to provide a positive contribution to the economy. As a result of this presumption, the burden was on the members of CFIUS to prove that particular transactions threatened national security. Foreign investors, however, could view P.L. 110-49 as reversing previous policy, because it shifted the burden onto firms to prove that they are not a threat to national security because they are owned or controlled by a foreign government. Although the number of investment transactions a year in which the foreign investor is associated with a foreign government is small compared with the total number of foreign investment transactions, some foreign investors and foreign governments could view this as a significant change in the traditional U.S. approach to foreign investment. P.L. 110-49 also increased the role of congressional oversight by requiring greater reporting by CFIUS on its actions either during or after it completes reviews and investigations and by increasing reporting requirements on CFIUS. The measure requires CFIUS to provide Congress with a greater amount of detailed information about its operations and it amended the CFIUS statute regarding the meaning of national security. The law requires the Director of National Intelligence to conduct reviews of any investment that poses a threat to the national security. The law also provides for additional factors the President and CFIUS are required to use in assessing foreign investments. In particular, the bill added implications for the nation’s critical infrastructure as a factor for reviewing or investigating an investment transaction. Federal-State Relations U.S. policy toward foreign direct investment also has been complicated by the interplay between state and local governments and the federal government. Since the end of World War II, U.S. policy toward direct investment has been one of neutrality by the federal government, while leading international negotiations to reduce restrictions by other countries on U.S. direct investment abroad. At home, the federal government has taken no role in coordinating or regulating the activities of state and local governments as they have developed and carried out their individual approaches toward attracting foreign direct investment to their jurisdictions. More than two-thirds of state government and numerous local governments have developed their own initiatives to attract foreign investors to their jurisdictions. Indeed, numerous jurisdictions have offered foreign firms tax and financial incentives and they have competed against other jurisdictions for the investment dollars and jobs that accompany such foreign investment. This conflict between the federal government’s stance of neutrality relative to the aggressive actions of state and local governments in attracting foreign investment has been criticized by other foreign Congressional Research Service 11 Foreign Direct Investment: Current Issues governments that question the value of entering into agreements with the federal government without being guaranteed that the federal government will exercise control over the activities of state and local governments. In addition, various foreign governments have questioned the motives of U.S. negotiators who have pressed them in international forums to eliminate the various tax and financial benefits they offer multinational firms to locate within their jurisdictions, because they argue that such incentives distort the investment market. At the same time, they argue that the U.S. federal government seemingly makes no effort to curtail the considerable tax and financial incentives many state and local governments offer to win foreign investment commitments. It is unclear how the Invest in America initiative will coordinate with state and local governments that are accustomed to operating on their own and to competing fiercely with one another in attracting foreign investors. Model Bilateral Investment Treaty (BIT) Program In June 2009, the Obama Administration appointed a private sector group to review the country’s Model Bilateral Investment Treaty (BIT) program. On September 30, 2009, the group delivered its report with 25 recommended changes to Secretary of State Clinton and to U.S. Special Trade Representative Kirk. The renewed focus on the BIT program in part reflects renewed interest in foreign direct investment due to growing displeasure among some elements of the public that have grown weary of trade and investment treaties, especially with the national rate of unemployment at 10%. As a result of the financial crisis and the economic recession, the G-20 countries agreed at the summits in Washington and London to avoid protectionist trade and investment measures. The United Nations concluded in its latest investment report27 that governments have not used the financial crisis or the economic recession to make an appreciable change in foreign investment policies or to slowdown the pace of signing new international investment agreements. 