Economy
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.
Employment in U.S. Health Care Industry Projected to Increase
Healthcare is one of the few sectors in the U.S. that is creating jobs now and is projected to add more jobs in the future.
The Unemployment rate in the U.S. rose to 10.2% in October as per the latest data from U.S. Bureau of Labor Statistics. The sectors which had the largest job losses were construction, manufacturing, and retail trade. Another 558,000 persons joined the unemployed which now stands at 15.7 million in this country.
Source: U.S. Bureau of Labor Statistics
The Health Care industry added 29,000 new jobs in October. Health care is one of the bright spots in the economy for job growth since the recession that started about 23 months ago. The industry has added a total of 597,000 jobs since the start of recession. Healthcare sector employs nearly 13.7 million people in the U.S.
The BLS states:
“Before 1960, about 3 percent of private-sector workers were employed in heath care establishments. In recent years, the proportion of workers employed in private-sector health services has exceeded 11 percent.”
As America’s 78.2 million baby boomers retire in the next few years they will require more health care services. In addition to the baby boomers, the general increase in population, technological advances in the medical field, increased stress levels among the general population, new diseases, etc. are going to create the need for additional health care services as well. Though health care is a highly regulated field, there will be plenty of potential for anyone interested in making a career in this field.
U.S. Ranks 9th in Global Prosperity Rankings 2009
The London-based think tank Legatum Institute has published “The 2009 Legatum Prosperity Index“. The U.S. is ranked at number 9 in this list.
The Top 10 Countries in the Prosperity Index are listed below:
The Legatum Prosperity Index is unique because it “is the world’s only global assessment of wealth and wellbeing; unlike other studies that rank countries by actual levels of wealth, life satisfaction or development, the Prosperity Index produces rankings based upon the very foundations of prosperity – those factors that help drive economic growth and produce happy citizens over the long term.”
Finland took the top spot followed by Switzerland, Sweden, Denmark and Norway.Compared to the U.S., these top 5 countries rank higher in Health, Safety& Security, Governance and Social Capital.
The U.S. was ranked at overall ranking of 1 in 2007 in a three-way tie that included Sweden and Norway. In 2009, the US has fallen behind to ninth rank. Despite the current economic slowdown, USA is the best country in the world for Entrepreneurship and Innovation.
Health is one category that US performs poorly. In the top 10 listing, it has the worst number for health. Globally US ranks 27th. The report notes “Dissatisfaction
with their overall health is dragging down Americans’ sense of well-being, affecting their
determination to get ahead and their faith in their healthcare system.”
Despite the billions of dollars spent on security at the federal and state levels, US ranks 19th in the safety and security. This is not surprising since the current economic problems are leading more Americans to commit crimes. As the gap between the haves and have-nots widens and more gated-communities spring up across the country, security and safety in many communities may get worse. The report also cited the high per capita murder in this country relative to other developed countries. For example, Finland ranks number 1 in this category followed by Norway.
Commenting on the report, Will Inboden wrote in Foreign Policy wrote:
“The distinction between domestic and foreign policy is very thin — America’s education system, health-care system, domestic economy, and even family and community strength, are inseparably linked to its international posture and power. In other words, yes, the prevailing debate about health care is in part a foreign-policy issue.”
This argument completely misses the mark. One country’s education system and health-care system are not related to foreign-policy.The broken education system in this country and the convoluted healthcare system has nothing to do with America’s foreign policy or power.Some might argue that the main problem with our government policies is that we do not have our priorities right. We ignore many of our domestic issues and instead focus our resources, time, money and energy on foreign issues that most Americans could not care. Would you agree?
A Review of Sovereign Wealth Funds
Sovereign Wealth Funds(SWFs) have become powerful players in the global markets in recent years due to the amount of funds they control. A recent Reuters article mentioned that Norway’s Sovereign Wealth Fund owns 1% of all global stocks. The following is a summary of important points from “Assessment and Outlook for Sovereign Wealth Funds”, Focus, Banque De France. I have also used other sources when required.
