The rise in global economic activity over the past several decades has brought about a wave of international investments from US companies. Between 1982 and 2021, US direct investments abroad grew from $580 billion to more than $6.4 trillion dollars.
More US companies are investing abroad to take advantage of tax breaks, to get access to foreign markets, and to lower labor and manufacturing costs.
More than 60% of these investments go into European countries. And the top five countries account for about half of all US investments abroad.
About half of all total foreign investments abroad goes to holding companies, which makes it easier for companies to reduce their tax obligations.
What is direct investment abroad?
Foreign direct investment is when one business directly invests in another business based in another country. This can be accomplished through buying 10% or more of the foreign company or purchasing existing facilities. It can also be done by establishing the business itself in a foreign country through new facilities.[1]
Unlike investing in a foreign company’s stock, directly investing abroad reflects a lasting interest in foreign markets by investing in physical assets rather than financial assets.
Why do US companies choose to invest abroad?
US direct investment abroad provides domestic companies many opportunities to expand their business and take advantage of favorable circumstances in foreign countries. These include lower rates of taxation, closer access to markets, and lower wages.
Domestic businesses may choose to move profits and business into foreign countries with tax incentives. Historically, countries such as Ireland have had corporate tax rates lower than those in the US. Companies typically do this by moving profits into foreign subsidiaries located in other countries.[2] These can include holding companies, finance companies, or other arrangements.
The Bureau of Economic Analysis (BEA) defines a holding company as a business holding securities and other financial assets of companies and enterprises for the purpose of owning a controlling interest in them or influencing their management decisions. Holding companies enjoy protection from losses if a subsidiary company goes bankrupt.
As of 2016, the IRS estimated that approximately $1.3 trillion in profits were held by foreign subsidiaries of US finance, insurance, and holding companies through direct investment abroad. By moving these profits into foreign countries, these companies avoided taxation in the US.[3] This is an example of profit shifting.
US companies also choose to invest in foreign countries in which they want to build supply and distribution chains. This can involve gaining access to resources not available in the US or establishing an outlet to produce and sell goods in other countries.
For example, US-based automakers have assembly plants all over the world so they have direct access to markets where they can sell their products. This can be a more cost-effective option than producing goods in the US and exporting them abroad.
Developing countries have lower wages compared to US employees in manufacturing sectors. For example, according to a 2013 BEA report, the average hourly wage for a Chinese manufacturing worker between 2002 to 2009 was less than 10% of the average hourly wage of a US manufacturing worker. This helps explain why US investment into the manufacturing sector in China grew from $12 billion in 2002 to $54 billion in 2009. This trend is similar across many developing countries.
Other jobs, such as those in information technology or customer service, are vulnerable to foreign outsourcing.
Are there any patterns in direct investments abroad?
Of the $6.4 trillion invested abroad since 2021, eight industrial sectors account for $6.3 trillion, or 97.5% of all total assets. The largest share of assets went to holding companies at $3 trillion.
Other large industrial categories include finance at 16%, and manufacturing at 14%.
Since the 1980s, direct investment abroad from the US has grown rapidly. In 1982, US companies directly invested $580 billion abroad. By 2021, direct foreign investments rose to $6.4 trillion.
Most direct investment went to European countries (61%), followed by Latin America (16%), Asian and Pacific countries (15%), Canada (6%), the Middle East (1%), and Africa (1%).
Of the five countries with the largest foreign direct investments from the US, four are European. The top five countries are the United Kingdom, the Netherlands, Luxemburg, Ireland, and Canada.
In 2021, holding companies made up 60% of direct investments to Ireland, 80% to the Netherlands, and 90% to Luxemburg. Holding, finance, and insurance companies made up 70% of foreign direct investment to the United Kingdom. Direct investments to Canada were much more diversified.
Over the last 20 years, investments across all major industries have grown.
Between 2001 and 2021, the information industry, which includes publishing, telecommunications, and data processing companies, has had the fastest growth rate in foreign investments, followed by holding companies.
Investments into information companies abroad have more than quadrupled since 2001, with total assets increasing from $43 billion in 2001 to $285 billion in 2021. Holding companies have grown approximately 3.5 times since 2001, with total assets increasing from $679 billion in 2001 to over $3 trillion in 2021.
[1] These are categorized as brownfield and greenfield investments, respectively.
[2] This relative comparison has changed with some provisions included in the 2017 Tax Cuts and Jobs Act (TCJA), which, among other things, lowered the US corporate tax rate from 35% to 21%.
[3] This report accounts for the time period between 1986 to 2016.
