International Trade and Investment

Contributions of Inward FDI to the U.S. Economy

   The United States receives inward FDI from firms and individuals located in countries from all over the world. Countries with the largest FDI positions in the United States include Great Britain, Japan, Germany, and Canada. These funds support firms across the U.S. economic landscape, from food, mining, and manufacturing firms to service sectors such as finance, telecommunications, and wholesale and retail trade. Every state in the United States is a recipient of foreign direct investment.

         Presence of U.S. Affiliates.

   Decades of trade and investment liberalization both here and abroad have encouraged the growth of multinationals and global supply chains. Today, U.S. affiliates of foreign multinationals account for an important part of the U.S. economy. In 2004, the latest year for which data are available, U.S. affiliates owned $5.5 trillion in assets and had $2.3 trillion in sales. They produced $515 billion of goods and services inside the United States and accounted for 5.7 percent of total U.S. private output-up from 3.8 percent in 1988. U.S. affiliates employed 5.1 million workers or 4.7 percent of the U.S. workforce in 2004-up from 3.6 percent in 1988. While historical data show upward trends in the presence of U.S. affiliates, since 2000 U.S. affiliate investment, output, and employment have leveled off or decreased slightly.

         Microeconomic Benefits to the U.S. Economy.

   Inward FDI provides a number of benefits to the U.S. economy at the microeconomic level. Research has shown that multinationals are more productive than firms focused primarily on domestic markets. The relatively high productivity of U.S. affiliates of foreign-owned firms is attributable, in part, to their relatively high levels of investment in physical capital, R&D, and exporting and importing. Specifically, while U.S. affiliates account for 5.7 percent of output and 4.7 percent of employment, they account for a disproportionately high share of U.S. exports (19 percent), imports (26 percent), physical capital expenditures (10 percent), and R&D expenditures (13 percent). Studies show that all of these activities are correlated with strong productivity performance.

   At the firm level, U.S. affiliates pay higher compensation (wages and benefits) on average than their counterparts in the rest of the U.S. economy. In 2004, an average U.S. worker employed by a U.S. affiliate of a foreignowned firm received $63,400 in annual compensation compared to $48,200 for workers in the rest of the economy. Research suggests that this difference is largely attributable to above-average labor productivity at U.S. affiliates. Part of this productivity advantage reflects these firms ability to integrate production processes across borders and their organizational efficiency. Another part reflects differences in plant size, capital intensity (that is, higher use of capital relative to other factors, such as labor, in the production process), and employee skill level. The data also suggest that these firms have higher levels of efficiency (how well labor and capital inputs are used), the gains of which are passed on, in part, to workers. In other words, firms can break up their production process across borders to lower average costs and realize increased productivity and revenues, which can be shared with workers through higher compensation and/or captured by firm owners as higher profits.

         Macroeconomic Benefits to the U.S. Economy.

   Inward FDI provides a number of benefits to the U.S. economy at the macroeconomic level. For instance, inward FDI is an additional source of investment that helps to modernize the U.S. capital stock. Another benefit is that it provides a source of financing for the U.S. current account deficit, which measures net flows of goods and services between the United States and the rest of the world. As the United States continues to run a current account deficit, foreigners continue to accumulate U.S. assets, and inward FDI is one of the main ways in which they do so.

   The accumulation of FDI flows over a period of time results in a stock of assets, or the gross foreign investment position. In 2005, the inward FDI position at market value totaled $2.8 trillion and was the largest component of foreign holdings of U.S. assets. Other components were U.S. Treasury securities ($2 trillion); corporate stocks ($2.1 trillion); and corporate and other private bonds, excluding official holdings ($2.3 trillion).

         Is Inward FDI on the Decline?

   The increase of inward FDI since the late 1980s has coincided with the generally solid performance of the U.S. economy, along with a surge in U.S. worker productivity that has occurred since 1995. Recently, however, some trends have developed with respect to FDI in the United States that may be cause for concern. First, while the U.S. affiliate share of U.S. output has grown over the past two decades, it has stagnated and even declined in recent years. Second, the U.S. affiliate share of employment has declined, from 5.1 percent in 2000 to 4.7 percent in 2004. Third, the share of inward FDI in the U.S. capital account-that is, FDI in the United States as a share of all the assets owned by foreign interests-has declined since 1999. It is not yet clear whether these are benign and temporary trends or whether this development is symptomatic of deeper issues with respect to the attractiveness of the United States as a country in which to make direct investment. To ensure that inward FDI remains a strong, positive force in the U.S. economy, foreign investors in the United States must continue to receive fair and equitable treatment as a matter of both law and practice.

   Historically, the United States has opposed the use of government actions that distort, restrict, or place unreasonable burdens on foreign investment. No property can be expropriated pursuant to U.S. law unless it is done for a public use with payment of just compensation. The United States has historically provided a domestic environment conducive to investment by providing foreign investors fair and equitable treatment based on the national treatment principle: foreign investors should be treated no less favorably than domestic investors in like circumstances. Moreover, while taking every necessary step to ensure that foreign investments do not jeopardize national security, the Administration recognizes that our economic vitality depends on our openness.