Foreign direct investment in the U.S. and its impact are highlighted in new Commerce Department report

Business America, August 23, 1993 by Lester A. Davis

Foreign direct investment in the United States became a sensitive policy concern during the last half of the 1980s in response to the rapid expansion of foreign ownership of U.S. firms. So far in the 1990s, the increase in foreign ownership has slowed, according to Foreign Direct Investment in the United States: An Update. This is the Department of Commerce's second annual report required by the Foreign Direct Investment and International Financial Improvements Act of 1990, and is published by the Office of the Chief Economist, Economics and Statistics Administration. The report was submitted to the Congress on July 7.

The report provides an overview of foreign direct investment in the United States (FDIUS) and the extent that foreign-owned bank and non-bank firms participate in the U.S. economy. This second report focuses on several key issues related to foreign-ownership of American firms, including their impact on U.S. trade performance and U.S. technology developments and transfer. It also examines the extent to which foreign firms shift their income away from the United States through transfer pricing practices. The study analyzes newly available information from the BEA-Census and BEA-BLS data link projects that provide detailed data on the foreign-owned affiliates' activities in specific industries. Also included are an extensive survey of recent non-government analytical literature on foreign direct investment and a statistical appendix.

Foreign direct investment inflows--reflecting changes in equity capital, adjustments in intercompany debt, and reinvested earnings--dwindled to $11.5 billion in 1991, and $2.4 billion in 1992. As a result, the growth in the total value of foreign-owned firms sharply slowed. While the United States remains the world's largest single host country for foreign direct investment, such investments are a small part of total U.S. net national wealth--2.7 percent in 1991, up from 1.2 percent in 1980. This share is smaller than in any other major industrialized country except Japan.

Among the key findings of the report are the following:

* The surge in FDIUS in the 1980s increased foreign-owned firms' share of the U.S. economy, but the slowdown between 1990 and 1992 slowed the rise in their share.

* U.S. affiliates of foreign firms paid slightly higher wages (corrected for industry composition) and increased their employment of U.S. workers slightly faster than U.S.-owned firms.

* The U.S. affiliates' share of the U.S. trade imbalance rose sharply in the 1980s, reflecting in 1990 a U.S. merchandise trade deficit by foreign-owned firms of $89.5 billion, compared with a much smaller deficit by U.S.-owned firms of $12.2 billion.

* The U.S. affiliates' share of high-technology industries is small though rising, and they are slightly more concentrated in high-technology industries than are U.S.-owned firms. They have contributed to overall U.S. technological capability and development.

* As a group, they had lower taxable incomes relative to revenues and assets than U.S.-owned corporations. At least half of the difference in incomes can be attributed to factors other than income shifting and transfer pricing.

Foreign direct investment inflows into the United States--defined as equity interest in a U.S. company in excess of 10 percent of the voting securities--rose in the late 1980s as a post-1985 decline in the dollar lowered the cost of investing in the United States. Contributing to the rise in direct investment were foreign firms' desires to improve their linkages with the world's largest consumer market, circumvent U.S. trade barriers, and exploit their own technological and managerial advantages. Financial liberalization in Japan and other major industrialized countries--which allows citizens more freedom in exporting and importing capital--and worldwide technological changes also have encouraged increased international investment flows.

The recent decline in U.S. foreign direct investment inflows coincides with a period of lower U.S. trade and current account deficits, a stable U.S. dollar, and recessionary conditions both in the United States and in major investment source countries such as Japan, United Kingdom, Netherlands, Germany, and Canada. Japan, in particular, has undergone a large reduction in its domestic capital base as a result of stock market and real estate declines which have limited the willingness of Japanese firms to invest abroad. Germany has been coping with unification demands that have absorbed much of its available investment funds.

Analysis of recently released Census and Bureau of Economic Analysis data indicate that foreign-owned U.S. firms have contributed substantially to U.S. economic growth and employment, providing jobs for 4.7 million Americans in 1990. These firms pay slightly higher wages (adjusting for industry composition) than do the average U.S.-owned firm. In addition, they have greatly increased their plant, equipment, and R&D expenditures in recent years, thus promoting U.S. technological progress. In some cases, however, the parent companies appear to have used their American investments to gain access to leading U.S. technologies.