28 Despite these officials actions, market condition in 2008 and 2009 caused foreign direct investment flows to fall by nearly 30%. The main factors behind this dropoff in foreign investment flows include: (1) reduced amounts of trade financing due to tighter credit condition; (2) reduced corporate profits and a greater aversion to risk; and (3) lower market demand for investments due to the economic downturn. In some cases, governments have responded to the economic downturn by fashioning fiscal stimulus programs that favor some types of firms through domestic content regulations. In other cases, government actions that differentiate firms based on national security considerations have been labeled by some observers as discriminatory. During this period, however, the United Nations reported that 59 bilateral investment treaties were signed in 2008, down slightly from the 65 that were signed in 2007. By yearend 2008, such treaties numbered nearly 2,700 and represented a major policy tool that both developed and developing countries are using to promote direct investment. An additional 16 other types of international investment agreements, generally as part of free trade agreements, were signed in 2008. One recurring question about foreign investment agreements is the impact they have on the flow of foreign investment, since such agreements are signed primarily to increase investment flows 27 28 World Investment Report 2009, United Nations Conference on Trade and Development, 2009. Report on G-20 Trade and Investment Measures, OECD, WTO, UNCTAD, September 14, 2009. Congressional Research Service 12 Foreign Direct Investment: Current Issues between the signatories. A recent study completed by UNCTAD reviewed 15 economic studies on the relationship between foreign investment flows and investment agreements. The study concluded that there is no direct cause-effect relationship between investment treaties and the flow of investment funds. The study concluded that “other factors, such as the economic attractiveness of a host country, its market size, its labor force or its endowment with natural resources may be much more important.”29 Indeed, the study concluded that market-related factors stand out as the most important determinants of foreign direct investment. One condition that is common to most host countries is that they are receptive to FDI. Another key issue is the degree of political stability determining the political risk of investing in a host country. Other key FDI determinants include the physical and technological infrastructure of the host country, the cost and quality of resources and other inputs and business facilitation measures, such as FDI promotion, including incentives to foreign investors. The overwhelming majority of investment agreements attempt to promote foreign investment by protecting foreign investors against certain political risks in the host country. In addition, such factors as the size and the growth of the host country market, its growth rate and the average income per capita have been determined to be important factors in attracting foreign direct investment. As countries sign more investment arrangements, those countries that lag behind may find that they have a comparative disadvantage in attracting such investment. Foreign Direct Investment in the U.S. Economy Foreigners invest in the U.S. economy in a number of ways and for a number of reasons. These investments can be divided roughly into two broad categories, portfolio investments, or investments in corporate stocks and bonds and U.S. government securities, and direct investment, or investments in U.S. businesses and real estate. In 2008, foreigners invested over $2.0 trillion dollars in the U.S. economy, $320 billion of which was in direct investment, with the rest of the funds invested in the broader category of portfolio investment. Typically, the Department of the Treasury tracks portfolio investments since a substantial part of these investments is in U.S. Treasury securities. The Treasury Department has shared responsibilities for tracking direct investment with the Department of Commerce, because the Commerce Department’s Bureau of Economic Analysis conducts surveys of direct investment that provide the basic data on such investments. The Treasury Department, however, takes the lead in negotiating international agreements on the treatment of direct investment and it chairs the inter-agency Committee on Foreign Investment in the United States, which represents the President as the chief federal government organization responsible for overseeing the national security implications of foreign investment in the economy. 