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International Trade and Finance

Notes country, direct investment abroad benefits individual firms, because firms that invest abroad are
better able to exploit their existing competitive advantages and are able to acquire additional skills
and advantages. This tends to further enhance the competitive position of these firms both at home
and abroad and shifts the composition and distribution of employment within the economy toward
the most productive and efficient firms and away from the less productive firms.
Some observers argue that U.S. direct investment abroad supplants U.S. exports, jobs, and research
and development funds, thereby reducing employment and wages in the U.S. economy. Others are
concerned that outward direct investment alters the industrial composition of domestic production
and trade flows, which can affect the sectoral and regional distribution of employment and the relative
demand for skilled and unskilled labor. For the home country, overseas investment may lead some
firms to shift parts of their production abroad, thereby supplanting some domestic production with
imports from abroad, but most studies indicate that, on balance, direct investment abroad increases
U.S. exports and helps sustain employment and wages at home. Intra-company trade is a relatively
new feature of the U.S. economy, but can be expected to increase as the economy becomes even more
globalized. In 2007, U.S. parent companies accounted for more than half of all U.S. exports and more
than one-third of U.S. imports.
Furthermore, about half of the exports by U.S. parent companies was to their foreign affiliates. At the
same time, the U.S. affiliates of foreign firms accounted for 20% of U.S. exports and 25% of U.S.
imports.
Globally, a relatively small share of the production of U.S. foreign affiliates makes its way back into
the U.S. economy. In 2007 the foreign affiliates of U.S. multinational firms exported about 10% of
their production back to the United States, but two-thirds of their production was sold within the
host country and the rest was exported to other foreign countries. Foreign direct investment also
supports U.S. exports to areas where formal restrictions to exports exist. In addition, by expanding
and supporting development in foreign markets, direct investment spurs improvements in foreign
economies, which in turn, creates new markets for U.S. goods. Direct investment also seems to be
associated with a strengthened competitive position, a higher level of skills of the employees, and
higher incomes of firms that invest abroad.
As a host country, the United States benefits from inward direct investment because the investment
adds permanently to the Nation’s capital stock and skill set. Direct investment also brings technological
advances, since firms that invest abroad generally possess advanced technology, processes, and other
economic advantages. Such investment also boosts capital formation, contributes to a growth in a
competitive business environment and to productivity. In addition, direct investment contributes to
international trade and integration into the global trading community, since most firms that invest
abroad are established multinational firms.
On the cost side, critics of foreign investment argue that some U.S. firms may invest abroad, and
thereby shift some resources from activities within the United States, in order to take advantage of
abundant natural resources, low-cost labor, or relaxed environmental and labor laws. Indeed, about
one-third of U.S. direct investment abroad is in developing countries, where economic conditions are
markedly different from those in the United States or in many parts of Europe. In some cases, firms
that invest abroad may shift production from the United States to a foreign location from which it
might export back to the United States products that it previously had produced in the United States,
but this does not seem to be a major activity of the foreign affiliates of U.S. firms. Such offshoring of
production, or globalization, has grown over the last decade as many developing economies have
dropped formal restrictions on foreign investment, but much of this investment seems to be geared
toward producing for the local market, or for exports to neighboring countries.
The data in Table 2 show the extent and influence of U. S. and foreign multinational firms in the
U.S. economy. In 2007, the latest year for which comprehensive data are available, foreign firms
had a total of nearly 11,000 affiliates operating in the United States. These affiliates were present in
every State and in every economic activity, where such activity is not prohibited by law.

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