This report was principally prepared by:

Project Leader

Laura Bloodgood

laura.bloodgood@usitc.gov

Office of Industries

Ed Cappuccilli, William Chadwick, Roger Corey, Christopher Mapes,

and Robert L. Randall

Office of Economics

Justino de la Cruz and Michael Ferrantino

With special assistance from

Lynette Gabourel and Cynthia Payne

Office of Industries

Karen Laney--Cummings, Director
i

Executive Summary

This study examines trends in inbound and outbound U.S. direct investment during 1999-

2004. The United States was both the largest source and largest destination of FDI in the

world during 1999-2004. Outbound U.S. direct investment abroad (USDIA) has consistently

been larger than foreign direct investment in the United States (FDIUS). In 2004, the USDIA

position was $2.1 trillion, compared with an FDIUS position of $1.5 trillion. That trend

seems likely to continue, as the USDIA position recorded average annual growth of 11.2

percent during the five year period under review, compared with 9.8 percent average annual

growth for the FDIUS position. 

For both inbound and outbound investment, the European Union and Japan accounted for

the majority of total FDI stock, together accounting for 51 percent of USDIA position and

73 percent of FDIUS position. U.S. direct investment stock in China reached $15.4 billion

in 2004, or 0.7 percent of total USDIA stock. USDIA in China recorded average annual

growth of 10 percent during 1999-2004, slightly below the average for all countries, but

jumped by 33 percent during 2003-2004 alone. 

By industry, the service sector accounted for 74 percent of USDIA position in 2004,

compared with 21 percent for manufacturing, 5 percent for mining, and a negligible amount

for agriculture. Finance and insurance and holding companies comprised the largest shares

of service sector investment. In the manufacturing sector, the chemicals industry holds the

largest share, with slightly less than half of investment in chemicals directed toward the

pharmaceuticals segment of the industry. For FDIUS, services comprised 63 percent of the

total investment position, compared with 34 percent in manufacturing and 3 percent in

mining. In the service sector, the largest recipients of FDIUS were wholesale trade, insurance

and banking. As for USDIA, the chemicals industry, and the pharmaceuticals segment in

particular, received the greatest share of foreign investment in the manufacturing sector.

Both inbound and outbound FDI are closely tied to export and import trends. U.S. and

foreign firms choose whether to supply markets outside their home countries by exporting

or by establishing affiliates and producing goods and services locally in those markets.

Affiliates both in the United States and abroad also choose whether to establish local supply

chains or to import needed goods and services inputs. In the case of both U.S. deliveries of

goods and services to foreign customers, and foreign deliveries to U.S. customers, affiliate

sales are a much higher proportion of total deliveries than cross-border exports or imports.

Intrafirm exports were 30 percent of total U.S. exports in 2003, while intrafirm imports were

36 percent of total U.S. imports. 

More detailed coverage of the broad trends noted above is presented in chapters 2 through

4 of the study. In addition, chapters 5 through 8 illustrate the incentives for USDIA and

FDIUS in the mining, agriculture, manufacturing, and service sectors, through detailed

analysis of FDI in the copper mining, salmon farming, chemicals, and computer services

industries. Chapter 9 shows that FDI by U.S. multinational companies (MNCs) contributes

to economic growth in foreign countries by contributing to overall capital formation and by

generating higher wages than those paid by many local firms. Chapter 10 assesses the

phenomenon of offshoring of services. The study finds that the liberalization of international

trade in services, combined with changes to legal and regulatory systems affecting FDI in

many countries, have created significant incentives for the offshoring of services. This
ii

offshoring has a positive effect on labor productivity in the home country, and a negative

effect on home country employment. However, job losses are small compared to those that

occur during a normal business cycle. 
iii

CONTENTS

Page 

Executive Summary .................................................. i

Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1

Purpose and scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1

Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

Direct investment defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5

Direct investment data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5

Chapter 2: U.S. Direct Investment Abroad . . . . . . . . . . . . . . . . . . . 2-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1

Which countries have attracted the most U.S. direct investment abroad 

(USDIA)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1

What proportion of U.S. outbound investment stock is in high-income vs. lowand middle-income countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5

How rapidly has USDIA in low- and middle-income countries grown, compared

to USDIA in high-income countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6

What is the U.S. direct investment position in Canada and Mexico? How does the

growth of USDIA in NAFTA partners compare to the growth rate of total

U.S. outbound investment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-7

What is the U.S. direct investment position in China? How does the trend in China

compare to trends in other countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-10

In which countries did U.S.-owned foreign affiliates record the highest sales? 

In which countries are foreign affiliate sales experiencing the most rapid 

growth? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-10

Have U.S. direct investors abroad focused on the primary, manufacturing or

service sectors? How fast has U.S. direct investment in these sectors grown? . . . . 2-13

On which industries have U.S. direct investors focused? . . . . . . . . . . . . . . . . . . . . . . . 2-16

For which industries do U.S.-owned foreign affiliates record the highest sales? Are

sales by foreign affiliates closely correlated with employment, wages, assets,

and investment stock? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-20

In which industries do U.S.-owned foreign affiliates employ the greatest number

of persons abroad? How are these employees distributed by country? . . . . . . . . . . 2-20

How does the compensation of foreign employees of U.S.-owned foreign affiliates

compare to compensation earned by workers in the U.S. market? . . . . . . . . . . . . . 2-26

How do the foreign operations of U.S. parent companies compare to the foreign

operations of other multinational companies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-29
iv

CONTENTS–Continued

Page 

Chapter 3: Foreign Direct Investment in the United

States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1

Which countries have the largest direct investment positions in the United States? . . . 3-1

What is the extent of FDIUS from Canada and Mexico? How does the growth of 

FDIUS from the NAFTA countries compare to the growth rate of total U.S.

inbound investment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

What is the extent of FDIUS from low- and middle-income countries? . . . . . . . . . . . . 3-6

How is FDIUS distributed by state? Within each state, which are the largest

industries for foreign direct investment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-7

Which countries’ affiliates have the most sales in the United States? How are these

sales divided by industry? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9

Is there a greater level of FDIUS in services or goods? How do the growth rates

compare in the two sectors? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9

In which industries is FDIUS stock the largest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-14

In which U.S. industries have FDIUS flows been largest in recent years? . . . . . . . . . . 3-17

Which countries’ affiliates employ the greatest number of people in the

United States? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-21

In which industries do U.S. affiliates employ the greatest number of people?

In which industry do U.S. affiliates account for the greatest share

of total employment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-23

How does the compensation of employees of U.S. affiliates compare to overall

U.S. employee compensation by industry? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-25

Which industries have the highest sales by U.S. affiliates? . . . . . . . . . . . . . . . . . . . . . . 3-27

How did the gross product of U.S. affiliates compare to the total U.S. GDP

during 1995-2004? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-30

Chapter 4: Foreign Direct Investment and Cross-border

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1

U.S. exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1

What is the predominant mode of delivering U.S. goods and services to foreign

customers, cross-border exports or foreign affiliate sales? . . . . . . . . . . . . . . . . . . . 4-1

How did the growth of U.S. intrafirm exports compare to the growth of total U.S.

exports during 1999-2003? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-2

Which countries are the most important destinations for intrafirm exports? . . . . . . . . 4-4

To what extent do foreign affiliates incorporate U.S.-made goods and services in 

their output? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5

How did the mix of goods and services in U.S. intrafirm exports change during

1999-2003? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-6
v

CONTENTS–Continued

Page 

Chapter 4: Foreign Direct Investment and Cross-border 

Trade–Continued

Which industries within the goods and services sectors account for the largest shares 

of intrafirm exports? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-7

What is the role of intellectual property (royalties and license fees) in 

intrafirm U.S. exports? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-8

Did U.S. parents or U.S. affiliates of foreign parents account for more U.S.

intrafirm exports during 1999-2003? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-9

U.S. imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-9

What is the predominant mode of delivering foreign goods and services to U.S.

customers, cross-border imports or U.S. affiliate sales? . . . . . . . . . . . . . . . . . . . . . 4-9

How did the growth of U.S. intrafirm imports compare to the growth of total U.S. 

imports during 1999-2003? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10

In which countries did most intrafirm goods and services imports originate 

during 1999-2003? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-11

To what extent do foreign-owned U.S. affiliates incorporate foreign-made goods

and services in their output? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-13

What was the role of intellectual property (royalties and licenses fees) in intrafirm

U.S. imports during 1999-2004? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-14

How did the mix of goods and services in U.S. intrafirm imports change during

1999-2003? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-14

Which industries within the goods and services sectors account for the largest

shares of intrafirm imports? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-14

Chapter 5: Copper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1

Global copper market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1

Competitive situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-2

Global investment mechanisms and timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6

U.S. role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-8

Incentives to new investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-10

Disincentives to new investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-11

U.S. direct investment abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-13

Foreign direct investment in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-14
vi

CONTENTS–Continued

Page 

Chapter 6: Whole Farmed Salmon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1

The farmed salmon industry in the U.S. economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1

The global market and major investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-4

Major market actors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-4

Investment strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-6

U.S. direct investment abroad and foreign direct investment in the United States . . . . . . . . 6-6

Direct investment and cross-border trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-9

Chapter 7: Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1

U.S. chemical industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-2

The global market and major investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-2

U.S. direct investment abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-4

Foreign direct investment in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-7

Direct investment and cross-border trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-7

Chapter 8: Computer Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1

The computer services industry in the U.S. economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1

Global market & major investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-2

U.S. direct investment abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-5

Foreign direct investment in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-7

Chapter 9: Effects of Foreign Direct Investment on

Host-country Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1

Effects on capital formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-2

Wages in U.S. manufacturing affiliates abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-7

Effects on economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-9
vii

CONTENTS–Continued

Page 

Chapter 10: Offshoring of Services and Foreign Direct

Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1

Summary of key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1

Foreign direct investment and trade in services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-2

Offshoring of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-5

Incentives for services offshoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-8

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1

Box

5-1. Mine development: Mid-tier mining companies are integral to the development of

new resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-7

Figures

2-1. USDIA: Direct investment position, by country, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2

2-2. USDIA: Direct investment position, by country income level, 2004 . . . . . . . . . . . . . . . . . . 2-6

2-3. USDIA: Direct investment position, top 10 low-and middle-income countries, 2004 . . . . . 2-7

2-4. USDIA: Direct investment position, NAFTA partners vs. rest of the world, 2004 . . . . . . . 2-8

2-5. USDIA: Direct investment outflows to China, 1999-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 2-11

2-6. USDIA: Direct investment outflows to China, Japan and Korea, 1999-2004 . . . . . . . . . . . 2-11

2-7. USDIA: Foreign affiliate sales, by country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13

2-8. USDIA: Direct investment position, by sector, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-14

2-9. USDIA: Assets of foreign affiliates, by sector, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-16

2-10. USDIA: Direct investment position in service industries, 2004 . . . . . . . . . . . . . . . . . . . . . . 2-17

2-11. USDIA: Direct investment position in the financial services industry, 2004 . . . . . . . . . . . . 2-18

2-12. USDIA: Direct investment position in manufacturing industries, 2004 . . . . . . . . . . . . . . . . 2-18

2-13. USDIA: Direct investment position in the chemicals industry, by country, 2004 . . . . . . . . 2-19

2-14. USDIA: Foreign affiliate sales, by selected industry, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 2-22

2-15. USDIA: Foreign affiliate employment by sector, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-24

2-16. USDIA: Foreign affiliate employment in manufacturing industries, 2003 . . . . . . . . . . . . . . 2-25

2-17. USDIA: Foreign affiliate employment in service industries, 2003 . . . . . . . . . . . . . . . . . . . . 2-26

2-18. USDIA: Foreign affiliate employment, by country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . 2-29

3-1. FDIUS: Direct investment position, 1999-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

3-2. FDIUS: Direct investment position, by country, 1999 and 2004 . . . . . . . . . . . . . . . . . . . . . 3-4

3-3. FDIUS: Direct investment position, Canada and Mexico, 1999-2004 . . . . . . . . . . . . . . . . . 3-6
viii

CONTENTS–Continued

Page

Figures–Continued

3-4. FDIUS: Direct investment position, low- and middle-income countries, by region, 2004 . . 3-7

3-5. FDIUS: Sales by U.S. affiliates, by country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-11

3-6. FDIUS: Direct investment position, by sector, 1999-2004 . . . . . . . . . . . . . . . . . . . . . . . . . 3-14

3-7. FDIUS: Direct investment position, by share of services and manufacturing sectors,

 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-16

3-8. FDIUS inflows by sector, 1999-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-18

3-9. FDIUS capital inflows from leading countries, by industry, 1999-2004 . . . . . . . . . . . . . . . 3-21

3-10. FDIUS: Employment by U.S. affiliates, by country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . 3-23

3-11. FDIUS: Employment by U.S. affiliates, by sector, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-25

3-12. FDIUS: Sales by U.S. affiliates, by sector, 1999-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-28

4-1. U.S. parents’ exports of goods to majority-owned foreign affiliates, by country, 2003 . . . . 4-5

4-2. U.S. parents’ receipts of royalties and license fees from foreign affiliates, by country, 

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-6

4-3. Intrafirm exports as a share of total exports of goods and services, 1993-2003 . . . . . . . . . . 4-97

4-4. U.S. exports of goods shipped by U.S. parents to foreign majority-owned affiliates, 

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-8

4-5. U.S. majority-owned affiliates’ intrafirm imports of goods, by country, 2003 . . . . . . . . . . 4-12

4-6. U.S. parents’ intrafirm imports of goods from majority-owned foreign affiliates, by

country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-12

4-7. U.S. intrafirm imports of services, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-13

4-8. U.S. parents’ imports of goods from foreign affiliates, by industry of foreign affiliate,

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-15

4-9. U.S. majority-owned affiliates’ imports of goods from foreign parents, by industry 

of U.S. affiliate, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-16

5-1. Copper: global inventory versus price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3

6-1. Farmed salmon: U.S. production and exports, 1998-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 6-3

6-2. Farmed salmon: U.S. consumption and imports, 1998-2004 . . . . . . . . . . . . . . . . . . . . . . . . 6-3

6-3 Farmed salmon: Production by major producers, 1998-2003 . . . . . . . . . . . . . . . . . . . . . . . . 6-5

6-4. Animal production: Foreign direct investment stock, 2000-2004 . . . . . . . . . . . . . . . . . . . . 6-8

8-1. USDIA and FDIUS: Direct investment position, computer services, 1997-2004 . . . . . . . . . 8-3

8-2. Computer services mergers and acquisitions, 1999-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-3

9-1. Ratio of wages and salaries per employee in manufacturing paid by U.S. affiliates 

abroad to wages and salaries paid by all manufacturing firms, by country . . . . . . . . . . 9-9

10-1. U.S. trade in services, 1986-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-4

10-2. U.S. trade balance in goods and services, 1986-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-4

10-3. Fragmentation and service links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-10
ix

CONTENTS–Continued

Page 

Tables

1-1. The world’s top 25 non-financial MNCs, ranked by foreign assets, 2003 . . . . . . . . . . . . . . 1-3

1-2. The world’s top 10 financial MNCs, ranked by foreign assets, 2003 . . . . . . . . . . . . . . . . . . 1-4

1-3. Majority-owned affiliates as a share of all affiliates, selected indicators, 2003 . . . . . . . . . . 1-7

2-1. USDIA: Direct investment position on a historical-cost basis, by country, 1999 

and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3

2-2. USDIA: Direct investment position in Canada, by industry, 1999 and 2004 . . . . . . . . . . . . 2-9

2-3. USDIA: Direct investment position in Mexico, by industry, 1999 and 2004 . . . . . . . . . . . . 2-9

2-4. USDIA: Foreign affiliate sales, by country, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 2-12

2-5. USDIA: Direct investment position on a historical-cost basis, by industry, 1999 

and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-15

2-6. USDIA: Foreign affiliate sales, by industry, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . 2-21

2-7. USDIA: Correlation of major indicators, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-22

2-8. USDIA: Employment by foreign affiliates, by industry, 1999 and 2003 . . . . . . . . . . . . . . . 2-23

2-9. USDIA: Employment by foreign affiliates, by country, 1999 and 2003 . . . . . . . . . . . . . . . 2-27

2-10. USDIA: Annual compensation per employee, U.S.-owned foreign affiliates vs. U.S. 

employees, by industry, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-28

2-11. Foreign sales by U.S. and foreign parents, selected industries, 2003 . . . . . . . . . . . . . . . . . . 2-30

3-1. FDIUS: Direct investment position on a historical-cost basis, by country, 1999

and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4

3-2. FDIUS: North America Free Trade Agreement (NAFTA) countries: Indicators of U.S. 

affiliate operations, 2003 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-7

3-3. FDIUS: Property, plant, and equipment (PPE) and employment of U.S. majority-owned 

affiliates, selected states by industry, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8

3-4. FDIUS: Property, plant, and equipment (PPE) and employment by U.S. affiliates, by state, 

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10

3-5. FDIUS: Sales by U.S. affiliates, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-12

3-6. FDIUS: Direct investment position on a historical-cost basis, by industry, 1999 and 

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-13

3-7. FDIUS: Assets of U.S. affiliates, by industry, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . 3-15

3-8. FDIUS: Capital inflows (outflows) by sector and selected industry, 1999-2004 . . . . . . . . . 3-19

3-9. FDIUS: Capital inflows from leading countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-20

3-10. FDIUS: Employment by U.S. affiliates, by country, 1999 and 2003 . . . . . . . . . . . . . . . . . . 3-22

3-11. FDIUS: Employment by U.S. affiliates, and employment by U.S. affiliates as percentage 

of U.S. industry total, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-24

3-12. FDIUS: Annual compensation per employee (wages plus benefits) for U.S. affiliates,

by industry, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-26
x

CONTENTS–Continued

Page 

Tables–Continued

3-13. FDIUS: Correlation of annual compensation rates with other indicators, by industry, 

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-28

3-14. FDIUS: Sales by U.S. affiliates, by industry, 1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . 3-29

3-15. FDIUS: Gross product of U.S. affiliates vs. U.S. private industry GDP, 2003 . . . . . . . . . . 3-31

4-1. Foreign affiliate sales as a share of total deliveries of U.S. goods to foreign customers, 

by industry, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-3

4-2. Foreign affiliate sales as a share of total deliveries of U.S. goods and services to

foreign customers, by country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-3

4-3. Intrafirm exports as a component of total U.S. exports, 1999 and 2003 . . . . . . . . . . . . . . . . 4-4

4-4. U.S. affiliate sales as a share of total deliveries of foreign goods and services to U.S.

customers, by country, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10

4-5. Intrafirm imports as a component of total U.S. imports, 1999 and 2003 . . . . . . . . . . . . . . . 4-11

5-1. Copper production, trade, and consumption, refined and unrefined, 2004 . . . . . . . . . . . . . . 5-4

5-2. Top ten world copper manufacturers, mining and refined copper production, 2004 . . . . . . 5-5

5-3. Mining: Reinvested earnings as a share of total capital outflows . . . . . . . . . . . . . . . . . . . . . 5-9

5-4. Mining and refining in the U.S. economy, excluding oil and gas, 2004 . . . . . . . . . . . . . . . 5-9

6-1. Fisheries in the U.S. economy, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2

6-2. Fisheries: Largest companies in the global market, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-5

6-3. Farmed salmon: Ownership structure in the U.S. industry, 2004 . . . . . . . . . . . . . . . . . . . . . 6-8

6-4. U.S. farmed salmon trade with Canada, 2000-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-11

7-1. U.S. chemical industry: Shipments, employment, wages, exports, imports, FDIUS, and

USDIA, 1999-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-3

7-2. Top global chemical companies, by sales, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-4

7-3. USDIA: Direct investment in chemicals on a historical-cost basis, selected countries, 

1999 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-5

7-4. USDIA: Direct investment, by chemical sub-sectors, all countries, 1999 and 2004 . . . . . . 7-6

7-5. FDIUS: Direct investment in the chemical industry on a historical-cost basis, 

selected countries, 1999 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8

7-6. USDIA: U.S. imports of chemicals shipped by foreign affiliates, by major country, 1999 

and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8

7-7. USDIA: U. S. Exports of chemicals shipped to foreign affiliates, by major country,

1999 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9

8-1. Computer services in the U.S. economy, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-6

8-2. Computer services: Largest companies in the global market, 2005 . . . . . . . . . . . . . . . . . . . 8-6

9-1. USDIA: Relative importance of capital outflows, 2000-2003 . . . . . . . . . . . . . . . . . . . . . . . 9-3

9-2. Wages and salaries per employee in manufacturing, by year . . . . . . . . . . . . . . . . . . . . . . . . 9-8

10-1. Definitions of export-oriented FDI projects related to offshore services . . . . . . . . . . . . . . . 10-7
 1

 For an extensive review of the determinants of direct investment, see “Examination of U.S. Inbound and

Outbound Direct Investment,” Staff Research Study No. 26, Pub. No. 3383, Jan. 2001, chapter 2.

 2

 In an acquisition, an MNC acquires an equity stake in an existing firm outside its home country. In a

greenfield investment, an MNC starts a new company as a branch or a subsidiary by transferring assets from

its home country. (Check BEA definitions). 

 3

 UNCTAD, WIR 2005, p. 10.

 4

 USDOC, BEA, Survey of Current Business, June 2005, p. 30.

 5

 UNCTAD, World Investment Report 2005, p. 267.

1-1

CHAPTER 1

Introduction

Purpose and Scope

Foreign direct investment (FDI), and the enterprises established or acquired as a consequence

of such investment, increasingly shapes global commerce. This report addresses questions

regarding the extent of U.S. direct investment abroad (USDIA) and foreign direct

investment in the United States (FDIUS), the nature of affiliate operations in the U.S. and

foreign markets, and the interrelationship between trade and investment. 

Multinational corporations (MNCs) are responsible for the majority of FDI through

investment in corporate affiliates outside their home countries. MNCs may establish a

commercial presence overseas for a variety of reasons, including better access to foreign

markets, lower labor costs, access to resources or to a labor force with particular skills, and

the ability to more closely monitor proprietary information and manufacturing processes.

The benefits of direct investment for host countries include greater access to technology, job

creation, and capital with which to fuel economic growth, pursue social objectives, and offset

temporary trade imbalances.1

 MNCs can invest through two modes of entry: acquisitions or

greenfield investments.2

 Acquisitions generally make up the largest share of new FDI in

developed countries. Greenfield investments are more prevalent in developing countries,

where there are fewer established firms that make attractive takeover targets.3

 In the United

States, for example, an average of 86 percent of all new FDI outlays during 1992-2004 were

in the form of acquisitions, with the level reaching 96 percent during 1999 and 2000, due to

the large number of mergers and acquisitions, especially in high-technology industries.4

 

Foreign operations account for a significant percentage of many MNCs’ business. As of

2003, for example, U.S.-based General Electric (GE), was ranked as the world’s top nonfinancial MNC in terms of total foreign assets ($258.9 billion) by the United Nations

Conference on Trade and Development (UNCTAD), with 40 percent of its sales, 40 percent

of its assets, and 49 percent of its employees outside the United States. U.K.-based Vodafone

and U.S.-based Ford Motor Company were ranked second and third, respectively. Of the top

100 non-financial MNCs in 2003, as ranked by UNCTAD, 24 were based in the United

States, including 6 of the top 25.5

 Tables 1-1 and 1-2, respectively, present details regarding

the international operations of the world’s 25 largest non-financial MNCs and 10 largest

financial MNCs.
 6

 UNCTAD, World Investment Report 2005, p. 14.

 7

 By comparison, outbound direct investment flows from the United Kingdom ranked second, totaling

$65.4 billion. The United Kingdom also ranked second in terms of inbound direct investment flows in 2004,

with a total of $78.4 billion, followed by China ($60.6 billion) and Luxembourg ($57.0 billion). World

Investment Report 2005, pp. 303-307.

 8

 See chapter 10 for additional discussion of how FDI affects host countries.

 9

 Both channels of delivery (affiliate transactions and cross-border exports), may be involved in a single

transaction. For instance, if a U.S. affiliate sells goods or services abroad and its foreign parent performs

some of the work integral to that sale and subsequently bills the affiliate, the sales revenue would be

recorded as an affiliate transaction, but the exchange between the affiliate and its parent would be recorded in

the U.S. balance of payments as a cross-border import.

 10 USDOC, Bureau of Economic Analysis (BEA), Foreign Direct Investment in the United States:

Selected Financial and Operating Data of Affiliates, by Industry of Affiliate, 2003, found at

http://bea.doc.gov/, retrieved Nov. 21, 2005.