30 The United States is widely recognized as the premier location for foreign firms to invest, as evidenced by the data in Table 1. According to the United Nation’s World Investment Report, the United States had received a cumulative amount of $3.1 trillion in foreign direct investment by year-end 2008, more than double the $1.5 trillion invested in the United Kingdom, the next single largest host to foreign direct investment, and it accounted for nearly 20% of the total cumulative amount of foreign direct investment among all nations. The United States is also the largest 29 The Role of International Investment Agreements in Attracting Foreign Investment to Developing Countries, UNCTAD, 2009, p. 22. 30 The focus of this report is on direct investment. For information about portfolio investment in the economy, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson. Congressional Research Service 13 Foreign Direct Investment: Current Issues foreign investor in the world, with over $2.3 trillion invested abroad. According to the U.N. report, of the $12.5 trillion in the total cumulative amount of foreign direct investment among all nations, the most economically advanced developed economies were host to 70% of this amount. From 1980 to 1990, this share increased sharply from 56% of total amount of foreign direct investment to 79%. From 1990 to 1995, the developed country share fell slightly to about 70%, where it has stayed relatively stable over the past decade. Table 1. Foreign Direct Investment Inward Position (in billions of U.S. dollars) 1985 1990 1995 2000 2006 2008 $972.2 $1,789.3 $2,992.1 $5,810.1 $11,998.8 $16,205.7 Developed Economies 569.7 1,416.9 2,035.8 4,031.3 8,453.8 13,623.6 Western Europe 285.0 815.2 1,213.0 2,293.8 5,717.2 8,997.4 European Union 267.1 768.2 1,136.0 2,180.7 5,434.3 8,086.8 France 36.7 86.8 191.4 259.8 782.8 1,397.0 Germany 36.9 111.2 192.9 271.6 502.4 1,450.9 United Kingdom 64.0 203.9 199.8 438.6 1,135.3 1,510.6 United States 184.6 394.9 535.5 1,256.9 1,789.1 3,162.0 64.7 112.8 123.3 212.7 385.2 520.4 402.5 370.3 916.7 1,707.6 3,155.9 2,356.6 Africa 33.8 58.4 77.3 153.2 315.1 98.0 Latin America 80.1 118.1 200.1 481.0 908.6 561.4 288.5 380.2 636.5 1,073.4 1,932.2 1,697.3 World Canada Developing Economies Asia Source: World Investment Report, United Nations Council on Trade and Development, various issues. The Costs and Benefits of Foreign Direct Investment Generally, economists conclude that direct investment benefits both the home and the host country and that the benefits of such investment outweigh the costs. Some groups within the U.S. economy, however, are concerned about the potentially negative effects of inward and outward direct investment. Most economists argue that free and unimpeded international flows of capital, such as direct investment, positively affect both the domestic (home) and foreign (host) economies. For the home country, direct investment abroad benefits individual firms, because firms that invest abroad are better able to exploit their existing competitive advantages and are able to acquire additional skills and advantages. This tends to further enhance the competitive position of these firms both at home and abroad and shifts the composition and distribution of employment within the economy toward the most productive and efficient firms and away from the less productive firms. Some observers argue that U.S. direct investment abroad supplants U.S. exports, jobs, and research and development funds, thereby reducing employment and wages in the U.S. economy. Others are concerned that outward direct investment alters the industrial composition of domestic production and trade flows, which can affect the sectoral and regional distribution of employment Congressional Research Service 14 Foreign Direct Investment: Current Issues and the relative demand for skilled and unskilled labor.31 For the home country, overseas investment may lead some firms to shift parts of their production abroad, thereby supplanting some domestic production with imports from abroad, but most studies indicate that, on balance, direct investment abroad increases U.S. exports and helps sustain employment and wages at home. 32 Intra-company trade is a relatively new feature of the U.S. economy, but can be expected to increase as the economy becomes even more globalized. In 2007, U.S. parent companies accounted for more than half of all U.S. exports and more than one-third of U.S. imports. Furthermore, about half of the exports by U.S. parent companies was to their foreign affiliates. At the same time, the U.S. affiliates of foreign firms accounted for 20% of U.S. exports and 25% of U.S. imports. Globally, a relatively small share of the production of U.S. foreign affiliates makes its way back into the U.S. economy. In 2007 the foreign affiliates of U.S. multinational firms exported about 10% of their production back to the United States, but two-thirds of their production was sold within the host country and the