The Economic Bedrock of Foreign Direct Investment



Daniel J. Ikenson | CATO Institute

President Trump famously complains about the “unfair” practices of U.S. trading partners. If only those foreign cheats could be compelled to play by the rules, Trump argues, the United States wouldn’t be getting ripped off, running trade deficits, and losing hundreds of billions of dollars every year.

The fact is, however, that the trade deficit has nothing to do with unfair trade and everything to do with the world’s confidence in the U.S. economy. If anything, annual trade deficits mean the United States is winning hundreds of billions of dollars in net inflows of foreign investment every year. Inward investment — rather than export growth — is the real prize of international competition and it tends to reward good policies.

The United States has long been the world’s premiere destination for foreign direct investment. In 2017, the accumulated stock of FDI in the United States surpassed $4 trillion, which accounts for nearly 25 percent of the total global stock. By comparison, the second largest destination is Hong Kong, which accounts for 6 percent. China and the United Kingdom account for roughly 5 percent each.

With one out of every four dollars of global FDI invested in U.S. subsidiaries of foreign headquartered companies (“international companies”), the United States enjoys economic advantages that no other country has. A reportpublished this morning by the Organization for International Investmentdocuments the significant contributions of these companies to the U.S. economy.

These international companies tend to be among the best in their industries, having succeeded in their home markets before taking their best practices and testing their mettle abroad. They have contributed disproportionately to U.S. economic performance over the years, as observed across of variety of objective measures. Even though these entities as a group comprise a mere 1.3 percent of all U.S. businesses, collectively they punch well above their weight, accounting for:

  • 5.5 percent of all private‐​sector employment
  • 6.5 percent of U.S. GDP (private‐​sector value added)
  • 14.8 percent of U.S. private‐​sector employee benefits
  • 16.0 percent of new private‐​sector, non‐​residential capital investment
  • 16.7 percent of private‐​sector research and development spending
  • 17.1 percent of all corporate federal taxes paid
  • 23.5 percent of U.S. exports
  • 24.3 percent higher worker compensation than the U.S. private‐​sector average

These direct contributions — and there are many more telling statistics in the report — provide only a partial picture of the impact of international companies on the economy. The full story must take into account the related economic activity that is spurred upstream of these companies with their suppliers, vendors, and intermediate goods’ providers, as well as the activity generated downstream through the spending of their employees.

It must also consider the effects of these companies on the U.S. economy over time through the reactions of domestic companies rising to the challenge of new competition, the residual benefits delivered through technology spillovers, the adoption of best practices in governance and workplace management, and the hybridization and evolution of ideas that make companies more efficient, more pioneering, and more exciting places to work.

Despite President Trump’s claims that trade killed U.S. manufacturing and that his mix of policies and threatening tweets will draw factories and their workers back to the United States, the fact is that over $1.6 trillion (40%) of that FDI is parked in U.S. manufacturing operations. That is by far the largest amount of FDI in any country’s manufacturing sector. If there’s been a race to the bottom driving factories south of the border and overseas, somebody forgot to tell foreign‐​headquartered companies, which continue to remain bullish on U.S. manufacturing.

Over one‐​fifth (20.7%) of the U.S. manufacturing sector’s GDP is generated by these international companies, which account for one‐​fifth (19.9%) of total U.S. manufacturing employment. They account for almost half of all property, plant, and equipment expenditures in the manufacturing sector (45.2%), over 17 percent of all manufacturing‐​sector R&D spending, and their effective tax rates exceed the U.S. manufacturing average by 35.8 percent.

What the OFII report shows is that international companies contribute significantly to the U.S. economy, raising average economic performance across a wide range of pertinent metrics through their direct contributions, but also because their presence and participation in U.S. markets brings out the best in incumbent domestic firms.

The report presents new and compelling evidence that international companies increase U.S. economic growth, vitality, and diversity well beyond the levels that would obtain without their contributions, and that U.S. policies should be designed to attract more of these companies — and more of their intellectual and financial capital — to U.S. shores.

Foreign investment in the United States is a barometer of the faith of the rest of the world that the U.S. economy is safe and strong, and will perform well, prospectively, relative to other economies. Meanwhile, investment is essential to economic growth and higher living standards. To remain atop global value chains and at the technological frontier, the U.S. economy requires continuous inflows of fresh capital to replenish the machinery, software, laboratories, research centers, and high‐​end manufacturing facilities that harness our human capital, animate new ideas, and create wealth.

Over the years, foreign companies have contributed significantly to the satisfaction of those capital requirements. With the world’s largest consumer market, relatively transparent business and regulatory environments, a skilled and productive workforce, an innovative culture, and deep and broad capital markets to commercialize that innovation, the United States has some big advantages in the global competition to attract investment.

Although the United States accounts for nearly a quarter of the global FDI stock, the U.S. share was much a much larger 37 percent, as recently as 2000. Since then, the competition for FDI has been intensifying.

By growing their economies, improving the education and skills of their workforces, strengthening the rule of law, implementing reforms to make their business climates more predictable, and adopting other best practices, countries once considered too risky have started to become viable competitors for a growing share of that investment.


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