An Analysis on Foreign Direct Investment in U.S.: Industries and Countries, Part 2

Now let us look at the operating performances of Chinese FDI in U.S.

The overall performance of China’s FDI in U.S. was disappointed so far, based on the data available between 2003 and 2007. The aggregate net income from China’s FDI was -$20 million in 2003, $66 million in 2004, $11 million in 2005, -$29 million in 2006, and $38 million in 2007. Actually, U.S. BEA changed the net income definition from net income after withholding tax deduction to net income before withholding tax deduction in 2006. Thus, the net income of China’s FDI should be lower in 2006 and 2007 if the definition is consistent.

As a comparison, net income from Asia and Pacific Region was $8.5 billion in 2003, $16.3 billion in 2004, $18.4 billion in 2005, $24.7 billion in 2006, and $26.9 billion in 2007. In addition, China fell behind almost all its major economic competitors in this category, which includes Japan, South Korea, Hong Kong, Taiwan, Singapore, and India. Net income of China’s FDI only accounted a faction of these economies’ net income from their FDI in U.S. in 2007.

If we take the total investment into consideration, return of investment (ROI) of China’s FDI was -7% in 2003, 15% in 2004, 2% in 2005, -3% in 2006, and 3% in 2007. For Asia and Pacific Region, ROI of FDI was 4% in 2003, 7% in 2004, 7% in 2005, 9% in 2006, and 8% in 2007. Except for 2004, ROI of China’s FDI was far below other economies’ in the region. This partly explained why China’s FDI in U.S. is still low. When previous investment did not generate a good return, Chinese investors may be lack of confidence to invest more.

Next we look into industries in which China’s FDI concentrated. Wholesale, manufacturing, and other industries are three sectors that China’s FDI had concentrated in so far. For wholesale sector where received the most China’s FDI in U.S., Chinese ROI is petty low compared to the overall average ROI in U.S (see Table 1).

Table 1

For manufacturing, only 2003 and 2007 data are available now. In both years, China’s FDI in U.S. manufacturing sector had negative net income. Among all industries in manufacturing sector, “Primary and fabricated metals” industry has $4 million net income in 2007, which is the highest net income in manufacturing sector from China’s FDI.

For other industries, which generally include agriculture, forestry, fishing, and hunting; mining; utilities; construction; transportation and warehousing; administration, support, and waste management; health care and social assistance; accommodation and food services; miscellaneous services ; and holding companies (nonbank), China’s FDI had a better performance in recent years (see Table 2).

Table 2

At last, why did China’s FDI in U.S. produce such a poor performance? More about this issue later.

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: www.bea.gov (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.