Foreign Direct Investment in the United States: An Economic Analysis of the Data and Current Issues

98-950 E

Updated June 1, 2000

CRS Report for Congress

Received through the CRS Web

Foreign Direct Investment in the United States: An

Economic Analysis of the Data and Current Issues

James K. Jackson

Specialist in International Trade and Finance

Foreign Affairs, Defense, and Trade Division

Summary

Foreign investors poured record amounts (in nominal terms) of funds into U.S.

businesses and real estate in 1998 and 1999, continuing the expansion that began in 1993.

British investors lead all others; Europeans as a whole are the largest foreign direct

investors,1 both in terms of annual investments and in terms of their cumulative holdings

of investments in the United States. Japanese investors have reduced their annual

investment expenditures in U.S. businesses, although they still rank as the second largest

foreign investors in the U.S. economy. Some Americans believe foreign investments

could eventually have a negative impact on the U.S. economy, but most economic

assessments indicate that foreign direct investment yields net national benefits to both the

recipient and the investing countries. By most measures, foreign investors have become

fully integrated into the U.S. economy and are indistinguishable in many ways from firms

that are wholly-owned by Americans. This report will be updated as events warrant.

Additional information on this and other trade-related issues is available from the CRS

Electronic Briefing Book on Trade at: [http://www.congress.gov/brbk/html/ebtra1.html].

Recent Investments

Foreigners invested nearly $300 billion in direct investment, or investment in U. S.

businesses and real estate, in 1999, according to Commerce Department data,2 a three fold

increase over the record amount foreigners invested in 1997. The data for 1999 indicate

1

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).

2

Bach, Christopher L. U.S. International Transactions, Fourth Quarter and Year 1999. Survey

of Current Business, April 2000. p. 174.

Congressional Research Service ˜ The Library of Congress

CRS-2

that foreigners are investing record sums on acquiring or establishing businesses in the

United States. The cumulative amount of foreign direct investment, or the position,3

increased by nearly $200 billion in 1998 and by close to $300 billion in 1999, when

adjusted for changes in the value of existing investments and currency values. As figure

1 shows, spending by foreigners on businesses and real estate in the United States during

the past two years has grown to levels that far surpass anything experienced previously.

As a share of the total amount of investment spending in the U.S. economy, investment

spending by foreign firms reached 17 % in 1999, exceeding the share such spending

accounted for in the U.S. economy in the late 1980s. Foreign firms' spending is being

sustained by growth in their reinvested earnings and in intercompany debt, but is arising

primarily from equity capital outlays that reflect a sharp increase in corporate merger and

acquisition activity in the United States.4

Figure 1. Foreign Direct Investment in the United States and

U.S. Direct Investment Abroad - Annual Flows, 1980-1999

(in billions of U.S. dollars)

3

The position 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.

4

At the same time, U.S. direct investment abroad rose in 1999 as U.S. parent firms increased their

acquisitions of foreign firms and their overall investment spending abroad. U.S. direct investment

abroad in 1999 totaled $152 billion (in nominal terms), a record for overseas investment by U.S.

firms.

CRS-3

With over $150 billion invested in businesses in the United States, Great Britain is

the largest foreign direct investor. Japan, with foreign direct investment of $133 billion

stands as the second largest investor. Sluggish economic growth and other economic

problems in Japan have caused Japanese firms at times to slow down their investment

spending in the United States to shore up their balance sheets back in Japan.5 Losses on

real estate and on parts of their U.S. operations also deterred Japanese investors.

Investment spending by other foreign firms, however, has been especially strong since the

mid-1990s, reflecting the continued fast-paced economic growth in the United States and

increases in U.S. productivity. Besides British and Japanese investors, Dutch, Canadian,

French, German, and Swiss investors have been investing heavily in U.S. businesses and

real estate.

On a historical cost, or book value basis (value at the time of the initial investment),

foreign direct investment in the United States reached $812 billion in 1998, the latest year

for complete data.. This represents an 17% increase over 1997 in the overall direct

investment position of foreign investors. Table 1 (page 4) shows that investments by

developed economies account for nearly 92% of all foreign direct investment in the United

States. These investments are predominately in the manufacturing sector, which accounts

for about 41% of foreign direct investment in the United States. Another 14% is in the

retail and wholesale trade sectors, reflecting purchases of department stores and other

investments to assist foreign firms in marketing and distributing their products. Other

sectors account for modest shares: insurance (10.0%), the petroleum sector (7.0%),

services (6.2%), finance (6.0%), and real estate (5.5%).