rest was exported to other foreign countries.33 Foreign direct investment also supports U.S. exports to areas where formal restrictions to exports exist. In addition, by expanding and supporting development in foreign markets, direct investment spurs improvements in foreign economies, which in turn, creates new markets for U.S. goods. Direct investment also seems to be associated with a strengthened competitive position, a higher level of skills of the employees, and higher incomes of firms that invest abroad. As a host country, the United States benefits from inward direct investment because the investment adds permanently to the Nation’s capital stock and skill set. Direct investment also brings technological advances, since firms that invest abroad generally possess advanced technology, processes, and other economic advantages. Such investment also boosts capital formation, contributes to a growth in a competitive business environment and to productivity. In addition, direct investment contributes to international trade and integration into the global trading community, since most firms that invest abroad are established multinational firms.34 On the cost side, critics of foreign investment argue that some U.S. firms may invest abroad, and thereby shift some resources from activities within the United States, in order to take advantage of abundant natural resources, low-cost labor, or relaxed environmental and labor laws.35 Indeed, about one-third of U.S. direct investment abroad is in developing countries, where economic conditions are markedly different from those in the United States or in many parts of Europe. In some cases, firms that invest abroad may shift production from the United States to a foreign location from which it might export back to the United States products that it previously had produced in the United States, but this does not seem to be a major activity of the foreign affiliates of U.S. firms. Such offshoring of production, or globalization, has grown over the last 31 International Investment Perspectives: 2007 Edition, the Organization for Economic Cooperation and Development. p. 99. 32 Ibid., p. 101; Brainard, S. Lael, and David A. Riker, Are U.S. Multinationals Exporting U.S. Jobs? NBER Working Paper 5958, National Bureau of Economic Research, March 1997. 33 Bureau of Economic Analysis, U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 1997 Statistics, August 2009. Table III.F1. 34 Such linkages appear to be important factors for both developed and developing host countries, see Alfaro, Laura, Areendum Chanda, Sebnem Kalemli-Ozcam, and Selin Sayek, How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on linkages. Working Paper 12522, September 2006, National Bureau of Economic Research. 35 World Investment Report: 2009, United Nations Council on Trade and Development. p. 155-162. Congressional Research Service 15 Foreign Direct Investment: Current Issues decade as many developing economies have dropped formal restrictions on foreign investment, but much of this investment seems to be geared toward producing for the local market, or for exports to neighboring countries. The data in Table 2 show the extent and influence of U.S. and foreign multinational firms in the U.S. economy. In 2007, the latest year for which comprehensive data are available, foreign firms had a total of nearly 11,000 affiliates operating in the United States. These affiliates were present in every State and in every economic activity, where such activity is not prohibited by law. Foreign firms employed 3.4 million U.S. workers and paid $433 billion in wages and compensation. In 2007, 40% of the foreign firms’ employment was in the manufacturing sector, more than twice the share of manufacturing employment in the U.S. economy as a whole. By comparison, U.S. multinational companies employed over 22 million workers in the U.S. economy and the foreign affiliates of these U.S. parent companies employed nearly 12 million workers in nearly 30 thousand firms abroad. The foreign affiliates of U.S. firms had 60% more in the value of their gross product than the affiliates of foreign firms operating in the United States, had a greater value of assets, higher sales, and paid three times as much in taxes. Table 2. Select Data on U.S. Multinational Companies and on Foreign Firms Operating in the United States, 2007 (in millions of dollars unless otherwise indicated) U.S. Multinational Companies U.S. Affiliates of Foreign Firms Parent Companies Foreign affiliates 2,270 26,342 10,941 Employment (thousands) 22,003.1 11,737.5 3,397.4 Employee compensation $1,392,180 $475,595 $433,065 Gross product $2,588,811 $1,117,585 $657,558 $19,964,935 $14,201,291 $12,732,967 $8,614,733 $5,517,143 $3,553,593 $257,292 $179,922 $57,731 N.A. $35,019 $44,158 Number of firms Total assets Sales Taxes R&D Expenditures Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 2007 Estimates; and Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies, Preliminary 2007 Estimates. Bureau of Economic Analysis, 2009. The affiliates of foreign firms spent $205 billion in the United States in 2007 on new plant and equipment, imported $550 billion in goods and services and exported $228 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, have far outperformed their U.S.