Foreign Investments

Foreign investment in the US-s grew steadily during the 1970s, but experienced a surge during the middle and late 1980s. The tall levels of foreign investment (FI) led to concerns about a loss of control over "economic sovereignty", or domestic economic activity, and the effect of foreign ownership on national security. With the economic slowdown of the early 1990s, and a drop off in the rate of foreign investment these concerns became muted. Attitudes toward foreign investment changed somewhat as localities vied to attract investment for its economic stimulus. These concerns are still evident, however, as the rate of investment has accelerated once again. It may be that changing political pressures in the United States may result in pressures against the free flow of investment.

Resons for Foreign Investment

The increase in foreign investment took place during a period in which international trade of all types was expanding. Free trade agreements such as that between the United States and Canada, and the creation of the North American Free Trade Agreement, make investment within the United States more attractive and expedient. Further, multinational operations provide opportunities for tax avoidance through transfer pricing policies, which shift accounting profits to lower tax areas. The foreign investment decision is, however, largely a function of microeconomic variables affecting the firm. Unless the firm can achieve some competitive advantage, it is likely to choose exporting rather than direct investment. Foreign investment activity, for instance, tends to be concentrated in technology-intensive industries in which research and development are important. Characteristically, foreign manufacturing investments have larger-than-average plant sizes and are more capital intensive than domestic firms. Although foreign manufacturing investments tend to have higher hourly production wages, this is offset by higher labor productivity.

Impact of Foreign Investment

The impact of foreign investment is complex and unclear. Fears of loss of economic sovereignty are sometimes countered by noting that foreign investment, though involving large sums, is still only a very small portion of the U.S. economy. The overall figures can hide specific impacts, however, and in some industries foreign-owned enterprises account for more than half of U.S. production.

On a global basis, and over a long time, a free flow of capital is beneficial since it promotes an efficient allocation of resources. For shorter periods, and within a given country or region, the impact is mixed. The most immediate impact is the creation of more jobs within the immediate locality. Beyond this, however, the increased competition, capital-intensive nature, and higher productivity may lead to a net loss of employment Foreign-owned enterprises also tend to have a higher import content than domestic firms. The technologically intensive nature of foreign investment is suggested as indicating a transfer of technology to the United States, but this is countered by the reverse flow of technology from acquired firms. It appears that there is no overall answer, and that individual analysis is required.

See also:

- The Oli Paradigm
- Multinational Corporation (MNC) and Multinational Corporations by country