Foreign Direct Investment

Friday, June 2, 2006



 The BEA reported today that 91.2% of foreign direct investment in the US during 2005 was to acquire the worldwide assets of existing US-incorporated firms. Only 8.8% of FDI was used to establish a new business within the US.
That is, foreign sources spent $79.2 billion to acquire the worldwide assets of US incorporated firms in 2005 (such as China’s Lenovo purchase of IBM’s personal computer division) but only $7.6 billion to establish new businesses.
For many years FDI has had an overwhelming preference for acquiring the existing worldwide assets of firms incorporated in the US rather than to establish new businesses in the US. Since 1992, $1,402 billion ($1.4 trillion) of FDI (90.0%) has gone to acquire existing US assets while only $156 billion in FDI has gone to establish new businesses in the US.
In 2005, FDI to acquire existing US assets worldwide rose by 9% (from $72.7 billion in 2004) while FDI to establish new business in the US fell by –44% (from $13.5 billion.)
Some theoretical academics and others still insist that today’s $2.2 billion daily current account deficits and the exchange strength of the US dollar is largely the result of the strong appeal of the US economy to foreign investors. However, the actual experience with FDI has been far different for many years. 
Charles W. McMillion, Ph.D.
President & Chief Economist
MBG Information Services
Washington, DC 20002-4928