High Foreign Investment in the United States
According to data from the International Monetary Fund, the United States received almost one-third of all global foreign investment from 2021 to 2023. This compares with an average of just 18% before the pandemic. The dramatic increase is even more remarkable considering widespread concern about the dominance of the U.S. dollar as a global currency.
By contrast, China received just 3% of foreign investment from 2021 to 2023, a significant drop from an average of 7% in the decade ending 2019. Investment in other emerging economies also declined as the United States dominated the global investment picture. While this imbalance contributed to an already strong U.S. economy, it weakened emerging economies that are more dependent on foreign investment.
Foreign investment falls into two broad categories of capital inflows from a foreign individual, company, or government. Foreign portfolio investment involves buying securities, while foreign direct investment involves buying an ownership stake in a business enterprise or starting a new business.
Buying U.S. securities
In the year ending June 30, 2023 (most recent data), foreign portfolio holdings in U.S. securities totaled almost $26.9 trillion, an increase of about $2 trillion from the previous year.3 Part of this increase was likely due to gains in the U.S. stock market, but foreign capital was also drawn by high interest rates offered by U.S. Treasury securities and other fixed-income investments.
The largest foreign holders of U.S. securities are in the United Kingdom, Japan, the Cayman Islands, Luxembourg, and Canada. The heavy holdings in the Cayman Islands and Luxembourg are due to their popularity as jurisdictions for private equity funds.
China, which ranks seventh in total U.S. portfolio investment, has low U.S. equity investments but is second to Japan in holding long-term Treasury securities — causing some concern that China might jolt U.S. markets by “dumping” U.S. debt. However, this is unlikely, because it would drive down the value of the dollar against the Chinese yuan, which would make Chinese export goods more expensive and therefore less competitive.
Owning U.S. companies
Foreign ownership of U.S. securities brings capital that can support economic growth. However, these positions can change quickly because investors trade securities frequently. Foreign direct investment (FDI), by contrast, represents a longer-term commitment to operating in the United States. At the end of 2023, FDI totaled $5.39 trillion. That figure marked an increase of $227 billion from the prior year.
The U.S. Department of Commerce groups FDI into three categories: acquisitions, new businesses, and business expansions. New businesses and expansions are known as greenfield investments. These investments create new jobs and expand U.S. productive capacity. For this reason, greenfield projects are the most valuable form of FDI. Despite their importance, they remain the smallest category. From 2015 to 2022, they accounted for an average of only about 5% of total FDI.
Manufacturing accounts for more than 40% of all FDI in the United States. Three federal initiatives aim to encourage investment in critical manufacturing sectors. These include the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the CHIPS and Science Act. Together, they have spurred both domestic and foreign investment projects. One example is a preliminary agreement by a Taiwan-based company to invest more than $65 billion in three semiconductor plants in Phoenix, Arizona. The project may receive up to $6.6 billion in CHIPS Act funding. If completed, it would represent the largest greenfield investment in U.S. history.
When ranked by the location of the parent company, the top sources of FDI include the Netherlands, Japan, Canada, and the United Kingdom. The Netherlands ranks highly because many multinational holding companies are based there. When measured by the ultimate beneficial owner, Japan ranks first, followed by Canada, Germany, and the United Kingdom. China plays a relatively small role in U.S. foreign direct investment.
The U.S. Treasury Department does not restrict foreign participation in securities markets, aside from specific sanctions. However, broker-dealers must report large transactions involving foreign entities. In addition, the Committee on Foreign Investment in the United States may review certain foreign direct investments and real estate transactions. The committee evaluates these transactions for potential national security risks.
Risks to future investment
Now that the Federal Reserve has begun lowering interest rates, the U.S. advantage in fixed-income investments may shrink. However, the strength of the U.S. stock market may continue to attract foreign portfolio investment. Government incentives for new manufacturing projects may also encourage ongoing foreign direct investment.
The greatest risks to future foreign investment include the growing U.S. deficit, shifting trade policies, and political uncertainty. Any of these factors could weaken the U.S. business and investment climate. For now, much of the world continues to invest capital in the United States.
All investing involves risk, including the potential loss of principal. No investment strategy can guarantee success. The federal government guarantees U.S. Treasury securities for the timely payment of principal and interest. Their value fluctuates with market conditions. Investors who sell before maturity may receive more or less than the original amount paid.
IMPORTANT DISCLOSURES
This material may address tax-related matters. It does not provide tax advice and cannot be used to avoid legal penalties. Each taxpayer should seek independent guidance from a qualified tax professional based on individual circumstances.
These materials are provided for general information and educational purposes only. They rely on publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. The information may change at any time without notice.
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