 11 USDOC, BEA, Survey of Current Business, July 2005, p. 83

 12 USDOC, BEA, Survey of Current Business, Aug. 2005, p. 198.

 13 Ibid., p. 200.

 14 USDOC, BEA, Selected Data for Nonbank Foreign Affiliates and Nonbank U.S. Parents in All

Industries, 2003, found at http://bea.doc.gov/, retrieved Nov. 21, 2005.

 15 USDOC, BEA, Survey of Current Business, July 2005, p. 83.

1-2

The operations of foreign affiliates of MNCs, as measured by affiliate sales, are now more

extensive than the level of global cross-border trade. In 2004, according to UNCTAD

estimates, global sales by foreign affiliates reached $18.7 trillion, compared with global

cross-border goods and services exports of $11.1 trillion. Foreign affiliates employed an

estimated 57.4 million workers; affiliates’ global gross product (value added) was estimated

at $3.9 trillion the same year, equal to 10 percent of global gross domestic product (GDP)

($40.7 trillion).6

The United States consistently has been the world’s largest source and recipient of FDI. In

2004, U.S. FDI outflows measured $229.3 billion, and inflows measured $95.9 billion.7

These capital flows and the operations of affiliate companies that result from such

investment have pronounced effects on the economies of the United States and other FDI

host countries.8

 Foreign firms are more likely to supply goods and services to U.S. customers

through their U.S.-based affiliates than they are to export to the United States.9

 In 2003, sales

by foreign-owned affiliates in the U.S. market totaled $2.3 trillion,10

whereas U.S. cross-border imports of goods and services totaled $1.5

trillion.11 In 2003, foreign-owned affiliates in the U.S. market accounted

for 5.8 percent of U.S. private-sector GDP, 4.7 percent of private-sector

U.S. employment,12 21 percent of U.S. exports, and 28 percent of U.S.

imports.13 Likewise, U.S. firms make extensive use of foreign affiliates

to meet the demand of foreign customers for U.S. goods and services. In

2003, sales by U.S.-owned affiliates in foreign markets totaled $3.4 trillion,14 whereas U.S.

cross-border exports of goods and services totaled $1.0 trillion.15 

The United States is the

largest source and

destination of foreign

direct investment.
1-3

Table 1-1

The world’s top 25 non-financial MNCs, ranked by foreign assets,1

 2003

Corporation Country Industry

Foreign

assets

Foreign

assets/

Total

assets

Foreign

sales/

Total

sales

Foreign

employment/

Total

employment

Millions

of dollars ––––––––––––Percent––––––––––––

General Electric . . . . . . . . . United States Electronics 258,900 40 40 49

Vodafone Group Plc ......

United

Kingdom Telecom 243,839 93 84 79

Ford Motor Company . . . . . United States Automotive 173,882 57 37 42

General Motors . . . . . . . . . . United States Automotive 154,466 34 28 35

British Petroleum Co. Plc . .

United

Kingdom Petroleum 141,551 80 83 84

ExxonMobil Corp . . . . . . . . United States Petroleum 116,853 67 70 61

Royal Dutch/

Shell Group . . . . . . . . . . . . .

United

Kingdom/

Netherlands Petroleum 112,587 67 64 84

Toyota Motor Corp . . . . . . . Japan Automotive 94,164 50 59 34

Total . . . . . . . . . . . . . . . . . . France Petroleum 87,840 87 80 55

France Telecom . . . . . . . . . France Telecom 81,370 64 41 40

Suez . . . . . . . . . . . . . . . . . . France Utilities 74,147 84 75 65

Electricite De France France Utilities 67,069 36 32 31

E.On . . . . . . . . . . . . . . . . . . Germany Utilities 64,033 45 36 43

Deutsche Telekom AG . . . . Germany Telecom 62,624 43 38 30

RWE Group . . . . . . . . . . . . Germany Utilities 60,345 61 48 42

Hutchinson Whampoa Ltd. Hong Kong Diversified 59,141 74 58 83

Siemens AG. . . . . . . . . . . . Germany Electronics 58,463 60 77 59

Volkswagen Group . . . . . . . Germany Automotive 57,853 38 72 48

Honda Motor Co Ltd. ..... Japan Automotive 53,113 68 77 71

Vivendi Universal . . . . . . . . France Diversified 52,421 76 55 65

ChevronTexaco Corp. . . . . . United States Petroleum 50,806 62 60 55

News Corporation . . . . . . . . Australia Media 50,803 92 93 92

Pfizer Inc. . . . . . . . . . . . . . . United States

Pharmaceuticals 48,960 42 41 60

Telecom Italia Spa . . . . . . . Italy Telecom 46,047 46 20 16

BMW AG . . . . . . . . . . . . . . . Germany Automotive 44,948 62 74 25

 1

 In a number of cases, companies reported only partial foreign assets. In these cases, the ratio of the partial foreign

assets to the partial (total) assets was applied to total assets to calculate the total foreign assets. In all cases, the

resulting figures were sent for confirmation to the companies.

Source: United Nations Conference on Trade and Development (UNCTAD)/Erasmus University database, from

UNCTAD, World Investment Report 2005, Annex table A.I.9.

 
1-4

Table 1-2

The world’s top 10 financial MNCs, ranked by foreign assets,1

 2003

Corporation Country

Assets,

total

Employment,

total

No. of

affiliates,

foreign,

total II2

Number

of host

countries

Millions of

dollars

Citigroup . . . . . . . . . . . . . . . . United States 1,264,032 275,000 320 601 53.2 77

UBS . . . . . . . . . . . . . . . . . . . Switzerland 1,221,066 65,929 344 410 83.9 48

Allianz Group . . . . . . . . . . . . Germany 1,179,298 173,750 606 852 71.1 48

Mizuho Financial Group .... Japan 3

1,115,081 27,900 41 87 47.1 15

Credit Agricole SA . . . . . . . . France 1,102,800 63,140 196 447 43.8 41

HSBC Bank plc . . . . . . . . . . .

United

Kingdom 1,034,216 218,000 573 971 59.0 48

Deutsche Bank . . . . . . . . . . . Germany 1,012,554 67,682 469 679 69.1 40

Mitsubishi Tokyo Financial 

 Group . . . . . . . . . . . . . . . . Japan 3

995,403 37,000 49 82 59.8 37

BNP Paribas SA . . . . . . . . . . France 986,675 89,071 351 641 54.8 48

ING Group . . . . . . . . . . . . . . Netherlands 981,740 114,344 429 1098 39.1 34

 1

 Two large mortgage companies in the United States, Fannie Mae and Freddie Mac, are excluded from this list

since they only operate in their home country. Similarly, the largest cooperative financial group in Japan, Zenkyoren,

is excluded from the list.

 2

 The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all

affiliates (note: affiliates counted in this table refer to only majority-owned affiliates).

 3

 Data refer to March 2004.

Source: UNCTAD, World Investment Report 2005, Annex table A.I.12.

 

Organization

The remainder of this chapter briefly defines direct investment, discusses the nature and

sources of the data used in this report, and defines key terms and concepts used throughout

the report. Chapter 2 focuses on USDIA during 1999-2004, examining both the countries and

the industries that are important destinations for U.S. investment, and the operations of U.S.-

owned affiliates located abroad. Chapter 3 examines the sources of FDIUS during the same

time period. The chapter also identifies the principal U.S. industries in which foreign-owned

enterprises have invested, and provides information regarding the operations of foreignowned affiliates in the United States. Chapter 4 examines the relationship between FDI and

cross-border trade, analyzing the extent of affiliates’ intrafirm and extrafirm trade, how that

trade relates to overall U.S. cross-border trade, and how it varies by industry and country.

Chapters 5 through 8 illustrate U.S. direct investment patterns, both inbound and outbound,

for four specific industries: copper mining, salmon farming, chemicals manufacturing, and

computer systems design services. Taken together, these industry analyses illustrate how

factors affecting FDI decisions, such as wage rates, government regulation, geography,

natural resources, and market proximity, vary across the mining, agriculture, manufacturing,

and service sectors. Chapters 9 and 10 discuss the current literature related to two FDI
 16 A U.S. parent is defined by BEA as a fully consolidated enterprise that consists of (1) the U.S. parent

corporation, with a direct or indirect ownership interest of 10 percent or more in a business interest in a

foreign business enterprise, (2) any U.S. corporation, proceeding up the ownership chain, that owns more

than 50 percent of each corporation below it, and (3) any U.S. corporation, proceeding down each ownership

chain from the U.S. parent corporation, that is more than 50 percent owned by the U.S. corporation above it. 

USDOC, BEA, U.S. Direct Investment Abroad: Final Results from the 1999 Benchmark Survey, found at

http://www.bea.gov/bea/ARTICLES/INTERNAT/USINVEST/Meth/usdia99.pdf.

 17 USDOC, BEA, “Foreign Direct Investment in the United States,” Survey of Current Business, Sept.

2005, p. 79.

 18 Persons are defined to include business enterprises; religious, charitable, or other nonprofit

organizations; individuals; governments; and certain other entities, such as estates and trusts.

 19 The ultimate beneficial owner (UBO) of a U.S. affiliate is that person, proceeding up the affiliate’s

ownership chain, that is not more than 50 percent owned by another person. Therefore, it is possible for the

affiliate, the foreign parent, and the UBO to be established in three separate countries. There are also cases

where a U.S. affiliate is owned by a foreign parent, which is owned in turn by a UBO in the United States. If

the foreign parent is not owned more than 50 percent by another juridical person (corporation), the foreign

parent and the UBO are the same. The foreign parent group consists of (1) the foreign parent, (2) any foreign

person, proceeding up the parent’s ownership chain, that owns more than 50 percent of the person below it,

up to and including the UBO, and (3) any foreign person, proceeding down the ownership chain of each of

these members, that is owned more than 50 percent by the person above it. USDOC, BEA, “Foreign Direct

Investment in the United States,” Survey of Current Business, Sept. 2005, p. 79.

 20 Historical cost data, which reflect the value of investments at the time of investment, are the only direct

investment data that provide country- and industry-specific detail. This report presents these data in nominal

terms only; the data are not corrected for inflation. For a discussion of issues regarding the deflation of these

data, see USDOC, BEA, “Valuation of the U.S. Net International Investment Position,” International Direct

Investment: Studies by the Bureau of Economic Analysis (Washington, DC: USDOC, 1999), pp. 3-15.

1-5

special topics: the effects of FDI on host countries, and trends in FDI related to the

offshoring of services, compared to the offshoring of manufacturing activities.

Direct Investment Defined

USDIA, or outbound investment, reflects investment by U.S. parent companies in foreignbased affiliate companies, where the U.S. parent owns or controls, directly or indirectly, 10

percent or more of the voting securities of an incorporated foreign business enterprise, or the

equivalent interest in an unincorporated foreign business enterprise.16

FDIUS, or inbound investment, is defined as the ownership or control, directly or indirectly,

by one foreign resident of 10 percent or more of the voting securities of an incorporated U.S.

business, or the equivalent interest in an unincorporated U.S. business.17 A foreign parent is

the first person18 outside the United States in a U.S. affiliate’s ownership chain that has a

direct investment in the affiliate. In certain instances, U.S. data are presented in terms of the

ultimate beneficial owner and the foreign parent group.19

Direct Investment Data

The Bureau of Economic Analysis (BEA) maintains two sets of data that provide information

about U.S. and foreign multinational corporations: (1) balance of payments data and

associated direct investment position data, and (2) financial and operating data of

multinational parents and their affiliates. Balance of payments data report the value of

transactions between parents and their affiliates, and are reflected in both the current account

and the capital account. Direct investment position, or stock, data reflect the cumulative

value of parents’ investments in their affiliates.20 In contrast, financial and operating data
 21 Affiliates are required to respond only if they have assets, sales, or net income greater than $3 million. 

USDOC, BEA, Survey of Current Business, Aug. 1999, p. 23.

 22 USDOC, BEA, “A Guide to BEA Statistics on U.S. Multinational Companies,” International Direct

Investment, pp. 199-200.

 23 See USITC, Examination of U.S. Inbound and Outbound Investment, Pub. No. 3383, Jan. 2001.

 24 FDIUS data by industry using the NAICS system is available from 1997, but this report begins its

analysis from 1999 for the sake of comparability with the USDIA data.

1-6

track sales, assets, wages, employment, and various other indicators pertaining to the

operations of both parents and affiliates. Data pertaining to the operations of affiliates reflect

the entire affiliate company, not just the equity share of the foreign parent.

BEA generally collects data through mandatory surveys. Benchmark surveys, conducted

every 5 years, collect both types of data and cover virtually all multinational corporations.

BEA also conducts quarterly and annual sample surveys, with balance of payments and

direct investment position data collected in the former, and financial and operating data

collected in the latter. Sample surveys are not mandatory for small affiliates,21 but BEA

estimates the data for these affiliates by extrapolating from the most recent benchmark

survey.22 Data regarding FDI capture a complex set of financial flows. More information on

these flows, and their relationship to the U.S. balance of payments accounts, is presented in

appendix A of “Examination of U.S. Inbound and Outbound Investment,” a previous

Commission study on this topic.23

The time series for this study begins in 1999, the year for which BEA began to present

USDIA data by industry according to the North American Industry Classification System

(NAICS). Due to the change in classification systems, industry data for prior years are not

directly comparable to data presented for 1999 and later.24 The most recent available data

reflect 2004 direct investment position and flows, and 2003 affiliate operations, including

sales, assets, employment, and other indicators. Much of the data relating to affiliate

operations are available only for affiliates that are majority-owned by their parents, rather

than for all affiliates (those for which parents control at least 10 percent of equity). While

this may introduce slight data discrepancies, indicators for majority-owned affiliates

represent approximately 90 percent of the total for all affiliates (table 1-3), and trends tend

to be very similar.

The data presented throughout this report use a consistent set of countries and industries to

illustrate direct investment trends. The countries presented in the tables were chosen as a

cross-section of countries from different geographical regions, and from both the developed

and developing countries. These countries include those that represent important sources and

destinations of U.S. FDI, as well as those whose FDI relationship with the United States is

not as strong. Data for the European Union include the EU-25 countries for 2004, and the

EU-15 countries for earlier years. BEA does not publish data for all of the individual EU

member countries, so it is not possible to present consistent data across all years. However,

the share of the 10 new EU member countries in overall EU inbound and outbound U.S.

investment is presumed to be small.

The industries presented in the tables generally reflect the major industry groups as defined

by BEA. For the purposes of this study, the service sector is defined in the tables as the total

for all industries, minus the manufacturing, agriculture, and mining sectors. The industry

groups included within the service sector thus include wholesale trade; retail trade;
 25 Includes construction; transportation and warehousing; real estate; rental and leasing; management of

nonbank companies and enterprises, including holding companies; administration, support, and waste

management; health care and social assistance; accommodation and food; education; arts, entertainment, and

recreation; and other miscellaneous services.

 26 See UNCTAD, World Investment Report 2005, Annex B, pp. 297-302.

1-7

Table 1-3

Majority-owned affiliates as a share of all affiliates, selected indicators, 2003

Number of

affiliates Assets Sales Employees

USDIA (million dollars) (thousands)

All affiliates . . . . . . . . . . . . . . . . . . . 25,112 8,194 3,383 9,878.9

Majority-owned affiliates . . . . . . . . . 23,201 7,469 2,909 8,363.9

Majority-owned affiliates as a 

share of total . . . . . . . . . . . . . . . . . . 92.4% 91.1% 85.9% 84.7%

FDIUS

All affiliates . . . . . . . . . . . . . . . . . . . 5,409 5,812 2,340 5,735.0

Majority-owned affiliates . . . . . . . . . 4,716 5,094 2,137 5,253.0

Majority-owned affiliates as a 

share of total . . . . . . . . . . . . . . . . . . 87.2% 87.6% 91.3% 91.6%

Source: USDOC, BEA, U.S. Direct Investment Abroad, Table 2.A.1 and 3.A.1, and Foreign Direct Investment in

the United States, Table 2.A.1.

information; depository institutions; finance and insurance; professional, scientific, and

technical services; utilities; and other services.25

Except where specifically noted, the data used in the study reflect values presented at

historical cost. These data have not been adjusted to account for inflation, shifts in exchange

rates, or market valuations of company assets. Such adjusted data are not available at the

level of industry and country detail presented here. Where possible, the industry discussions

in chapters 5 through 9 present similar data, to facilitate comparison of FDI trends across

industries. However, the available data vary by industry, so direct comparisons are not

always possible.

The BEA data are supplemented in this report with data from UNCTAD and the World

Bank, for purposes of cross-country comparison. UNCTAD and the World Bank collect data

from official country statistical agencies, and through annual surveys of investment experts

and industry representatives.26 Throughout the report, data from these sources are

supplemented by data from individual country statistical agencies, private databases,

company information, and press reports, as appropriate. Chapters 9 and 10 also rely on the

available economic literature relevant to particular aspects of foreign direct investment.

 1

 Among leading host countries of USDIA, Canada, France, Germany, Ireland, Japan, Luxembourg,

Mexico, the Netherlands, Switzerland, and the United Kingdom are OECD member countries. Organisation

for Economic Co-operation and Development, OECD Member Countries.

2-1

CHAPTER 2

U.S. Direct Investment Abroad

Summary of Key Findings

The majority of U.S. direct investment abroad (USDIA) is invested in the developed OECD

economies, with the EU-25 accounting for 46 percent of the USDIA position in 2004 and

Canada accounting for 10 percent. Middle and low-income countries as a group accounted

for 19 percent of USDIA position. Sales by U.S.-owned foreign affiliates were highest in

the United Kingdom and Canada, but sales by affiliates located in China, Russia,

Luxembourg, and Bermuda recorded the fastest growth, all in the range of 20 percent per

year, on average, between 1999 and 2004. U.S. affiliates employ the greatest number of

people in the United Kingdom, Canada, and Mexico.

The service sector accounts for 74 percent of USDIA stock, with the finance industry

accounting for the greatest share. Investment in the finance industry includes funds destined

for holding companies, which are generally reinvested in other sectors, but data on the final

industry destinations are not available. The manufacturing sector accounts for 20 percent of

USDIA stock, with the chemicals industry taking the largest share, followed by computers

and electronic products. However, manufacturing affiliates accounted for 47 percent of sales

by foreign affiliates, implying that much of the funding invested in holding companies is

eventually destined for the establishment of manufacturing affiliates. The manufacturing

sector also accounts for 51 percent of employees of foreign affiliates, with the largest share

in the transportation equipment industry.

Which countries have attracted the most U.S. direct investment

abroad (USDIA)?

Between 1999 and 2004, developed OECD economies received the greatest share of USDIA,

suggesting that U.S. firms invest abroad, in part, to establish and maintain a presence in

large, well established markets.1

 In 2004, the United Kingdom was the leading host country

of USDIA, followed by Canada, the Netherlands, Switzerland, and

Bermuda (figure 2-1). U.S. direct investment in large OECD countries

conforms to well established investment patterns, while investment in

Bermuda reflects the island’s status as a major offshore financial center

and the large amount of capital moving through resident financial

institutions. The leading destinations for USDIA did not change

significantly between 1999 and 2004, although some movement among

country rankings did occur (table 2-1). Notably, France and Brazil

dropped out of the top ten and were replaced by Luxembourg and

The European Union

held almost half of

USDIA from 1999 to

2004.
 2

 While USDIA in Brazil decreased from 1999 to 2004, the stock of USDIA in France increased, albeit

too slowly to retain its status as a top ten host country of USDIA. U.S. and foreign companies often note the

very high payroll and income taxes, pervasive regulation of labor and products markets, and sometimes

negative attitudes toward foreign investors as disincentives to investing in France. U.S. Department of State,

“2005 Investment Climate Statement: France.”

 3

 U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), “Direct Investment

Positions for 2002 - Country and Industry Detail,” 27.

 4

 Industry sectors within Ireland experiencing the greatest average annual increase in USDIA during 1999

to 2004 include wholesale trade (51.0 percent), finance and insurance (45.8 percent), computer and electronic

products (42.5 percent), and chemicals (25.7 percent). Industry sectors with the most regressive average

annual change in USDIA during the same period included primary and fabricated metals (-15.6 percent) and

machinery (-25.1 percent). USDOC, BEA, U.S. Direct Investment Abroad, 2002, 118; and USDOC, BEA,

U.S. Direct Investment Abroad, 2004, 134.

 5

 U.S. Department of State, “2005 Investment Climate Statement: Ireland.”

2-2

Ireland.2 Brazil fell from the top ten, in part because of negative currency-translation

adjustments resulting from the strengthening of the U.S. dollar against the country’s

currency.3

 U.S. direct investment in Luxembourg and Ireland increased dramatically from

1999.4

 Investors in Ireland have cited several explanations, including a highly educated,

English-speaking population; low corporate tax rates; recent infrastructure investment; and

Ireland’s access to the EU market. There are about 580 U.S.-based firms in Ireland,

operating primarily in chemicals, bio-pharmaceuticals and healthcare, computer hardware

and software, electronics, and financial services.5

 As noted in chapter 9, FDI in Luxembourg

is primarily in holding companies, destined for final destinations in other countries and

industries.

United Kingdom 14.7%

Netherlands 9.8% Canada 10.5%

Switzerland 4.9%

Bermuda 4.4%

Japan 3.9%

Germany 3.9%

Luxembourg 3.6%

Ireland 3.5%

Mexico 3.2%

Other 37.6%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Sept. 2005, pp. 152-154.

Total = $2.1 trillion

Figure 2-1

USDIA: Direct investment position, by country, 2004
2-3

Table 2-1

USDIA: Direct investment position on a historical-cost basis, by country, 1999 and 2004

Country 1999 2004

 Average

annual

growth,

1999-2004 

 Gross

domestic

product,

2004

Millions of

dollars

Percent

of total

Millions of

dollars

Percent

of total Percent

Million

dollars

All countries . . . . . . . . . 1,215,960 2,063,998 11.2 23,129,494

Australia . . . . . . . . . . . . . . . 35,386 2.9 2

48,858 2.4 6.7 631,256

Belgium . . . . . . . . . . . . . . . . 21,756 1.8 27,761 1.3 5.0 349,830

Bermuda . . . . . . . . . . . . . . . 50,847 4.2 91,265 4.4 12.4 3,966

Brazil . . . . . . . . . . . . . . . . . . 37,184 3.1 33,267 1.6 -2.2 604,855

Canada ................ 119,590 9.8 216,571 10.5 12.6 979,764

Chile . . . . . . . . . . . . . . . . . . 10,177 0.8 10,196 0.5 0.0 94,105

China . . . . . . . . . . . . . . . . . 9,401 0.8 15,430 0.7 10.4 1,649,329

France . . . . . . . . . . . . . . . . 43,120 3.5 58,927 2.9 6.4 2,002,582

Germany . . . . . . . . . . . . . . . 53,399 4.4 79,579 3.9 8.3 2,714,418

Hong Kong . . . . . . . . . . . . . 22,759 1.9 43,743 2.1 14.0 163,005

Hungary . . . . . . . . . . . . . . . 2,409 0.2 3,285 0.2 6.4 99,712

Iceland . . . . . . . . . . . . . . . . 3

26 0.0 5 0.0 -28.1 12,380

India . . . . . . . . . . . . . . . . . . 2,390 0.2 6,203 0.3 21.0 691,876

Ireland . . . . . . . . . . . . . . . . . 25,157 2.1 73,153 3.5 23.8 183,560

Italy . . . . . . . . . . . . . . . . . . . 17,889 1.5 33,378 1.6 13.3 1,672,302

Japan . . . . . . . . . . . . . . . . . 55,120 4.5 80,246 3.9 7.8 4,623,398

Luxembourg . . . . . . . . . . . . 22,148 1.8 74,902 3.6 27.6 31,143

Mexico . . . . . . . . . . . . . . . . 37,151 3.1 66,554 3.2 12.4 676,497

Netherlands ............ 121,315 10.0 201,918 9.8 10.7 577,260

Panama . . . . . . . . . . . . . . . 33,493 2.8 5,868 0.3 -29.4 13,793

Philippines . . . . . . . . . . . . . 3,517 0.3 6,338 0.3 12.5 86,429

Poland . . . . . . . . . . . . . . . . 3,281 0.3 6,059 0.3 13.1 241,833

Russia . . . . . . . . . . . . . . . . . 1,678 0.1 2,231 0.1 5.9 582,395

Singapore . . . . . . . . . . . . . . 20,665 1.7 56,900 2.8 22.5 106,818

South Africa . . . . . . . . . . . . 3,474 0.3 4,966 0.2 7.4 212,777

Spain . . . . . . . . . . . . . . . . . 19,970 1.6 45,251 2.2 17.8 991,442

Sweden . . . . . . . . . . . . . . . . 10,624 0.9 36,399 1.8 27.9 346,404

Switzerland . . . . . . . . . . . . . 40,532 3.3 100,727 4.9 20.0 359,465

Taiwan . . . . . . . . . . . . . . . . 6,744 0.6 2

12,148 0.6 12.5 286,002

United Kingdom Islands,

Caribbean . . . . . . . . . . . . 29,762 2.4 63,066 3.1 16.2 (4

)

United Kingdom ......... 216,638 17.8 302,523 14.7 6.9 2,140,898

European Union5 ......... 564,037 46.4 965,379 46.8 11.3 (4

)

 1

 Direct investment position is the sum of foreign parents’ equity holdings in their U.S. affiliates (including retained

earnings), plus the net outstanding loans that foreign parents have made to these affiliates. Direct investment

position is negative when the value of loans made by U.S. affiliates to their foreign parent companies exceeds the

value of the parents’ equity holdings plus the value of loans made by the parent to its affiliate companies.