-owned counterparts. Although foreign-owned firms account for less than 4% of all U.S. manufacturing establishments, they have had 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 Congressional Research Service 16 Foreign Direct Investment: Current Issues 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 have 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. 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 which 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. Most economists conclude that foreign investment benefits the host economy because such investment adds permanently to the capital stock of the economy and increases the total amount of capital in the economy. While these conclusions seem generally to be true, they probably should be tempered somewhat relative to foreign direct investment in the United States. The data in Table 3 show the inflows and outflows of capital in the U.S. economy over the past eight years that are associated with direct investment. The data indicate that firms can raise funds in three different ways: they can borrow it from the parent company as an intercompany debt transfer; they can raise the funds in the domestic economy in the form of equity capital, or they can raise their funds internally from profits generated by the firm and used as reinvested earnings. The data in Table 3 indicate that over the eight-year period 1999-2006, 8% of the funds foreign firms used to invest in U.S. businesses came from the foreign parent company in the form of intercompany debt. The rest of the funds foreign investors used to invest in U.S. businesses was raised in the United States, not imported from abroad. Equity capital raised in the U.S. capital markets accounted for 77% of the share of the funds foreign firms used to invest, with the rest, 15%, generated from the reinvested earnings of the foreign firms. In comparison, the overseas affiliates of U.S. parent firms raised the largest part of their funds—72%—from the reinvested earnings of the affiliates, partly reflecting the older, more mature nature of the investments. Of the rest of the funds, 42% was raised through the equity capital markets in the host country, and 6% was raised through intercompany debt. Table 3. U.S. Direct Investment Abroad and Foreign Direct Investment in the U.S. Economy, Annual Flows 1999-2006 (in billions of U.S. dollars) 2001 2002 2003 2004 2005 2006 2007 2008 U.S. Direct Investment Abroad Capital Equity capital $142.3 $154.5 $149.6 $316.2 $3.6 $244.9 $398.6 $332.0 60.9 42.7 35.5 133.2 61.9 49.0 174.9 90.2 Congressional Research Service 17 Foreign Direct Investment: Current Issues 2001 2002 2003 2004 2005 2006 2007 2008 Reinvested earnings 69.8 85.3 121.0 162.9 -10.3 217.3 238.9 251.5 Intercompany debt 11.6 26.5 -6.6 20.0 -15.4 -21.3 -15.3 -9.7 Foreign Direct Investment in the United States Capital $167.0 $84.4 $63.7 $146.0 $112.6 $243.1 $275.7 $319.7 Equity capital 140.9 105.3 93.4 92.9 70.7 115.0 155.0 250.2 Reinvested earnings -33.9 1.6 14.5 49.5 41.7 69.1 49.4 54.6 60.0 -22.6 -44.0 3.5 0.2 59.0 71.0 15.0 Intercompany debt Source: U.S. Department of Commerce. Supporters of foreign direct investment also highlight the number of jobs created by foreign investment in the economy. In the case of foreign direct investment n the U.S. economy, however, the employment picture is somewhat unclear. While foreign direct investment on the whole does support and contribute to existing employment in the economy, the particular nature of the investment makes it difficult to assess the full contribution of this investment to the overall employment picture. Foreign firms can invest in the U.S. economy in three ways: by adding to current investments; by establishing a new venture, termed, a “greenfield” investment; or by acquiring an existing U.S. business. The data in Table 4 exclude additions to employment that can be accounted for by on-going foreign-owned firms and focus on U.S. businesses that are acquired or are newly established by foreign investors. The data in Table 4 also indicate that during the 1998-2008 period, acquisitions of existing U.S. firms accounted for nearly 90% of the assets of the businesses that were either newly established or acquired by foreign investors, 95% of the increases in employment, 92 % of the sales, and 91% of the investment outlays. As a result, employment associated with acquisitions of established U.S. firms accounts for a large part of the total number of employees of foreign