Question

Analysis of FDI and OFDI of U.S

Answer 1

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. The origin of the investment does not impact the definition, as an FDI: the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding the operations of an existing business in that country.

Foreign direct investment is not limited to investment of excess profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods. The main determinants of FDI is side as well as growth prospectus of the economy of the country when FDI is made.

The United States remains an attractive foreign direct investment (FDI) destination for a variety of reasons, including its large consumer base, a productive workforce, a business environment that encourages innovation, and its legal protections. As a result, foreign firms make investments in the United States on a regular basis by establishing new operations, purchasing existing operations of another company, or providing additional capital to their existing U.S. operations. This report highlights the latest available Bureau of Economic Analysis data on FDI, building on previous reports by the Office of the Chief Economist.

FDI trends identified in our earlier reports continued in 2016. FDI inflows on a historic cost basis in 2015 were the largest on record at $465.8 billion while 2016 inflows, though slightly lower at $457.1 billion, were at the second highest level on record. FDI in these two years was more than double the average annual inflows of roughly $200 billion for 2012-2014. Increased investment in manufacturing, specifically in chemical manufacturing, accounted for most of the investment gains for both 2015 and 2016.

An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country. This can take the form of a green field investment, a merger/acquisition or expansion of an existing foreign facility.

Investment in production outside the United States is a method by which U.S. firms raise their shares in foreign markets and defend them against foreign rivals from the host countries and from other countries. The investing firms are exploiting their firm-specific assets such as proprietary technologies, patents, or skills in advertising or marketing, and the opportunity to produce abroad raises the value of these assets and encourages firms' investment in them by extending the range of markets and the length of time over which they can be exploited. Overseas production has contributed to the ability of American multinationals to retain world market shares in the face of the long- term decline in the share of the U.S. as a country and short-term changes such as exchange rate fluctuations. It has performed the same functions for Swedish firms and, more recently, for Japanese firms. Within U.S. multinationals, those with higher shares of their production overseas have higher employment at home relative to home production. Foreign production appears to require larger numbers of employees in headquarters activities such as R&D and supervision.

The extent of a nation's outward direct investment can be seen as an indication that its economy is mature. American, European and Japanese firms, for example, have long made extensive investments outside their domestic markets. Because of their more rapid growth rates, emerging market economies often receive large amounts of ODI, as China has for the past two decades.But even some emerging market countries have begun to make investments abroad. Chinese companies are now engaged in large-scale outward direct investments, and, in fact, in 2015 Chinese overseas investment exceeded foreign direct investment (FDI) in China for the first time ever. In 2016 Chinese companies invested over $170 billion overseas.