 2

 Data are for 2003. Data for 2004 are not available.

 3

 Data are for 2000. Data for 1999 are not available.

 4

 Not available.

 5

 Data for 1999 are for the EU-15. Data for 2004 are for the EU-25.

Sources: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Balance of Payments and

Direct Investment Position Data, found at http://www.bea.gov/bea/di/di1us/bal.htm; estimates by the Commission;

World Bank, found at http://www.worldbank.org/ retrieved Dec. 22, 2005; Government of Bermuda, Department of

Statistics; and Republic of China, National Statistics, found at http://eng.stat.gov.tw.
 6

 USDOC, BEA, U.S. Direct Investment Abroad, 124.

 7

 USDOC, BEA, U.S. Direct Investment Abroad, 124.

 8

 In 2004, China ranked twentieth by USDIA position. USDOC, BEA, Direct Investment Positions for

2004, 43.

 9

 USDOC, BEA, Direct Investment Positions for 2004, 43.

2-4

Together, the leading ten recipient countries accounted for 62 percent of the U.S. direct

investment position abroad in 2004. The EU-25 accounted for almost half of USDIA, owing

in large part to the United Kingdom, which was the largest recipient of U.S. direct

investment stock worldwide. Within Europe, industries that attracted the most USDIA in

2004 were, ordered by amount of USDIA, manufacturing, finance and insurance, and

wholesale trade. Industries in which USDIA experienced the greatest change were

information, which increased sharply, and utilities, which decreased.6

 Industries that

attracted the most USDIA within the United Kingdom were, ordered by amount of USDIA,

finance and insurance, manufacturing, and depository institutions (banking). Industries in

which USDIA in the United Kingdom experienced the greatest change were professional,

scientific, and technical services, which increased by 26 percent, and mining, which

decreased by 27 percent.7

Since 1999, USDIA has grown rapidly in Sweden, Luxembourg, Ireland, Singapore, and

India. For Bermuda, Canada, Ireland, Luxembourg, Mexico, and Switzerland, U.S. outbound

stock grew faster than the average annual rate of 11.2 percent for all countries during 1999-

2004. In contrast, the U.S. outbound direct investment position in Germany, Japan, the

Netherlands, and the United Kingdom grew at a slower rate than total U.S. outbound stock

during the period. USDIA in China also grew at an average annual rate just below the rate

for all countries. China’s USDIA position in the manufacturing sector increased from 2003

to 2004, primarily because of equity capital flows and reinvested earnings.8

In 2004, the USDIA position in the Asia-Pacific region grew more rapidly than USDIA in

other regions in both absolute and percentage terms. The restructuring of a large Australian

media company (Rupert Murdoch’s News Corporation) was primarily responsible for the

increase, yet even excluding this transaction, USDIA in the region grew significantly. In

Japan, reinvested earnings of affiliates in the finance and insurance industry sector and in

holding companies contributed to the increase in USDIA position.9

 Industries holding the

most USDIA in Japan in 2004 included finance and insurance; wholesale trade; professional,

scientific, and technical services; information services; computer and electronic products;

and chemical manufacturing. These sectors accounted for 81 percent of USDIA in Japan,

with finance and insurance alone accounting for 49 percent of the total. 
 10 Countries in which gross national income (GNI) per capita was greater than or equal to $10,066 (in

2004) are considered by the World Bank to be high-income economies. Fifty-five countries are currently

classified as high-income economies.

 11 World Bank, “GNI per capita 2004, Atlas method and PPP.”

 12 USDOC, BEA, “U.S. Multinational Companies - Operations in 2003,” Survey of Current Business, July

2005, 17.

 13 Reflects all European countries, not just EU members. Switzerland accounted for almost 5 percent of

USDIA in 2004 (table 2-1).

 14 All data in this paragraph are from USDOC, BEA, U.S. Direct Investment Abroad, 2002, 118; and

USDOC, BEA, U.S. Direct Investment Abroad, 2004, 136.

2-5

What proportion of U.S. outbound investment stock is in

high-income vs. low- and middle-income countries?

In 2004, 81 percent of U.S. outbound direct investment stock was in high-income economies

(figure 2-2).10 Further, high-income countries in which gross national income (GNI) per

capita is greater than $20,000 accounted for 74 percent of total U.S. outbound investment

stock in 2004.11 The majority of foreign affiliates of U.S. firms are also located in

high-income countries. The longstanding tendency for U.S. multinational corporations

(MNCs) to position investments in high-income countries suggests that key factors

influencing such investment include access to large and affluent markets. Relevant criteria

may include access to skilled labor, access to supplying firms, political stability, ability to

repatriate profits, stable currency,

and other factors.12

Europe received the largest amount of USDIA in 2004, accounting for 53 percent of the

worldwide total.13 U.S. investment in Europe is widely diversified across industries,

reflecting the strong European market for both goods and services, as well as

the integration of the U.S. and European economies. For example, in 2004, the

European chemicals, information, wholesale trade, and depository institutions

(banking) industries each accounted for approximately 60 percent of worldwide

USDIA stock in these industries. As is the case for USDIA worldwide, finance

and insurance, wholesale trade, and chemicals are the leading industry sectors

for USDIA in Europe, together accounting for 29 percent of the European total.

Industries in Europe that experienced the greatest increases in USDIA since

1999 were finance and insurance, wholesale trade, and computer and electronic products.

Industries that experienced the smallest average annual changes in USDIA were mining,

machinery manufacturing, transportation equipment, and utilities.14

Middle and low

income countries

accounted for 19

percent of USDIA

stock in 2004.
 15 According to the World Bank, countries in which 2004 GNI per capita fell between $826 and $10,065

are considered middle-income economies, and countries in which 2004 GNI per capita was less than or equal

to $825 are considered low-income economies. Fifty-nine countries are currently classified as low-income

economies, 94 countries are classified as middle-income economies, and 55 are classified as high-income

economies. The World Bank Group, “Data & Statistics - Country Classification.”

2-6

How rapidly has USDIA in low- and middle-income countries

grown, compared to USDIA in high-income countries?

U.S. outbound investment stock located in low-income economies more than doubled during

1999-2004, yet the share of USDIA hosted by such economies increased from just 0.5

percent to 0.6 percent, as the amount remained a fraction of total USDIA stock.15 Among

low-income economies, India, Pakistan, and Nigeria experienced significant increases of

USDIA stock since 1999, both in terms of overall totals and percentage gains. USDIA stock

in middle-income economies increased from $226 billion in 1999 to $242 billion in 2004,

yet as a share of total USDIA stock, USDIA stock in middle-income economies decreased

from 18.6 percent to 11.7 percent. By contrast, the share of U.S. outbound stock hosted by

high-income countries has risen slightly since 1999, while the share of outbound stock

hosted by the 10 leading high-income countries has remained fairly constant.

The five leading middle-income economies in terms of USDIA position in 2004 were

Mexico, Brazil, China, Argentina, and Chile (figure 2-3). Among low-income economies,

India hosted the largest share of total U.S. outbound stock, with $6.2 billion, or 0.3 percent,

of total U.S. outbound stock in 2004. USDIA in China, India, Mexico, and the Philippines

experienced particularly strong growth, yet because they are starting from a relatively small

base, their rankings by share of total USDIA have changed little. Leading industries for

USDIA in India in 2004 included utilities, depository institutions, and professional,

High-income 80.9%

Middle- and low-income 19.1%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Sept. 2005, pp. 152-154; and World Bank, found at

http://siteresources.worldbank.org/datastastics/resources/class.xls, retrieved May

22, 2006.

Total = $2.1 trillion

countries

countries

Figure 2-2

USDIA: Direct Investment position, by country income level, 2004
 16 Congressional Research Service, The Library of Congress, Trade Integration in the Americas.

 17 The NAFTA agreement went into effect on January 1, 1994, while the U.S.-Canada Free Trade

Agreement went into effect in 1989.

2-7

scientific, and technical services. In Mexico, leading industries included transportation

equipment, chemicals, and finance and insurance; and in the Philippines they included

utilities, computer and electronic products, and finance and insurance.

The declining USDIA position in Brazil is primarily due to significant decreases in four

industries: chemicals, computer and electronic products, depository institutions, and

transportation equipment, which recorded declines of 29 percent, 63 percent, 10 percent, and

83 percent, respectively, during 1999 to 2004. At the end of the 1990s, Brazil experienced

a financial crisis and the 1999 devaluation of the Brazilian real. The downturn in Brazil’s

economy slowed the country’s economic growth, and likely contributed to declining U.S.

investment.16

What is the U.S. direct investment position in Canada and Mexico? 

How does the growth of USDIA in NAFTA partners compare to the

growth rate of total U.S. outbound investment?

The United States’ direct investment position in its NAFTA partner countries, Canada and

Mexico, totaled $283.1 billion in 2004, of which 77 percent was invested in Canada and 24

percent in Mexico.17 The combined total accounted for 14 percent of total U.S. outbound

investment stock (figure 2-4). The manufacturing, finance and insurance, and mining sectors

Brazil 14.4% Mexico 28.7%

China 6.7%

Argentina 5.0%

Chile 4.4%

Malaysia 3.8%

Thailand 3.3%

Philippines 2.7% India 2.7%

Poland 2.6%

Other 25.7%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Sept. 2005, pp. 152-154; and World Bank, found at

http://www.worldbank.org/, retrieved Dec. 22, 2005.

Total = $255 billion

 1 Total does not include the following 14 countries: Australia, Cuba, Fiji,

Indonesia, Iran, Lithuania, Macau, Palau, Paraguay, Slovenia, St. Lucia,

Suriname, Syria, and Vanuatu.

Figure 2-3

USDIA: Direct investment position, top 10 low- and middle-income

countries,1

 2004
 18 For more information on U.S. investment in the mining sector, see chapter 5.

 19 U.S. Government official, telephone interview with USITC staff, Jan. 19, 2006.

 20 For more information, see Newmont Mining Corporation’s Internet site at

www.newmont.com/en/about/history/index.asp.

 21 Diavik Diamond Mines Inc., Diavik Annual Social and Environmental Report - 2000; U.S. Geological

Survey, “Diamond (Industrial),” Mineral Resources Program, Minerals Yearbook 2004,, found at

minerals.usgs.gov/minerals/pubs/commodity/diamond/diamomyb04.pdf; and Marketwatch profile, found at

www.answers.com/topic/aber-diamond-corporation-usa, retrieved Jan. 19, 2006.

 22 Numerous transactions occurred in both directions across the Great Lakes and into Quebec and

Labrador. For more information, see U.S. Geological Survey, “Iron Ore,” Mineral Commodity Summaries

and Minerals Yearbook, various issues, minerals.usgs.gov/minerals/pubs/commodity/iron_ore/.

 23 A consequence of the 1990s boom in such investment was the significant shift in the structure of

financial systems in emerging market economies such as Mexico. Most notably, the share of assets held by

foreign banks increased considerably. In Mexico, foreign ownership of the banking sector is as high as

80 percent. Bank for International Settlements, Committee on the Global Financial System, Foreign Direct

Investment in the Financial Sector of Emerging Market Economies.

2-8

account for the greatest share of U.S. outbound stock in Canada (table 2-2).18 The rise in U.S.

outbound stock in the mining sector reflects several new equity transactions during 1999-

2001, and the reinvestment of earnings resulting from higher metal prices in 2003-04.19

Notable transactions include Newmont Mining Company’s acquisition of several Canadian

gold interests,20 Aber Diamond Corporation’s 40-percent joint venture development of the

Diavik Diamond Mine, which started producing in 2002,21 Inco’s development of the

Voisey’s Bay nickel properties, and several other companies’ iron ore mining ownership and

development transactions.22

In Mexico, U.S. direct investment stock is most concentrated in manufacturing, depository

institutions, and finance and insurance (table 2-3). Overall, Mexico accounted for about

50 percent of all USDIA stock in Latin American financial services from 1990 to 2003.23 A

Canada 10.5%

Mexico 3.2%

Rest of World 86.3%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 152.

Total = $2.1 trillion

Figure 2-4

USDIA: Direct investment position, NAFTA partners vs. rest of the

world, 2004
2-9

Table 2-2

USDIA: Direct investment position in Canada, by industry, 1999 and 2004

Industry 1999 2004

Millions of

dollars

Percent of

total

Millions of

dollars

Percent of

total

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,880 9.9 30,879 14.3

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,151 1.0 1,387 0.6

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,694 39.9 76,786 35.5

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,135 6.8 11,797 5.4

Depository institutions . . . . . . . . . . . . . . . . . . . . . . . 1,967 1.6 2,981 1.4

Finance and insurance . . . . . . . . . . . . . . . . . . . . . . 25,231 21.1 36,889 17.0

Professional, scientific and technical services . . . . 1,149 1.0 2,281 1.1

Information services . . . . . . . . . . . . . . . . . . . . . . . . 2,350 2.0 3,485 1.6

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,032 16.8 50,085 23.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,590 216,571

Note. - Due to rounding total percent might not equal 100.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Balance of Payments and

Direct Investment Position Data, found at http://www.bea.gov/di/di1us/bal.htm.

Table 2-3

USDIA: Direct investment position in Mexico, by industry, 1999 and 2004

Industry 1999 2004

Millions of dollars Percent of total Millions of dollars Percent of total

Mining . . . . . . . . . . . . . . . . . . . . . 321 0.9 1,703 2.6

Utilities . . . . . . . . . . . . . . . . . . . . 246 0.7 568 0.9

Manufacturing . . . . . . . . . . . . . . . 18,155 48.9 19,438 29.2

Wholesale trade . . . . . . . . . . . . . 2,175 5.9 1,954 2.9

Depository institutions . . . . . . . . . 1,623 4.4 16,811 25.3

Finance and insurance . . . . . . . . 4,135 11.1 11,160 16.8

Professional, scientific and

technical services . . . . . . . . . . . . 618 1.7 567 0.9

Information services . . . . . . . . . . 1,069 2.9 1,495 2.2

Other . . . . . . . . . . . . . . . . . . . . . . 8,807 23.7 12,858 19.3

Total . . . . . . . . . . . . . . . . . . 37,151 66,554

Note. - Due to rounding total percent might not equal 100.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Balance of Payments and

Direct Investment Position Data, found at http://www.bea.gov/di/di1us/bal.htm.
 24 Zephyr database.

 25 USDOC, BEA, “U.S. Direct Investment Abroad, 2004.”

 26 USDOC, BEA, Survey of Current Business, Sept. 2004, 138; and Sept. 2005, 154.

 27 Data for 2003 are the most recent available.

 28 Data for foreign affiliate sales in China in 1999 were suppressed to avoid disclosure of data of

individual companies.

2-10

number of U.S. banks have important investments in Mexico, including Citigroup, which

acquired 100 percent of Grupo Financiero Banamex in 2001 for $12.5 billion, Bank of

America, which acquired a 25 percent equity stake in Grupo Financiero Santander-Serfin in

2003 for $1.6 billion, and Principal Financial, which acquired 100 percent of Afore Tepeyac,

a Mexico insurance and pension fund provider, for $57.7 million in 2003.24

What is the U.S. direct investment position in China? How does the

trend in China compare to trends in other countries?

U.S. direct investment stock in China reached $15.4 billion in 2004, equal to less than 1

percent of total USDIA stock, but recording average annual growth of over

10 percent during 1999-2004.25 Annual flows of new U.S. investment into

China ranged from just under $1 billion to just under $2 billion during 1999-

2003, then increased by $4.2 billion in 2004 (figure 2-5). A comparison with

U.S. capital outflows to other East Asian host countries sheds light on

USDIA to China during the period. In 1999, USDIA outflows to China were

roughly 20 percent of the amount of U.S. capital sent to Japan. In 2004, U.S.

capital outflows to China were equivalent to 40 percent of outflows to Japan

(figure 2-6). Throughout the period, USDIA outflows to China were similar

to outflows to Korea. In 2004, USDIA capital outflows to China were nearly

eight times the level of outflows to Thailand.26

In which countries did U.S.-owned foreign affiliates record the

highest sales? In which countries are foreign affiliate sales

experiencing the most rapid growth?

In 2003, U.S.-owned foreign affiliates recorded sales totaling $3.4 trillion.27 Foreign

affiliates in the United Kingdom registered the highest sales, accounting for $443.4 billion,

or 13 percent, of total foreign affiliate sales (table 2-4). Other countries accounting for a

significant portion of U.S.-owned foreign affiliate sales were Canada (12 percent), Japan (8

percent), Germany (8 percent), and the Netherlands (5 percent) (figure 2-7). The EU-15

accounted for 44 percent of total U.S. owned foreign affiliate sales. Other countries that

accounted for more than 2 percent of foreign affiliate sales in 2003 include Australia,

Belgium, Brazil, Ireland, Italy, Mexico, Singapore, and Spain.

Sales by U.S.-owned foreign affiliates have increased since 1999 in Europe and the AsiaPacific region, while such sales in South America experienced a sharp drop, reflecting

economic difficulties in Argentina, and slow growth in other countries in the region. Sales

by U.S.-owned foreign affiliates grew rapidly during 2000-2003 in China, increasing at an

average of 25 percent per year.28 This likely reflects the liberalization of many Chinese

foreign investment regulations following China’s WTO accession in 2001, with U.S. and

other foreign firms permitted to operate in many cities formerly closed to foreign investors.

USDIA in China is

rising rapidly, but

remains a small

percentage of the

overall U.S. total.
2-11

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 154 and Sept. 2003, p. 144.

1999 2000 2001 2002 2003 2004

-5

0

5

10

15

China Japan Korea

Billions of U.S. dollars

Figure 2-6

USDIA: Direct investment outflows to China, Japan, and Korea, 1999-

2004

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 154 and Sept. 2003, p. 144.

1999 2000 2001 2002 2003 2004

0

1

2

3

4

5

Billions of U.S. dollars

Figure 2-5

USDIA: Direct investment outflows to China, 1999-2004
2-12

Table 2-4

USDIA: Foreign affiliate sales, by country, 1999 and 2003

Countries 1999 2003

Average annual 

growth

Millions of

dollars

Percent

of total

Millions 

of dollars

Percent

of total Percent

All countries . . . . . . . . . . . . . . . . . . 2,611,764 100 3,383,010 100 6.7

Australia . . . . . . . . . . . . . . . . . . . . . . . . 72,579 2.8 89,704 2.7 5.4

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . 64,184 2.5 73,037 2.2 3.3

Bermuda . . . . . . . . . . . . . . . . . . . . . . . . 21,145 0.8 42,822 1.3 19.3

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,371 2.7 74,394 2.2 1.0

Canada ......................... 302,162 11.6 396,527 11.7 7.0

Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,420 0.4 11,924 0.4 1.1

China . . . . . . . . . . . . . . . . . . . . . . . . . . 23,407 0.9 56,831 1.7 24.8

France . . . . . . . . . . . . . . . . . . . . . . . . . 142,508 5.5 158,289 4.7 2.7

Germany . . . . . . . . . . . . . . . . . . . . . . . . 244,568 9.4 254,152 7.5 1.0

Hong Kong . . . . . . . . . . . . . . . . . . . . . . 48,703 1.9 57,271 1.7 4.1

Hungary . . . . . . . . . . . . . . . . . . . . . . . . 9,165 0.4 10,036 0.3 2.3

Iceland . . . . . . . . . . . . . . . . . . . . . . . . . 151 0.0 (1

) (1) (1)

India . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,416 0.2 12,092 0.4 17.2

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . 59,039 2.3 112,716 3.3 17.5

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,523 3.0 105,702 3.1 7.7

Japan .......................... 196,980 7.5 282,096 8.3 9.4

Luxembourg . . . . . . . . . . . . . . . . . . . . . 4,567 0.2 10,374 0.3 22.8

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . 102,531 3.9 137,639 4.1 7.6

Netherlands ..................... 137,312 5.3 161,742 4.8 4.2

Panama . . . . . . . . . . . . . . . . . . . . . . . . 4,970 0.2 6,842 0.2 8.3

Philippines . . . . . . . . . . . . . . . . . . . . . . 9,063 0.3 12,509 0.4 8.4

Poland . . . . . . . . . . . . . . . . . . . . . . . . . 10,328 0.4 15,299 0.5 10.3

RRussia . . . . . . . . . . . . . . . . . . . . . . . . 3,789 0.1 8,797 0.3 23.4

Singapore . . . . . . . . . . . . . . . . . . . . . . . 81,483 3.1 104,955 3.1 6.5

South Africa . . . . . . . . . . . . . . . . . . . . . 13,805 0.5 19,050 0.6 8.4

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . 54,469 2.1 70,421 2.1 6.6

Sweden ......................... (1

) (1) 49,013 1.4 (1)

Switzerland . . . . . . . . . . . . . . . . . . . . . . 73,383 2.8 124,650 3.7 14.2

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . 21,362 0.8 29,801 0.9 8.7

United Kingdom Islands,

Caribbean . . . . . . . . . . . . . . . . . . . . . 10,616 0.4 (1

) (1) (1)

United Kingdom .................. 378,272 14.5 443,388 13.1 4.1

EU-15 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,717 47.9 1,501,792 44.4 4.7

 1

 Not available.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Balance of Payments and

Direct Investment Position Data, found at http://www.bea.gov/bea/di/di1usdop.htm/.
 29 USDOC, BEA, U.S. Direct Investment Abroad.

2-13

Sales by foreign affiliates also increased in African countries, growing at an average annual

rate of 11 percent, to reach $50.2 billion in 2003. However, the increases in foreign affiliate

sales in China and Africa did not have a significant impact on total value of sales by

U.S.-owned foreign affiliates, as these regions each accounted for less than 2 percent of total

sales in 2003.29

Have U.S. direct investors abroad focused on the primary,

manufacturing or service sectors? How fast has U.S. direct

investment in these sectors grown? 

The service sector accounted for 74 percent of total U.S. outbound direct

investment stock in 2004, equal to $1.5 trillion (figure 2-8). USDIA in the

service sector increased at an average annual rate of 14 percent during

1999-2004, compared to the 11-percent average annual growth rate of total

USDIA. In contrast, the shares of total outbound stock accounted for by the

United Kingdom 13.1%

Japan 8.3% Canada 11.7%

Germany 7.5%

Netherlands 4.8%

France 4.7%

Mexico 4.1%

Switzerland 3.7%

Ireland 3.3%

Other 38.8%

Total = $3.4 trillion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Financial and Operating Data for U.S. Multinational Companies, found

at http://www.bea.gov/bea/di/di1usdop.htm.

Figure 2-7

USDIA: Foreign affiliate sales, by country, 2003

Three-quarters of

USDIA is invested in

the services sector.
 30 Defined as mining, agriculture, forestry, fishing, and hunting.

 31 U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, 155-158.

2-14

primary30 and manufacturing sectors decreased from 6 percent to 5 percent and from 27

percent to 21 percent, respectively, during 1999-2004, even while recording average annual

growth rates of 6 percent and 8 percent, respectively (table 2-5).31

Within the service sector, the largest share of USDIA is invested in the finance and insurance

industry, which accounts for $371.0 billion. Within the industry, the largest U.S. positions

are in the United Kingdom (23 percent), Bermuda (14 percent), Japan (11 percent), and

Canada (10 percent). In 2004, new FDI outflows in the services sector were largest to Japan

and Canada. In the primary resource industries, Canada is by far the preferred destination,

with a $30.9 billion investment position in mining, representing 30 percent of total USDIA

in mining in 2004. Indonesia, the United Kingdom, Norway, and Australia are other notable

mining destinations. The overall share of USDIA in the manufacturing sector declined from

27 percent to 21 percent during 1999-2004. U.S. direct investment in the manufacturing

sector is largest in Canada ($76.8 billion, with significant investments in transportation

equipment, machinery, and chemicals) and the United Kingdom ($52.3 billion, with

significant investments in chemicals and machinery). 

The United Kingdom and Canada were the two largest

destinations for new capital outflows from the United States

during 2004. The manufacturing sector accounted for 58 percent

of new capital outflows to the United Kingdom, followed by 18

percent for the finance and insurance industry. 