firms that currently are operating in the United States. It is likely that such acquisitions help to sustain the level of employment of the acquired firms, but it is difficult to estimate how much new employment is added to the economy as a result of the extensive role foreign acquisitions play in the economy. It also is unclear what long-term impact these acquisitions are having on employment among the acquired firms. In some cases, foreign firms may use their acquisitions as a springboard to expand their operations and, therefore, their employment in the United States, in other circumstances, they may use an acquisition to consolidate or to streamline other operations, which may result in reducing their level of employment. Table 4. U.S. Businesses Acquired or Established by Foreign Investors (in millions of dollars, unless otherwise indicated) U.S. business enterprises acquired 1998 Total assets Total assets Sales $274,349 $218,483 $147,434 Congressional Research Service Number of empl. 603,385 Investment outlays $182,357 U.S. business enterprises established Total Assets Sales $55,866 $17,471 Number of empl. Investment outlays 21,199 $32,899 18 Foreign Direct Investment: Current Issues U.S. business enterprises acquired U.S. business enterprises established Total assets Total assets Sales 1999 454,012 430,226 115,534 589,311 265,127 23,786 2000 482,021 463,142 153,525 748,952 322,703 2001 382,308 311,220 90,778 335,088 2002 105,516 92,800 51,945 2003 219,072 198,474 2004 308,638 2005 Number of empl. Investment outlays Total Assets Number of empl. Investment outlays 8,718 13,368 9,829 18,879 7,204 21,068 12,926 138,091 71,087 18,131 74,879 9,017 211,679 43,442 12,716 3,735 6,808 11,077 51,376 161,607 50,212 20,598 3,173 4,449 13,379 252,481 60,592 199,227 72,738 56,127 6,744 12,366 13,481 181,846 148,695 65,188 230,825 73,997 33,151 1,953 5,045 17,393 2006 356,541 343,454 78,395 214,660 148,604 13,086 868 686 16,999 2007 411,777 377,551 159,438 487,000 223,616 34,226 3,240 9,598 28,301 2008 895,733 872,291 176,657 364,469 242,798 23,443 6,284 4,036 17,564 Sales Source: Anderson, Thomas, Foreign Direct Investment in the United States: New Investment in 2008. Survey of Current Business, June 2009. p. 32. As Table 5 shows, acquisition activity is not limited to foreign firms, but is a well-established feature of the overall business climate in the United States. In terms of the number of acquisitions that were completed, 1998 stands out as the most active year, with over 10,000 deals completed. As the U.S. economy posted strong economic growth through the later 1990s and into the early 2000s, such acquisition activity remained strong among all three groups: U.S. firms acquiring U.S. firms; foreign firms acquiring U.S. firms and U.S. firms acquiring foreign firms. On average over the 10-year period, nearly 8,000 acquisitions were completed each year among the three types of investments. The share of these transactions accounted for by foreign acquisitions of U.S. firms grew by 50% over the 1998-2007 period, rising from 8% of all acquisition transactions in 1998 to nearly 15% of all transactions in 2007. Merger and acquisition activity slowed markedly in 2008 and 2009 as the financial crisis and economic slowdown reduced corporate profits and substantially reduced access to financial resources. Table 5. U.S. and Foreign Acquisition Activity, 1997-2006 Total Acquisitions $ Billions U.S. Acquisitions of U.S. Companies $ Billions U.S. Acquisitions of Foreign Companies Number of Deals $ Billions Number of Deals Year Number of Deals 1997 8,479 $771.0 6,317 $606.3 775 $84.9 1,387 $80.3 1998 10,193 1,373.8 7,575 1,019.6 971 227.0 1,647 127.2 1999 9,173 1,422.9 6,449 1,005.1 1,148 264.0 1,576 153.8 2000 8,853 1,781.6 6,032 1,304.6 1,264 338.0 1,557 139.0 2001 6,296 1,155.8 4,269 838.3 923 204.3 1,104 113.2 2002 5,497 625.0 3,989 450.4 700 85.5 808 89.1 2003 6,169 525.5 4,539 352.8 750 82.0 880 90.7 Congressional Research Service Number of Deals Foreign Acquisitions of U.S. Companies $ Billions 19 Foreign Direct Investment: Current Issues U.S. Acquisitions of U.S. Companies Total Acquisitions $ Billions Number of Deals $ Billions Foreign Acquisitions of U.S. Companies U.S. Acquisitions of Foreign Companies Number of Deals $ Billions Number of Deals Year Number of Deals $ Billions 2004 7,102 855.3 5,140 628.6 822 104.1 1,140 122.6 2005 7,600 996.9 5,463 733.9 977 112.7 1,160 150.3 2006 8,621 1,434.4 6,105 1,015.5 1,142 200.9 1,374 218.0 2007 9,167 1,737.8 6,343 1,151.0 1,343 321.2 1,481 265.5 Source: Mergers & Acquisitions, February 2007. p. 69. Another notable feature of the data is the way in which foreign acquisitions of U.S. firms and U.S. acquisitions of foreign firms seem to rise and fall in tandem. As the rate of U.S. economic growth slowed in the early 2000s, acquisition activity slowed not only in the United States, but for