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DIRECT INVESTMENT

Updated on May 5, 2012

The two major sub accounts of the U.S. financial account, direct investment and portfolio investment, have changed since 1991. Reversing a trend of the previous decade, the balance on net direct investment went negative in 1991 and continued to be negative through 1997. It appears that the world's enthusiasm for the acquisition of U.S. firms and other foreign-controlled direct investment in the United States has been exceeded by an acquisition of freight firms and assets by U.S. firms during the 1990s. Net direct investment was positive in 1998, but it is still too early to determine if this is the  beginning of a new trend, similar to that of the 1980s.

The boom in foreign investment in the United States during the 1980s was how ever, extremely controversial. Historically, it has typically been the case that U.S. firms invested abroad. The rapid growth of the U.S. economy and the expansion of many U.S. firms to build manufacturing, mining, refining, and many other industrial facilities around the world had become the norm. With the 1980s came a complete reversal in the direction of these net capital flows. Foreign investors were pouring more long-term capital into the United States than U.S. firms invested abroad. Many Americans worried about this increasing foreign presence in the U.S. marketplace, not just in selling products to U.S consumers as has become so common with merchandise imports but with foreign investors actually exercising significant control over U.S. firms, U.S. workers, and U.S. assets.

The source of concern over foreign investment in any country, including the United States, normally focuses on one of two major topics: control and profit. Most countries have restrictions on what foreigners may own. This is based on the premise that domestic land assets and industry in general should be held by residents of the country. For example, until 1990 it was not possible for a foreign firm to own more than 20 percent of any company in Finland. And this is the norm, rather than the exception. The United States has traditionally had few restrictions on what foreign residents or firms can own or control in the United States with most restrictions remaining today related to national security concerns. As opposed to many of the traditional debates over whether international trade should be free or not there is not there is not the same consensus for unrestricted international investment. This is a question that is still very much a domestic political concern first and an international economic issue second.

The second major source of concern over foreign direct investment is who ultimately receives the profits from the enterprise.  Foreign companies owning firms in the United States will ultimately profit from the activities of the firms, or put another way, from the efforts of American workers. In spite of evidence that indicates foreign firms in the United States reinvest most of the profits in the United States (in fact, at a higher rate than domestic firms), the debate has continued on possible profit drains. Regardless of the choices made, workers of any nation usually feel the profits of their work should remain in the hands of their own countrymen. Once again, this is in many ways a political and emotional concern more than an economic one.

A final note regarding capital inflows into the United States. The choice of which words are used to describe this increasing foreign investment can alone influence public opinion. If these massive capital inflows are described as capital investments from all over the world showing their faith in the future of American industry, the net capital surplus is represented as decidedly positive. If however the net capital surplus is described as resulting in the United States as the world's largest debtor nation, the negative connotation is obvious. But which if either, is correct? The answer actually quite simple. Investment, whether short-term or long term, flows to where it believes it can earn the greatest return for the level of risk. And although in an accounting sense this is international debt, when the majority of the capital inflow is in the form of direct investment, a long-term commitment to jobs, production, services technologic and other competitive investments, the competitiveness of American industry (industry located within the United States) is increased. The net debtor label is also misleading in that it invites comparison with  large debtor-nations like Mexico and Brazil. But unlike Mexico and Brazil, the majority of this foreign investment is not bank loans that will have to be paid back in regular installments over eight to ten years, and it is not bank loans denominated in a currency that is foreign. Mexico and Brazil owe U.S. dollars: the United States owes U.S. dollars. Therefore the profitability of the industry and the economy in the United States will be the source of repaying the investments. The feelings of poor nations about the global trading system and debt are noted in Global Learning Experience.

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