Services 74.3%

Manufacturing 20.7%

Mining and agriculture 4.9%

 1 The U.S. direct investment position in the mining sector represents 4.9 percent of the

total . The U.S. direct investment position in the agriculture sector is very small.

Total = $2.1 trillion

1

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 155-158.

Figure 2-8

USDIA: Direct investment position, by sector, 2003

Capital outflows to Canada and

the United Kingdom were

largest in manufacturing.
2-15

Table 2-5

USDIA: Direct investment position1

 on a historical-cost basis, by industry, 1999 and 2004

Industry 1999 2004

Average annual 

growth

Millions of

dollars

Percent

of total

Millions 

of dollars

Percent of

total Percent

All industries . . . . . . . . . . . . . . . . . . . . . 1,215,960 2,063,998 11.2

Mining . . . . . . . . . . . . . . . . . . . . . . . . 72,526 6.0 101,477 4.9 6.9

Agriculture, forestry, fishing and

hunting . . . . . . . . . . . . . . . . . . . . . . 1,579 0.1 517 0.0 -20.0

Utilities . . . . . . . . . . . . . . . . . . . . . . . 22,472 1.8 18,985 0.9 -3.3

Manufacturing .................. 327,282 26.9 428,235 20.7 5.5

Food and kindred products . . . . . . 38,928 3.2 53,981 2.6 6.8

Chemicals . . . . . . . . . . . . . . . . . . . 81,727 6.7 107,908 5.2 5.7

Pharmaceuticals . . . . . . . . . . . 29,661 2.4 44,623 2.2 8.5

Primary and fabricated metals . . 21,569 1.8 26,328 1.3 4.1

Plastics and rubber products . . . 10,542 0.9 13,810 0.7 5.5

Nonmetallic mineral products . . . 6,370 0.5 11,341 0.5 12.2

Machinery . . . . . . . . . . . . . . . . . 21,501 1.8 24,543 1.2 2.7

Computers and electronic

products . . . . . . . . . . . . . . . . . . . 46,783 3.8 58,615 2.8 4.6

Electrical equipment, appliances

and components . . . . . . . . . . . . 8,212 0.7 12,392 0.6 8.6

Transportation equipment . . . . . 43,322 3.6 48,418 2.3 2.2

Textiles, apparel, and leather

products . . . . . . . . . . . . . . . . . . . 3,969 0.3 3,314 0.2 -3.5

All other manufacturing . . . . . . . 44,359 3.6 67,585 3.3 8.8

Services . . . . . . . . . . . . . . . . . . . . . 814,573 67.0 1,533,769 74.3 13.5

Wholesale trade . . . . . . . . . . . . . 86,313 7.1 136,949 6.6 9.7

Retail trade . . . . . . . . . . . . . . . . . 18,975 16 40,445 2.0 16.3

Information . . . . . . . . . . . . . . . . . 50,062 4.1 56,422 2.7 2.4

Telecommunications . . . . . . . . 25,499 2.1 5,897 0.3 -25.4

Depository institutions . . . . . . . . 40,879 3.4 68,100 3.3 10.7

Finance and insurance ........ 198,749 16.3 370,965 18.0 13.3

Finance .................. 145,740 12.0 274,654 13.3 13.5

Insurance . . . . . . . . . . . . . . . . 53,009 4.4 96,311 4.7 12.7

Professional, scientific and

technical services . . . . . . . . . . . . 29,963 2.5 42,110 2.0 7.0

Other services . . . . . . . . . . . . . . 389,632 32.0 818,778 39.7 16.0

 1

 Direct investment position is the sum of foreign parents’ equity holdings in their U.S. affiliates (including

retained earnings), plus the net outstanding loans that foreign parents have made to these affiliates. Direct

investment position is negative when the value of loans made by U.S. affiliates to their foreign parent companies

exceeds the value of the parents’ equity holdings plus the value of loans made by the parent to its affiliate

companies. 

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Balance of Payments and

Direct Investment Position Data, found at http://www.bea.gov/bea/di/di1us/bal.htm.

In Canada, new U.S. FDI in the manufacturing sector was 25 percent of the total FDI

outflows in 2004, followed by 22 percent in financial services.

An analysis of U.S. direct investment assets by sector yields similar results. In 2003, the

service sector accounted for $6.3 trillion, or 77 percent, of total outbound assets (figure 2-9),

an increase of 6 percent from 1999. In contrast, the manufacturing sector’s share of total

outbound assets decreased from 24 percent in 1999 to 19 percent in 2003. The primary

sector’s share of total outbound assets decreased only slightly from 5 percent in 1999 to 4

percent in 2003. During 1999-2003, assets in the service sector registered average annual

growth of 18 percent, faster than the 15-percent growth rate of total outbound assets. Assets
 32 U.S. Department of Commerce, Bureau of Economic Analysis. U.S. Direct Investment Abroad, 1999-

2003.

 33 Financial services comprise securities, commodities, and other financial intermediation; credit

intermediation funds and trusts, insurance, and other related activities. Data for depository institutions

(banks) are reported separately. In 2004, outbound stock in depository institutions was $68.1 billion.

2-16

in the primary sector increased at a slower-than-average rate of 12 percent, while U.S. direct

investment assets in manufacturing increased at an average annual rate of 8 percent, which

accounts for the significant decline in share.32

On which industries have U.S. direct investors focused? 

In 2004, 46 percent of outbound U.S. investment stock in the

service sector, and 34 percent of total USDIA stock, was directed

toward holding companies, for a total USDIA position of $705.4

billion (figure 2-10). USDIA stock in holding companies

increased at a faster-than-average pace of 18 percent per annum.

Holding companies are designed primarily for tax purposes, to

channel funds to operating companies in a wide variety of

industries. Due to data collection limitations, the final country

and industry destinations of these investment funds are unknown.

The financial services industry33 accounts for the second-largest share of outbound direct

investment stock, accounting for 24 percent, or $371.0 billion, of U.S. service sector

investment in 2004 (see table 2-5). Strong direct investment in the financial services

Services 77.0%

Manufacturing 18.8%

Mining and agriculture 4.2%

Total = $8.2 trillion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Balance of Payments, found at

http://www.bea.gov/bea/di/di1usdop.html.

1

 1 Assets of foreign affiliates in the mining sector represent 4.1 percent of total assets of

foreign affiliates. Assets of foreign affiliates in the agriculture sector is very small.

Figure 2-9

USDIA: Assets of foreign affiliates, by sector, 2003

Over one-third of 2004 USDIA

was directed toward holding

companies with uncertain

ultimate destinations.
 34 U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Sept. 2005,

155-158. 

 35 Bermuda is an offshore financial market. A significant share of the direct investment flows to this

country are reinvested in third countries, but BEA has no way to discern the final destination of such capital

flows. 

 36 For additional information on chemicals industry investment, see chapter 7.

2-17

industry reflects the increasing globalization of large financial service providers, the

progressive privatization of large financial institutions overseas, and regulatory reform in key

financial markets.34 Countries that accounted for significant shares of total U.S. direct

investment in financial services included the United Kingdom (23 percent), Bermuda (12

percent), Canada (9 percent), and Japan (9 percent) (figure 2-11).35 The wholesale trade

industry comprises 9 percent, or $137.0 billion, of USDIA stock in the service sector, of

which 45 percent is invested in EU-25 countries, most prominently Germany and France.

Within the service sector, U.S. outbound stock in education services and health care and

social assistance services increased most rapidly, registering average annual growth rates of

32 percent and 30 percent, respectively, during 1999-2004. However, the USDIA positions

in these industries are small, at $929 million and $1.2 billion, respectively.

Within the manufacturing sector, the chemicals industry accounted for the largest share of

outbound investment stock, totaling $107.9 billion. This represented 25 percent of outbound

investment in manufacturing (figure 2-12) and 5 percent of total outbound investment in

2004. Countries that accounted for large shares of total U.S. outbound investment in the

chemicals industry included Canada (13.2 percent), the United Kingdom (11.8 percent), the

Netherlands (11.2 percent), and Ireland (9.3 percent) (figure 2-13).36 As discussed in chapter

7, U.S. investment in the Canadian chemicals industry is facilitated by the extensive network

Holding companies 46.0%

insurance 24.2%

Wholesale trade 8.9% Depository institutions 4.4%

Information 3.7%

Professional, scientific & technical 2.7%

Retail trade 2.6%

Rental & leasing 1.7%

Other 5.6%

Total = $1.5 trillion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Balance of Payments, found at

http://www.bea.gov/bea/di/di1usdop.html.

Finance &

Figure 2-10

USDIA: Direct investment position in service industries, 2004
2-18

United Kingdom 23.3%

Bermuda 11.6%

Canada 9.1%

Japan 9.0%

Mexico 6.4%

Netherlands 5.1%

Hong Kong 3.3%

Switzerland 2.8%

Germany 2.8% Ireland 2.5%

United Kingdom Islands 2.4%

Other 21.7%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 136.

Total = $439.1 billion

 1 Includes finance, insurance and depository institutions.

 2

 Data for direct investment position in depository institutions was suppressed. Data

reflect investment in finance and insurance industries only.

2

Figure 2-11

USDIA: Direct investment position in the financial services industry,1

2004

Chemicals 25.2%

Computers & electronic products 13.7%

Food & kindred products 12.6%

Transportation equipment 11.3%

fabricated metal 6.1%

Plastic & rubber 3.2%

Electrical equipment, appliances, & components 2.9% Nonmetal goods 2.6%

Textiles 0.8%

Other 21.6%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 136.

Total = $428.2 billion

Primary &

Figure 2-12

USDIA: Direct investment position in manufacturing industries, 2004
2-19

of pipelines and other infrastructure on the U.S.-Canadian border. Computers and electronics

equipment was the second largest manufacturing industry, accounting for $58.6 billion of

outbound U.S. FDI in the manufacturing sector in 2004, followed by food, beverages, and

tobacco, with $54.0 billion. U.S. outbound stock in the manufacturing sector recorded

slower-than-average growth of 6 percent during 1999-2004. The only manufacturing

industry which grew at a faster-than-average rate was nonmetallic mineral products, growing

at an average annual rate of 12 percent to $11.3 billion by 2004. This primarily reflects

purchases of specialty minerals facilities in Africa and the Pacific Rim. Textiles, leather, and

apparel was the only manufacturing industry that recorded a decline in USDIA position,

down 4 percent annually.

The mining industry accounts for most of USDIA stock in the primary sector. Outbound

investment stock in the mining industry grew at an annual rate of 7 percent during 1999-

2004, to $101.5 billion. Oil and gas extraction accounts for 69 percent of mining investment,

but the growth rates were higher for gold and silver mining (up 31 percent per annum during

the period) and nonmetallic mineral mining and quarrying (up 30 percent per annum).

Outbound investment stock in agriculture, forestry, fishing, and hunting declined at an

average annual rate of 20 percent during 1999-2004, to $517 million.

Canada 13.2%

Netherlands 11.2% United Kingdom 11.8%

Ireland 9.3%

France 5.5%

Belgium 4.9%

Switzerland 4.4%

Italy 4.1%

Mexico 3.5%

Spain 3.4% Brazil 3.3% Japan 2.6%

Other 22.7%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, p. 136.

Total = $107.9 billion

Figure 2-13

USDIA: Direct investment position in the chemicals industry, by

country, 2004
 37 USDOC, BEA, U.S. Direct Investment Abroad 2005.

 38 Calculations by the Commission, based on USDOC, BEA, U.S. Direct Investment Abroad.

2-20

For which industries do U.S.-owned foreign affiliates record the

highest sales? Are sales by foreign affiliates closely correlated with

employment, wages, assets, and investment stock? 

U.S.-owned foreign affiliates in the service sector account for 49 percent

($1.7 trillion) of foreign affiliate sales, while the manufacturing sector

accounts for 47 percent ($1.6 trillion). The primary sector accounts for

the remaining 4 percent ($131.5 billion), but has increased most rapidly

in recent years, at an average annual growth rate of 15 percent during

1999-2003 (table 2-6).

Wholesale trade, transportation equipment, and chemicals manufacturing accounted for the

largest shares of foreign affiliate sales (figure 2-14) in 2003. Sales by foreign wholesale trade

affiliates accounted for $769.8 billion, or 23 percent, of total sales by foreign affiliates, while

affiliates in the transportation equipment and chemicals manufacturing industries

respectively accounted for 12 percent and 9 percent of such sales.

Other industries in which foreign affiliates recorded high sales

include computers and electronic products, food and kindred

products, and information services, each of which accounted for

approximately 6 percent of total foreign affiliate sales in 2003.37

Industries posting particularly rapid average annual growth include

retail trade (17 percent, led by a seven-fold increase in sales by

motor vehicle and parts dealers); mining (15 percent, led by oil and

gas extraction); wood products (14 percent); and finance and insurance, except depository

institutions (11 percent, led by a doubling of sales by agencies, brokerages, and other

insurance-related affiliates). 

A strong and positive correlation exists between foreign affiliate sales and employment,

assets, wages, and investment position (table 2-7).38 This result is not surprising, as one

would expect foreign affiliates with relatively large capital and labor resources to account

for a large share of foreign affiliate sales. The greatest correlation is between foreign affiliate

sales and wages. This may reflect high employee productivity, or the concentration of

affiliate sales in high wage industries and high wage countries. Assets and investment

position were also closely related, as would be expected, but assets are not quite as closely

correlated to sales, employment, and wages, which appears to indicate that capital intensity

(as in manufacturing industries) has a greater effect than the level of affiliate holdings.

In which industries do U.S.-owned foreign affiliates employ the

greatest number of persons abroad? How are these employees

distributed by country? 

The manufacturing sector accounted for the largest share of employment by U.S.-owned

foreign affiliates in 2003, with 5.0 million employees or 51 percent of all workers employed

by foreign affiliates. Foreign affiliates in the service sector accounted for 47 percent of such

workers, and the primary sector accounted for 3 percent (table 2-8). During 1999-2003, the

number of workers employed by foreign affiliates in the service sector increased at an

average annual rate of 4 percent, faster than the 2-percent average for total foreign affiliate

Mexico and Germany are

leading host country

manufacturing centers. 

Sales by foreign affiliates in

the primary sector are small,

but are growing the fastest.
2-21

Table 2-6

USDIA: Foreign affiliate sales, by industry, 1999 and 2003

Industry 1999 2003

Percent

of total, 2003

Average

annual

growth

 ——Millions of dollars–— ——Percent——

All industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,611,764 3,383,010 100 6.7

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,657 127,822 3.8 14.8

Agriculture, forestry, fishing and hunting . . . . . . 2,887 3,650 0.1 6.0

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,953 61,862 1.8 3.0

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . 1,283,684 1,598,390 47.2 5.6

Food and kindred products ............... 160,723 197,605 5.8 5.3

Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,097 286,083 8.5 7.5

Pharmaceuticals . . . . . . . . . . . . . . . . . . 69,550 108,286 3.2 11.7

Primary and fabricated metals . . . . . . . . . . . . 46,930 53,615 1.6 3.4

Plastics and rubber products . . . . . . . . . . . . . 27,302 35,403 1.0 6.7

Nonmetallic mineral products . . . . . . . . . . . . . 13,793 17,108 0.5 5.5

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,109 81,516 2.4 1.4

Computers and electronic products ........ 197,465 210,106 6.2 1.6

Electrical equipment, appliances and

components . . . . . . . . . . . . . . . . . . . . . . . . . . 28,737 32,123 0.9 2.8

Transportation equipment................ 286,369 391,888 11.6 8.2

Textiles, apparel, and leather products . . . . . . 12,805 13,237 0.4 0.8

All other manufacturing ................. 218,354 279,706 8.3 6.4

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,251,536 1,653,148 48.9 7.2

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . 613,256 769,784 22.8 5.8

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,796 124,524 3.7 16.8

Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,334 191,294 5.7 8.2

Finance and insurance .................. 161,150 242,773 7.2 10.8

Professional, scientific and technical 

services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,414 96,159 2.8 3.3

Other services . . . . . . . . . . . . . . . . . . . . . . . . 186,586 228,614 6.8 5.2

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), U.S. Direct Investment

Abroad: Financial and Operating Data for U.S. Multinational Companies. Found at

http://www.bea.gov/bea/di/di1usdop.htm.
2-22

Table 2-7

USDIA: Correlation of major indicators, 2003

Sales Employment Assets Wages1

Investment

position

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.000

Employment . . . . . . . . . . . . . . . . . . . . . . 0.984 1.000

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.862 0.856 1.000

Wages1 . . . . . . . . . . . . . . . . . . . . . . . . . . 0.992 0.994 0.878 1.000

Investment position . . . . . . . . . . . . . . . . . 0.884 0.897 0.976 0.903 1.000

 1

 Wages equal total annual compensation per employee.

Source: Compiled by the Commission.

Wholesale trade 22.8%

Transportation equipment 11.6%

Chemicals 8.5%

electronic products 6.2%

Food & kindred products 5.8%

Information 5.7%

Finance 4.0%

Retail trade 3.7%

Insurance 3.2%

Telecommunications 3.1% Mining 3.8%

Other 21.6%

Total = $3.4 trillion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Financial and Operating Data for U.S. Multinational Companies, found

at http://www.bea.gov/bea/di/di1usdop.htm.

1

 1 Excludes depository institutions.

Computers &

Figure 2-14

USDIA: Foreign affiliate sales, by selected industry, 2003
 39 USDOC, BEA, U.S. Direct Investment Abroad.

2-23

Table 2-8

USDIA: Employment by foreign affiliates, by industry, 1999 and 2003

Industry 1999

Percent

of total,

1999 2003

Percent

of total,

2003

Average

annual growth

Thousands of employees —————Percent——————

All industries . . . . . . . . . . . . . . . . . . . . . . . 9,220.2 9,878.9 1.7

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . 149.5 1.6 178.5 1.8 4.5

Agriculture, forestry, fishing and hunting 65.7 0.7 65.3 0.7 -0.2

Utilities .......................... 121.3 1.3 101.8 1.0 -4.3

Manufacturing . . . . . . . . . . . . . . . . . . . . 5,015.7 54.4 5,021.3 50.8 0.0

Food and kindred products ....... 753.2 8.2 882.0 8.9 4.0

Chemicals . . . . . . . . . . . . . . . . . . . . 634.4 6.9 660.3 6.7 1.0

Pharmaceuticals . . . . . . . . . . . . 209.6 2.3 240.9 2.4 3.5

Primary and fabricated metals .... 250.7 2.7 265.0 2.7 1.4

Plastics and rubber products ..... 176.8 1.9 172.6 1.7 -0.6

Nonmetallic mineral products . . . . . 89.0 1.0 86.8 0.9 -0.6

Machinery . . . . . . . . . . . . . . . . . . . . 398.2 4.3 395.0 4.0 -0.2

Computers and electronic products 783.8 8.5 630.3 6.4 -5.3

Electrical equipment, appliances

and components ............. 304.8 3.3 256.0 2.6 -4.3

Transportation equipment ........ 971.0 10.5 1,115.1 11.3 3.5

Textiles, apparel, and leather

products ................... 148.2 1.6 134.5 1.4 -2.4

All other manufacturing .......... 505.6 5.5 423.7 4.3 -4.3

Services . . . . . . . . . . . . . . . . . . . . . . . . . 3,989.3 43.3 4,613.8 46.7 3.7

Wholesale trade . . . . . . . . . . . . . . . 712.0 7.7 837.9 8.5 4.2

Retail trade . . . . . . . . . . . . . . . . . . . 441.8 4.8 710.2 7.2 12.6

Information . . . . . . . . . . . . . . . . . . . 618.8 6.7 616.3 6.2 -0.1

Telecommunication . . . . . . . . . . . 368.5 4.0 307.8 3.1 -4.4

Finance and insurance .......... 280.4 3.0 320.0 3.2 3.4

Finance .................... 139.5 1.5 139.5 1.6 3.6

Insurance . . . . . . . . . . . . . . . . . . 140.9 1.5 1593.2 1.6 3.1

Professional, scientific and technical

services . . . . . . . . . . . . . . . . . . . . 432.0 4.7 466.6 4.7 1.9

Other services . . . . . . . . . . . . . . . . . 1,504.3 16.3 1,662.8 16.8 2.5

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), U.S. Direct

Investment Abroad: Financial and Operating Data for U.S. Multinational Companies. Found at

http://www.bea.gov/bea/di/di1usdop.htm.

employment. Employment by foreign affiliates in the primary sector also grew faster than

total foreign affiliate employment, recording an average annual growth rate of over

3 percent, led by the mining subsector. In contrast, employment by foreign affiliates in the

manufacturing industry experienced no significant change.

During 1999-2003, foreign affiliate employment among manufacturing affiliates increased

most rapidly in the food and kindred products and pharmaceuticals segments. Employment

by affiliates engaged in the manufacturing of computers and electronic products and

electrical equipment declined during the period. U.S.-owned foreign affiliates in the

transportation equipment and food and kindred products industries employed the largest

number of persons among foreign manufacturing affiliates, respectively accounting for

22 percent and 18 percent of all persons employed by foreign manufacturing affiliates in

2003 (figure 2-15).39 
 40 Calculations by the Commission, based on USDOC, BEA, U.S. Direct Investment Abroad. The BEA

data provide ranges for some years due to incomplete reporting. Nevertheless, each subsector noted recorded

a decline in the range size.

 41 See Chapter 5 for examples related to the copper mining industry.

2-24

During 1999-2003, foreign affiliate employment in the mining industry led the growth of the

primary sector, growing at a faster-than-average annual rate (5 percent). Metal mining and

support ventures were the principal segments of the mining industry that caused the high

employment growth rate. In contrast, the number of workers employed by foreign affiliates

in the agriculture industry as a whole declined marginally.40

In the service sector, wholesale trade and retail trade affiliates were the largest employers,

respectively accounting for 18 percent and 15 percent of employment by foreign service

sector affiliates in 2003 (figure 2-16). Wholesale trade affiliate employment increased at an

average annual rate of 4 percent during the period, led by an array of durable and nondurable goods.

The finance and insurance industry registered 3-percent average annual employment growth.

Notably, employment by primary product wholesalers (metals, oil, lumber, paper, etc.)

declined. This likely indicates increased centralization of these activities by the major

resource companies.41 Retail trade employment increased by 12.6 percent per annum, led by

employment by motor vehicle and parts dealers, which increased over three-fold. Other

service subsectors showing rapid average annual growth of U.S.-owned foreign affiliate

employment during 1999-2003 include health care and social assistance (70 percent) and

management of nonbank companies and enterprises (up nearly seven-fold), both of which

increased by 14 percent per annum. However, total employment in these areas was small,

Transportation equipment 22.2%

Food & kindred products 17.6%

Chemicals 13.1%

Computers 12.6%

Machinery 7.9%

Primary & fabricated metals 5.3%

Electric & electronic equipment 5.1%

Textiles, apparel, & leather products 2.7%

Nonmetallic mineral products 1.7%

Other 11.9%

Total = 5.0 million employees

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Financial and Operating Data for U.S. Multinational

Companies, found at http://www.bea.doc.gov.

Figure 2-15

USDIA: Foreign affiliate employment in manufacturing industries, 2003
 42 USDOC, BEA, , U.S. Direct Investment Abroad 2005.

 43 USDOC, BEA, U.S. Direct Investment Abroad 2003, tables II.H.3 and II.H.4.

2-25

at 13,800 for health care and 28,100 for management of nonbank companies. Other rapidly

growing industries included accommodation and food service (4.5 percent per annum) and

administration, support, and waste management (3.5 percent per annum).42

U.S.-owned foreign affiliates employ the largest number of persons in the United Kingdom,

Canada, Mexico, and Germany, which together accounted for 41 percent of total

employment in foreign affiliates of U.S. firms in 2003 (figure 2-17, table 2-9). The service

sector accounted for the greatest share of U.S. affiliate jobs in the United Kingdom and

Canada. In the United Kingdom, the most prominent industries were information services

(with employment spread fairly evenly among publishing, broadcasting,

telecommunications, and data processing affiliates) and computer systems design services.

In Canada, retail trade and food and drink establishments accounted for the largest shares of

U.S. foreign affiliate employment. In Mexico and Germany, by contrast, the manufacturing

sector accounted for the largest share of employment. In both countries, transportation

equipment affiliates accounted for 20 percent of foreign affiliate employment, followed by

wholesale trade affiliates in Germany, and by computers and electronic products affiliates

in Mexico.43

Wholesale trade 18.2%

Retail trade 15.4%

food services 12.5%

waste management 11.7%

technical services 10.1%

Telecommunications 6.7% Transportation & warehousing 4.3%

Finance & insurance 6.9%

Other 14.2%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Database,

found at http://www.bea.doc.gov, retrieved Nov. 14, 2005.

