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The United States and Foreign Direct Investment

FDI -- What It Is, Where It Comes From, and Where It Goes

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Updated June 23, 2012

Foreign direct investment, or FDI, is a two-way street -- in more ways than one. FDI is just what the name says: foreign countries or companies investing in the United States, or conversely, the U.S. government or companies investing in foreign nations or foreign companies.

FDI is also an emotionally charged political issue. Americans tend to like FDI when U.S. entities are investing abroad (outflow FDI), but they tend to hate it when foreign entities invest in the U.S. (inflow FDI). Americans frequently lament that "foreigners" own more of America than Americans do.

Of course, that's not necessarily right, nor is it necessarily bad.

FDI -- both inflow and outflow -- has also been a central part of the United States' economy since its founding in 1776.

Historic Foreign Investment In The U.S.

Certainly, the United States would never have existed had not investors -- whether countries like Spain, or joint-stock companies like the Virginia Company of London -- put up money to fund expeditions to North America. But foreign investment similar to today's FDI began upon the nation's independence from Great Britain.

France started the trend when it made loans to the revolutionary U.S. as part of the Franco-American Alliance of 1778. Between the end of the American Revolution in 1783 and the start of the Constitutional government in 1789, foreign investment in the U.S. was between 22% and 29% of of the federal debt. The Netherlands held most of that debt.

Great Britain soon eclipsed other nations as the leading investor in the U.S. as Jay's Treaty of 1794 solidified trade relations between the former enemies. By 1803 (the first year for which detailed records exist), foreign countries held 56% of the U.S. federal debt. Foreign entities also invested heavily in individual American states.

In 1791, the United States opened the Bank of the United States. The bank was the brainchild of Alexander Hamilton, the country's first secretary of the treasury. Hamilton foresaw the bank as a way to stabilize the nation's economy, hold federal deposits, and make and receive loans. By 1803 foreigners held 62% of the stock in the Bank of the U.S.

The Bank of the U.S. had a 20-year charter, which ended in 1811. Congress, scared of the large amount of foreign investment in the bank, did not renew the charter. American trouble financing the War of 1812, however, convinced Congress to charter the Second Bank of the United States in 1816, again for 20 years. President Andrew Jackson vetoed recharter of the bank as its 20-year term neared, again partly because of the amount of foreign investment.

Foreign investors turned to state banks and American companies themselves. By 1853 foreigners held 58% of state debts as well as 26% of American railroad bonds. That interest "inflow FDI" made the U.S. a "debtor" nation between 1875 and 1914. In fact, that situation is normal for developing countries.

When countries "mature," the FDI situation tends to reverse, that is, they invest more in other countries than foreign countries invest in them. Sure enough, the U.S. trend reversed after two World Wars when the U.S. began investing in the rebuilding and future of global nations. The U.S. became a "creditor" nation with "outflow FDI."

Benefits Of FDI

Interestingly, the period when the U.S. became a debtor nation was known as The Gilded Age, when American business boomed and corporate empires grew. Despite many fears of FDI, it has advantages.

Economics writer Mack Ott explains it best:

"Foreign investment increases the amount of capital-equipment, buildings, land, patents, copyrights, trademarks, and goodwill-in the host economy. The increase in the quantity and quality of tools for labor's use in converting one set of goods (labor and other inputs) into another (finished output) raises labor productivity and GDP. Because about two-thirds of GDP goes to labor as wages, salaries, and fringe benefits, rising output means higher wages or more employment. Thus, foreign investment raises labor productivity, income, and employment. Workers are better off with more capital than with less and are usually indifferent to the nationality of the investor."

Who Invests The Most?

Knowing, then, that foreign investment in the United States is normal, what countries today invest the most in the United States, and how much?

Inflow FDI reached what the U.S. Department of Commerce calls a "historical peak" in 2008 with total foreign investments of $328 billion. Investments in 2000 nearly reached that point, but fell to a low of $64 billion in 2003. (Think of how policies effect investment potential: in 2003 the U.S. had endured 9/11, was in a war in Afghanistan, and was just starting one in Iraq.)

Investments rebounded to the 2008 level, but fell after the Great Recession began late that year. Inflow FDI in 2009 was about $140 billion; in 2010 it was back up to $194 billion, and inflow in about $228 billion in 2011.

The top investors in the U.S. in 2010 were Switzerland, about $37 billion; United Kingdom, about $33 billion; Japan, about $22 billion; France, $21 billion; Germany, $20 billion; Luxembourg, $12 billion; the Netherlands, $12 billion; and Canada, about $9 billion. Those countries accounted for 84% of total inflow FDI in 2010.

In fact, those countries traditionally make up the "Top Eight" foreign investors in the U.S. Over the past two decades, they have continually made up 80% to 84% of total inflow FDI.

Where Does The U.S. Invest?

Outflow FDI -- U.S. overseas investments -- totaled nearly $330 billion in 2010. The Netherlands, United Kingdom, Canada, Luxembourg, Bermuda, and Ireland received just over 50% of that investment.

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