In some cases, investments by one or two countries dominate certain industrial

sectors, suggesting that there is a rough form of international specialization present in the

investment patterns of foreign multinational firms. By year end 1998, the Netherlands and

the United Kingdom accounted for the bulk of foreign investments in the U.S. petroleum

sector, reflecting investments by two giant companies Royal Dutch Shell and British

Petroleum. Japan is the single largest foreign investor in U.S. real estate, nearly equalling

the value of all European holdings. In addition, the Swiss, the Dutch, and the British are

the largest foreign investors in the insurance sector. Japan's $26 billion investment in the

U.S. banking and finance sectors is more than twice as large as comparable investments

by any European country and means that the Japanese are the single largest foreign

investor in those sectors. Foreign direct investment in the manufacturing sector is also

represented by a relatively small number of countries: investments by the United Kingdom,

the Netherlands, Japan, Germany, and France account for 71% of the total amount of

foreign direct investment in this sector.

5

U.S. Library of Congress. Congressional Research Service. Japan's Economy: From Bubble

to Bust. CRS Report 94-226 E, by James K. Jackson.

CRS-4

Table 1. Foreign Direct Investment Position in the United States on a

Historical-Cost Basis at Year-end 1998 (in millions of U.S. dollars)

All countries

Canada

Europe

Belgium

France

Germany

Ireland

Italy

Luxembourg

Netherlands

Sweden

Switzerland

U. K.

L. America

Africa

Middle East

Asia

Australia

Japan

All

Industries

Petroleum

811,756

74,840

539,906

9,577

62,167

95,045

13,227

3,830

20,214

96,904

14,564

54,011

151,335

32,210

884

7,831

156,085

14,755

132,569

53,254

2,633

42,771

(D)

(D)

312

739

(D)

0

11,505

(D)

252

26,277

4,072

-4

1,061

2,720

3,202

234

Manufac- Wholeturing

sale

trade

329,346

26,152

252,893

4,232

37,820

51,018

4,874

907

(D)

35,109

9,065

26,310

64,022

4,329

-90

966

45,096

2,982

39,918

Retail

trade

Banking

Finance

96,261 18,778 44,785 50,858

5,098 1,039 2,569 7,130

43,554 14,479 26,725 18,914

1,018

935 (D)

306

1,972

515 3,851 5,545

12,405 2,520 5,712 1,741

1,980 (D)

(D)

-268

423

595 1,094 (D)

1,311 (D)

0

110

5,606 4,696 6,473 4,301

2,028 (D)

(D)

(D)

2,579

183 (D)

2,478

10,099 3,894 3,210 1,957

1,858

897 3,526 4,859

21

17

47

432

131

392

931

216

45,598 1,954 10,988 19,307

-55

14

157 (D)

43,114 1,868 9,043 17,445

Insurance

Real

estate

Services

Other

industries

80,378

7,861

65,745

1

4,886

9,657

1,649

(D)

(D)

16,844

-6

17,112

14,265

5,356

0

0

1,416

(D)

990

44,436 50,252 43,409

9,084 2,488 10,786

14,303 36,463 24,059

51 1,489 (D)

(D)

3,018 3,261

3,547 5,924 2,209

31

816

638

65 (D)

188

(D)

4,315 (D)

6,612 3,625 2,131

744 2,036

333

211 2,341 (D)

1,801 12,058 13,752

4,105 1,472 1,736

116

234

111

3,728

125

280

13,101 9,469 6,436

691 (D)

4,202

10,743 7,304 1,910

Note: The position is the book value of foreign direct investors' equity in, and net outstanding loans to, their

U.S. affiliates. A negative position may result as U.S. affiliates repay debts to their foreign parents, and as foreign

parents borrow funds from their U.S. affiliates. D indicates that data have been suppressed by the Department of

Commerce to avoid the disclosure of data of individual companies.

Source: Lowe, Jeffrey H. Foreign Direct Investment in the United States: Detail for Historical-Cost Position

and Related Capital and Income Flows, 1998. Survey of Current Business, September, 1999. p. 37.

