Foreign investment history

Investments made in a country by a foreign investor, usually a corporation. Foreign investment differs from foreign trade, which is selling goods from a domestic base to foreign customers. In the case of foreign investment, a company invests money to produce and/or distribute goods overseas in order to be closer to the foreign market.

Foreign investment is divided into two types—direct and portfolio. Direct investment occurs when a foreign investor acquires tangible assets, or what is considered to be a dominant shareholding, in an American company. The size of the investment does not necessarily have to be a majority shareholding. Traditionally, a foreign investment in the United States has been considered to be any shareholding in an American company of 10 to 15 percent, but certainly less than a 51 percent majority holding. Exactly how much of a foreign investment in an American company constitutes foreign investment has changed periodically and traditionally is defined by the U.S. Department of Commerce.

Portfolio investment involves a foreign investor buying intangible assets in the United States, namely stocks, bonds, and other financial instruments, or holding copyrights and patents. Portfolio, or indirect, investment is considered to be the less stable of the two since foreign investors can liquidate their holdings and withdraw their capital from the markets at short notice. Direct investment, on the other hand, is assumed to be more stable since it represents a “brick and mortar” investment that is long-term in nature.

The American experience with foreign investment has fallen into two broad historical periods. From the 18th century to the end of World War I, the United States was a net importer of longterm capital. The traditional suppliers of funds were the Dutch and the British, along with other European countries. Private banking firms such as BARING BROTHERS and the House of ROTHSCHILD provided much-needed foreign investment during the 19th century, especially before the Civil War. American banks such as August Belmont & Co. and Drexel Morgan & Co. also helped bring in foreign investment, as did Drexel Morgan’s successor, J. P. Morgan & Co.

After World War I, the United States became a supplier of investment funds to the rest of the world, reversing its earlier reliance on foreign investment. The trend accelerated after World War II. Then in the 1970s, as the United States began experiencing balance of payment problems, the situation changed. In the late 1970s and 1980s, the Japanese became one of the largest foreign investors in the United States. European investors also supplied substantial funds, including the British, Germans, and Swiss. These traditional sources supplied money for both direct and portfolio investments, often on a large scale.

In the late 1970s and early 1980s, many foreign companies, notably Japanese, began opening operations in the United States to produce goods and sell them locally. Often these operations were prompted by changes in TARIFFS, especially in the case of automobiles. The Reagan administration urged Japanese auto manufacturers to agree to a voluntary quota on the number of compact autos sold each year in the United States. While they did agree, the agreement did not prohibit production within the United States, and, as a result, several Japanese companies opened manufacturing facilities to build the cars domestically.

A major accounting change for valuing overseas assets and liabilities in the early 1980s helped American firms operating abroad and softened the blow of major currency changes on the FOREIGN EXCHANGE MARKETs that could affect the value of those investments. American foreign investment has centered mostly on Britain and western Europe, but American investments are spread around the globe. Britain traditionally is the major recipient of American investment along with Canada. The United States remains the largest foreign investor in the world and has also attracted the largest amount of foreign investment from abroad. With the emergence of China and South Korea as major trading nations in the 1990s, both have become investors in American assets, notably Treasury securities and other indirect investments.

See also BELMONT, AUGUST.

Further reading

• Geisst, Charles R. Entrepot Capitalism: Foreign Investment and the American Dream in the Twentieth Century. New York: Praeger, 1992. 
• Graham, Edward M., and Paul Krugman. Foreign Direct Investment in the United States.Washington, D.C.: Institute for International Economics, 1989. 
• Wilkins, Mira. A History of Foreign Investment in the United States to 1914. Cambridge, Mass.: Harvard University Press, 1989.