Foreign Direct Investment in the U.S. Grew in 2021, and That’s Good News

By SBE Council at 22 July, 2022, 4:46 pm

by Raymond J. Keating – 

We haven’t taken a look at foreign direct investment data from the U.S. Bureau of Economic Analysis (BEA) in a while, and that’s unfortunate. Just as the free movement of goods and services across international borders creates value and expands opportunity for consumers, workers, entrepreneurs and businesses, so does the free flow of financial capital.

First, let’s consider exactly what direct investment is.

As defined by the BEA, foreign direct investment is “a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise resident in another economy. Ownership or control of 10 percent or more of the voting securities of an entity in another economy is the threshold for separating direct investment from other types of investment.”

So, foreign direct investment is far from a complete measure of what’s going on in the realm of international investment, but it remains a valuable measure of certain types of business investment.

The 2021 data and why foreign direct investment matters.

As for the latest numbers, the BEA reported that U.S. direct investment abroad increased from $6.09 trillion at the close of 2020 to $6.49 trillion at the end of 2021, a rise of $403.3 billion. That was an increase of 6.6 percent.

As for foreign direct investment in the United States, that increased from $4.47 trillion at the end of 2020 to $4.98 trillion at the close of 2021 – an increase of $506.1 billion, or 11.3 percent.

Keep in mind that inflation from the end of 2020 to the end of 2021 ran at 7 percent. Therefore, while U.S. foreign direct investment declined slightly in 2021 in real terms, foreign direct investment in the U.S. ran comfortably ahead of inflation.

Also, the BEA reported regarding foreign direct investment in the U.S., “By industry, affiliates in manufacturing and information accounted for the majority of the increase.”

Why does the free flow of investment matter? As SBE Council has explained previously:

“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.”

In addition:

“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… 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.”

The economy is not a zero-sum game. Wealth and growth-generating investment in the U.S. and abroad is good news for everyone – for all U.S. business including small businesses, workers and consumers, and for businesses, workers and consumers in other nations.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.