Acquisitions and Establishments

Another way of looking at foreign direct investment is by distinguishing between

transactions in which foreigners acquire existing U.S. firms and those in which foreigners

establish new firms -- termed "greenfield" investments. New investments are often

preferred at the local level because they are thought to add to local employment, whereas

a foreign acquisition adds little, if any, new employment. In 1998, outlays for new

investments, which include investments made directly by foreign investors and those made

by existing U.S. affiliates, rose by 250% from the amount invested in 1997 to $200 billion

(in nominal terms). Acquisitions of existing U.S. firms accounted for 62% of the new

investments by number and 90% by value, while investments by U.S. affiliates accounted

for 78% of the transactions by investor.6 Part of the increase in foreign investment to

acquire or establish new establishments can be traced to a substantial increase in very large

investments. The number of investments over $2 billion rose from 3 in 1997 to 12 in

1998, while there was a slight decrease overall in the total number of investments.

6

Fahim-Nader, Mahnaze. Foreign Direct Investment in the United States: New Investments in 1998.

Survey of Current Business, June 1999. p. 16-23.

CRS-5

Included among these investments are the purchase of Amoco Corporation by British

Petroleum PLC. for $55 billion and Daimler-Benz AG’s acquisition of the Chrysler

Corporation for $40 billion.

Economic Performance

By year-end1997, the latest year for which detailed data are available, foreign firms

employed 5 million Americans, about 5% of U.S. employment, and owned over 9

thousand business establishments.7 In 1997, 45% 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. The affiliates of foreign firms spent $100 billion in the

United States in 1997 on new plant and equipment and $20 billion on research and

development. 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 6.0%. 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, are far outperforming their U.S.-owned

counterparts. Although foreign-owned firms account for only 3.4% of all U.S.

manufacturing establishments, they have 14% more value added on average and 15%

higher value of shipments than other manufacturers. The average plant size for foreignowned firms is much larger -- five times-- than for U.S. firms, on average, in similar

industries. This difference in plant size apparently rises from the fact that there are no

small plants among those that are foreign-owned. As a result of the larger plant scale and

newer plant age, foreign-owned firms 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.

The 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.

7

Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign

Companies, Preliminary 1997 Estimates. Bureau of Economic Analysis, 1999, Table A-1.

CRS-6

Conclusions

Foreign direct investment in the United States far surpasses the record-breaking

amounts set in the 19890s, when both Congress and the American public expressed

concerns over the potential economic impact of such investments. Presently, public

concerns seem to be focused not so much on foreign direct investment per se, but on the

overall phenomenon referred to as”globalization.” Within this context, these concerns

seem not to stem from potential losses of international competitiveness that characterized

similar concerns in the 1980s. Instead, concerns over foreign direct investment seem to

arise from potential job losses that could result from mergers and acquisitions, although

such losses could occur wether the acquiring company was foreign- or U.S.-owned.

Looking ahead, the pace of economic growth in U.S. and foreign economies and the

resultant pull between domestic sources of and demands for capital determine the role and

amount of foreign capital in the economy. Within this broader context, the federal

government's budget deficits or surpluses relative to the credit conditions in the rest of the

economy also influence capital conditions in the economy and the importance of foreign

capital. In addition to credit conditions, foreign direct investment seems to be tied closely

to the overall performance of the economy and will rise and fall with economic conditions.

Strong economic growth, such as the United States has experienced over the last six years,

increases direct investment by attracting new investments and by encouraging firms to

reinvest profits in their U.S. operations.

As long as the U.S. economy continues growing at favorable rates and the rate of

price inflation stays in check, foreign direct investment in the United States likely will grow

in nominal terms as it has since 1992. It seems unlikely, however, that the pace set over

the last two years can be sustained. Additional increases in interest rates by the Federal

Reserve could restrain corporate profits, reducing somewhat the attractiveness of

additional large-scale investments. Moreover, a slow pick-up in economic growth in

Europe could make investments there more attractive and compete for funds that

European investors have been placing in investments in the U.S. economy. Additionally,

a long-expected slow down in the annual growth rate of the U.S. economy likely would

reduce activity in the mergers and acquisitions market as well and, thereby, reduce the

pace of foreign direct investment.