Between 1982 and 1990 U.S. current account deficits—the amount by which imports of goods and services plus foreign aid exceeded U.S. exports of goods and services—totaled over $900 billion. The deficits were financed by net capital inflows—foreign investment in the United States less U.S. investment abroad. Although U.S. holdings of foreign assets rose, foreign holdings of U.S. assets rose by $900 billion more. U.S. assets abroad minus foreign assets in the United States went negative in 1985 for the first time since 1914.
These data, however, are based on historic cost, the cost at the time the investment was made. The proper measure of any investment is its current market value, not its historic cost. Recognizing this, the U.S. Commerce Department switched to market valuation in its June 1991 report. Measured by market values, the net foreign investment position of the United States remained positive until 1987, and reached minus $360.6 billion in 1990, about 40 percent smaller than the number computed on an historic cost basis.
At the end of 1990, about 16 percent of foreign assets in the United States were owned by foreign governments, while 84 percent were privately owned. (Similarly, 14 percent of foreign assets owned by the United States were official, and 86 percent were private.)
In contrast, as a share of total investment, U.S. direct investment abroad (comprising equity holdings of 10 percent or more of any firm) is substantially larger than foreign direct investment in the United States. U.S. direct investment abroad still exceeded foreign direct investment in the United States in 1990, and by a wider margin than in 1985—$184 billion versus $152 billion.
Despite the notoriety of Japanese investors, the British have the largest U.S. direct investment holding—with the Dutch not far behind—as has been the case since colonial times. In 1990 the United Kingdom held about 27 percent of foreign direct investment in the United States, significantly greater than Japan's 21 percent. The European Economic Community (EC) collectively holds about 57 percent. Moreover, according to research by Eric Rosengren, between 1978 and 1987, Japanese investors acquired only 94 U.S. companies, putting them fifth behind the British (640), Canadians (435), Germans (150), and French (113).
Outlays for New Investment in the United States
by Foreign Direct Investors, 1980-2008
Why Do Foreigners Invest in the United States?
With no restrictions on movements of labor or capital, each tends to flow to any host country where wages or returns are higher than at home. During the eighties laborers migrated to western Europe from eastern Europe, southern Europe, and Turkey, and to the Arab Gulf states from Africa and southern Asia because of higher wages. Capital migrated to the United States because of higher returns. The U.S. stock market's annual appreciation of over 15 percent (not counting dividends) was exceeded among the major Western industrial countries only by the Japanese stock market's rise of nearly 20 percent. In comparison, average stock market increases were 5 percent in Canada, about 11 percent in France, 12 percent in Germany, 14 percent in Italy, and 12 percent in the United Kingdom.
Tax differences also influence international capital flows. Both defenders and critics of the Reagan administration's 1981 tax cuts agree that they caused increased capital inflows during the eighties. Defenders argue that U.S. investments became more profitable after tax than non-U.S. investments, both to U.S. investors and to foreign investors, while critics argue that large federal deficits drew the capital inflows.
Foreign Investment In Uinited State
Consistent with the defenders' view, U.S. investors were selling off foreign assets in the early eighties to finance domestic investment. U.S. direct investment abroad, valued at historic cost, declined from 1981 to 1984; in market value it declined during 1983 and 1984. Correspondingly, U.S. nonresidential fixed investment rose substantially in 1983 and 1984 and peaked in 1985, following publication of the U.S. Treasury's tax reform proposals in the fall of 1984. In 1985 U.S. direct investment abroad began to rise again. Meanwhile, foreign investment in the United States grew somewhat faster in the early eighties than in the late eighties. Higher tax rates on capital gains became effective in 1986, and, from the end of 1985, the rise in U.S. foreign direct investment has exceeded that of foreign direct investment in the United States. Moreover, the pattern of the rise and fall of the U.S. dollar—appreciating between 1980 and 1985 and depreciating from 1985 to 1987—is also consistent with the defenders' view.
The United States attracts capital not only because of lower taxes, but also because of greater U.S. consumer wealth and labor productivity. At purchasing power parity—GDP adjusted for differences in exchange rates and prices—U.S. wealth (per capita GDP) was one-fourth greater than Japan's in 1990 and one-third greater than Germany's. Moreover, except for Japan the other main industrial countries did not narrow this margin between 1980 and 1990. On a production-per-employee basis, the message is the same: U.S. labor is the most productive in the world.
