Foreign Direct Investment: Current Issues
Congressional research reportFeb 11, 2010
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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
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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.
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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.
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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.
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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
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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.
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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).
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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...)
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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.
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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.
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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.
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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
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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.
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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.
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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
World
$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
Canada
64.7
112.8
123.3
212.7
385.2
520.4
Developing Economies
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
Asia
288.5
380.2
636.5
1,073.4
1,932.2
1,697.3
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
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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.
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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
Total assets
$19,964,935
$14,201,291
$12,732,967
Sales
$8,614,733
$5,517,143
$3,553,593
Taxes
$257,292
$179,922
$57,731
N.A.
$35,019
$44,158
Number of firms
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
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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
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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
Intercompany
debt
60.0
-22.6
-44.0
3.5
0.2
59.0
71.0
15.0
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
U.S. business enterprises established
Number
of empl.
Investment
outlays
Total
Assets
Sales
Number
of empl.
Investment
outlays
603,385
$182,357
$55,866
$17,471
21,199
$32,899
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Foreign Direct Investment: Current Issues
U.S. business enterprises acquired
Total
assets
Total
assets
Sales
1999
454,012
430,226
2000
482,021
2001
U.S. business enterprises established
Number
of empl.
Investment
outlays
Total
Assets
Number
of empl.
Investment
outlays
115,534
589,311
265,127
23,786
8,718
13,368
9,829
463,142
153,525
748,952
322,703
18,879
7,204
21,068
12,926
382,308
311,220
90,778
335,088
138,091
71,087
18,131
74,879
9,017
2002
105,516
92,800
51,945
211,679
43,442
12,716
3,735
6,808
11,077
2003
219,072
198,474
51,376
161,607
50,212
20,598
3,173
4,449
13,379
2004
308,638
252,481
60,592
199,227
72,738
56,127
6,744
12,366
13,481
2005
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
U.S. Acquisitions of
U.S. Companies
Foreign
Acquisitions of U.S.
Companies
U.S. Acquisitions of
Foreign Companies
Year
Number
of Deals
$
Billions
Number of
Deals
$
Billions
Number
of Deals
$
Billions
Number
of Deals
$
Billions
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
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Foreign Direct Investment: Current Issues
U.S. Acquisitions of
U.S. Companies
Total Acquisitions
Foreign
Acquisitions of U.S.
Companies
U.S. Acquisitions of
Foreign Companies
Year
Number
of Deals
$
Billions
Number of
Deals
$
Billions
Number
of Deals
$
Billions
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
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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.
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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
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