Total = 4.6 million employees

1

 1 Excludes depository institutions.

Accomodiations &

Professional, scientific, &

Administrative, support &

Figure 2-16

USDIA: Foreign affiliate employment in service industries, 2003
 44 Employee compensation refers to total compensation paid by employers, divided by the total number of

full-time and part-time employees. The term thus includes non-wage compensation such as benefits. This is

distinct from the data presented in chapter 9, which include wages without benefits. Calculations by

Commission staff from U.S. Department of Commerce, Bureau of Economic Analysis data.

 45 The large international primary and manufacturing industries all commonly report lower wages in their

foreign affiliates as part of the impetus to move operations overseas.

2-26

How does the compensation of foreign employees of U.S.-owned

foreign affiliates compare to compensation earned by workers in the

U.S. market?

In 2003, U.S. workers received average annual compensation of $45,012, while foreign

workers employed by U.S.-owned foreign affiliates received average annual compensation

of $34,716 (table 2-10).44 Likewise, in most industries, annual compensation paid to U.S.

workers exceeded compensation paid to employees of foreign affiliates. This is likely due

to lower costs-of-living in lesser-developed countries (LDCs), and the fact that one incentive

for U.S. firms to invest abroad is to take advantage of lower labor costs.45

United Kingdom 13.0%

Mexico 10.6% Canada 11.4%

Germany 6.3%

France 6.0%

Japan 5.1%

Brazil 4.0%

China 3.9%

Australia 3.3%

Italy 2.6%

Netherlands 2.3%

Other 31.5%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Financial and Operating Data for U.S. Multinational

Companies, found at http://www.bea.gov/bea/di/di1usdop.htm.

Total = 9.9 million employees

Figure 2-17

USDIA: Foreign affiliate employment, by country, 2003
2-27

Table 2-9

USDIA: Employment by foreign affiliates, by country, 1999 and 2003

Countries 1999 2003

Percent of

total, 2003

Average

annual

growth

Thousands of employees –––––––––Percent–––––––––

All countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,220.2 9,878.9 100 1.7

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311.5 329.0 3.3 1.4

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146.3 145.9 1.5 -0.1

Bermuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) 7.9 0.1 46.8

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421.9 399.9 4.0 -1.3

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,072.6 1,125.1 11.4 1.2

Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.0 84.6 0.9 6.0

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293.7 387.3 3.9 7.2

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571.3 591.0 6.0 0.9

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684.2 620.6 6.3 -2.4

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.6 113.3 1.1 3.8

Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.2 50.6 0.5 -8.5

Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 (1

) (2) (2)

India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.3 157.6 1.6 12.8

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.2 86.4 0.9 0.1

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208.8 255.1 2.6 5.1

Japan ................................ 399.1 501.0 5.1 5.8

Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 (1

) (2) (2)

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994.5 1,047.0 10.6 1.3

Netherlands ........................... 180.6 223.8 2.3 5.5

Panama .............................. (1

) 33.3 0.3 (2)

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.4 86.9 0.9 0.4

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.4 91.0 0.9 5.9

Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.8 37.1 0.4 2.4

Singapore ............................. 120.4 100.8 1.0 -4.3

South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . 137.8 116.4 1.2 -4.1

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183.7 219.9 2.2 4.6

Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.2 99.3 1.0 5.2

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.2 66.5 0.7 2.5

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.5 79.7 0.8 -0.9

UK Islands, Caribbean . . . . . . . . . . . . . . . . . . . 7.6 6.9 0.1 -2.4

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . 1,162.4 1,285.5 13.0 2.5

EU-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,473.9 3,742.7 37.9 1.9

 1

 In 1999, U.S.-owned foreign affiliates in Bermuda employed between 5,000 and 9,999 workers; and in Panama,

between 50,000 and 99,999 workers. In 2003, U.S.-owned foreign affiliates in Iceland employed between 1 and 499

workers, and in Luxembourg, between 10,000 and 24,999 workers. BEA reported a size range in order to avoid

disclosure of individual company information.

 2

 Not available.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), U.S. Direct Investment

Abroad: Financial and operating data for U.S. multinational companies. Found at

http://www.bea.gov/bea/di/di1usdop.htm.
 46 The differences in compensation levels for a given industry in the United States versus other countries

also may be due in part to different definitions of job functions in the countries, or to differing productivity

levels within the same industry in different countries. USDOC, BEA, U.S. Direct Investment Abroad

1999-2003; and USDOC, BEA, Survey of Current Business, U.S. Multinational Companies, July 2005, 22.

2-28

Table 2-10

USDIA: Annual compensation per employee,1

 employees of U.S.-owned foreign affiliates vs. U.S.

employees, by industry, 2003

Industry

Annual

compensation,

employees of

foreign affiliates

Annual

compensation,

U.S. employees

–––––Dollars/employee/year–––––

All industries2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,716 45,012

 Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,426 76,996

 Agriculture, forestry, fishing and hunting . . . . . . . . . . . . . . . . . . 8,469 22,874

 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,517 91,420

 Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,626 61,586

 Food and kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . 23,254 46,109

 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,335 88,784

 Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,494 (3

)

 Primary and fabricated metals . . . . . . . . . . . . . . . . . . . . . . . 32,091 55,837

 Plastics and rubber products . . . . . . . . . . . . . . . . . . . . . . . . 33,731 47,170

 Nonmetallic mineral products . . . . . . . . . . . . . . . . . . . . . . . . 31,359 50,946

 Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,423 61,853

 Computers and electronic products . . . . . . . . . . . . . . . . . . . 26,617 89,514

 Electrical equipment, appliances and components . . . . . . . 20,949 59,839

 Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 35,106 89,155

 Textiles, apparel, and leather products . . . . . . . . . . . . . . . . 18,528 35,780

 All other manufacturing ............................. (3

) (3)

 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,218 (3

)

 Whole sale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,698 60,702

 Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,670 28,084

 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,043 70,398

 Finance and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,628 78,645

 Professional, Scientific and technical service . . . . . . . . . . . . 58,641 70,180

 Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3

) (3)

 1

 Wages equal total annual compensation per employee.

 2

 Includes domestic, private industries.

 3

 Not available.

 

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), U.S. Direct Investment

Abroad: Operations of U.S. Parent Companies and Foreign Affiliates (USDIA); and USDOC, BEA, National Income

and Product Accounts, Tables 6.4D and 6.2D.

The greatest compensation differential is observed in the utilities industry. In 2003, U.S.

employees of utilities received average annual compensation of $91,420, while employees

of U.S.-owned foreign utilities affiliates received average annual

compensation of $28,517. This is likely due to the high-tech

nature of the domestic utilities industry relative to LDCs,

particularly the emissions safeguards and controls. Other

industries in which average annual U.S. compensation exceeded

average foreign affiliate compensation by at least $20,000 in

2003 include the mining industry, most manufacturing industries

(both for similar reasons to utilities), and the information industry

(for which the U.S. remains the technology development and application leader, and thus

pays more).46 By contrast, most service industries showed less disparity between U.S. and

foreign employees, with finance and insurance employees receiving nearly identical

Average annual compensation for

U.S. manufacturing workers is

almost double the compensation

paid to employees of foreign

affiliates.
 47 For additional detail on this issue, see chapter 9 of this study.

 48 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2005,

annex table A.1.9.

2-29

compensation within and without the United States.47 This is likely due to the smaller

influence of capital-intensive, high-technology skills in many service industries.

How do the foreign operations of U.S. parent companies compare to

the foreign operations of other multinational companies?

MNCs based outside the United States have a higher proportion of foreign assets, sales, and

employment than U.S.-based MNCs in almost every industry (figure 2-18), based on the

annual list of the world's 100 largest non-financial MNCs published

by the U.N. Conference on Trade and Development (UNCTAD).

The list is ranked in terms of their foreign assets, which includes

data regarding assets, sales, and employment by location. This is

particularly true in the transportation equipment,

telecommunications, and pharmaceuticals industries (table 2-11).48

MNCs based outside the United States likely averaged a greater

share of foreign sales because their domestic markets are smaller

than the U.S. market, forcing them to increase sales by venturing

into foreign markets. Other factors such as past colonial ties or

management differences may also play a role. 

The operations of non-U.S.

MNCs appear more globally

dispersed than the operations

of MNCs based in the United

States.

Source: UNCTAD, World Investment Report 2005.

Assets Sales Employment

0

10

20

30

40

50

Foreign MNCs U.S. MNCs

Percent of total

Figure 2-18

Level of foreign operations compared to total operations, foreign vs.

U.S.-based MNCs, 2003
 49 This figure is an estimate based on available data. UNCTAD's employment data is incomplete.

 50 UNCTAD, World Investment Report 2005, annex table A.1.9.

2-30

Table 2-11

Foreign sales by U.S. and foreign parents, selected industries, 2003

Industry

Number of

foreign

companies in

UNCTAD 100

Number of

U.S.

companies in

UNCTAD 100

Foreign

companies

in UNCTAD

100

U.S.

companies

in

UNCTAD

100

U.S. share of

total foreign

sales by

UNCTAD

100

––Foreign sales/total sales––

––—————––––––Percent–––––———––––

All Industries . . . . . . . . . . . . . 76 24 59.5 43.0 26.1

Chemicals . . . . . . . . . . . . . . . 1 2 58.4 58.2 61.2

Electronic equipment . . . . . . 5 3 59.7 51.7 45.9

Petroleum . . . . . . . . . . . . . . . 8 2 67.2 60.0 35.9

Pharmaceuticals . . . . . . . . . . 5 3 73.0 40.0 24.3

Transportation equipment . . . 11 3 63.5 33.3 19.8

Telecommunications . . . . . . . 7 2 53.9 21.6 11.7

Utilities . . . . . . . . . . . . . . . . . 7 2 46.9 38.1 8.4

Source: United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2005 (New York:

United Nations, 2005).

U.S. multinational companies account for 30 percent of the total foreign assets of all 100

companies on the UNCTAD list, and represent 26 percent of total foreign sales and 27

percent of total foreign employment by such companies.49 U.S. representation on the

UNCTAD list is strongest in the chemicals sector, where U.S. firms account for 61 percent

of all foreign sales by chemicals companies on the list, followed by the electronic equipment

and petroleum industries, where U.S. firms account for 46 percent and 36 percent,

respectively, of foreign sales by UNCTAD’s top 100 non-financial MNCs.50
3-1

CHAPTER 3

Foreign Direct Investment in the United

States

Summary of Key Findings

The majority of foreign direct investment in the United States (FDIUS) comes from the

developed OECD economies, with the EU-25 accounting for 62 percent of FDIUS position

in 2004, Japan accounting for 12 percent, and Canada and Switzerland each accounting for

slightly less than 10 percent. Middle and low-income countries as a group accounted for 12

percent of FDIUS position. Sales by foreign-owned affiliates in the United States were

highest for affiliates owned by parents based in Japan, the United Kingdom and Germany,

but sales by affiliates located in Brazil, Mexico, and Bermuda recorded the fastest growth,

all recording growth of greater than 20 percent per year, on average, between 1999 and 2004.

U.S. affiliates owned by parents in the United Kingdom, Germany, Japan, and the

Netherlands employed the greatest number of people in the United States, together

employing almost 3 million U.S. workers.

The service sector accounts for 63 percent of FDIUS stock, with the wholesale trade industry

accounting for the greatest share, followed by the insurance and depository institutions

(banking) industries. The manufacturing sector accounts for 34 percent of FDIUS stock,

with the chemicals industry taking the largest share, followed by transportation equipment.

The manufacturing sector accounts for 40 percent of employees of foreign affiliates, with 16

percent of all U.S. manufacturing workers employed by foreign-owned firms. For the

chemicals manufacturing industry, 37 percent of all U.S. workers are employed by foreignowned U.S. affiliates; for transportation equipment manufacturing, the figure is 22 percent.

For most industries, employees of U.S. affiliates are paid at higher rates than employees of

U.S.-owned firms. 

Which countries have the largest direct investment positions in the

United States?

Cumulative FDIUS totaled $1.5 trillion in 2004 (figure 3-1). European countries as a group

accounted for 73 percent of this total, or $1.1 trillion. The United Kingdom is the leading

single country investor in the United States, accounting for 17 percent, or $251.6 billion, of

the FDI stock in the United States in 2004 (table 3-1). Japanese investors accounted for the

second largest share of FDIUS, or 12 percent of FDI stock in the United States in 2004,

while the Netherlands and Germany ranked third and fourth, respectively. The rankings of

the top four countries remained unchanged throughout 1999-2004 (figure 3-2).

Investors from low- and middle-income countries accounted for $50.7 billion of inbound

direct investment stock in 2004, or 3 percent of the total. Mexico held the largest share of

FDIUS among low- and middle-income countries in 2004, accounting for $7.9-billion of

inbound investment and ranking sixteenth overall. Direct investment stock from Mexico
3-2

accounted for 16 percent of all FDIUS from low- and middle-income countries, and

increased at an average annual rate of 32 percent between 1999 and 2004.

With few exceptions, FDIUS from small and developing countries recorded relatively high

annual growth rates between 1999 and 2004, principally because such investment grew from

a relatively small base. FDIUS from Iceland, Hungary, Macau, Egypt, Barbados, Azerbaijan,

Colombia, and Venezuela recorded average annual growth rates in excess of 100 percent.

However, none of these countries accounted for more than 1.4

percent of total FDIUS by 2004. During 1999-2004, FDIUS held

by investors from Hungary, Luxembourg, and Switzerland

increased at rates well above the 10 percent average annual rate

for all countries. By contrast, FDIUS held by Japan and the

Netherlands, two of the three largest investors in the United

States, increased at rates below the average for all countries,

posting 3 percent and 6 percent average annual growth,

respectively. The overall share of U.S. inbound direct investment

held by the United Kingdom, the largest investor, increased at an average rate of 10 percent

per annum, on pace with the average annual growth rate recorded for total inbound

investment. 

What is the extent of FDIUS from Canada and Mexico? How does

the growth of FDIUS from the NAFTA countries compare to the

growth rate of total U.S. inbound investment? 

The United States’ NAFTA partners jointly accounted for 9 percent of all foreign direct

investment stock in the United States in 2004, down from 10 percent in 1999. On average,

FDIUS by NAFTA partners grew by 9 percent annually during 1999-2004 (table 3-2). This

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, 

p. 111 and Sept. 2004, p. 94.

1999 2000 2001 2002 2003 2004

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

All countries Europe

Trillion dollars

Figure 3-1

FDIUS: Direct investment position, 1999-2004

FDIUS stock from Mexico

was $7.9 billion in 2004,

increasing 32 percent per

year from 1999.
3-3

Table 3-1

FDIUS: Direct investment position1

 on a historical-cost basis, by country, 1999 and

2004

Country 1999 2004

Average

annual

growth

Gross

domestic

product,

2004

Millions 

of dollars

Percent 

of total

Millions 

of dollars

Percent

of total Percent

Million

dollars

All countries .......... 955,726 100 1,526,306 100 9.8 40,887,837

Australia . . . . . . . . . . . . . 15,616 1.6 28,083 1.8 12.5 631,256

Belgium . . . . . . . . . . . . . . 11,011 1.2 11,285 0.7 0.5 349,830

Bermuda . . . . . . . . . . . . . 14,798 1.5 8,442 0.6 -10.6 3,966

Brazil . . . . . . . . . . . . . . . . 735 0.1 1,286 0.1 11.8 604,855

Canada . . . . . . . . . . . . . . 90,559 9.5 133,761 8.8 8.1 979,764

Chile . . . . . . . . . . . . . . . . 42 0.0 40 0.0 -1.0 94,105

China . . . . . . . . . . . . . . . 295 0.0 490 0.0 10.7 1,649,329

France . . . . . . . . . . . . . . 89,945 9.4 148,242 9.7 10.5 2,002,582

Germany . . . . . . . . . . . . . 112,126 11.7 163,372 10.7 7.8 2,714,418

Hong Kong . . . . . . . . . . . 885 0.1 1,709 0.1 14.1 163,005

Hungary . . . . . . . . . . . . . 1,000 0.1 17,705 1.2 77.7 99,712

Iceland . . . . . . . . . . . . . . 113 0.0 8,249 0.5 135.9 12,380

India . . . . . . . . . . . . . . . . 88 0.0 522 0.0 42.8 691,876

Ireland . . . . . . . . . . . . . . . 14,958 1.6 21,153 1.4 7.2 183,560

Italy . . . . . . . . . . . . . . . . . 4,444 0.5 7,421 0.5 10.8 1,672,302

Japan ............... 153,815 16.1 176,906 11.6 2.8 4,623,398

Luxembourg . . . . . . . . . . 35,644 3.7 107,842 7.1 24.8 31,143

Mexico . . . . . . . . . . . . . . 1,999 0.2 7,880 0.5 31.6 676,497

Netherlands .......... 125,010 13.1 167,280 11.0 6.0 577,260

Panama . . . . . . . . . . . . . 5,275 0.6 10,707 0.7 15.2 13,793

Philippines . . . . . . . . . . . 101 0.0 25 0.0 -24.4 86,429

Poland . . . . . . . . . . . . . . 58 0.0 52 0.0 -2.2 241,833

Russia . . . . . . . . . . . . . . . 97 0.0 330 0.0 27.7 582,395

Singapore . . . . . . . . . . . . 1,365 0.1 1,801 0.1 5.7 106,818

South Africa . . . . . . . . . . 236 0.0 356 0.0 8.6 212,777

Spain . . . . . . . . . . . . . . . 2,749 0.3 5,669 0.4 15.6 991,442

Sweden . . . . . . . . . . . . . . 18,954 2.0 23,853 1.6 4.7 346,404

Switzerland . . . . . . . . . . . 52,973 5.5 122,944 8.1 18.3 359,465

Taiwan . . . . . . . . . . . . . . 3,021 0.3 3,227 0.2 1.3 286,002

UK Islands, Carribean . . . 11,573 1.2 24,243 1.6 15.9 (2

)

United Kingdom ....... 153,797 16.1 251,562 16.5 10.3 2,140,898

European Union (3

) ..... 582,006 60.9 941,679 61.7 10.1 (2)

 1

 Direct investment position is the sum of foreign parents’ equity holdings in their U.S. affiliates

(including retained earnings), plus the net outstanding loans that foreign parents have made to these

affiliates. Direct investment position is negative when the value of loans made by U.S. affiliates to their

foreign parent companies exceeds the value of the parents’ equity holdings plus the value of loans

made by the parent to its affiliate companies.

 2

 Not available.

 3

 1999 data are for the EU-15; 2004 data are for the EU-25.

Sources: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Balance of

Payments and Direct Investment Position Data, found at http://www.bea.gov/bea/di/di1fdibal.htm;

estimates by the Commission; World Bank, found at http://www.worldbank.org/ retrieved Dec. 22,

2005; Government of Bermuda, Department of Statistics; and Republic of China, National Statistics,

found at http://eng.stat.gov.tw.
3-4

United Kingdom 16.1%

Japan 16.1%

Netherlands 13.1%

Germany 11.7%

Canada 9.5%

France 9.4% Switzerland 5.5%

Luxembourg 3.7%

Other 14.8%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Sept. 2005, pp. 111-112; and Sept. 2004, pp. 94-95.

Total = $956 billion

United Kingdom 16.5%

Japan 11.6%

Netherlands 11.0%

Germany 10.7%

France 9.7%

Canada 8.8%

Switzerland 8.1% Luxembourg 7.1%

Other 16.7%

Total = $1.5 trillion

2004

1999

Figure 3-2

FDIUS: Direct investment position, by country, 1999 and 2004
3-5

Table 3-2

FDIUS: North American Free Trade Agreement (NAFTA) countries: Indicators of U.S. affiliate

operations, 2003 and 2004

Direct investment

position, 2004

Employment, 

2003 Sales, 2003 Assets, 2003

Country

Total

Average

annual

growth Total

Average

annual

growth Total

Average

annual

growth Total 

Average

annual

growth

Millions of

dollars

1999-04

Percent

Thousands1999-03

Percent

Millions

of dollars

1999-03

Percent

Millions

of dollars

1999-03

Percent

Canada ...... 133,761 8.1 422.5 -10.5 142,048 -3.1 358,403 -3.8

Mexico . . . . . . 7,880 31.6 (2

) (1) (1)22,897 22.2 125,600 23.2

NAFTA . . . . . . 141,641 8.9 (3

) (3) 164,945 -1 384,012 -2.7

Rest of the 

World . . . . 1,384,665 9.9 (3

) (3)

2,175,21

3 3.8

5,427,74

3 9.7

 Total . . . . . . . 1,526,306 9.8 5,735.0 -1.2 2,340,15

8

3.4 5,811,75

5

8.6

 1

 Reflects 2002 data. Data for 2003 are not available.

 2

 In 2003, Mexican-owned affiliates in the United States employed more than 100,000 workers. BEA reported a size

range to avoid disclosure of individual company information.

 3

 Not available.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, FDIUS: Operations of Foreign Parent Companies

and their U.S. Affiliates, found at http://www.bea.gov/bea/di/di1fdiop.htm.

growth rate largely reflects investment by Canadian parent firms: Canada accounts for the

bulk of the NAFTA partners’ investment (94 percent in 2004). However, as noted above,

FDIUS from Mexico increased at an average annual rate of 32 percent during the period,

much more rapidly than the 8-percent rate recorded by Canadian firms (figure 3-3). Canadian

parent firms are in turn increasing their investment in the United States more slowly than the

10-percent average growth rate among all direct investors.

Foreign-owned U.S. affiliates of parents from NAFTA partners employed more than 500,000

U.S. workers in 2003, accounting for 8 percent of all U.S. workers employed by U.S.

affiliates of foreign firms. The two NAFTA partners have exhibited

very different employment patterns in the United States, however.

U.S. affiliates of Canadian parent firms reduced their total

employment from 659,100 to 422,500 workers during 1999-2003.

By contrast, employment by Mexican-owned U.S. affiliates

increased from 33,000 in 1999 to more than 100,000 workers in

2003, consistent with the rise of Mexico’s investment stock in the

United States. 

In 2003, firms based in

Canada and Mexico

employed 442,200 U.S.

workers.
 1

 Includes Central and South America, Africa, and the Asia-Pacific region, excluding Australia, Hong

Kong, Japan, the Republic of Korea, New Zealand, Singapore, and Taiwan.

3-6

What is the extent of FDIUS from low- and middle-income

countries?

Low- and middle-income countries accounted for 2 percent, or $29.7 billion, of total FDIUS

stock in 2004.1

 Central and South American parent firms accounted for 89 percent of such

investment (figure 3-4), which grew at an average annual rate of 26 percent between 1999

and 2004. Investment from low and middle-income economies in the Asia-Pacific region

grew more slowly, but still faster than the average, at 14 percent

per annum, reaching $1.8 billion in 2004. Investment from

African-based MNCs reached $1.6 billion in 2004, with growth

of 3 percent, on average, during 1999-2004. The developing

countries with the largest shares of FDIUS in 2004 were

Panama, Mexico, and Venezuela, with FDIUS stock of $9.2

billion, $7.7 billion, and $4.4 billion, respectively.

The shares of affiliate employment, sales, and assets held by MNCs from low and middleincome economies are similarly small: 6.0 percent, 5.9 percent, and 4.4 percent, respectively.

Employment growth among such affiliates has actually been slightly negative in recent

years, down by 0.3 percent per year since 1999, to just under 313,000 persons in 2003. Sales

and assets held by such economies have risen significantly, however. Total sales by

affiliates of low and middle-income parents grew by 22.3 percent per year since 1999, to

$125.6 billion in 2003. Assets held by such affiliates grew by 29 percent per year during the

same period, to more than $226 billion in 2003.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Sept. 2005, p. 111; and Sept. 2004, p. 94;.

1999 2000 2001 2002 2003 2004

0

20

40

60

80

100

120

140

Canada Mexico

Billions

Figure 3-3

FDIUS: Direct investment position, Canada and Mexico, 1999-2004

FDIUS from Latin America

grew by 26 percent between

1999 and 2004.
 2

 This seems consistent with earlier research suggesting that market size is the principal factor

determining U.S. affiliates’ location by state. USITC, “Examination of U.S. Inbound and Outbound Direct

Investment,” USITC Publication 3383 (January 2001), p. 4-10, footnote 15 (“the correlation coefficient

between total property, plant, and equipment in foreign affiliates and state gross domestic product, an

indicator of market size, is 0.957”). 

 3

 Data on FDIUS employment from USDOC, BEA; data on total state employment from U.S. Department

of Labor, Bureau of Labor Statistics. Data on the percentage of total PPE by state are not available. 

3-7

How is FDIUS distributed by state? Within each state, which are the

largest industries for foreign direct investment? 

