Foreign Direct Investment in the United States: Country Analysis

By Leopold, Greg; Maniam, Balasundram | Journal of Economics and Economic Education Research, January 1, 2006 | Go to article overview

Foreign Direct Investment in the United States: Country Analysis


Leopold, Greg, Maniam, Balasundram, Journal of Economics and Economic Education Research


ABSTRACT

Multinational corporations (MNCs) throughout the world must make critical business decisions in determining when and where to expand internationally. Foreign Direct Investment (FDI) refers to the investment in an asset(s) in a foreign country or market. The United States experienced a drastic increase in FDI throughout the 1980's and continues to expand in numerous industries and states. Firms must make several important decisions when undertaking a FDI including location, mode of entry, objectives of the FDI, and the degree of risk involved. The United States offers several positive characteristics for MNCs that will be explored throughout this paper. The purpose of this paper is to explore the factors that may lead a foreign firm to pursue FDI in the United States. Specific factors will be analyzed including the process firms undertake in choosing a location in the US, role of technology for a variety of industries, industry specific characteristics and risks involved.

INTRODUCTION

Since the beginning of the 1980 's, the United States has remained attractive to foreign investors and foreign firms interested in expanding their operations. Over the last two decades, the number of foreign firms conducting business within the US has nearly tripled (Grosse and Trevino, 1996). This attractiveness is motivated by factors such as the large market size of the US, potential lower wages (depending on the home market of the firm), avoidance of import trade barriers and others. FDI serves as a foundation for continuous improvements in economic development both globally and domestically in the United States. The underlying goal of any FDI is to produce a profit utilizing efficient and effective resources. FDI is normally conducted when a firm has developed a product of differentiation enabling the firm to establish a sustainable competitive advantage (Chung and Alcacer, 2002). The United States experienced dramatic growth in foreign direct investments (FDI) during the 1980's and continues to provide a substantial percentage of capital into the US market. There are several areas of interest in regards to FDI in the US.

Foreign firms that are wholly or majority owned US subsidiaries comprise the vast maj ority of FDI in the US (Graham, 1991). Those countries that are heavily industrialized provide the largest percentage of FDI in the US throughout the past several decades (Grosse and Trevino, 1996). In 2002, the United Kingdom and France had the largest number of total outlays in the US, with $12.9 billion and $15.6 billion, respectively (Anderson, 2001).

When it comes to foreign direct investment in the US, firms are faced with several critical decisions, which will ultimately determine the success or failure of the investment. Firms may undertake foreign investment for several reasons, including the low cost factors of production, technological advancements or advantages, economies of scale in the production processes, and many others. The United States has experienced fluctuations in the amount of FDI expanding into the country. The attractiveness of the US market in terms of size and stability are potentially the two leading indicators of foreign investments. As export barriers evolve in the US, foreign firms recognize the benefits of investing in the US.

What factors do foreign corporations analyze when determining a location for the US affiliate? There are a wide range of variables that comprise the decision in determining the state location of the US operation. These factors will be explored throughout this paper and will assist in developing a location decision methodology. The location decision often varies by the type of industry in which the corporation will be involved.

Domestic firms operating in the US are faced with increased competition from foreign corporations and must identify competencies that establish competitive advantages. These firms are demanding stricter regulations that could potentially restrict foreign firms from entering the US market. …

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