Inaya Mclaughlin
Foreign investment in the United States has been a significant aspect of the country's economic landscape, with its impact on job creation, technological advancements, and cultural exchange. While there are concerns about control and potential disadvantages, the US has welcomed foreign investment due to its strong economic growth policies, innovation ecosystem, and highly developed market. One notable example is the investment by a Japanese biotechnology company in North Carolina, which will create hundreds of jobs and bring over a billion dollars in revenue. This investment trend has also raised questions about the long-term consequences of foreign ownership and the potential loss of skilled jobs, technological advantages, and economic growth. China's accumulation of US debt through the purchase of US Treasury securities is another dimension to this discussion, with potential implications for interest rates and economic growth.
What You'll Learn
Foreign investment in the US
Foreign direct investment (FDI) is an investment made by foreign companies or individuals in the United States. The United States has been ranked as the top destination for FDI for 12 consecutive years, according to Kearney's Global Business Policy Council's 2024 Foreign Direct Investment Confidence Index. The US has maintained its lead ranking due to its strong economy, consumer sentiment, and technological innovation.
In 2022, foreign firms invested a total of $177 billion in the US through acquisitions, opening establishments, or expanding existing ones. The US direct investment abroad position, or the cumulative level of investment, increased by $364 billion to $6.68 trillion at the end of 2023. The foreign direct investment in the US position increased by $227 billion to $5.39 trillion during the same period, with Canada and Europe being the top sources of investment.
The US welcomes foreign investment and is considered the best place to invest worldwide due to its strong economic growth policies, innovation ecosystem, and highly developed market. The country's strong workforce, legal protections, and encouragement of innovation also make it an attractive destination for business investment.
One example of foreign investment in the US is China's steady accumulation of US Treasury securities over the last few decades. As of August 2024, China owned $774.6 billion in Treasuries, which are bonds issued by the federal government and the main form of US debt to China. China invests in these securities to keep its export prices lower and maintain its large trade surplus with the US. While there are concerns about China selling off its US debt holdings, doing so would also pose risks for China, making it unlikely to happen.
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US investment abroad
The United States is the world's top destination for foreign direct investment (FDI). In 2021, the US recorded the largest increase in inward FDI of all economies, with a rise of $506 billion, or 11.3%. The US direct investment abroad position, or the cumulative level of investment, increased by $364 billion to $6.68 trillion at the end of 2023. This increase reflected a $147.1 billion increase in investment in Europe, primarily in Ireland, Switzerland, and the Netherlands. By industry, holding company affiliates saw the largest increase.
The US welcomes foreign investment and is considered the best place to invest worldwide due to its strong economic growth policies, innovation ecosystem, and highly developed market. The country's direct investment abroad has seen significant fluctuations over the years, reaching an all-time high of $167.5 billion in March 2007 and a record low of -$126.9 billion in December 2018.
In terms of US investment abroad, the US direct investment abroad position has seen substantial growth. As of the latest data from March 2024, it expanded by $136.7 billion compared to the previous quarter, with a historical average of $10.9 billion since 1960. Foreign Direct Investment (FDI) also increased by $81.4 billion in March 2024.
The US's investment abroad and its attractiveness as a destination for FDI are important aspects of its economic interactions with other countries. The US's direct investment abroad position and its ability to attract FDI contribute to its economic influence and global reach.
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Foreign control of US economy
Foreign control of the US economy is a complex and multifaceted issue that has evolved over time. Here is an analysis of this topic, focusing on the question of "how would a country cash out its US investments?"
US Openness to Foreign Investment
The United States has a long history of welcoming foreign investment, driven by its strong economic growth policies, innovative ecosystem, and highly developed market. The US government, through the Committee on Foreign Investment in the United States (CFIUS), ensures that only foreign investments posing national security concerns are restricted, while the majority are allowed to flourish. This open investment policy has made the US an attractive destination for global investors seeking stable and profitable opportunities.
Foreign Holdings of US Debt
One significant aspect of foreign control over the US economy is the holding of US debt by foreign countries. As of August 2024, China held $774.6 billion in US Treasuries, making it the second-largest foreign holder of US debt after Japan. This accumulation of US debt by China is driven by its export-led growth strategy, as it needs to keep the renminbi low compared to the US dollar to maintain competitive export prices. While there are concerns about China dumping its US Treasuries, the potential economic repercussions for China make this scenario unlikely.
