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What is the Role of FDI?
Information Courtesy Congressional Research Service, IF11016
What countries are the largest source of and destinations for global foreign direct investment (FDI)?
According to the United Nations Conference on Trade and Development (UNCTAD), in 2019 the total stock of global outward FDI was $36 trillion. In 2019, the United States was the largest source of FDI worldwide, followed by the Netherlands, China, the UK, Japan and Hong Kong, all with individual outward investment positions about one-third or less than that of the United States. The United States was also the largest recipient of FDI, followed by the UK, Hong Kong, China, the Netherlands and Singapore. By region, developing Asia accounted for the largest share of global FDI inflows in 2019 (33%), followed by Europe (31%), North America (19.3%), Latin America and the Caribbean (11%), and Africa (3%).
What are the levels of U.S. outward and inward FDI?
FDI to and from the United States has increased rapidly over the past few decades, and the United States has been the largest source and recipient of global FDI. From 1985 to 2019, the stock of U.S. FDI abroad rose from $238 billion to approximately $6.0 trillion, while the stock of FDI in the United States increased from $184 billion to $4.5 trillion. The largest destinations for cumulative (or the stock of) U.S. FDI outflows through 2019 included the Netherlands, the UK, Luxembourg, Canada, Ireland, Singapore, Australia, Germany, and Japan. The largest sources of cumulative FDI inflows are similarly, Japan, the UK, Canada, the Netherlands, Germany, Switzerland, Luxembourg, France and Ireland. Transatlantic ties drive investment flows, with about 60% of U.S. direct investment abroad in Europe and 64% of FDI in the United States from Europe. By sector, U.S. outward direct investment is primarily concentrated in high-technology, finance, and services. The largest share of U.S. inward FDI is in the manufacturing sector, primarily chemicals and transport industries.
What are the benefits of FDI?
Generally, economists argue for unimpeded international flows of capital, such as FDI, because such flows complement domestic economic activity and positively affect both the domestic (home) and foreign (host) economies. For the home country, direct investment benefits the firms that invest abroad because they are better able to exploit their competitive advantages and acquire additional skills and other advantages in foreign markets. Direct investment is also associated with a strengthened competitive position, a higher level of skills of the employees, and higher incomes of firms that invest abroad. Host countries benefit from inward FDI because the investment adds permanently to the capital stock and often to the skill set of the economy. Direct investment also brings technological advances, since firms that invest abroad generally possess advanced technology and production processes, boosts capital formation, and contributes to a more competitive business environment and productivity growth. More broadly, FDI contributes to global trade and economic integration, since most firms investing abroad are established MNCs that operate within global value chains.
Both inward and outward FDI play a role in U.S. trade, jobs, and production. In 2018, the majority-owned affiliates of foreign firms in the United States employed 7.8 million workers, exported $395.3 billion in goods, and imported $750.6 billion in goods. Foreign firm affiliates contributed $1.1 trillion value-added to U.S. GDP, with larger annual growth in value-added on average compared to other private U.S. firms.
Are there costs associated with FDI?
Some stakeholders raise concerns that U.S. firms invest abroad to send manufacturing and jobs overseas, and that U.S. FDI in operations and production facilities abroad supplants U.S. production and exports, thereby reducing employment and wages in the United States. There have been examples of U.S. firms closing a domestic plant and opening another plant abroad, but no official sources track such activities in aggregate. As a result, most data on the activity of U.S. firms shifting plants or jobs abroad remain anecdotal. More broadly, most U.S. outward FDI is concentrated in high-income developed countries, where markets and consumer tastes are broadly similar to those in the United States, and most of this production is consumed abroad.
Most economists argue there is no conclusive evidence that U.S. direct investment abroad leads to fewer jobs or lower incomes overall for Americans. Instead, they generally argue that the loss of U.S. manufacturing jobs in recent decades reflects a broad restructuring of the sector, responding primarily to improvements in productivity and other domestic economic forces. That said, jobs in particular companies and sectors can be adversely affected when a company makes decisions to produce similar products abroad.
How does the U.S. government promote investment?
The United States promotes both inward and outward FDI. The U.S. International Development Finance Corporation (DFC) provides political risk insurance, financing, direct equity investments, and technical assistance to help facilitate U.S. private investments abroad in developing countries. The Better Utilization of Investments Leading to Development Act of 2018 (BUILD Act), enacted on October 5, 2018 (P.L. 115-254, Division F) established the DFC as a new, consolidated agency that assumed the development finance functions of the Overseas Private Investment Corporation (OPIC, now terminated) and the USAID Development Credit Authority (DCA); the BUILD Act also expanded the DFC’s authorities and capacity, compared to OPIC.
SelectUSA, a Department of Commerce program established in 2011 via executive order, coordinates federal efforts to attract FDI in the United States. Primary functions of SelectUSA include providing information and data on investments to businesses and economic development organizations (EDOs), helping to resolve issues involving federal programs, and advocating at the national level for making investments in the United States over a foreign location.