Approximately 5 percent of U.S. private-sector employees, or 5.3 million people, worked

for U.S. affiliates of foreign firms in 2003. The states of California, Texas, and New York

were the three largest hosts of FDIUS, measured in terms of both employment and gross

property, plant, and equipment (PPE), a measure of physical assets.

Together they accounted for approximately 24 percent of total FDIUS

employment.2

 Affiliates in California employed 561,000 workers,

followed by affiliates in New York (382,600 workers) and Texas

(339,300 workers). Other states which ranked among the top ten for

FDIUS employment in 2003 included Illinois, Florida, Pennsylvania,

New Jersey, Ohio, Michigan, and North Carolina. The states with the

largest proportions of workers employed by foreign-owned firms are

South Carolina, Hawaii, and New Hampshire, where U.S. affiliates employed 9 percent, 8

percent, and 8 percent, respectively, of all private sector workers in 2003 (table 3-3).3

South & Central America 88.4%

Asia & Pacific 6.2%

Africa 5.4%

 1

 Does not include the following countries, which are all classified as highincome by the World Bank: Australia, Japan, Hong Kong, Korea, New Zealand,

Singapore, and Taiwan.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Sept. 2005, pp. 111-112.

Total = $29.7 billion

1

Figure 3-4

FDIUS: Direct investment position, low- and middle-income countries,

by region, 2004

Foreign-owned firms

employ 9 percent of all

workers in South Carolina.
3-8

Table 3-3FDIUS: Property, plant, and equipment (PPE) and employment of U.S. majority-owned affiliates, selected states by 

(million dollars)

Total Manufacturing Wholesale Retail Information

Finance1/

insurance

Real

estate

Pr

California

Employment (thousands) . . 561.0 180.4 87.2 25.4 40.1 23.6 3.6 

PPE (million dollars) . . . . . . 88,247 31,690 17,124 3,246 5,940 2,322 13,633 

New York

Employment (thousands) . . 382.6 87.5 30.2 58.3 34.7 44.0 5.3 

PPE (million dollars) . . . . . . 62,257 12,712 5,915 4,840 3,911 4,704 15,215 

Texas

Employment (thousands) . . 339.3 140.4 39.2 13.7 9.7 12.8 2.3 

PPE (million dollars) . . . . . . 85,350 44,520 19,654 1,792 1,779 965 4,897 

Illinois

Employment (thousands) . . 254.9 97.2 29.0 10.2 16.5 17.5 1.0 

PPE (million dollars) . . . . . . 40,852 17,073 9,436 1,120 1,880 1,505 3,472 

Florida

Employment (thousands) . . 248.9 73.0 24.1 25.9 12.8 11.2 5.3 

PPE (million dollars) . . . . . . 29,452 9,902 3,696 1,545 1,460 585 4,429 

Pennsylvania

Employment (thousands) . . 227.7 108.8 14.3 29.3 9.8 8.8 1.8 

PPE (million dollars) . . . . . . 30,245 16,869 2,158 2,320 932 638 2,276 

All states

Employment (thousands) . . 5,253.0 2,138.3 512.1 564.9 239.1 244.5 36.3 

PPE2 (million dollars) . . . . . 1,049,569 484,624 195,086 42,035 43,063 32,537 75,103 

1 Does not include depository institutions.2 Includes data for PPE held by U.S. affiliates outside the United States and PPE not permanently located in a particular state, such a

stock, satellites and undersea cable.Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Foreign Direct Investment in the United States: 

Parent Companies and their U.S. Affiliates (FDIUS), tables D-12 and G-7, found at http://www.bea.gov/lea/di/di1fdiop.htm.
 4

 This category includes agriculture, mining, construction, transportation, communications, and public

utilities services.

 5

 Data for values excludes most mining and agriculture transactions, for which data were suppressed by

BEA to avoid disclosure of individual company information. BEA, “Table 4. Foreign Direct Investment

Position in the United States on a Historical Cost Basis, 2001-2004" Survey of Current Business, Sept. 2005,

p. 83; BEA, “Foreign Direct Investment Position in the United States on a Historical-Cost Basis, 1999,"

available at <http://www.bea.gov/bea/di/fdipos-99.htm>; BEA, Survey of Current Business, “Table 17.

Foreign Direct Investment in the United States: Selected Items by Detailed Industry of U.S. Affiliate, 2000-

2004,” Sept. 2005, pp. 113 -114.; BEA, “Foreign Direct Investment in the United States: U.S. Business

Enterprises Acquired or Established by Foreign Direct Investors, 1998-2004,” available on the web at URL

<http://www.bea.gov/bea/ai/iidguide.htm#IID_comprehensive> , tables 1.1, 1.2, 4.2, 4.3, 4.4, 4.5, 5.2, 5.3,

5.4, 5.5, 5.6, and 5.7.

3-9

For the country as a whole, the manufacturing sector accounts for just under one-third of

employment by U.S. affiliates. However, there are distinct variations by state (table 3-4). For

instance, in California, manufacturing accounts for 25 percent of all affiliate employment in

the state, with wholesale trade and “other industries”4

 accounting for large shares as well. In

New York, manufacturing accounts for 16 percent of all affiliate employment, and in Texas

it accounts for 29 percent of such employment.

Which countries’ affiliates have the most sales in the United States?

How are these sales divided by industry? 

Affiliates with parents based in seven developed OECD countries accounted for 87 percent

of total 2003 sales by U.S. affiliates (figure 3-5). This reflects the high

concentration of FDIUS in the United States from developed countries. Sales by

affiliates of Japanese-, British-, and German-based affiliates together accounted

for half of all sales by U.S. affiliates. Japan’s U.S. affiliates alone accounted for

19 percent of sales ($449.6 billion) in 2003, while British-owned affiliates

recorded sales of $399.1 billion (table 3-5). Sales by Canadian-owned affiliates

were $142.0 billion in 2003. Together, the NAFTA countries accounted for

approximately 7 percent of total sales by all foreign-owned U.S. affiliates.

Wholesale trade accounted for more than half of Japanese-owned affiliates’ sales,

and almost half of British-owned affiliates’ sales. Affiliates of EU-owned firms

accounted for about 75 percent of total sales in the finance and insurance

industry. U.S. affiliate sales are also strong in the chemicals industry (where, again, the EU

is strongest), with sales of $160.2 billion in 2004.

Is there a greater level of FDIUS in services or goods? How do the

growth rates compare in the two sectors?

During 1999-2004, the FDIUS position in the services and manufacturing sectors increased

at average annual growth rates of 13 percent and 5 percent, respectively. In 2004, FDIUS

stock in the service sector measured $962.1 billion, or 63 percent of the total, while FDIUS

stock in manufacturing measured $519.4 billion, or 34 percent of the total (table 3-6). The

mining industry accounted for 3 percent of direct investment position with an average annual

growth of 26 percent, while agriculture and related industries accounted for 0.2 percent with

an average annual growth rate of 0.9 percent (figure 3-6). The service sector accounted for

a majority of the cross-border acquisitions of U.S. firms during 1999-2003 as well, with

1,534 foreign acquisitions of U.S. service firms, 61 percent of all acquisitions of U.S. firms,

valued at $542.7 billion. The same period included 999 foreign acquisitions of U.S. goodsproducing firms, valued at nearly $277 billion.5

Firms based in 7

industrialized

countries accounted

for 87 percent of sales

by U.S. affiliates.
3-10

Table 3-4

FDIUS: Property, plant, and equipment (PPE) and employment by U.S. affiliates, by

state, 2003

State PPE

Share of

PPE for

all states Employment

Percent of

employment

for all states

FDIUS

employment

as percent of

total state

employment

Millions of

dollars Percent Thousands ——————Percent—————

Total . . . . . . . . . . . 1,049,569 5253.0 4.9

South Carolina . . . . . 20,533 2.3 127.5 2.4 8.8

New Hampshire . . . . 4,613 0.5 41.9 0.8 8.1

Hawaii . . . . . . . . . . . . 7,751 0.9 36.1 0.7 8.0

Delaware . . . . . . . . . . 6,154 0.7 26.5 0.5 7.6

Connecticut . . . . . . . . 12,682 1.4 104.9 2.0 7.5

Massachusetts . . . . . 23,088 2.6 189.0 3.6 6.9

New Jersey . . . . . . . . 33,362 3.7 223.2 4.3 6.8

North Carolina . . . . . . 25,021 2.8 204.6 3.9 6.6

Rhode Island ....... (1

) (1) 25.9 0.5 6.3

Maine . . . . . . . . . . . . 5,986 0.7 30.1 0.6 6.1

Kentucky . . . . . . . . . . 25,575 2.8 87.0 1.7 6.1

Indiana . . . . . . . . . . . 29,836 3.3 134.2 2.6 6.1

Georgia . . . . . . . . . . . 26,125 2.9 182.8 3.5 5.8

New York . . . . . . . . . 62,257 6.9 382.6 7.3 5.6

Michigan . . . . . . . . . . 39,009 4.3 205.0 3.9 5.6

Alaska . . . . . . . . . . . . (1

) (1) 11.7 0.2 5.4

Maryland . . . . . . . . . . 10,902 1.2 104.1 2.0 5.2

Illinois . . . . . . . . . . . . 40,852 4.5 254.9 4.9 5.2

Virginia . . . . . . . . . . . 16,733 1.9 138.6 2.6 5.0

Alabama . . . . . . . . . . 16,102 1.8 72.8 1.4 4.9

Wyoming . . . . . . . . . . 10,946 1.2 8.8 0.2 4.8

Pennsylvania . . . . . . 30,245 3.4 227.7 4.3 4.8

Ohio . . . . . . . . . . . . . 32,686 3.6 208.6 4.0 4.6

California . . . . . . . . . 88,247 9.8 561.0 10.7 4.5

Texas . . . . . . . . . . . . 85,350 9.5 339.3 6.5 4.5

Vermont . . . . . . . . . . (1

) (1) 10.4 0.2 4.2

Wisconsin . . . . . . . . . 16,463 1.8 97.6 1.9 4.2

Colorado . . . . . . . . . . 13,505 1.5 73.5 1.4 4.1

West Virginia . . . . . . . 6,238 0.7 22.2 0.4 4.1

Florida . . . . . . . . . . . . 29,452 3.3 248.9 4.8 4.0

Missouri . . . . . . . . . . 14,438 1.6 87.2 1.7 4.0

District of Colombia . . 4,461 0.5 16.5 0.3 3.9

Washington . . . . . . . . 18,069 2.0 82.8 1.6 3.8

Minnesota . . . . . . . . . 10,828 1.2 84.6 1.6 3.8

Utah . . . . . . . . . . . . . 11,933 1.3 32.2 0.6 3.8

Oregon . . . . . . . . . . . 10,314 1.1 48.4 0.9 3.7

Arkansas . . . . . . . . . . 4,864 0.5 33.7 0.6 3.6

Kansas . . . . . . . . . . . 5,726 0.6 35.6 0.7 3.4

Iowa . . . . . . . . . . . . . 6,028 0.7 38.1 0.7 3.2

Louisiana . . . . . . . . . 29,200 3.2 48.0 0.9 3.2

Arizona . . . . . . . . . . . 10,015 1.1 59.8 1.1 3.1

North Dakota . . . . . . . 1,617 0.2 7.9 0.2 3.1

Oklahoma . . . . . . . . . 8,100 0.9 32.5 0.6 2.9

Nevada . . . . . . . . . . . 6,795 0.8 27.2 0.5 2.9

Mississippi . . . . . . . . 5,836 0.6 22.8 0.4 2.6

Nebraska . . . . . . . . . 1,986 0.2 18.9 0.4 2.6

See footnote at end of table.
3-11

Table 3-4—Continued

FDIUS: Property, plant, and equipment (PPE) and employment by U.S. affiliates, by

state, 2003

State PPE

Percent of

PPE for

all states Employment

Percent of

employment

for all states

FDIUS

employment

as percent of

total state

employment,

2003

Millions of

dollars Percent Thousands ——————Percent—————

Idaho . . . . . . . . . . . . . 2,139 0.2 11.2 0.2 2.4

South Dakota . . . . . . 777 0.1 7.0 0.1 2.4

Puerto Rico . . . . . . . . 2,646 0.3 16.4 0.3 2.3

New Mexico . . . . . . . 4,246 0.5 12.5 0.2 2.2

Montana . . . . . . . . . . 2,353 0.3 6.6 0.1 2.1

Tennessee . . . . . . . . 18,002 2.0 127.4 2.4 1.7

 1

 Includes “other U.S. areas.”

Source: Bureau of Economic Analysis (BEA), Foreign Direct Investment in the United States: Operations

of Foreign Parent Companies and their U.S. Affiliates (FDIUS), tables D-12 and G-7, found at

http://www.bea.gov/lea/di/di1fdiop.htm; and U.S. Department of Labor, Bureau of Labor Statistics,

Employment and Wages, Annual Averages 2003, Table 6, found at

http://www.bls.gov/cew/ew03table6.pdf.

Japan 19.2%

United Kingdom 17.1%

Germany 13.5%

Netherlands 9.2%

France 7.3%

Canada 6.1%

Switzerland 5.2%

Other 22.4%

Total = $2.3 trillion

Source: U.S. Department of Commerce, Bureau of Economic, Analysis, Foreign

Direct Investment in the United States: Operations of Foreign Parent Companies

and their U.S. Affiliates, found at http://www.bea.gov.

Figure 3-5

FDIUS: Sales by U.S. afffilates, by country, 2003
3-12

Table 3-5

FDIUS: Sales by U.S. affiliates, 1999 and 2003

Country 1999 2003

Average

annual

growth

Millions

of dollars

Percent

of total

Millions

of dollars

Percent

of total Percent

 All countries . . . . . . . . . 2,044,359 100.0 2,340,158 100.0 3.4

Australia . . . . . . . . . . . . . . 30,236 1.5 38,913 1.7 6.5

Belgium . . . . . . . . . . . . . . . 19,627 1.0 28,619 1.2 9.9

Bermuda . . . . . . . . . . . . . . 28,866 1.4 60,909 2.6 20.5

Brazil . . . . . . . . . . . . . . . . . 3,287 0.2 7,659 0.3 23.6

Canada ............... 161,132 7.9 142,048 6.1 -3.1

Chile . . . . . . . . . . . . . . . . . 531 0.0 (1

) (1) (1)

China . . . . . . . . . . . . . . . . 1,494 0.1 (2

)2,139 0.1 9.4

France . . . . . . . . . . . . . . . 169,876 8.3 171,691 7.3 0.3

Germany . . . . . . . . . . . . . . 312,281 15.3 315,505 13.5 0.3

Hong Kong . . . . . . . . . . . . 6,833 0.3 8,367 0.4 5.2

Hungary .............. (1

) (1) (1) (1) (1)

Iceland . . . . . . . . . . . . . . . 350 0.0 451 0.0 6.5

India . . . . . . . . . . . . . . . . . 466 0.0 (1

) (1) (1)

Ireland . . . . . . . . . . . . . . . . 13,830 0.7 11,475 0.5 -4.6

Italy . . . . . . . . . . . . . . . . . . 20,328 1.0 22,417 1.0 2.5

Japan ................ 451,099 22.1 449,638 19.2 -0.1

Luxembourg . . . . . . . . . . . 3,486 0.2 (3

)3,721 0.2 1.6

Mexico . . . . . . . . . . . . . . . 10,279 0.5 (2

)22,897 1.0 22.2

Netherlands ........... 182,193 8.9 216,075 9.2 4.4

Panama . . . . . . . . . . . . . . 2,245 0.1 1,573 0.1 -8.5

Philippines . . . . . . . . . . . . 197 0.0 (3

)134 0.0 -9.2

Poland . . . . . . . . . . . . . . . 66 0.0 (1

) (1) (1)

Russia . . . . . . . . . . . . . . . . (1

) (1) (1) (1) (1)

Singapore . . . . . . . . . . . . . 4,234 0.2 6,261 0.3 10.3

South Africa . . . . . . . . . . . 3,475 0.2 (3

)5,152 0.2 10.3

Spain . . . . . . . . . . . . . . . . 3,805 0.2 (2

)5,429 0.2 9.3

Sweden . . . . . . . . . . . . . . . 42,242 2.1 41,629 1.8 -0.4

Switzerland . . . . . . . . . . . . 108,401 5.3 122,626 5.2 3.1

Taiwan . . . . . . . . . . . . . . . 13,158 0.6 10,100 0.4 -6.4

UK Islands, Caribbean . . . 9,234 0.5 11,082 0.5 4.7

United Kingdom ........ 282,640 13.8 399,079 17.1 9.0

EU-15 . . . . . . . . . . . . . . . . 1,072,923 52.5 1,249,659 53.4 3.9

 1

 Data not available.

 2

 Data for 2002. Data for 2003 are not available.

 3

 Data for 2001. Data for 2002 and 2003 are not available.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Foreign

Direct Investment in the United States: Operations of Foreign Parent Companies and their U.S.

Affiliates (FDIUS), found at http://www.bea.gov/.
3-13

Table 3-6

FDIUS: Direct investment position1

 on a historical-cost basis, by industry, 1999 and 2004

Industry 1999 2004

Average

annual

growth

Millions

of dollars Percent

Millions

of dollars Percent Percent

All industries ............................ 955,726 1,526,306 9.8

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,415 1.4 42,507 2.8 25.9

Agriculture, forestry, fishing and hunting . . . . . 2,220 0.2 2,325 0.2 0.9

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,954 1.0 42,682 2.8 33.8

Manufacturing ......................... 406,415 42.5 519,410 34.0 5.0

Food and kindred products . . . . . . . . . . . . . 19,632 2.1 36,004 2.4 12.9

Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . 96,614 10.1 147,952 9.7 8.9

Pharmacy and medicines . . . . . . . . . . . . 41,693 4.4 66,427 4.4 9.8

Primary and fabricated metals . . . . . . . . . . . 18,831 2.0 18,897 1.2 0.1

Plastics and rubber products . . . . . . . . . . . . 12,720 1.3 14,221 0.9 2.3

Nonmetallic mineral products . . . . . . . . . . . 22,387 2.3 33,430 2.2 8.3

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . 30,462 3.2 49,541 3.2 10.2

Computers and electronic products . . . . . . . 62,566 6.5 41,883 2.7 -7.7

Electrical equipment, appliances and

components . . . . . . . . . . . . . . . . . . . . . . . 13,413 1.4 13,593 0.9 0.3

Transportation equipment . . . . . . . . . . . . . . 52,809 5.5 70,022 4.6 5.8

Textiles, apparel, and leather products . . . . 2,505 0.3 2,746 0.2 1.9

All other manufacturing . . . . . . . . . . . . . . . . 74,476 7.8 91,121 6.0 4.1

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533,676 55.8 962,064 63.0 12.5

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . 106,745 11.2 201,101 13.2 13.5

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . 22,387 2.3 26,122 1.7 3.1

Information . . . . . . . . . . . . . . . . . . . . . . . . . . 78,035 8.2 117,190 7.7 8.5

Telecommunications . . . . . . . . . . . . . . . . 25,598 2.7 28,645 1.9 2.3

Depository institutions . . . . . . . . . . . . . . . . . 61,972 6.5 123,304 8.1 14.8

Finance and insurance ................ 132,203 13.8 206,533 13.5 9.3

Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 48,605 5.1 69,874 4.6 7.5

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 83,598 8.7 136,659 9.0 10.3

Professional, scientific and technical 

services . . . . . . . . . . . . . . . . . . . . . . . . . . 11,682 1.2 38,778 2.5 27.1

Other services . . . . . . . . . . . . . . . . . . . . . . . 120,652 12.6 249,036 16.3 15.6

 1

 Direct investment position is the sum of foreign parents’ equity holdings in their U.S. affiliates (including retained

earnings), plus the net outstanding loans that foreign parents have made to these affiliates. Direct investment

position is negative when the value of loans made by U.S. affiliates to their foreign parent companies exceeds the

value of the parents’ equity holdings plus the value of loans made by the parent to its affiliate companies.

 2

 Not available.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, found at

http://www.bea.gov/lea/di/di1fdiop.htm.
 6

 ‘Other industries’ accounted for 3.1 percent of total assets in 2004; BEA reporting breakdowns do not

permit full allocation between goods-producing and services-producing industries.

 7

 BEA, “Foreign Direct Investment in the United States: New Investment in 2004,” Survey of Current

Business, June 2005, p. 32; BEA, “Table 9.1. Selected Financial and Operating Data of Majority-Owned

Affiliates by Industry of Affiliate, 2002, Survey of Current Business, August 2005, p. 211; BEA, “Table 9.2.

Selected Financial and Operating Data of Majority-Owned Affiliates by Industry of Affiliate, 2003, Survey of

Current Business, August 2005, p. 212. 

3-14

The service sector represents a much larger proportion of FDIUS when total assets of

foreign-owned affiliates are used as a measure. Service sector affiliates accounted for 80

percent of total assets in 2003, compared with 19 percent for the manufacturing sector (table

3-7).6

 The bulk of the assets in the service sector (95 percent) are controlled by companies

in the finance, insurance, and real estate industries. Financial assets accounted for a larger

share of assets in these companies than property, plant, and equipment. Service sector assets

increased at an average rate of 10 percent annually during 1999-2003, versus 9 percent for

all sectors. Assets of manufacturing affiliates increased at a 2 percent average annual rate.7

In which industries is FDIUS stock the largest?

Within the service sector, the wholesale trade, insurance, and depository institutions

industries accounted for the greatest shares of inbound investment stock in

2004, equal to 21 percent ($201.1 billion), 14 percent ($136.7 billion), and

13 percent ($123.3 billion), respectively, of FDIUS stock in services in 2004

(figure 3-7). During 1999-2004, the most rapid growth in FDIUS stock

occurred in the utilities and professional, scientific, and technical service

industries, which reported average annual growth of 34 percent and 27

Source: U.S. Department of Commerce, Bureau of Economic Analysis,

Survey of Current Business, found at http://www.bea/gov/bea/di/di1fdiop.htm.

1999 2000 2001 2002 2003 2004

0

200

400

600

800

1000

Services Manufacturing

Mining Agriculture

Figure 3-6

FDIUS: Direct investment position, by sector, 1999-2004

FDIUS grew fastest in

utilities and professional

services.
3-15

Table 3-7

FDIUS: Assets of U.S. affiliates, by industry, 1999 and 2003

Industry 1999

Percent of

total, 1999 2003

Percent of

total, 2003

Average

annual

growth

Millions of

dollars

Percent Millions of

dollars

————Percent—————

All industries . . . . . . . . . . . . . . . . . . . 4,177,211 5,811,755 8.6

Mining . . . . . . . . . . . . . . . . . . . . . . 45,066 1.1 70,302 1.2 11.8

Agriculture, forestry, fishing 

and hunting . . . . . . . . . . . . . . . 6,371 0.2 4,292 0.1 -9.4

Utilities . . . . . . . . . . . . . . . . . . . . . 28,015 0.7 97,175 1.7 36.5

Manufacturing ................ 992,765 23.8 1,087,087 18.7 2.3

Food and kindred 

products . . . . . . . . . . . . . . . . . 58,417 1.4 77,327 1.3 7.3

Chemicals . . . . . . . . . . . . . . . . . 207,312 5.0 253,205 4.4 5.1

Pharmacy and 

medicines . . . . . . . . . . . . 87,929 2.1 118,647 2.0 7.8

Primary and 

fabricated metals . . . . . . . . . . 60,465 1.4 49,697 0.9 -4.8

 Plastics and rubber 

products . . . . . . . . . . . . . . . . . 28,733 0.7 29,240 0.5 0.4

Nonmetallic mineral 

products . . . . . . . . . . . . . . . . . 46,486 1.1 61,031 1.1 7.0

Machinery . . . . . . . . . . . . . . . . . 64,664 1.5 100,007 1.7 11.5

Computers and 

electronic products ......... 107,694 2.6 103,406 1.8 -1.0

Electrical equipment, 

appliances and components . 40,132 1.0 27,218 0.5 -9.3

Transportation 

equipment ............... 186,470 4.5 227,812 3.9 5.1

Textiles, apparel, and 

leather products . . . . . . . . . . . 10,921 0.3 5,848 0.1 -14.5

All other manufacturing ....... 181,471 4.3 152,296 2.6 -4.3

Services . . . . . . . . . . . . . . . . . . . . 3,133,009 75.0 4,650,074 80.0 10.4

Whole sale trade . . . . . . . . . . . . 306,995 7.3 462,465 8.0 10.8

Retail trade . . . . . . . . . . . . . . . . 70,381 1.7 68,835 1.2 -0.6

Information . . . . . . . . . . . . . . . . . 223,103 5.3 368,903 6.3 13.4

Telecommunication . . . . . . . . 87,167 2.1 (1

) 0.0 (1)

Finance and insurance . . . . . . . 2,170,737 52.0 3,190,263 54.9 10.1

Finance . . . . . . . . . . . . . . . . . 1,154,326 27.6 1,679,541 28.9 9.8

Insurance . . . . . . . . . . . . . . . . 1,016,410 24.3 1,510,722 26.0 10.4

Professional, scientific 

and technical services . . . . 25,485 0.6 63,952 1.1 25.9

Other services . . . . . . . . . . . . . . 336,308 8.1 495,656 8.5 10.2

 1

 Data not available.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Foreign Direct Investment

in the United States: Operations of Foreign Parent Companies and their U.S. Affiliates (FDIUS), found at

http://www.bea.gov/lea/di/di1fdiop.htm, table A-2.
3-16

Wholesale trade 20.9%

Insurance 14.2%

Depository institutions 12.8%

Information services 12.2%

Finance 7.3%

Utilities 4.4%

Professional, scientific, & technical 4.0% Telecommunications 3.0%

Retail trade 2.7%

Other 18.5%

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, found at http://www.bea.gov/bea/di/di1fdiop.htm.