Foreign Influence on US Monetary and Trade Policies
The US dollar's status as the world's reserve currency gives the US significant influence over global economic policies. However, foreign countries, particularly those with large holdings of US debt, can exert influence on US monetary and trade policies. For example, during the 1970s, the large balance-of-payments deficit and the suspension of dollar convertibility led to protectionist trade measures and a move towards isolationism. This shift in US foreign economic policy had significant repercussions globally and raised questions about the future of the US economy and its foreign relations.
US Foreign Policy and National Security
The US foreign policy agenda, led by the Department of State, aims to "build and sustain a more democratic, secure, and prosperous world for the benefit of the American people and the international community." This agenda includes promoting democracy, maintaining military predominance, fostering commercial interaction, and safeguarding American interests abroad. The US Constitution grants the President significant powers in foreign policy, including commanding the military, negotiating treaties, and appointing ambassadors. The Central Intelligence Agency (CIA) and the Department of Defense also play crucial roles in gathering intelligence and carrying out military policy, respectively.
Sanctions and National Security Tools
The US wields economic and trade sanctions as powerful tools to achieve its foreign policy and national security goals. The Office of Foreign Assets Control (OFAC) administers these sanctions, targeting foreign countries, individuals, and organizations that pose a threat to US national security, engage in illicit activities, or violate human rights. These sanctions can have a significant impact on the economies and political dynamics of the targeted entities.
In summary, while the US economy remains predominantly under domestic control, foreign investment, debt holdings, and geopolitical dynamics do influence its trajectory. The US government actively manages these foreign interests through policies, sanctions, and national security tools to promote its economic and strategic objectives.
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Impact of exchange rates
Exchange rates can have a significant impact on a country's US investments. A country's returns on its foreign investments can be enhanced or reduced by fluctuations in the value of its home currency or the foreign currency. If a country's foreign investment portfolio generates a positive rate of return, but its home currency loses value, the net return will be enhanced when profits are converted to the home currency. Conversely, if the foreign investment declines and the home currency strengthens, the returns will be dampened.
For example, if a country has a 12% rate of return on its foreign investment portfolio but its home currency loses 10% of its value, the net return will be higher when converted to the home currency. On the other hand, if the foreign investment declines by 5% and the home currency strengthens by 10%, the returns will be further reduced.
The impact of exchange rates on foreign investments is also influenced by the performance of the primary investment and the foreign currency. During bull markets, some investors seek opportunities to align their investments with the foreign currency effect, while others attempt to reduce the impact of the foreign price.
Additionally, currency appreciation in emerging markets can result in double gains for investors. The first gain comes from the growth of emerging stock markets, while the second comes from the strengthening of the local currency. However, currency effects can also amplify losses. For example, if a country's stocks and currency both outperform international markets, investors from that country may experience lower returns and currency losses simultaneously.
To mitigate the risks associated with exchange rate fluctuations, international investors may choose to hedge against undesirable movements in foreign currencies. Currency-hedged ETFs, derivatives, and forex markets are some of the tools available to manage currency risk.
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US debt
The national debt is composed of distinct types of debt, including non-marketable or marketable securities, and debt held by the public or intragovernmental debt. The US federal government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating-rate notes, and Treasury inflation-protected securities (TIPS). The national debt is the accumulation of this borrowing, along with interest owed to investors. The US Treasury uses the terms "national debt", "federal debt", and "public debt" interchangeably.
The national debt enables the federal government to pay for important programs and services for the American public, even if it does not have funds immediately available. The federal government needs to borrow money to pay its bills when its ongoing spending activities and investments cannot be funded by federal revenues alone. Decreases in federal revenue can be due to a decrease in tax rates or individuals or corporations earning less money.
Comparing a country's debt to its gross domestic product (GDP) is considered a better indicator of its fiscal health than just the national debt number alone. This ratio reveals the country's ability to pay down its debt. The US debt-to-GDP ratio surpassed 100% in 2013 when both debt and GDP were approximately $16.7 trillion.
The US government's debt load is now considered the biggest risk to financial stability, according to a Federal Reserve survey. The survey also noted that the banking sector remained "sound and resilient overall", while leverage across hedge funds was at or near the highest level observed since data became available in 2013.
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Frequently asked questions
Foreign investment in the US can lead to an increase in jobs and salaries, as well as skill improvements for local workers. It can also bring in tax revenue for state and local governments.
There is a risk that most of the profits from the investment flow outside of the US. There may also be cultural differences that cause problems between foreign owners and domestic management and workers.
A country can cash out a US investment by selling US assets or spending US dollars elsewhere. For example, by using US dollars to purchase oil from Middle Eastern countries.
If a country were to cash out a large amount of US investment, it could lead to a decline in the value of the US dollar and an increase in interest rates. This could make US exports more expensive and potentially hurt economic growth.
