Friday, October 6, 2017

Foreign Direct Investment into US Rising

Here's an interesting post by Timothy Taylor.

He notes that foreign direct investment into the US has recently spiked.  Here is a graph from his post.

That is interesting.  The US has a longstanding pattern of investing in high-return direct investment in foreign economies.  Foreign investors into the US tend to invest in low risk/low return debt.  This is actually the main source of our trade deficit.

Think of it this way.  Take $1 billion of US foreign direct investment earning 6% returns and $2 billion of foreign investment in the US earning 3% returns - $60 million each.  Let's say that earnings are reinvested in both cases, with similar returns.  Next year, US investors abroad will earn $3.6 billion additional returns and foreign investors in the US will earn $1.8 billion.

Foreign investors must invest an additional $60 billion into the US in order to keep up with the growing US foreign income.  If they don't, then US foreign income will continue to climb.  In order to get those additional $60 billion, they export us goods and services and then they send those dollars back to the US as investments.

This is basically what has been happening over the past 20 or 30 years.

So, this is an interesting development.  We should expect that foreign earnings on US investment will grow.  And, this should also moderate the trade deficit.  (I mean to state that as a fact, not as some sort of normative hope.  We shouldn't be that concerned one way or the other.)  And, Taylor mentions that these tend to be export-intensive investments.  In other words, the operations funded by these investments tend to produce US exports.

All in all, I think this is generally a good sign, if only because it is a sign, finally, of a return to more at-risk investments and a possible decline in the equity risk premium.

5 comments:

  1. http://www.esa.gov/sites/default/files/FDIUS2017update.pdf

    If you read the primary document, there are a couple of puzzles.

    So what country, by far, is the heaviest FDI investor in the U.S. 2010-2016?

    Mighty, mighty…Luxembourg.

    I am not sure what the charts mean exactly, but the largest "greenfield" FDI is in real estate, rentals and leasing.

    So, are we seeing a surge in property buyers from overseas, who route their money through Luxembourg?

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  2. The more I look at that primary document, the more curious it gets.

    About half of FDI comes from Luxembourg (the biggest), Switzerland, Netherlands, and UK. And UK literally has an asterisk, which means it includes Cayman Islands etc.

    A good bet is that most FDI into the U.S. is re-routed through Luxembourg et al. Is that money laundering? Flight capital from China? Who knows?

    Property investment is surging---that makes sense, as yields on low-risk investments, such as Treasuries have gotten so low as to make property very enticing,

    Maybe foreigners have developed a large enough beach-head in the US they know now how to JV with local partners and leverage up.

    Would you rather buy a $10 million portfolio of US Treasuries, or leverage up and acquire $50 million worth of upgradeable apartments in tight markets?

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    Replies
    1. The real estate connection is interesting. As with trade figures, though, I doubt that the individual source countries are a very meaningful metric.

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  3. https://www.yahoo.com/news/blackstone-simple-math-makes-us-bullish-housing-123344462.html

    this seems obvious…yet not that much commentary out there...

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