Foreign direct investment in the United States: an economic analysis.(Congressional Research Service)(Report)

 Contents  Recent Investments Acquisitions and Establishments Economic Performance Conclusions Contacts Author Contact Information 

November 5, 2009

Summary

Foreign direct investment in the United States declined sharply after 2000, when a record $300 billion was invested in U.S. businesses and real estate. [Note: 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 [section] 806.15 (a)(1).] In 2008, according to Department of Commerce data, foreigners invested $325 billion. Foreign direct investments are highly sought after by many state and local governments that are struggling to create additional jobs in their localities. While some in Congress encourage such investment to offset the perceived negative economic effects of U.S. firms investing abroad, others are concerned about foreign acquisitions of U.S. firms that are considered essential to U.S. national and economic security.

Recent Investments

Foreigners invested $325 billion in U.S. businesses and real estate in 2008, according to data published by the Department of Commerce. (1) As Figure 1 shows, this represents a sharp increase over the $237 billion invested in 2007. Investments abroad by U.S. parent firms fell slightly in 2008 to $318 billion, down from the $333 billion they invested abroad in 2007. The increase in foreign direct investment flows mirrors a turnaround in global flows. According to the United Nations' World Investment Report, global foreign direct investment inflows increased by 30% in 2007 and 38% in 2006. The data indicate that global foreign direct investment flows increased slightly in 2004 after three years of declining flows that arose from competitive international price pressures leading to greater internationalization of production, rising commodity prices, and increased international merger and acquisition activity in some areas.

[FIGURE 1 OMITTED]

The cumulative amount, or stock, of foreign direct investment in the United States on a historical cost basis (2) rose from $2.1 trillion in 2007 to about $2.3 trillion in 2008. This marked an increase of 8.0%, below the 14.6% percent increase experienced in 2007. (3) The rise in the value of foreign direct investment includes a large increase in equity capital that was partially offset by a large downward valuation adjustment. The downward adjustment reflects the decline in the value of equities as a result of the decline in stock values. Tightened credit conditions and the slowdown in the rate of growth in the U.S. economy, however, tended to push down such mainstays of foreign direct investment activity as mergers and acquisitions. Foreign direct investments in the U.S. manufacturing sector generally were higher, while investments in banks, finance, and real estate were down. Data for the first two quarters of 2009 indicate that foreign direct investment in the United States is about one-third the amount recorded in the comparable period in 2008. Such investments may well pick up in the second half of the year as the rate of economic growth improves.

As a share of the total amount of nonresidential investment spending in …