Foreign Investment Takes a Dip

Foreign direct investment (FDI) has dropped off significantly in the United States since 2000. A recent analysis by the Progressive Policy Institute in Washington looks at this issue and offers some explanations.

Here are the numbers:

Foreign direct investment flows to the U.S., 2000: $314 billion
Foreign direct investment flows to the U.S., 2001: $144 billion
Foreign direct investment flows to the U.S., 2002: $30 billion

Now what happened?

Since 2000, global FDI flows have receded and FDI flows to the United States have nearly dried up altogether. Total FDI in the U.S. dropped to $144 billion in 2001 and to $30 billion (including only $4.5 billion in manufacturing) last year.

Within the United States, investment from the United Kingdom has fallen most dramatically (from $82 billion to $14 billion since 2000); investment from France and Japan held up best. By sector, the most dramatic fall has been in the computer and electronics industry, where foreign outlays fell from $42.6 billion in 2000 to less than half a billion dollars last year. (Outlays are a slightly different statistic from total inflows; for example they include money raised within the United States but exclude new investment in existing facilities, and include borrowing within the U.S. for purchases.) Telecom has seen a similar steep drop, from $91 billion to $2.4 billion. On the relatively bright side, foreigners set up 9,785 new businesses in the United States last year; but this is still down from 32,885 in 2000.

Why the downward shift? The PPI suggests a couple possible answers: (1) slow global growth and thus a smaller global FDI pool; (2) weak technology investment levels; (3) falling confidence in long-term U.S. growth prospects, as perceptions of terrorist threats grow and structural budget deficits re-emerge after recent tax bills; and (4) higher dollar values relative to the euro in 2001 and 2002, raising the price of acquisitions here.

My own commentary on this trend is that things are improving and will continue to do so as the U.S. economy gets back on its feet. Yes, there are some major storm clouds on the horizon, but many are breaking up.

My advice is to continue to give adequate attention to foreign direct investment prospects in your area. As always, mergers and acquisitions will account for most of the deals in the future.