Total = $962 billion

Transportation equipment 13.5% Chemicals 28.5%

Computers & electronic 8.1%

Machinery 9.5%

Food & kindred products 6.9%

Nonmetallic mineral products 6.4%

Primary & fabricated metals 3.6% Plastics & rubber 2.7% Electrical equipment 2.6%

Textiles 0.5%

Other 17.6%

Total = $519 billion

Manufacturing industries

Services

products

Figure 3-7

FDIUS: Direct investment position, by share of services and

manufacturing sectors, 2004
 8

 BEA, “Foreign Direct Investment in the United States: Detail for Historical Cost Position and Related

Capital and Income Flows, 2004", Table 10.3, Survey of Current Business, Sept. 2005, p. 95. 

 9

 Ibid.

 10 Zephyr database.

3-17

percent, respectively, during the period. The wholesale trade industry recorded inbound

investment growth of 14 percent annually, on average, slightly higher than the average for

all service industries. Foreign firms acquired 229 U.S. wholesale trade firms during 1999-

2003 and 273 U.S. information services firms, more than in any other service sector

industry. FDIUS stock in the finance and insurance industry grew by 9 percent on an average

annual basis. Foreign firms acquired 90 U.S. insurance firms and 117 other non-depository

financial firms during 1999-2003.8

Within the manufacturing sector, the chemicals industry attracted the greatest share of

foreign direct investment, with direct investment stock measuring $148.0 billion in 2004,

equal to 29 percent of FDIUS stock in manufacturing. Almost half this amount is invested

in the pharmaceutical industry. Foreign direct investment in the chemicals industry recorded

average annual growth of 9 percent during 1999-2004, with the pharmaceuticals segment

growing by 10 percent per annum. Foreign firms acquired a total of 127 U.S. chemical firms

during 1999-2003. Chapter 7 discusses inbound and outbound FDI in the chemicals industry

in greater detail. Foreign investment in the food and kindred products industry recorded the

fastest growth in the manufacturing sector, with average annual increases of 13 percent

during 1999-2004.9

The two industries with the fastest overall growth rates in FDIUS stock were mining and

utilities, with average annual growth rates of 26 percent and 34 percent, respectively.

Chapter 5 of this study presents an in-depth discussion of FDI in the mining sector. In the

utilities industry, large European firms including RWE AG (Germany), E.ON (Germany),

Veolia Water (formerly Vivendi SA, France), and Suez Lyonnaise des Eaux (France) have

amassed a significant presence in the U.S. water and electric power sectors in recent years.

For instance, RWE acquired U.S.-based American Water Works Company in a deal valued

at $8.6 billion in 2003, and RWE Thames Water, a British-based subsidiary of RWE AG,

acquired Elizabethtown Corporation for $928 million in 2001.10 Vivendi SA acquired U.S.

Filter Corporation in 1999 for $6.0 billion, and Suez acquired United Water Resources, Inc.

in 2000 for $1.2 billion.

In which U.S. industries have FDIUS flows been largest in recent

years?

Total capital inflows resulting from direct investment into the United States were $95.9

billion in 2004, below the average of $163.5 billion during 1999-2004. This average reflects

the very high capital inflows due to the large number of mergers and acquisitions associated

with the internet stock market boom that began in the 1990s and continued through 2001.

Consequently, total capital inflows declined sharply after 2000. Throughout the period, the

service sector has captured the largest share of capital inflows (figure 3-8). This was

particularly true in 1999 and 2000, before the 2001 stock market crash, and reflects strong

investment in the telecommunications and finance sectors in 1999 and 2000. New FDIUS

inflows in telecommunications alone were $77.7 billion in 1999, which dropped sharply
 11 Separate data for the telecommunications industry is not available after 1999, but the total for the

broader category of broadcasting and telecommunications is reflected in table 3-8. Aside from 2001, when

the total reached $40.6 billion, the category total was lower than $5.0 billion for the remainder of the period.

 12 The data shows that capital flows from Switzerland were higher for manufacturing over the period

under discussion, but this is due to data suppressed by BEA to avoid disclosing individual company

information in depository institutions.

3-18

during 2000-2004.11 Within the service sector, total capital inflows throughout the period

were largest in broadcasting and telecommunications, wholesale trade, insurance, finance,

and professional, scientific, and technical services (table 3-8). Within the manufacturing

sector, the chemicals, computer and electronic products, and electrical equipment sectors

recorded the largest total capital inflows during the period. Investment in computer and

electronic products was very strong during 1999 and 2001, again tied to the strong interest

in internet-related industries during that time, and dropped sharply for the remainder of the

period.

The five countries which recorded the largest capital flows during 1999-2004 were the

United Kingdom, the Netherlands, France, Canada, and Switzerland (table 3-9). Due to the

nature of capital flows data, which vary from year to year due to that year’s particular

transactions, the rankings of these countries changed throughout the period, but all were

significant investors. Consistent with the data for all countries, each of the top five invested

significantly more in the service sector than in manufacturing during 1999-2004.12 Figure

3-9 illustrates the industry composition of capital flows from these top five countries.

1999 2000 2001 2002 2003 2004

-50

0

50

100

150

200

250

Manufacturing Services

Mining Agriculture

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Sept. 2005 and Sept. 2004.

Figure 3-8

FDIUS inflows by sector, 1999-2004
3-19

Table 3-8

FDIUS: Capital inflows (outflows) by sector and selected industry, 1999-2004

(millions of dollars)

Industry 1999 2000 2001 2002 2003 2004

Total

1999-2004

Average

1999-2004

All industries ............... 283,376 314,007 159,461 71,331 56,834 95,859 980,868 163,478

Manufacturing . . . . . . . . . . . . . . 82,382 105,119 51,069 25,715 14,888 19,372 298,545 49,758

 Chemicals . . . . . . . . . . . . . . . 7,435 25,466 16,823 -6,629 7,775 7,485 58,355 9,726

 Computer and electronic

products . . . . . . . . . . . . . . 29,481 33,073 -1,403 -6,648 -2,043 -784 51,676 8,613

 Electrical equipment,

appliances, and

components . . . . . . . . . . . 4,206 13,333 20,545 3,182 -959 1,064 41,371 6,895

 Transportation equipment . . . 7,153 1,653 9,694 5,797 3,332 4,560 32,189 5,365

 Machinery . . . . . . . . . . . . . . . 17,878 2,175 3,560 5,176 611 937 30,337 5,056

Services . . . . . . . . . . . . . . . . . . 197,377 202,884 96,645 35,018 40,352 69,993 642,269 107,045

 Broadcasting and

telecommunications . . . . . 77,529 4,436 40,597 4,430 4,317 -3,584 127,725 21,288

 Wholesale trade . . . . . . . . . . . 16,458 52,501 5,998 10,689 -5,762 15,311 95,195 15,866

 Insurance . . . . . . . . . . . . . . . . 23,033 36,951 6,430 8,249 -3,135 16,090 87,618 14,603

 Finance, except depository

institutions . . . . . . . . . . . . 12,152 14,039 11,726 -5,353 22,580 15,745 70,889 11,815

 Professional, scientific, and

technical services . . . . . . . 5,826 34,136 9,309 1,241 186 4,425 55,123 9,187

 Depository institutions

(banking) . . . . . . . . . . . . . 19,471 5,775 6,429 2,756 4,094 16,220 54,745 9,124

 Utilities . . . . . . . . . . . . . . . . . . 10,243 9,528 335 6,641 8,259 763 35,769 5,962

Mining . . . . . . . . . . . . . . . . . . . . 3,562 5,797 11,694 10,951 1,781 6,332 40,117 6,686

Agriculture . . . . . . . . . . . . . . . . 55 207 53 -353 -187 162 -63 -10

Source: USDOC, BEA, Survey of Current Business, Sept. 2004 and Sept. 2005.
3-20

Table 3-9FDIUS: Capital inflows from leading countries

(million dollars)

Country 1999 2000 2001 2002 2003 2004

1

All countries .......................... 283,376 314,007 159,461 71,331 56,834 95,859 

United Kingdom ....................... 108,566 82,652 2,819 26,515 -5,649 19,430 Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . 41,689 33,517 24,036 4,472 5,562 6,192 France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,834 51,001 14,546 6,035 3,306 9,234 Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,367 27,258 9,173 1,882 12,198 31,805 

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,503 12,124 61,789 9,762 -3,500 4,732 Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,478 14,054 40,206 -1,149 8,876 1,545 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,555 7,820 -3,132 6,010 7,752 16,146 Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,193 4,935 6,490 6,645 3,671 3,635 Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . 6,887 30,864 -21,498 -3,775 13,694 -538 United Kingdom Islands, Caribbean . . . . . . . . 4,137 3,800 12,961 1,361 2,745 -2,175 Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810 3,992 12,463 87 2,711 -3,593 Barbados . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284 290 3,075 4,201 4,573 686 Source: USDOC, BEA, Survey of Current Business, Sept. 2004 and Sept. 2005.
 13 BEA, “U.S. Affiliates of Foreign Companies: Operations in 2003,” Survey of Current Business, August

2005; BEA data tables II.G.3 for 1999 and 2003 respectively; calculations by USITC staff.

3-21

Which countries’ affiliates employ the greatest number of people in

the United States?

Employment by U.S. foreign affiliates declined at an average annual rate of 1.2 percent

between 1999-2003, most likely reflecting the general loss of jobs in the U.S. manufacturing

sector.13 By contrast, U.S. employment by firms based in some smaller economies, including

Chile, China, Bermuda, and Singapore, registered rapid increases. U.S. affiliates of Britishowned firms employed 1.1 million U.S. workers in 2003, or 19 percent of all workers

employed by U.S. affiliates. German-owned affiliates and Japanese-owned affiliates

employed 12 percent and 11 percent, respectively (figure 3-10). 

Among U.S. affiliates of parent firms from the industrial countries, the fastest growing in

terms of employment were affiliates with parents based in Spain and Sweden, which

recorded average annual growth of 16 and 11 percent, respectively (table 3-10).

Employment by affiliates with parents based in most other large industrial economies was

stable or declined during the period. U.S. affiliates owned by British and Dutch parents

recorded average annual employment growth close to 1 percent during the period, while

employment by affiliates of German, Japanese, and Canadian parents all declined. Firms

based in these three countries are primarily invested in manufacturing, so the declining

employment levels are consistent with the broader decline of U.S. manufacturing

employment.

UK Netherlands France Canada Switzerland

-50

0

50

100

150

200

250

Other Chemicals Wholesale trade

Information Finance

Source: U.S. Department of Commerce, Bureau of Economic Anaylsis, Survey of

Current Business, Sept. 2005 and Sept. 2004.

Figure 3-9

FDIUS capital inflows from leading countries, by industry, 1999-2004
3-22

Table 3-10

FDIUS: Employment by U.S. affiliates, by country, 1999 and 2003

Country 1999 2003

Average

annual

growth

Thousands

Percent

of total Thousands

Percent

of total —Percent—

 All countries . . . . . . . . . . . . . . 6,027.6 100.0 5,735.0 100.0 -1.2

Australia . . . . . . . . . . . . . . . . . . . . 83.8 1.4 79.2 1.4 -1.4

Belgium . . . . . . . . . . . . . . . . . . . . . 124.0 2.1 136.6 2.4 2.4

Bermuda . . . . . . . . . . . . . . . . . . . . 126.4 2.1 213.7 3.7 14.0

Brazil . . . . . . . . . . . . . . . . . . . . . . . 3.5 0.1 5.0 0.1 9.3

Canada ..................... 659.1 10.9 422.5 7.4 -10.5

Chile . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.0 2.8 0.0 53.8

China . . . . . . . . . . . . . . . . . . . . . . 2.5 0.0 3.3 0.1 7.2

France . . . . . . . . . . . . . . . . . . . . . 614.3 10.2 500.0 8.7 -5.0

Germany . . . . . . . . . . . . . . . . . . . . 848.8 14.1 707.5 12.3 -4.5

Hong Kong . . . . . . . . . . . . . . . . . . 25.2 0.4 22.9 0.4 -2.4

Hungary . . . . . . . . . . . . . . . . . . . . 0.5 0.0 (1

) (1) (1)

Iceland . . . . . . . . . . . . . . . . . . . . . 0.9 0.0 1.2 0.0 7.5

India . . . . . . . . . . . . . . . . . . . . . . . 1.6 0.0 2.2 0.0 8.3

Ireland . . . . . . . . . . . . . . . . . . . . . . 65.2 1.1 37.1 0.6 -13.1

Italy . . . . . . . . . . . . . . . . . . . . . . . . 90.8 1.5 93.8 1.6 0.8

Japan ...................... 827.0 13.7 653.5 11.4 -5.7

Luxembourg . . . . . . . . . . . . . . . . . 9.1 0.2 (1

) (1) (1)

Mexico . . . . . . . . . . . . . . . . . . . . . 33.0 0.5 (1

) (1) (1)

Netherlands ................. 498.9 8.3 513.6 9.0 0.7

Panama . . . . . . . . . . . . . . . . . . . . 12.4 0.2 6.6 0.1 -14.6

Philippines . . . . . . . . . . . . . . . . . . 0.7 0.0 0.5 0.0 -8.1

Poland . . . . . . . . . . . . . . . . . . . . . 0.2 0.0 (1

) (1) (1)

Russia . . . . . . . . . . . . . . . . . . . . . . 0.3 0.0 2.3 0.0 66.4

Singapore . . . . . . . . . . . . . . . . . . . 10.7 0.2 18.7 0.3 15.0

South Africa . . . . . . . . . . . . . . . . . 8.5 0.1 9.0 0.2 1.4

Spain . . . . . . . . . . . . . . . . . . . . . . 11.9 0.2 21.7 0.4 16.2

Sweden ..................... 145.1 2.4 221.1 3.9 11.1

Switzerland . . . . . . . . . . . . . . . . . . 442.4 7.3 487.9 8.5 2.5

Taiwan . . . . . . . . . . . . . . . . . . . . . 25.1 0.4 17.6 0.3 -8.5

UK Islands, Caribbean . . . . . . . . . 35.7 0.6 25.4 0.4 -8.2

United Kingdom . . . . . . . . . . . . . . 1,017.4 16.9 1,068.4 18.6 1.2

EU-15 . . . . . . . . . . . . . . . . . . . . . . 3,488.7 57.9 3,421.8 59.7 -0.5

 1

 In 2003, Hungarian-owned affiliates employed between 500 and 999 workers; Luxembourg-owned affiliates,

between 25,000 and 49,999 workers; Mexican-owned affiliates, 100,00 or more workers; and Polish-owned affiliates,

between 1 and 499 workers. BEA reported a size range in order to avoid disclosure of individual company

information.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Foreign Direct Investment

in the United States: Operations of Foreign Parent Companies and their U.S. Affiliates (FDIUS), found at

http://www.bea.gov/bea/di/di1fdiop.htm.
3-23

In which industries do U.S. affiliates employ the greatest number of

people? In which industry do U.S. affiliates account for the greatest

share of total employment?

Foreign-owned, nonbank affiliates employed a total of 5.7 million U.S. workers in 2003, 59

percent of whom were employed in the service sector (figure 3-11). In 2003, foreign-owned

U.S. affiliates employed 5 percent of all U.S. private sector workers, including 14 percent

of mining employees and 16 percent of manufacturing sector employees (table 3-11). 

The largest employer within the manufacturing sector was the transportation equipment

industry, with 393,700 thousand U.S. workers in 2003, closely followed by the chemicals

industry, with 331,800 thousand workers. Transportation equipment affiliates recorded a 2

percent average annual decline during 1999-2003, while employment by chemicals industry

affiliates recorded an average annual decline of slightly more

than 2 percent during the same period. U.S. affiliates in the

electrical equipment and textiles industries recorded the sharpest

declines in employment, both at 17 percent per annum. This is in

line with an average annual decline of 4 percent for all

manufacturing industries. By contrast, employment by U.S.

affiliates in the utilities industry grew by 30 percent annually,

although overall U.S. employment in the industry was low at

35,700 workers in 2003. 

U.S. affiliates employed an average of 4 percent of all U.S. service sector workers. The share

of private sector employment by U.S. service affiliates was highest in the wholesale

Total = 5.7 million

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign

Direct Investment in the United States: Operations of Foreign Parent Companies

and their U.S. Affiliates, found at http://www.bea.gov.

United Kingdom 18.6%

Germany 12.3%

Japan 11.4%

Netherlands 9.0%

France 8.7%

Swtzerland 8.5%

Canada 7.4% Sweden 3.9%

Bermuda 3.7%

Other 16.5%

Figure 3-10

FDIUS: Employment by U.S. affiliates, by country, 2003

Overall employment by U.S.

affiliates declined during

1999-2003, but employment

by service sector affiliates

increased.
3-24

Table 3-11FDIUS: Employment by U.S. affiliates, and employment by U.S. affiliates as percentage of U.S. industry total, 1999 aIndustry 1999 2003

Average

annual

growth

as perc

b

Thousands Percent Thousands Percent —————Pe

All industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,027.6 5,735.0 -1.2 

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.3 1.0 72.3 1.3 5.1 Agriculture, forestry, fishing and hunting . . . . . . . . . 16.7 0.3 9.2 0.2 -13.8 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.7 0.2 35.7 0.6 29.5 Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,617.5 43.4 2,266.5 39.5 -3.5 

Food and kindred products ................. 183.3 3.0 120.5 2.1 -10.0 Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365.5 6.1 331.8 5.8 -2.4 

Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . 129.7 2.2 155.1 2.7 4.6 

Primary and Fabricated metals .............. 210.2 3.5 152.6 2.7 -7.7 Plastics and rubber products ................ 143.4 2.4 133.7 2.3 -1.7 

Nonmetallic mineral products ............... 152.7 2.5 155.8 2.7 0.5 Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.2 3.7 249.6 4.4 2.9 Computers and electronic products ........... 299.6 5.0 243.3 4.2 -5.1 Electrical equipment, appliances and 

components .... 184.1 3.1 85.8 1.5 -17.4 

Transportation equipment .................. 423.3 7.0 393.7 6.9 -1.8 Textiles, apparel, and leather products . . . . . . . . 69.4 1.2 32.5 0.6 -17.3 All other manufacturing .................... 364.0 6.0 367.0 6.4 0.2 

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,334.0 55.3 3387.0 59.1 0.4 

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . 527.3 8.7 538.3 9.4 0.5 Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740.4 12.3 655.7 11.4 -3.0 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344.3 5.7 317.1 5.5 -2.0 

Telecommunications . . . . . . . . . . . . . . . . . . . . 123.8 2.1 (1) (1) (1) 

Finance and insurance .................... 263.5 4.4 297.6 5.2 3.1 

Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.3 1.2 (1) (1) (1) 

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190.1 3.2 (1) (1) (1) 

Professional, scientific and technical service .... 115.5 1.9 172.5 3.0 10.5 

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,343.0 22.3 1,406.0 24.5 1.1 

1 Not available.

Source: U.S. Department of Commerce (USDOC), BEA, Foreign Direct Investment in the United States: Operations of Foreign Parent Co

U.S. Affiliates (FDIUS), found at http://www.bea.gov/bea/di/di1fdiop.htm.
 14 For the purposes of this chapter, wages are equal to total compensation paid by employers, divided by

the total number of full-time and part-time employees. The term thus actually reflects total compensation per

employee (including non-wage compensation such as benefits). High-wage industries are those for which

total compensation per employee was greater than the average compensation per employee for all private

U.S. industries of $45,012 in 2003. Calculations by the Commission from BEA data.

3-25

trade industry, representing 10 percent of the domestic industry’s workforce; the information

industry (10 percent) and the finance and insurance industry (5 percent).

How does the compensation of employees of U.S. affiliates compare

to overall U.S. employee compensation by industry?

Employees of foreign-owned U.S. affiliates received average annual compensation14 of

$60,080 in 2003, compared with average annual compensation of $45,012 for all U.S.

companies (table 3-12). For the majority of the 19 industries for which comparable data

exist, foreign-owned affiliates paid more than the U.S. average for the industry in 2003. This

is likely due to U.S. affiliates entering the U.S. markets in these capital intensive industries

more recently than domestic firms. Therefore, they are more likely to have newer, more

productive capital equipment, and fewer employees relative to total output. However, for

manufacturing sector industries that pay the highest salaries, U.S. affiliates of foreign

companies usually pay lower wages than the domestic industry average. These industries

include transportation equipment; utilities; electrical equipment, appliances and components;

and computers and electronic products. Foreign-owned firms in certain industries,

particularly transportation equipment, may be less likely to have a unionized labor force.

Total = 5.7 million employees

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign

Direct Investment in the United States: Operations of Foreign Parent Companies

and their U.S. Affiliates, found at http://www.bea.gov.

Services 59.0%

Manufacturing 39.5%

Mining 1.3%

Agriculture 0.2%

Figure 3-11

FDIUS: Employment by U.S. affiliates, by sector, 2003
3-26

Table 3-12FDIUS: Annual compensation per employee (wages plus benefits) for U.S. affiliates, by industry, 1999 and 2003Industry

1999

 compensation

(FDIUS)

2003

compensation

(FDIUS)

Average

annual

compensation

growth

Compensation

(United States)

2003 

Thousands of dollars

per year

Thousands of

dollars per year Percent

Thousands of

dollars per year 

All industries . . . . . . . . . . . . . . . . . . . . . . . . . 48,564 60,080 5.5 45,012  Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,013 78,714 1.6 76,996  Agriculture, forestry, fishing and hunting . . 36,527 46,087 6.0 22,874  Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,827 76,611 8.2 91,420  Manufacturing . . . . . . . . . . . . . . . . . . . . . . 54,933 70,480 6.4 61,586  Food1 . . . . . . . . . . . . . . . . . . . . . . . . . . 40,760 56,573 8.5 46,109 

 Chemicals . . . . . . . . . . . . . . . . . . . . . . . 70,542 100,989 9.4 88,784 

 Pharmacy and medicines . . . . . . . . . 82,143 123,591 10.8 (2) 

 Primary and Fabricated metals . . . . . . . 50,932 65,111 6.3 55,837  Plastics and rubber products . . . . . . . . 49,407 58,085 4.1 47,170  Nonmetallic mineral products . . . . . . . . 49,437 58,986 4.5 50,946  Machinery . . . . . . . . . . . . . . . . . . . . . . . 52,241 68,734 7.1 61,853  Computers and electronic products . . . 65,180 82,326 6.0 89,514  Electrical equipment, appliances and

components . . . . . . . . . . . 44,921 53,135 4.3 59,839 

 Transportation equipment . . . . . . . . . . 56,740 63,614 2.9 89,155  Textiles, apparel, and leather products 35,605 45,969 6.6 35,780  All other manufacturing . . . . . . . . . . . . . 51,903 66,016 6.2 (2) 

 Services . . . . . . . . . . . . . . . . . . . . . . . . . . 43,173 52,761 5.1 (2)  Whole sale trade . . . . . . . . . . . . . . . . . . 58,286 72,694 5.7 60,702  Retail trade . . . . . . . . . . . . . . . . . . . . . . 22,751 28,929 6.2 28,084  Information . . . . . . . . . . . . . . . . . . . . . . 62,382 71,646 3.5 70,398  Telecommunication . . . . . . . . . . . . . . 58,950 (2) (2) (2)  Finance and insurance ............. 105,670 124,462 4.2 78,645  Finance ....................... 191,514 (2) (2) 158,206  Insurance . . . . . . . . . . . . . . . . . . . . . . 72,625 (2) (2) 66,714  Professional, Scientific and technical

service . . . . . . . . . . . . . . . 63,810 78,852 5.4 70,180 

 Other services . . . . . . . . . . . . . . . . . . . . 29,537 33,604 3.3 (2) 

1 Includes food manufacturing only. Data for beverage and tobacco manufacturing not available.2 Not available.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Survey of Current Business, Aug. 1998, pp. 79-

Foreign Direct Investment in the United States: Operations of Foreign Parent Companies and their U.S. Affiliates, table O-1, 1997 and ta
3-27

The finance and insurance industries and transportation equipment industry show the greatest

wage differentials between U.S. affiliates and domestic-owned companies. Average annual

wages for employees of foreign-owned affiliates of finance and insurance firms is $124,462,

while the average for domestic firms in the same industry is $78,645. A likely explanation

is that a considerable share of the domestic firms’ employment is in lower-wage “retailing”

of such services, while foreign investors are more likely to participate in large scale,

wholesale financial services such as financing, underwriting, and re-insurance, where there

are fewer, but relatively better paid, employees. In contrast, the average compensation for

employees of foreign-owned transportation equipment affiliates is $63,614, while the

average in the U.S. transportation equipment industry is $89,155. As noted above, this is

likely due to the foreign-owned affiliates’ facilities more efficient assembly plants and lack

of unions.

