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Foreign Direct Investment and the Domestic Capital Stock

Rising levels of foreign direct investment (FDI) concern growing numbers of policymakers and members of the American public. These concerns stem from the perception that foreign activities of American multinational corporations reduce employment and other economic activities within the United States. While investment flows within the United States go largely unnoticed, in an international setting the lexicon of "winners" and "losers" can be inescapable. Curiously, both capital exporting countries and capital importing countries have at times expressed concern over the consequences of international capital flows.

Capital exporting countries worry that too much of their capital goes abroad while capital importing countries fear foreign control of domestic assets and the possible macroeconomic instability associated with rapid changes in foreign investment levels. The concerns of capital exporting countries, while diffuse, often are based on conceptions of outbound FDI as diverting economic activity. Unsurprisingly, growing overseas activities of multinational firms have become a source of economic insecurity for workers, managers, and tax collectors.

Concerns over the economic impact of rising FDI have limited analytic and empirical support. The paucity of analysis reflects the nascent nature of FDI theories, and the difficulty, until recently, of analyzing the internal dynamics of multinational firms whose activities span borders. Given the rapidly rising scope of multinational activity, the absence of a readily available framework with which to analyze FDI is increasingly costly.

While the ratio of outbound FDI to private nonresidential fixed investment in the United States averaged six percent through the 1960s and 1970s, this ratio has risen to fifteen percent by the 2000s. This dramatic increase in outbound FDI is matched by a similarly dramatic increase in FDI flows into the United States.

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Foreign Direct Investment and the Domestic Capital Stock