Foreign Investment in the United States and Three Latin American Countries

July 22, 2013

Individuals and businesses in one country may transfer wealth to another country by investing in its business enterprises; this kind of wealth transfer is called foreign direct investment. Similarly, citizens of a given country may also put their money in another country's banks, which will in turn make loans to individuals and enterprises; this activity is known as indirect foreign investment. Yet another option is to buy bonds issued by a foreign government, says Sergio Daga, director of research at Politicas Publicas para la Libertad, in Bolivia, and a visiting senior policy analyst at the Heritage Foundation.

  • In a perfect world, wealthy nations would invest much of their capital in poorer nations, where capital is scarcer and therefore offers a higher rate of return.
  • However, rich countries typically invest in other rich countries.
  • This is because investors are reluctant to put money in poor countries with unstable governments, where they may never recoup their investment.
  • Widespread corruption is another deterrent to investment, as it is to economic activity in general.
  • In addition, many poorer countries impose controls on the flow of capital in and/or out of the country, called capital controls.

Among the factors that helped the United States grow from a small agricultural nation to an industrial giant, one factor, perhaps the most important, was an inflow of capital from Western Europe in general and from Britain in particular.

Foreign investment is still important to the U.S. economy. In fact, the United States is both the source and the recipient of more foreign direct investment than any other country in the world. Thus:

  • In 2011 the United States received a flow of foreign direct investment of nearly $227 billion, and Americans invested directly abroad almost $400 billion.
  • At the end of 2012, people in other countries held 48 percent of the government bonds sold to the public by the United States.

Everyone wins when investments create a growing economy. Despite some countries' fears that foreign investors will carry off much of their national wealth, leaving the local population poorer, there is probably no country in history from which foreigners have carried away more wealth than the United States. By that reasoning, Americans ought to be some of the poorest people in the world, rather than consistently maintaining one of the world's highest standards of living. Why have we achieved prosperity?  Because economic transactions and trade are not a zero-sum activity; they create wealth.

Source: Sergio Daga, "Foreign Investment in the United States and Three Latin American Countries," National Center for Policy Analysis, July 22, 2013.

 

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