U.S. acquisitions abroad as well. Figure 2 and Figure 3 show the number of deals and the value of those deals for U.S. acquisitions of foreign firms and foreign acquisitions of U.S. firms, respectively. In both cases, the number of deals and the value of those deals dropped between 2000 and 2002 for both U.S. and foreign firms before activity rebounded after 2002. Such similarities in the acquisition activity of U.S. and foreign firms seem to be counter-intuitive in that those forces that draw U.S. firms to invest abroad should theoretically be separate from those factors that draw foreign firms to invest in the United States. Figure 2. U.S. Acquisitions of Foreign Companies Source: Mergers and Acquisitions In some respects, foreign investment in the United States and U.S. investment abroad should operate as substitutes, so that both U.S. and foreign firms would be expected to invest in the United States when the U.S. economic growth rate was strong relative to other advanced economies and both U.S. and foreign firms would be expected to invest elsewhere when the Congressional Research Service 20 Foreign Direct Investment: Current Issues relative rate of U.S. economic growth was weak. Instead U.S. investment abroad is strong when foreign investment in the United States is strong and U.S. investment abroad is weak when foreign investment in the United States is weak. The two trends likely reflect the impact the U.S. economy has on the global economy and particularly on Western Europe, where much of the U.S. overseas investment and acquisition activity is concentrated. As a result, when the rate of economic growth in the United States is strong, foreign firms are drawn to invest in U.S. businesses. In addition, the stronger rate of economic growth in the United States enhances the profit position of U.S. firms which encourages them to increase their investments both at home and abroad as U.S. economic activity also boosts economic performance in Western Europe and among other developed economies that have become increasingly linked with the U.S. economy. Figure 3. Foreign Acquisitions of U.S. Companies Source: Mergers and Acquisitions Conclusions The terrorist attacks of September 11, 2001, have affected the perception of many policymakers and elements of the public about the role and the risks of foreign investment in the economy. As a result, some Members of Congress have called for changes in U.S. investment laws and U.S. investment policies that will increase the federal government’s scrutiny over foreign investment in critical industries and in sectors essential to national security and to homeland security. In addition, Congress may broaden its oversight over the activities of federal agencies that are involved in administering U.S. direct investment policies. Economic studies generally conclude that the U.S. economy as a whole is benefitting from inward and outward direct investment. That is not to say that such investment does not bring costs as well as benefits. Indeed, some groups within the economy and some regions within the country likely benefit more than others. While dislocations likely are resolved eventually, they potentially can cause disruptions for some producers and some workers, especially those at the margins of the economy and struggling to remain competitive. Congressional Research Service 21 Foreign Direct Investment: Current Issues While Congress is grappling to sort out conflicting viewpoints and policies concerning the role and impact of foreign direct investment in the economy in a world of heightened security concerns, the Invest in America initiative stands out. The stated objective of the initiative is to promote the United States as a foreign investment location, which likely is aimed at assuaging foreign concerns about the course and direction of U.S. policies toward foreign direct investment. Although such a policy is not necessarily at odds with actions within Congress, it does seem to be a major shift in the traditional U.S. policy of neither helping nor hindering foreign direct investment. The initiative also raises questions concerning the cost of the initiative, how funds will be appropriated, and the role of congressional oversight. It is also unclear what role the initiative will have in coordinating the investment promotion activities of state and local governments that are accustomed to operating on their own and often compete against other localities for foreign investment commitments. In addition, while foreign direct investment does have positive net benefits for the economy as a whole, empirical research has not established that such benefits remain unambiguously positive when tax and financial incentives are offered as inducements. Author Contact Information James K. Jackson Specialist in International Trade and Finance jjackson@crs.loc.gov, 7-7751 Congressional Research Service 22