Curious about how foreign direct investment shapes the U.S. economy? Discover its impact on jobs, innovation, and industries!
Foreign direct investment has long been a driving force behind the United States’ economic growth, fostering innovation, creating jobs, and supporting various industries across the country.
As global companies seek to expand their reach, they often look to the U.S., attracted by its stable economy, skilled workforce, and vast consumer market.
In recent years, foreign direct investment (FDI) has surged, making the U.S. one of the top destinations for international capital.
This influx of foreign direct investment not only strengthens domestic businesses but also enhances America’s position as a leader in global trade and innovation.
FAQs
Q1: What is foreign direct investment?
A1: Foreign direct investment refers to investments made by individuals or companies from one country into businesses or assets located in another country. This can include buying property, acquiring stakes in companies, or establishing new business operations.
Q2: Why is foreign direct investment important for the U.S.?
A2: Foreign direct investment is crucial for the U.S. economy because it brings in capital that helps businesses expand, creates jobs, fosters innovation, and strengthens industries like manufacturing, technology, and real estate.
Q3: Which countries invest the most in the United States?
A3: Some of the largest investors in the U.S. include countries like Canada, Japan, Germany, and the United Kingdom. These nations contribute significantly to sectors such as manufacturing, finance, real estate, and technology.
Surge In Foreign Direct Investment In The U.S.
According to data from the International Monetary Fund, the United States received almost one-third of all global foreign investment from 2021 to 2023.
This compares with an average of just 18% before the pandemic
The dramatic increase is even more remarkable considering widespread concern about the dominance of the U.S. dollar as a global currency.1
Decline In Investment In China And Emerging Economies
By contrast, China received just 3% of foreign investment from 2021 to 2023, a significant drop from an average of 7% in the decade ending 2019.
Investment in other emerging economies also declined as the United States dominated the global investment picture.
While this imbalance contributed to an already strong U.S. economy, it weakened emerging economies that are more dependent on foreign investment.2
Categories Of Foreign Investment
Foreign direct investment falls into two broad categories of capital inflows from a foreign individual, company, or government:
- Foreign portfolio investment involves buying securities
- Foreign direct investment involves buying an ownership stake in a business enterprise or starting a new business
Growth In Foreign Holdings Of U.S. Securities
In the year ending June 30, 2023 (most recent data), foreign portfolio holdings in U.S. securities totaled almost $26.9 trillion, an increase of about $2 trillion from the previous year.3
Part of this increase was likely due to gains in the U.S. stock market, but foreign capital was also drawn by high interest rates offered by U.S. Treasury securities and other fixed-income investments.4
Foreign Holders Of U.S. Securities
The largest foreign holders of U.S. securities are in the United Kingdom, Japan, the Cayman Islands, Luxembourg, and Canada.
The heavy holdings in the Cayman Islands and Luxembourg are due to their popularity as jurisdictions for private equity funds5
China, which ranks seventh in total U.S. portfolio investment, has low U.S. equity investments but is second to Japan in holding long-term Treasury securities, causing some concern that China might jolt U.S. markets by “dumping” U.S. debt.
However, this is unlikely, because it would drive down the value of the dollar against the Chinese yuan, which would make Chinese export goods more expensive and therefore less competitive.6–7
Foreign direct investment continues to play a pivotal role in shaping America’s economic landscape by driving growth across key sectors such as manufacturing, technology, and real estate. As global capital flows into the country, it not only strengthens domestic businesses but also creates jobs and fosters innovation that benefits both local communities and international markets alike. Looking ahead, maintaining an attractive business environment will be crucial for sustaining high levels of foreign direct investment while navigating potential challenges posed by shifting global dynamics.
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, 2, 4) Bloomberg, June 16, 2024
3, 5–6) U.S. Treasury Department, April 30, 2024
7) Investopedia, October 18, 2024