Free Term Paper on Foreign Direct Investment

Much has been made about U.S. companies putting jobs and factories in foreign countries. This phenomenon, called outsourcing, has stirred concerns about the United States’ competitiveness and the ability of U.S. workers to go head-to-head with foreign workers, many of whom are paid much less.

But perhaps just as important, yet not as thoroughly covered in the popular press, is the opposite flow of money and jobs. This occurs when foreign companies and foreign investors put funds into the U.S. economy. The money is used to build factories and stores or buy financial investments. With the inflow of money usually come jobs and incomes. This process is called foreign direct investment (FDI) and is popularly termed insourcing.

Outline

I. The Size and Origin of Foreign Direct Investment

II. Why Do Foreigners Invest in the United States?

III. Impact of FDI on Employment

IV. Comparing Insourcing and Outsourcing

V. Are Foreigners Buying Up the United States?

VI. The World Is Our Economy

The Size and Origin of Foreign Direct Investment

Foreign direct investment can happen from any country. People and companies from any country can invest in (almost) any other country. For example, there is FDI in China, France, Poland, and Chile. Of course, there is also FDI in the United States, which will be the focus of this entry.

So when we talk about the amount of money foreigners invest in the United States, are we talking about a small or large amount? Figure 1 gives the answer. The dollar amounts in different years in the figure have been adjusted so they have the same purchasing power; therefore, they are directly comparable. As can be seen, FDI in the United States is substantial, at $2.3 trillion in 2008. It has also increased substantially in recent years, rising over 500 percent from 1990 to 2008.

Figure 1. Foreign direct investment in the United States (2008 dollars in billions) (Bureau of Economic Analysis, http://www.bea.gov/)

Foreign Direct Investments Figure 1Who is behind these investments? That information is given in Table 1, which shows FDI in the United States according to the top countries of origin in 1990 and 2008. In both years, the leading investor countries were all in Europe, of European origin (Australia), or Japan. The biggest changes from 1990 to 2008 have been a reduction in the shares of the two leading countries, the United Kingdom (Great Britain) and Japan, and the replacement of Australia in 1990 with Luxembourg in 2008 as a leading investor country.

Why Do Foreigners Invest in the United States?

What motivates foreigners to invest in the United States, and should we be pleased or worried by the interest of foreign investors? These are important questions that help determine how we feel about FDI.

On one level, we should not be surprised that foreigners want to invest in the United States. The United States is the world’s largest economy by far, the biggest in aggregate wealth, and has a stable political system that respects the rights of investors. The U.S. economy has more than doubled in size in the past 20 years (1990–2010), and its population is among the fastest growing for developed countries. Against this backdrop, any investor would want part of the action in the United States.

Recently, there has been a demographic reason for FDI in the United States. Compared to Europe, Japan, and soon China, the United States is a relatively young country with a growing population. Europe, Japan, and China are aging rapidly, and their populations may even decline in the decades ahead. Older people tend to be savers and investors so that they can ensure an income in their later years. Younger people, by contrast, are usually borrowers so that they can supplement their income to purchase the homes, cars, appliances, and other assets needed for their lives. Therefore, it makes sense that countries with older populations will lend—which is another way of looking at investing—to countries with a higher proportion of younger people. The greatest source of FDI in the United States is from the aging countries of Europe plus Japan.

Last, there is a practical reason why foreign citizens invest in the United States. For most of the past 30 years, U.S. businesses and consumers have been purchasing more products and services from foreign countries than foreign businesses and consumers have been buying from the United States. In other words, imports to the United States have exceeded exports from the United States. This means that foreign citizens have been accumulating U.S. dollars. Eventually, these dollars have to make their way back to the United States, and they do so as FDI in the United States. This is one reason to expect China, with which the United States now runs a large trade deficit, to soon become a major source of FDI. The Chinese computer giant Lenovo’s purchase of IBM’s personal computer unit in 2004 and the Chinese auto company Geely’s purchase of Volvo from Ford in 2009 are examples of what is likely ahead.

Impact of FDI on Employment

Like any investment, FDI in the United States creates jobs. But how many jobs, and where are they and what do they pay?

More than 5.3 million jobs in the United States are directly associated with FDI, accounting for approximately 4 percent of all jobs in the country. Perhaps the most striking feature is the concentration of jobs in the manufacturing sector. Of the 5.3 million jobs, over 2 million of them are in manufacturing. This is 39 percent of the total FDI jobs. In comparison, in 2004, only 10 percent of all U.S. jobs were in manufacturing. An interesting feature of FDI is the growth of production and jobs in foreign-owned vehicle manufacturing factories placed in the United States.

FDI employment in the United States also pays well. In 2004, for example, FDI jobs paid an average of $62,959 in salaries and benefits, compared to $48,051 for all U.S. jobs. Hence, the average FDI job paid over 30 percent more than the average U.S. job in the country. So foreign investors are not creating low-paying positions in the United States; they are creating just the opposite—jobs that pay at the upper end of the wage scale.

Comparing Insourcing and Outsourcing

How does FDI in the United States (insourcing) compare to U.S. direct investment in foreign countries (outsourcing)? Although FDI in the United States has been growing substantially, U.S. investment in foreign countries is larger still. The total value of U.S. investments in foreign countries is almost one-third larger than the corresponding foreign investment in the United States. Also, there are about two jobs in U.S. foreign factories and offices for every one job in the United States in a foreigncontrolled company. So, by these standards, it can be said that outsourcing is larger than insourcing.

But before the conclusion is reached that this is bad, consider two counterpoints. First, since the U.S. economy is the largest in the world, it makes sense that U.S. companies will have more operations in foreign countries than foreign countries have in the United States. Second, foreign investments by U.S. companies can be complementary to domestic operations, making the domestic operations more efficient and profitable. Stated another way, putting some jobs in foreign countries, where costs may be lower or where access to important inputs is easier, can actually save jobs at home by making the operating company stronger and healthier.

Are Foreigners Buying Up the United States?

Although many positive aspects can be stated for FDI, there are a couple of nagging questions that frequently bothers people: Will foreign investments give the foreign owners control over the U.S. economy? Would these owners then pursue policies that are contrary to the national interests of the United States and its citizens? From an economic perspective, these concerns are unlikely to be realized. This is because any investor, domestic or foreign, has two main objectives: preserving its investment and earning income on that investment. Pursuing destructive policies that damage the investment or its income-earning ability are simply not consistent with basic investment philosophy.

Another way of answering the questions is to calculate the proportion of the U.S. economy that foreigners own. This is found by taking foreign-owned assets as a percentage of all assets in the United States. In 2008, this percentage came to a little over 12 percent ($23.4 trillion of $188 trillion). Although this is double the percentage in the late 1990s, foreign gains have not come at the expense of domestic ownership. Between 1997 and 2008, foreign-owned assets in the United States increased by more than $5 trillion, but U.S. domestically owned assets rose by about $30 trillion.

The World Is Our Economy

It is likely that FDI, both in the United States by foreign citizens as well as in foreign countries by U.S. citizens, will increase in coming years. The reason is simple: globalization. With trade barriers lower and technology making travel and communication among countries in the world easier, we should expect money flows between nations and regions to likewise surge. Just as a century ago local financial markets in the United States expanded to become nationwide financial markets, world markets are now supplanting national markets. Our perspective of what is normal and common will have to adjust.

 

Michael L. Walden

 

Bibliography:

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