The oldest sovereign fund, The Kuwait Investment Authority, dates back to the 1950s while the Abu Dhabi Investment Authority and the Singaporean fund, Temasek Holdings, were set up in the 1970s
What are Soverign Funds?
According to IMF:
“Sovereign wealth funds are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, fiscal surpluses, and/or receipts resulting from commodity exports.”
SWFs are of two types:
Commodity funds (or stabilisation funds) manage the guaranteed revenue of commodity-exporting countries oil, gas, precious metals, etc.).
Non-commodity funds manage the resources derived from current account and financial account surpluses or budget revenues.
The size of sovereign funds grew spectacularly over the pas few years upto 2008 due to the rise in commodity prices (mainly oil and gas) and the conjunction of macro-economic factors and foreign exchange policies for non-commodity funds.From about $500 B at the start 1990 the asset size of the 10 largest funds increased to over $3T by early 2008.
The Ten Largest SWFs:
Click to Enlarge
The annual growth rate of SWFs could reach 10% to 20% between 2008 and 2012, with outstanding amounts between $5T and $10 T.
Will Emerging Markets Continue to Outperform Developed Markets?
Emerging markets have strongly outperformed developed markets this year. The equity market indices of countries like China, India, Brazil, etc. are up significantly over markets in Europe, Japan and North America. Over the last 10 years, the US and Japanese equity markets were essentially flat to down. Emerging market indices have grown many times in the same period.
An IMF study in published in the World Economic Outlook, September 2003 mentioned that the GDP per capita of a country is positively correlated to the change in the size of the working ppopulation. Based on this theory, developed countries are projected to have lower growth which in turn will lead to lower equity returns. One of the reasons for the low growth in developed countries is that the ratio of dependents will rise dramatically in the coming years due to declining population growth and increasing life expectancy, In the US, the era of strong participation in the workforce by the baby boomers is over. While in Europe population decline is an issue, in the U.S. the decline will not be big due problem to immigration and high fertility rates. Unlike the developed world, labor force in emerging countries are growing. By 2050 India, China and Brazil are projected to have the largest working population in the world.
In the U.S. as baby boomers retire they would liquidate their stocks, bonds and other assets leading to a fall in prices. In emerging markets the working population is expected to increase higher than the general population growth. With high savings rates, prudent investment policies, emerging market equities may easily beat developed market equities in the future also.
The U6 unemployment rate is over 16% in the USA. Millions of unemployed workers are unable to find well-paying jobs. Compared to this, emerging markets like India are attracting large foreign direct investments as per a research report by Morgan Stanley, This is leading to more job opportunities in many sectors. In addition to manufacturing, many emerging countries are developing their knowledge-based sectors such as bio-technology, drug industry, mathematical analytical systems, etc. All these activities will help emerging markets beat developed markets over the next decade and beyond.
Related ETFs:
The iShares MSCI Emerging Markets Index Fund (EEM)
The iShares FTSE/Xinhua China 25 Index Fund (FXI)
The iShares Brazil Index Fund (EWZ)
Real Equity Market Returns Over 108 Years vs. Past 20 Years
The chart below shows the performance of equity markets of select countries over the long-term and in the past 20 years:
Source: Credit Suisse via Equinox of South Africa
In the long-term (1900-2008) shown in red color bar, the stock market returns of the countries shown above ranged from 1.5% to 6.5%. The grey bar shows the return during the dot com/technology boom period from 1990 to 1999. During this bull market period, most markets outperformed their long-term averages and had returns that exceeded 15%.
The most recent period from 2000 to 2008 is denoted by the blue bar.During this period, only S had positive returns. South Africa was the top performer yielding over 7%. The worst performers in this timeline were Italy, Ireland, Japan, The Netherlands and the USA.
Source: Kokkie Kooyman: Now is the time to invest in developed-country banks
