Foreign Investment Boosts U.S. Economy

By SBE Council at 24 July, 2020, 9:31 am

by Raymond J. Keating-

When economists talk about free trade and its benefits, we’re not only talking about lowering or removing barriers to selling and buying goods and services, but also reducing governmental barriers to investment.

Economic growth and development are enhanced by allowing for the efficient distribution of financial capital, based on market competition and cooperation; price, profit and loss signals; and governed ultimately by consumers. That goes for investment within nations and across borders. The benefits, including rising incomes and diminished poverty, are enjoyed far and wide.

Part of the story of foreign investment in the United States is captured by a report from the U.S. Bureau of Economic Analysis. On July 23, the BEA’s “Direct Investment by Country and Industry, 2019” report was released, and it was noted that “U.S. direct investment abroad position, or cumulative level of investment, increased $158.6 billion to $5.96 trillion at the end of 2019 from $5.80 trillion at the end of 2018.”

Meanwhile, it also was noted, “The foreign direct investment in the United States position increased $331.2 billion to $4.46 trillion at the end of 2019 from $4.13 trillion at the end of 2018.”

What is “Direct Investment” and Why it is Good

In terms of the definition of “direct investment,” the BEA explains: “Direct investment is an investment by an entity resident in one economy that represents a lasting interest, defined as 10 percent or more voting ownership, in an enterprise resident in another economy.”

So, while this is not a comprehensive measure of foreign direct investment, it is significant and worth noting.

The growth in such an investment overall was good news for the U.S. economy in 2019 and will be going forward. U.S. direct investment abroad is undertaken to enhance the performance and returns of, for example, U.S. firms, which in turn boosts, for example, U.S. workers at such businesses.

The benefits of foreign direct investment in the U.S. should be even clearer to most, with increased investment in the U.S. more directly helping to drive innovation, productivity, and economic growth forward. As the BLS report noted, for example, “Foreign direct investment in the United States was concentrated in the U.S. manufacturing sector, which accounted for 40.1 percent of the position.”

So, it is a significant positive that foreign businesses and investors see value in investing in the U.S. to the overall tune of nearly $4.5 trillion, according to this report, including growth of $331.2 billion last year.

Such valuable investment needs to be kept in mind when policymakers decide to play around of with protectionist trade policies that include governmental pressure for U.S. companies to disinvest in other nations. Retaliation from trading partners not only could include erecting barriers to U.S. goods and services, but also could features decisions that make it far more difficult for investors and businesses to invest in the U.S., or to maintain such investments.

What might that mean? Bryan Riley of the National Taxpayers Union Foundation recently summed it up this way:

“Plans to ‘bring the factories home’ come with great risks. One that is rarely mentioned is the likelihood that other countries may decide to copy this policy and ‘take the factories home.’ For the 2.6 million American manufacturing workers employed by foreign-owned companies that have built U.S. factories, this would be a devastating result.”

Free trade, regarding the buying and selling of goods and services and the free movement of investment, remains a clear and critical net positive for U.S. entrepreneurs, businesses, workers and consumers.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.