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A BRIEF LOOK AT FOREIGN INVESTMENT IN THE UNITED STATES

19 January, 2016 - 15:18

Direct foreign investment is only a fraction of international investment—that is, money that foreigners invest in this country. Of the approximately $1.5 trillion worth of foreign investment in the United States for 1987, DFIUS ($262 billion) represented only about 17.5%; the remaining $1238 billion was in U.S. Treasury securities, corporate stocks and bonds, commercial bank deposits, and other foreign investments that do not qualify as DFI. The latter category represents investments in physical assets of a company in which the foreign investor has more than 10% ownership or equity interest. 1

Although it has increased markedly in the last few years, DFIUS is not a recent phenomenon. With the advent of the railroad and the development of the West, foreigners took advantage of state, territorial, and railroad land promotions to buy extensive tracks of land and to take up cattle ranching, mining, and agriculture. Europeans were not the only ones buying up U.S. land. The Japanese were prominent landowners, primarily in Hawaii and California, where by 1919 they held up to 75% of the land. In addition to land, foreigners acquired a significant part of the resources industry. For example, about 25% of the common stock and 9% of the preferred stock of the U.S. Steel Corporation was held by foreigners in 1914. During the next forty or so years, foreign direct investment activity in the United States was rather small, primarily because of the two World Wars. By the end of 1959, DFIUS was barely over $3 billion.

DFIUS increased substantially during the first two decades following World War II. In 1971, however, the United States experienced a net outflow of money invested by foreigners, especially the Japanese. These investors removed their investments in anticipation of major problems with currencies that they anticipated would follow this country's refusal to honor foreign demands for dollar convertibility into gold.

Following the large increase in oil prices and the huge accumulation of U.S. companies' stock by the primarily Arab "petrodollar" owners, the Foreign Investment Act of 1974 was enacted. The act required two executive-branch agencies, the Department of Commerce and the Treasury Department, to undertake major studies on the extent, characteristics, and impact of direct (commerce) and portfolio (treasury) investment in the U.S. economy.

In 1974, the Commerce Department carried out its first benchmark survey of DFIUS and the Treasury Department its benchmark survey of portfolio investment. These surveys were updated in 1982 in compliance with the act, which requires studies of international investment activity in the United States, both USDFI and DFIUS, at least every five years.

The eighties witnessed a remarkable reversal of this country's role in foreign investment. The United States changed from a major investor in foreign countries to a principal recipient of foreign investment (see Figure 3.9). The 1982 U.S. Department of Commerce benchmark survey provides a wealth of data on both USDFI (see Figure 3.10) and DFIUS, or, as it is alternatively known, foreign investment in reverse (see Figure 3.11).

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Figure 3.9 U.S. vs. Foreign Assets 
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Figure 3.10 U.S. Direct Foreign Investment (USDFI) (in millions of dollars) 

The Department of Commerce's records on both USDFI and DFIUS address the following items: (1) investment position–the book value of the foreign investor's equity in and net outstanding loans to its affiliates (a measure of the net claims of the foreign direct investor in its overseas affiliates); (2) income and rate of return on investment; (3) earnings and reinvestment; and (4) fees and royalties.

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Figure 3.11 Direct Foreign Investment in the United States (DFIUS) (in millions of dollars)

The USDFI position was consistent and stable in the years 1982 to 1984. The USDFI position grew at a rate of 2.3% from 1982 to 1983 and at a rate of 2.8% from 1983 to 1984. These growth rates are a small fraction of the growth rates of direct foreign investment in reverse over the same period of time.

DFIUS grew at a remarkable rate in the 1982-1983 period, and at an even greater rate in the 1983-1984 period. The growth rate of DFIUS for the 1982-1983 period was about four times that of USDFI for the same period (9.9% vs. 2.3%). The difference in growth rates between USDFI and DFIUS is considerably larger for the 1983-1984 period, when the DFIUS growth rate was almost eight times that of the USDFI (16.4% vs. 2.8%). This growth in the DFIUS was due in large measure to the activities of foreign companies operating in the United States, many of which are listed in Figure 3.12.

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Figure 3.12 Foreign Companies in the United States 

The Japanese were the greatest contributors to the growth rate of DFIUS. Over 64% of the Japanese investments in the United States from 1982 through 1984 were in wholesale trade. It appears that the Japanese are steadily increasing their wholesale and distribution investment in the United States. In 1984, Japanese manufacturing investment jumped by an unprecedented rate of 40%, after lying dormant during 1983.

Overall, the Europeans hold the majority of foreign investments in this country. European DFIUS surpassed USDFI in Europe by some $3 billion in 1984. Some 67% of the total foreign investments are by Europeans. During 1984 alone, Europeans increased their foreign investment position by almost 15%, to over $106 billion. Among the Europeans, the British were the heaviest investors during the 1982-1984 period. In 1983 there was a tremendous increase in British wholesale trade investment (19.4%). Then in 1984 the United Kingdom upped its holdings in the petroleum industry by some $10 billion, an 83.3% increase that reflected Shell Oil Company's acquisition of its U.S. affiliate.

ISSUES FOR DISCUSSION

If history is a predictor of the future, questions regarding foreign investors' role in U.S. society will soon emerge. The relationship between the foreign investor and the host country resembles the popular view of marriages: after an initial honeymoon, in which both partners enjoy the relationship, there comes a period during which at least one of the partners begins to question the benefits derived from the relationship. Finally, after considerable negotiation a settlement is reached, which may involve the termination of the relationship or the formation of a somewhat different arrangement. The honeymoon between this country and foreign investors is ending, and questions are beginning to be raised about foreign investors' presence in the United States. For example:

  1. Should the U.S. government think about imposing some type of control over the amount, kind, and nature of direct foreign investment beyond the existing requirements?
  2. Should the U.S. government demand that foreign multinationals be managed by U.S. citizens, a practice followed by most countries, including some rather economically and politically developed countries such as Canada?
  3. Should the U.S. government set up screening procedures and establish agencies whose job is to produce a sort of foreign investment impact statement?
  4. Should the U.S. government forbid states from offering preferential treatment (incentives) to investors from overseas?
  5. Should the U.S. government impose limitations on currency expatriation (that is, sending profits, fees, and commissions back to the homeland) by foreign MNCs, as do most countries?
  6. Should the U.S. government impose conditions on technology transfer between the U.S. subsidiary and the headquarters?

Although no one can predict when or with what intensity, these and many other issues may surface in the years to come, and it behooves students of international business to think about them. Such forethought is precisely what proactive management is all about.