Which is Higher: U.S. Direct Investments Abroad or Foreign Direct Investments in the U.S.?
It is common knowledge that foreigners own many of the assets in the U.S.. This is true especially with financial assets where China and Japan hold some of the largest chunks of U.S. treasuries. But what about direct investments?. Do foreign companies invest more in the U.S than U.S. Multi National Companies (MNCs) invest abroad? This article presents some analysis on this subject.
According to the “Direct Investment Positions for 2008″ report from the Bureau of Economic Analysis (BEA):
“IN 2008, both the U.S. direct investment abroad and foreign direct investment in the United States positions, valued at historical-cost, grew 8 percent. This marked a slowdown in growth for both positions compared with 2007, when the U.S. direct investment abroad—or “outward”—position rose 18 percent and the foreign direct investment in the United States—or “inward”—position rose 15 percent.”
Hence last year as the global financial crisis worsened, not only U.S. companies reduced their overseas investments foreigners also decreased their direct investments in the US.
Some of the highlights from U.S. direct investment abroad include:
- The outward investment position in 2008 was not only less than the figure in 2007, but also the smallest since 2005.
- Reinvested earnings by US companies was the largest contributor to the 8% increase in 2008. This clearly shows that profit made by US companies are not fully repatriated back to the US and also shows that US firms help foreign countries’ economic growth by reinvesting their earnings there which produces more jobs, tax revenues, etc. in those countries. This could also be another reason why jobs are so scarce in the U.S. at this time.
- Though net equity investments increased in 2008 they were less than the previous year mainly due to the lack of available credit that reduced acquisitions.
Some of the highlights from Foreign Direct Investment(FDI) in the US include:
- The turbulent financial markets in 2008 kept foreign investments away. The 8% growth in 2008 lagged the 12% average during 1996-2006.
- Net equity investment was the largest contributor accounting for 61% to all the inward investment increase in 2008. This shows that foreigners took advantage of cheap equity prices and scooped up many of them.
- Despite the decline in earnings in 2008, reinvested earnings by foreign companies in the U.S. grew substantially
#1) US Direct Investment Abroad:
At the end of 2008, the U.S. direct investment position abroad was valued at $3,162.0 billion. This includes the book value of U.S. direct investors’ equity in, and net outstanding loans to, their foreign affiliates.
Which country received the most U.S. investment in 2008?
Canada, The Netherlands and the UK accounted for one-third of US investment positions in 2008. Canada is one of the major US investment destinations since it is a neighbor and is also the largest trade partner. However it is surprising to see The UK and The Netherlands as major recipients of US investment capital.
Historical inward and outward direct investment positions
Historically outward investment positions have been higher than inward investment. The gap between the two widened in the late 90s as more and more manufacturing and other operations were moved offshore to cut costs.
#2) Foreign Direct Investment in the U.S.
At the end of 2008, the foreign direct investment position in the US was valued at $2,278.0 billion. The UK was the largest investor accounting for 20% of the total followed by the Netherlands and Japan. Canada and Germany also have large investment positions in the US.
The BEA report added:
“Capital inflows for foreign direct investment in the United States were $316.1 billion in 2008, up from $271.2 billion in 2007. Capital flows in 2008 consisted of $250.2 billion in net equity capital investment, $51.0 billion in reinvested earnings, and $15.0 billion in net intercompany debt investment.”
Europe accounted for 68% of all foreign direct investments in the US last year with the UK and Netherlands as the major investors. There were also an increase in Swiss, Hungarian and Spanish direct investments in the US. More than half of the foreign direct investments (54%) went into the manufacturing sector. This is ironic in the sense that foreigners are investing in US manufacturing now while US companies decimated the sector in the past couple of decades by moving them offshore. Obviously European companies are able to invest in manufacturing here and earn a profit while US companies say that they have to move manufacturing overseas in order to be profitable.
To answer my title question, U.S. direct investments abroad is much higher than FDI into the US for many years now.
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