High Foreign Investment in the U.S. — Will It Last?

Foreign investment in the United States has surged over the past few years, driven by various economic and political factors. According to the International Monetary Fund, the U.S. received nearly one-third of all global foreign investment from 2021 to 2023, compared to an average of 18% before the pandemic. This boost is especially notable given concerns about the stability of the U.S. dollar as a global currency.

In contrast, China saw a dramatic drop in foreign investment, accounting for only 3% from 2021 to 2023, down from 7% in the previous decade. Other emerging economies, traditionally dependent on foreign capital, also saw declines as the U.S. took a larger share of global investment, strengthening its economy but exacerbating capital shortfalls elsewhere.

Types of Foreign Investment: Portfolio and Direct

Foreign investment generally falls into two main categories: foreign portfolio investment (FPI) and foreign direct investment (FDI). FPI refers to the purchase of securities, such as stocks and bonds, while FDI involves a direct ownership stake in businesses or new ventures, indicating a stronger commitment to operate within the U.S. economy.

Foreign Portfolio Investment: Securities

As of June 30, 2023, foreign portfolio holdings in U.S. securities reached $26.9 trillion, marking an increase of roughly $2 trillion from the previous year. The appeal of U.S. securities is partly due to strong stock market performance and the relatively high yields on U.S. Treasury bonds and other fixed-income assets. These returns have attracted investors from around the world, even as interest rates begin to stabilize.

The top holders of U.S. securities include investors from the United Kingdom, Japan, the Cayman Islands, Luxembourg, and Canada. The Cayman Islands and Luxembourg stand out as popular locations for private equity funds due to favorable tax and regulatory environments, making them hubs for foreign capital.

China ranks seventh among U.S. portfolio investors, with substantial holdings in U.S. Treasury securities. Concerns have been raised about China’s influence on U.S. debt markets, given its large position in U.S. Treasuries. However, any substantial reduction in holdings could harm China's own economy, as it would likely cause the dollar to depreciate against the yuan, reducing the competitiveness of Chinese exports.

Foreign Direct Investment: Ownership and New Ventures

Unlike portfolio investments, FDI represents a more stable, long-term commitment to the U.S. economy. In 2023, FDI totaled $5.39 trillion, reflecting a $227 billion increase from the previous year. The U.S. Department of Commerce classifies FDI into three areas: acquisitions, new business establishments, and business expansion.

Notably, greenfield investments — establishing new businesses or facilities — are considered the most valuable for the U.S. economy due to their potential to create jobs and boost production capacity. However, they account for only about 5% of FDI on average, underscoring that most foreign investment is still focused on acquisitions rather than new enterprises.

About 40% of FDI in the U.S. goes to the manufacturing sector, reflecting the government's efforts to revitalize American industry. Recent legislation like the 2022 Inflation Reduction Act, Infrastructure Investment and Jobs Act, and the CHIPS and Science Act have created incentives for both domestic and foreign-funded projects in manufacturing. For instance, a Taiwan-based semiconductor company has committed to investing over $65 billion in new plants in Phoenix, Arizona, bolstered by $6.6 billion in federal funding — marking the largest greenfield investment in U.S. history.

Who Is Investing? Major FDI Sources

The Netherlands, Japan, Canada, and the United Kingdom are among the top sources of FDI in the United States. Notably, the Netherlands ranks highly due to the presence of many holding companies rather than direct business activities. By ultimate beneficial ownership, Japan leads, followed by Canada, Germany, and the U.K. China, although a significant player globally, remains a minor participant in U.S. FDI, reflecting both political tensions and a strategic focus on domestic development.

While the U.S. places minimal restrictions on foreign investment in securities, larger transactions must be reported by U.S. brokers, and certain direct investments are subject to national security review by the Committee on Foreign Investment in the United States (CFIUS). This ensures that critical U.S. industries remain protected from undue foreign influence.

Challenges to Continued Investment

Looking forward, several factors may impact foreign investment in the U.S. A key factor is the U.S. Federal Reserve’s interest rate policy. As the Fed begins to lower rates, the appeal of U.S. fixed-income investments may decline, potentially reducing portfolio investment flows. However, the U.S. stock market’s resilience could continue to draw foreign capital, while government initiatives aimed at supporting manufacturing could sustain FDI in the sector.

Nonetheless, persistent fiscal deficits, shifting trade policies, and potential political disruptions could pose risks to the U.S. investment climate. Mounting national debt may erode confidence in the U.S. economy’s long-term stability, while political changes might lead to a more protectionist stance, complicating foreign transactions.

Future Prospects: Sustained Appeal or Waning Interest?

For now, the U.S. remains a magnet for global investment due to its robust economy, technological prowess, and relative political stability. But sustaining high levels of foreign investment may require careful management of national fiscal policies, continued support for open markets, and prudent foreign relations.