Page 310 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH
P. 310
International Trade and Finance
Notes risk of investing overseas. Foreign investors also tend to opt for larger scale and higher capital-
intensity plants than the average U.S. firm to offset the risks inherent in investing abroad and to
generate higher profits to make it economical to manage an operation far removed from the parent
firm.
Most economists conclude that foreign investment benefits the host economy because such investment
adds permanently to the capital stock of the economy and increases the total amount of capital in the
economy. While these conclusions seem generally to be true, they probably should be tempered
somewhat relative to foreign direct investment in the United States. The data in Table 3 show the
inflows and outflows of capital in the U.S. economy over the past eight years that are associated with
direct investment. The data indicate that firms can raise funds in three different ways : they can
borrow it from the parent company as an intercompany debt transfer; they can raise the funds in the
domestic economy in the form of equity capital, or they can raise their funds internally from profits
generated by the firm and used as reinvested earnings.
The data in Table 3 indicate that over the eight-year period 1999-2006, 8% of the funds foreign firms
used to invest in U.S. businesses came from the foreign parent company in the form of intercompany
debt. The rest of the funds foreign investors used to invest in U.S. businesses was raised in the United
States, not imported from abroad. Equity capital raised in the U.S. capital markets accounted for 77%
of the share of the funds foreign firms used to invest, with the rest, 15%, generated from the reinvested
earnings of the foreign firms. In comparison, the overseas affiliates of U.S. parent firms raised the
largest part of their funds—72%—from the reinvested earnings of the affiliates, partly reflecting the
older, more mature nature of the investments. Of the rest of the funds, 42% was raised through the
equity capital markets in the host country, and 6% was raised through intercompany debt.
Table 3 : U.S. Direct Investment Abroad and Foreign Direct Investment
in the U.S. Economy, Annual Flows 1999-2006
(in billions of U.S. dollars)
2001 2002 2003 2004 2005 2006 2007 2008
U.S. Direct Investment Abroad
Capital $142.3 $154.5 $149.6 $316.2 $3.6 $244.9 $398.6 $332.0
Equity capital 60.9 42.7 35.5 133.2 61.9 49.0 174.9 90.2
Reinvested 69.8 85.3 121.0 162.9 —10.3 217.3 238.9 251.5
earnings
Intercompany 11.6 26.5 — 6.6 20.0 —15.4 — 21.3 — 15.3 — 9.7
debt
Foreign Direct Investment in the United States
Capital $167.0 $84.4 $63.7 $146.0 $112.6 $243.1 $275.7 $319.7
Equity capital 140.9 105.3 93.4 92.9 70.7 115.0 155.0 250.2
Reinvested — 33.9 1.6 14.5 49.5 41.7 69.1 49.4 54.6
earnings
Intercompany 60.0 — 22.6 — 44.0 3.5 0.2 59.0 71.0 15.0
debt
Source : U.S. Department of Commerce.
Supporters of foreign direct investment also highlight the number of jobs created by foreign investment
in the economy. In the case of foreign direct investment in the U.S. economy, however, the employment
picture is somewhat unclear. While foreign direct investment on the whole does support and contribute
to existing employment in the economy, the particular nature of the investment makes it difficult to
304 LOVELY PROFESSIONAL UNIVERSITY