Discover why foreign direct investment keeps the U.S. economy thriving! Learn more about its impact and opportunities.
Foreign direct investment plays a pivotal role in bolstering the U.S. economy, representing a more enduring commitment than mere foreign ownership of securities.
By the end of 2023, foreign direct investment in the United States reached an impressive $5.39 trillion, showcasing its significance as a driver of economic growth and innovation.
This post delves into the various facets of foreign direct investment, including its categories, concentration in manufacturing, and contributions from top investing countries, while also exploring regulatory considerations and potential risks to future investments.
FAQs
Q1: Why is foreign direct investment important for the U.S.?
A1: Foreign direct investment contributes to economic growth by creating jobs, fostering innovation, and enhancing productivity through capital inflows and technology transfer.
Q2: Which sectors attract the most foreign direct investment in the U.S.?
A2: The manufacturing sector attracts more than 40% of FDI in the United States, driven by government initiatives and strategic investments from global companies.
Q3: How does foreign direct investment differ from foreign portfolio investment?
A3: Unlike foreign portfolio investment, which involves buying securities for financial returns, FDI involves a lasting interest and significant influence over business operations.
Foreign Ownership vs. Foreign Direct Investment In The U.S.
While foreign ownership of U.S. securities brings capital flows that can help strengthen the U.S. economy, these ownership positions can change quickly as they are bought and sold on the markets.
By contrast, foreign direct investment is a more lasting commitment by a foreign entity to do business in the United States.
Foreign direct investment totaled $5.39 trillion at the end of 2023, an increase of $227 billion over the previous year1
Categories Of Foreign Direct Investment
The U.S. Department of Commerce breaks foreign direct investment into three categories:
- Acquisitions
- New Businesses
- Business Expansion
Establishing and expanding businesses are called greenfield investments, because they create new opportunities in the U.S. workforce and new capacity within the U.S. economic engine.
For this reason, greenfield investments are the most important type of foreign direct investment.
But they are also the smallest component, averaging about 5% of all foreign direct investment from 2015 to 2022.2
Foreign Direct Investment Concentration In U.S. Manufacturing
More than 40% of foreign direct investment in the United States is in the manufacturing sector.3
Three government initiatives aimed at encouraging investment in key manufacturing industries, the 2022 Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the CHIPS and Science Act, have stimulated both domestic and foreign-funded projects.4
A preliminary agreement by a Taiwan-based company to invest more than $65 billion in three semiconductor plants in Phoenix, Arizona, aided by up to $6.6 billion in funding under the CHIPS and Science Act, would be the largest greenfield investment in U.S. history.5
Top Countries Contributing To U.S. Foreign Direct Investment
Based on the location of the parent company, the top countries for foreign direct investment are the Netherlands, Japan, Canada, and the United Kingdom.
The Netherlands ranks high only because it is the domicile for many large holding companies
Based on the country of the ultimate beneficial owner— the entity at the top of the global ownership chain — the top investing country is Japan, followed by Canada, Germany, and the United Kingdom.
China is a minor player in FDI6
Regulatory Consideration For Foreign Investments
While the U.S. Treasury Department does not place nationality restrictions on buying or selling securities (apart from certain sanctions), large transactions with foreign entities must be reported by the U.S. broker/dealer.
Certain foreign direct investments and real estate transactions may be reviewed for national security concerns by the multiagency Committee on Foreign Investment in the United States.7
Risks To Future Investment
Now that the Federal Reserve has begun lowering interest rates, the U.S. edge on fixed income investments might become less significant, but the strength of the U.S. stock market may continue to draw foreign portfolio capital, while government incentives for new manufacturing projects could continue to drive foreign direct investment.
The biggest threats to future foreign investment are the untamed U.S. deficit and the potential for changing trade policies and political unrest. Any of these could make the U.S. business and investment climate less appealing.15
For now, however, much of the world is putting their money to work in the United States
Foreign direct investment remains a cornerstone of economic vitality in the United States, driving innovation, job creation, and competitive advantage across various sectors. Despite potential risks such as political unrest and economic fluctuations, the strategic initiatives and favorable investment climate continue to attract substantial foreign capital. As global dynamics evolve, maintaining this momentum will be crucial for sustaining long-term growth and prosperity in the U.S.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid.
Contact your tax and financial advisors to determine the best moves for your situation.
1, 3, 6) U.S. Bureau of Economic Analysis, July 23, 2024
2) U.S. Commerce Department, September 2024
4) U.S. Treasury Department, June 27, 2023
5) U.S. Commerce Department, April 8, 2024
7) U.S. Treasury Department, 2024