Friday, April 3, 2009

An Analysis on Foreign Direct Investment in U.S.: Industries and Countries

The biggest foreign investor group is European, especially Western European. About 71% of total foreign direct investment (FDI) in U.S., which is about $1,483 billion, comes from Europe up to 2007. But the number could be a little tricky here. Among the European countries which make investment, some are clearly used as the offshore tax havens to structure the investment in U.S., i.e. Luxembourg, which accounts for nearly one-tenth of that $1,483 billion European investment. The top three European countries to invest in U.S. till 2007 are United Kingdom, Netherlands, and Germany.

Asia and Pacific countries’ investment only accounts for 15% of FDI in U.S., which is about $320 billion. Not surprisingly, Japan is the largest Asian investor (the second largest in the world) in 2007. Japanese invested totally about $233 billion in U.S. by the end of 2007. The next tier of East Asian investors includes South Korea and Singapore. Both countries had invested more than $10 billion in U.S. by the end of 2007. The third tier includes regions and countries like Taiwan, Hong Kong, India, and China mainland. All of them had invested between $1 billion and $10 billion in U.S.

Looking at the industries that received FDI in U.S., European had spent the most money on manufacturing in U.S., which is about 38% of their investment ($557 billion). But investors from Asia and Pacific region had only spent 31% on manufacturing ($98 billion). What Asian investors liked most is the wholesale industry, which received about $114 billion from Asia and Pacific region (36% of FDI from Asia and Pacific region).

The differences in investment destinations between Western European and East Asian are so obvious. The Asian investment in distribution channels and marketing is to serve their domestic manufactures and exporters to gain greater access to U.S. market. European invests more in manufacturing probably because they want to avoid exchange risks in addition to gaining access to U.S. market. Furthermore, European investment has been more diversified than Asian investment in recent years. Between 2002 and 2007, manufacturing and wholesale sectors only accounted for about 41% of the total FDI from Europe. Financial industries and other industries accounted for another 50% of the FDI from Europe.* But for Asian investment, manufacturing and wholesale sectors together accounted for 76% of the FDI from Asia and Pacific Region between 2002 and 2007.

At last, let’s take a look at China’s direct investment in U.S. China’s total FDI in U.S. is very small compared to other major foreign investors. Similar to other major Asian exporters, China’s investment is concentrated in manufacturing and wholesale sectors. Till 2007, China had $847 million invested in wholesale industry in U.S., compared to the total investment of $1,091 million. Most of China’s wholesale investment ($501 million) happened in 2005. The manufacturing sector, chemicals ($89 million) and primary and fabricated metals ($126 million) are two largest industries that received a lot of Chinese investors’ attention. Outside manufacturing and wholesale sectors, China has $73 million investment in professional service and $111 million investment in other industries.

Data source: (All dollar amounts are on historic cost base.)

* other industries is defined as industries other than manufacturing, wholesale, retail, financial services, information, real estate, and professional services.

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