As shown in table 3-12, employment by U.S. affiliates in the manufacturing sector is highest

in the transportation equipment, chemicals, machinery, and computers and electronic

products industries. All of these are high-wage, capital-intensive industries. In the service

sector, employment is highest in the retail trade and wholesale trade industries. Wholesale

trade is a high-wage industry, but retail trade is not, illustrating the wage diversity of foreign

investment in the United States. Wage levels also do not show any correlation with sales,

employment, or assets of foreign-owned affiliates (table 3-13), suggesting that foreign

investors in the United States are not primarily concerned with wage levels.

Which industries have the highest sales by U.S. affiliates?

The wholesale trade industry accounted for $675.7 billion in sales by U.S. affiliates in 2003,

followed by the transportation equipment industry, with $207.6 billion. Sales by all U.S.

affiliates totaled more than $2.3 trillion in 2003, recording 3.4 percent average annual growth

during 1999-2003, with the services industries accounting for 60 percent of the total (figure

3-12). Within services, sales by wholesale trade affiliates were by far the largest,

with average annual growth of 8 percent. Retail trade and information service

affiliates accounted for U.S. sales of $133.9 billion and $118.8 billion,

respectively (table 3-14). Sales by U.S. affiliates increased fastest in the

professional, scientific, and technical services, showing an average annual

increase of 26 percent. This rapid growth is consistent with the growth in FDIUS

stock, suggesting that the increase is based in new investment, rather than

increased sales by existing affiliates. Among manufacturing industries, transportation

equipment, with average annual sales in excess of $200 billion, was by far the largest,

followed by chemicals and computers and electronic equipment, with U.S. affiliate sales of

$177.7 billion and $100.4 billion, respectively, in 2003. However, while sales by U.S.

chemicals affiliates increased by 5 percent annually over the period, and sales by affiliates

in the pharmaceuticals subsector increased by 11 percent per year, sales by affiliates in the

computers and electronic products industry recorded average annual declines of 3 percent.

Service industries

account for more

than 60 percent of

foreign affiliate

sales in the U.S.
3-28

Table 3-13

FDIUS: Correlation of annual compensation rates with other indicators, by industry, 2003

Sales Assets Employees

Annual

compensation

Investment

position Productivity1

Capital

intensity2

Sales . . . . . . . . . . . . . . . 1.00

Assets . . . . . . . . . . . . . . 0.95 1.00

Employees . . . . . . . . . . 0.98 0.88 1.00

Annual compensation . . -0.11 0.07 -0.19 1.00

Investment position . . . . 0.99 0.92 0.99 -0.09 1.00

Productivity1 . . . . . . . . . -0.09 -0.14 -0.17 0.55 -0.11 1.00

Capital intensity2 . . . . . . 0.23 0.40 -0.02 0.56 0.07 0.13 1.00

 1

 Productivity is equal to gross product per employee.

 2

 Capital intensity is equal to total assets per employee.

Source: Calculations by the Commission, based on U.S. Department of Commerce (USDOC), Bureau of Economic

Analysis (BEA), Foreign Direct Investment in the United States: Operations of Foreign Parent Companies and their

U.S. Affiliates (FDIUS), found at http://www.bea.gov/lea/di/di1fdiop.htm.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign

Direct Investment in the United States: Operations of Foreign Parent Companies

and their U.S Affiliates, found at http://www.bea.gov/lbea.di/di1fdiop.htm.

1999 2000 2001 2002 2003

0

500

1000

1500

2000

2500

Other Manufacturing

Services

Billions of dollars

 1 Other includes mining and agriculture and related industries.

1

Figure 3-12

FDIUS: Sales by U.S. affiliates, by sector, 1999-2003
3-29

 Table 3-14

FDIUS: Sales by U.S. affiliates, by industry, 1999 and 2003

Industry 1999 2003

Average

annual

growth

Millions

 of dollars Percent

Millions

 of dollars Percent Percent

All industries . . . . . . . . . . . . . . . . . . . . . . . . 2,044,359 2,340,158 3.4

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,429 1.0 24,158 1.0 5.6

Agriculture, forestry, fishing and

hunting . . . . . . . . . . . . . . . . . . . . . . . . . 2,874 0.1 2,400 0.1 -4.4

Utilities .......................... 32,360 1.6 40,287 1.7 5.6

Manufacturing ..................... 909,177 44.5 916,326 39.2 0.2

Food and kindred products . . . . . . . . . 60,600 3.0 (2

)50,156 2.1 -4.6

Chemicals . . . . . . . . . . . . . . . . . . . . . . 143,870 7.0 177,701 7.6 5.4

Pharmaceuticals . . . . . . . . . . . . . . . 53,299 2.6 80,699 3.4 10.9

Primary and fabricated metals . . . . . . . 57,497 2.8 53,633 2.3 -1.7

Plastics and rubber products . . . . . . . . 30,432 1.5 34,251 1.5 3.0

Nonmetallic mineral products . . . . . . . 34,930 1.7 42,170 1.8 4.8

Machinery . . . . . . . . . . . . . . . . . . . . . . 51,272 2.5 66,280 2.8 6.6

Computers and electronic products . . . 111,551 5.5 100,379 4.3 -2.6

Electrical equipment, appliances and 

components . . . . . . . . . . . . . . . . . . . 39,276 1.9 21,985 0.9 -13.5

Transportation equipment .......... 202,729 9.9 207,567 8.9 0.6

Textiles, apparel, and leather

products . . . . . . . . . . . . . . . . . . . . . . 10,870 0.5 6,079 0.3 -13.5

All other manufacturing ............ 166,150 8.1 156,125 6.7 -1.5

Services . . . . . . . . . . . . . . . . . . . . . . . . . 1,112,879 54.4 1,397,274 59.7 5.9

Wholesale trade . . . . . . . . . . . . . . . . . . 506,664 24.8 675,682 28.9 7.5

Retail trade . . . . . . . . . . . . . . . . . . . . . 114,508 5.6 133,942 5.7 4.0

Information . . . . . . . . . . . . . . . . . . . . . . 93,661 4.6 118,754 5.1 6.1

Telecommunications . . . . . . . . . . . . 35,267 1.7 (1

) 0.0 (1)

Finance and insurance ............ 206,108 10.1 (1

) 0.0 (1)

Finance 73,331 3.6 62,255 2.7 -4.0

Insurance 132,777 6.5 (1

) 0.0 (1)

Professional, scientific and technical

services . . . . . . . . . . . . . . . . . . . . . . 20,073 1.0 50,318 2.2 25.8

Other services . . . . . . . . . . . . . . . . . . . 171,865 8.4 (1

) (1) (1)

 1

 Data not available.

 2

 Includes food only. Data for beverages and tobacco products were suppressed for 2003.

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Foreign Direct Investment

in the United States: Operations of Foreign Parent Companies and their U.S. Affiliates (FDIUS), found at

http://www.bea.gov/lea/di/di1fdiop.htm.
 15 Does not include depository institutions.

3-30

How did the gross product of U.S. affiliates compare to the total U.S.

GDP during 1995-2004?

The U.S. gross domestic product (GDP) totaled $11.0 trillion, and total GDP of U.S. privatesector industries equaled $9.6 trillion in 2003. Total gross product of foreign-owned, U.S.

affiliates measured $486 billion, accounting for 5 percent of 2003 private-industry GDP. The

United States’ private-industry GDP grew at an average annual rate of 4 percent during

1999-2003, compared with a 1.5 percent average annual growth rate for the gross product

of U.S. affiliates (table 3-15).

By industry, there are significant differences in the proportion of U.S. output that is

attributed to affiliates of foreign companies. Foreign companies have a very strong presence

in the chemicals industry, accounting for 28 percent or almost $182 billion of the industry’s

gross product in 2003. Other industries for which U.S. affiliates comprise a large portion of

GDP include the non-metallic mineral products and machinery manufacturing industries.

U.S. foreign affiliates accounted for 17 percent of the output of the entire manufacturing

sector in 2003. However, the share of U.S. affiliates in manufacturing sector output has

declined by over 1 percent annually during 1999-2003, slightly faster than the 1-percent

decline of the entire U.S. manufacturing sector. 

Foreign companies have a much smaller presence in the service sector, with the percentage

of service-sector gross product generated by U.S. affiliates representing 3

percent in 2003. Among services industries, wholesale trade and finance stand

out with the largest shares of output from U.S. affiliates, at 13 percent and 7

percent, respectively. U.S. affiliates’ gross product as a share of overall output

in the service sector has increased at an average annual rate of 5 percent during

1999-2003. For the finance industry, affiliate gross product increased by 64

percent per annum during the period.15 Average annual growth was 25 percent

for telecommunications and professional, scientific and technical services. The

gross product of U.S. insurance affiliates declined at an average annual rate of

6 percent between 1999 and 2004.

U.S. affiliates account

for the largest share of

gross product in 3

manufacturing.
3-31

Table 3-15

FDIUS: Gross product of U.S. majority-owned affiliates vs. U.S. private industry GDP, 2003

Industry

Affiliate

gross

product

2003

Average

annual

growth of

affiliate

gross

product,

1999-2003

Total

U.S.

private

sector

output

2003

Average

annual

growth

of U.S.

private

sector

output,

1999-

2003

Affiliate

gross

product

/U.S.

private

sector

output

2003

––Millions of dollars–– —————Percent——————

All industries ........................... 486,344 1.5 9,556,754 4.1 5.1

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,842 -2.5 142,323 13.6 6.2

Agriculture, forestry, fishing and hunting . . . . 610 -13.1 114,217 5.1 0.5

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,291 39.6 222,628 4.7 4.2

Manufacturing ........................ 227,682 -1.2 1,369,234 -0.1 16.6

Food and kindred products . . . . . . . . . . . . 16,257 1.6 170,621 2.7 9.5

Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . 49,950 4.5 181,776 3.7 27.5

Pharmaceuticals . . . . . . . . . . . . . . . . . 28,176 15.0 (1

) (1) (1)

Primary and fabricated metals . . . . . . . . . . 12,327 -5.2 147,767 -2.5 8.3

Plastics and rubber products . . . . . . . . . . . 9,004 -3.0 65,632 -0.2 13.7

Nonmetallic mineral products . . . . . . . . . . 14,733 2.3 46,160 0.6 31.9

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . 19,871 8.7 95,090 -2.6 20.9

Computers and electronic products . . . . . . 22,849 -1.5 125,639 -6.3 18.2

Electrical equipment, appliances and 

components . . . . . . . . . . . . . . . . . . . . . . 5,510 -14.9 48,577 0.2 11.3

Transportation equipment . . . . . . . . . . . . . 35,191 -5.4 194,905 2.1 18.1

Textiles, apparel, and leather products . . . 1,235 -18.4 41,163 -5.3 3.0

All other manufacturing . . . . . . . . . . . . . . . 40,755 -3.4 251,904 1.2 16.2

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,210 4.6 7,930,980 4.8 3.1

Wholesale trade . . . . . . . . . . . . . . . . . . . . . 83,843 9.7 632,953 2.3 13.2

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . 27,878 -0.4 750,976 4.3 3.7

Information . . . . . . . . . . . . . . . . . . . . . . . . . 26,836 -1.2 491,807 2.9 5.5

Telecommunications . . . . . . . . . . . . . . . 4,316 25.1 (1

) (1) (1)

Finance and insurance . . . . . . . . . . . . . . . 25,577 -9.0 885,186 6.8 2.9

Finance . . . . . . . . . . . . . . . . . . . . . . . . . 12,487 64.3 172,992 2.8 7.2

Insurance . . . . . . . . . . . . . . . . . . . . . . . . 13,090 -6.1 260,353 4.7 5.0

Professional, scientific and technical

services . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,872 24.8 727,353 4.3 2.5

Other services . . . . . . . . . . . . . . . . . . . . . . 67,204 2.7 4,442,705 5.2 1.5

 1

 Not available.

Sources: Bureau of Economic Analysis (BEA), Foreign Direct Investment in the United States: Operations of Foreign Parent

Companies and their U.S. Affiliates (FDIUS), annual publication, 1992-96. Table A-1, 1992-96; table O-1, 1997; and BEA,

found at internet address http://www.bea.gov, retrieved Mar. 16, 2000.

 1

 BEA does not publish data for goods trade on an industry-specific or a country-specific basis. Thus, for

the sake of comparability, cross-border exports were calculated by adding the value of U.S. cross-border

services exports, as reported by BEA, to the value of U.S. cross-border goods exports, as reported by the

World Trade Atlas.

 2

 Goods and services sold by affiliates are most often sold in the domestic market of the host country, but

may also be exported to third countries or back to the parent firm’s home country. Sales by affiliates to all

destinations are included in these data.

 3

 This discussion reflects the activity of majority-owned foreign affiliates only, as the Bureau of

Economic Analysis (BEA) does not publish sufficiently detailed data for all foreign affiliates.

 4

 Includes food, beverage, and tobacco manufacturing.

4-1

CHAPTER 4

Direct Investment and Cross-border Trade

Summary of Key Findings

Sales by U.S.-owned affiliates in foreign markets, and sales by foreign-owned affiliates in

the U.S. market, are significantly larger than either U.S. exports or imports. U.S.-owned

foreign affiliates recorded sales of $3.4 trillion in 2003, while

foreign-owned affiliates in the United States recorded sales of

$2.3 trillion. As is the case for overall U.S. trade, U.S. intrafirm

trade reflects a U.S. deficit in merchandise trade and a U.S.

surplus in services trade, resulting in an overall U.S. intra-firm

trade deficit of $222.2 billion. This chapter examines the

relationship between direct investment and cross-border trade,

focusing on the extent of U.S. imports and exports that are

linked to U.S. and foreign-based multinational corporations

(MNCs). The chapter compares affiliate sales to cross-border exports, investigates the share

of total U.S. exports and imports for which MNCs account, and examines the nature of

intrafirm trade between parents and their affiliates.

U.S. Exports

What is the predominant mode of delivering U.S. goods and services

to foreign customers, cross-border exports or foreign affiliate sales?

Foreign affiliate sales is the predominant mode of delivering both goods and services from

U.S. companies to foreign customers, accounting for about three-quarters ($2.5 trillion) of

such deliveries in 2003, compared to $1.0 trillion in cross-border exports.1

 Affiliate sales2

accounted for 76 percent of goods deliveries in 2003, while such sales accounted for 64

percent of services deliveries.3

 Affiliate sales accounted for two-thirds of deliveries of U.S.

manufactured goods in 2003, but there were variations among manufacturing industries.

Food and kindred products4

 and chemicals manufacturers reported 83 percent and 74 percent,

respectively, of total deliveries through affiliate sales. In most other industries,

manufacturers reported about one-half of deliveries from affiliate sales. In the mining sector,

almost all deliveries take place through affiliate sales. This reflects the fact that most U.S.-

based mining firms operate primarily outside the United States, to be close to sources of

petroleum and mined ores. In contrast, in the agriculture sector, only a very small share of

The majority of U.S. goods and

services are delivered to

foreign customers through

affiliate sales.
 5

 See, e.g., Office of the United States Trade Representative (USTR), 2005 National Trade Estimate

Report on Foreign Trade Barriers, 297-341. 

 6

 Sales by U.S.-owned foreign affiliates to third countries are not included here, because the data are taken

from the “Ownership-Based Framework of the U.S. Current Account,” which only reflects trade with the

United States. For additional information, see “Technical Note,” USDOC, BEA, Survey of Current Business,

January 2006, 44.

 7

 USDOC, BEA, Survey of Current Business, January 2006, 45.

4-2

total deliveries occurs through affiliate sales. U.S. farmers and livestock producers are much

more likely to deliver their products from the United States through cross-border exports

than to invest in overseas farms (table 4-1).

A comparison of affiliate sales and cross-border trade data by country reveals that affiliate

sales account for a greater share of deliveries in large single-country or regional markets and

in countries with hospitable investment climates (table 4-2). For example, affiliate sales

accounted for 93 percent of U.S. goods and services deliveries to the EU-15 countries in

2003. Affiliate sales also accounted for a particularly high share of total deliveries in

Bermuda (84 percent) and Switzerland (88 percent). The large financial services markets in

those countries encourage a higher share of sales by affiliates. Affiliate sales account for a

smaller-than-average share of deliveries to Chinese and Japanese customers, and to the

NAFTA countries. For China, the rapid growth of inbound FDI likely has been too recent

for foreign investors to have captured significant domestic market share by 2003. The

relatively small share of affiliate sales in Japan may be a result of a historically difficult

business climate for foreign investors.5

 This shift may reflect ongoing reform efforts in

Japan aimed at increasing openness to foreign investment. In Canada and Mexico, some U.S.

firms may not perceive benefits from establishing a physical presence, due to the proximity

of those markets to the United States and the low trade barriers between the NAFTA

countries. 

How did the growth of U.S. intrafirm exports compare to the growth

of total U.S. exports during 1999-2003?

Intrafirm exports of goods and services increased at an average annual rate of 2 percent

during 1999-2003, from $290.9 billion to $316.0 billion (table 4-3). Total U.S. exports grew

more slowly, at a 1-percent average annual rate, from $966.4 billion in 1999 to $1,022.6

billion in 2003. Intrafirm trade is that portion of cross-border trade carried out between

parent and affiliate firms. This trade may reflect either U.S. exports by

U.S. parents to their foreign affiliates, or U.S. exports by U.S. affiliates

to their foreign parents.6

 The growth in intrafirm exports principally

reflected rapid growth in U.S. exports by U.S. affiliates to their foreign

parents. During 1999-2003, U.S. parents’ exports of goods and services

to their foreign affiliates declined slightly, to $216.3 billion. By contrast,

U.S. affiliates’ exports to foreign parents increased by 8 percent per

year, on average, to $99.7 billion. Intrafirm exports represented 30

percent of total U.S. exports in 1999 and 31 percent in 2003, with little

fluctuation in the total share during 1993-2003.7

Intrafirm exports

accounted for almost

one-third of total U.S.

exports in 2003.
4-3

Table 4-1

Foreign affiliate sales as a share of total deliveries of U.S. goods to foreign customers, by

industry, 2003

Percent of deliveries accounted

for by affiliate sales

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.6

Food and kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83.1

Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.8

Primary and fabricated metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.5

Industrial machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 47.3

Electronic and other electrical equipment . . . . . . . . . . . . . . . . . . . . . . 57.7

Other manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.3

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.9

Agriculture, forestry and fishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6

Source: U.S. International Trade Commission dataweb; U.S. Department of Commerce, Bureau of Economic

Analysis, Survey of Current Business, Oct. 2005 and U.S. direct investment abroad, table III.F.3.

Table 4-2

Foreign affiliate sales as a share of total deliveries of U.S. goods and services to foreign

customers, by country, 2003

Goods Services Total

Percent of deliveries accounted for by affiliate sales

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.5 75.6 79.1

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.1 61.5 91.5

Bermuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.4 74.1 83.6

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.5 72.0 79.7

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57.9 60.4 59.1

Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.2 38.2 62.0

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.5 38.8 57.0

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.3 70.6 83.7

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.1 63.1 82.1

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.1 70.6 73.7

Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89.2 (1

) 90.4

Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) (1)

India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.8 24.4 50.6

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.4 (1

) 55.3

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.2 67.9 83.9

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68.1 59.5 67.0

Luxembourg ........................... (1

) (1) 96.2

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.4 37.6 43.3

Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.9 66.3 81.0

Panama .............................. (1

) (1) 63.7

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) 49.3

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) 94.4

Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.6 (1

) 76.6

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83.0 52.6 79.7

South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.6 54.2 75.6

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89.9 67.1 86.3

Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.7 76.8 86.7

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91.9 72.8 88.1

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.7 65.2 52.4

UK Islands, Caribbean . . . . . . . . . . . . . . . . . . . 99.6 (1

) 99.7

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . 88.3 76.2 85.0

EU-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) 70.1 92.5

 All countries . . . . . . . . . . . . . . . . . . . . . . . . . 73.9 62.1 72.0

 1

 Not available.

Source: Compiled by the Commission based on data from U.S. Department of Commerce, Bureau of Economic

Analysis, and U.S. trade data as reported by the World Trade Atlas.
 8

 Country-level data on intrafirm transactions are only available for U.S. parents and their majority-owned

affiliates. Country-level data for all affiliates, defined as U.S. equity ownership of 10 percent or more, are

not available.

 9

 USDOC, BEA, U.S. Direct Investment Abroad, Table 3.I.1, 1999 and 2003.

 10 USDOC, BEA U.S. Direct Investment Abroad, Table III.I.9 and FDIUS, Table III.H.2.

4-4

Table 4-3

Intrafirm exports as a component of total U.S. exports, 1999 and 2003

1999 2003

Average

annual 

growth,

1999-2003

Billions of

dollars

Percent of

total U.S.

exports

Billions of

dollars

Percent of

total U.S.

exports Percent

Total U.S. exports . . . . . . . . . . . . . . . . . . 966.4 1,022.6 1.4

Total U.S. intrafirm exports . . . . . . . . . . . 290.9 30.1 316.0 30.9 2.1

Exports by U.S. parents to

their foreign affiliates ........... 218.7 22.6 216.3 21.2 -0.3

Exports by U.S. affiliates to

their foreign parents . . . . . . . . . . . . 72.2 7.5 99.7 9.7 8.4

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Jan. 2006,

p. 45.

Which countries are the most important destinations for intrafirm

exports?

In 2003, U.S. parents exported goods valued at $150.9 billion to their majority-owned

foreign affiliates (MOFAs),8

 with MOFAs located in Canada, the EU-15, Mexico, Japan, and

Singapore accounting for a combined total of 81 percent, or $121.7 billion, of such exports

(figure 4-1). MOFAs in Canada ranked first, accounting for intrafirm exports of $43.9

billion. Of the major export destinations, only U.S. exports to Mexico recorded an increase

during the period.9

 U.S. affiliates exported goods valued at $71.7 billion to their foreign

parent groups in 2003. The EU-15 and Japan were the primary destinations of such exports.10

U.S. exports of services are divided into two categories: receipts for

royalties and license fees and receipts for other private services. U.S.

receipts for royalties and license fees collected from foreign parents and

U.S.-owned foreign affiliates were $39.0 billion in 2004. This includes

$35.1 billion paid by foreign affiliates to their U.S. parents, and $3.9

billion paid by foreign parents to affiliates located in the United States. In

2003, 46 percent of all intrafirm receipts for royalties and license fees was

collected from affiliates located in the EU-25. Leading country sources of

such receipts were the United Kingdom, Japan, Switzerland, Canada,

U.S. exports to foreign

affiliates declined

overall, but increased

to affiliates in Mexico.
 11 The figure reflects only royalties and license fees paid by foreign affiliates to U.S. parents. Data by

country for such fees paid by U.S. affiliates to their foreign parents are not available. USDOC, BEA, Survey

of Current Business, Oct. 2005, 56.

 12 USDOC, BEA, Survey of Current Business, Oct. 2005, 60.

 13 USDOC, BEA, Survey of Current Business, Jan. 2006, 45.

4-5

Singapore, and Germany (figure 4-2).11 U.S. parents and affiliates recorded $140.5 billion

in receipts (exports) for other private services in 2004, but a breakdown by country is not

available.12

To what extent do foreign affiliates incorporate U.S.-made goods

and services in their output?

U.S. exports of goods and services constituted a decreasing share of value added by U.S.-

owned foreign affiliates during 1999-2003. In 2003, U.S. exports to foreign affiliates

comprised 31 percent of total foreign affiliates’ output, down from 39 percent in 1999.

Foreign affiliates purchased U.S. goods and services valued at $216.3 billion in 2003,

representing 21 percent of total U.S. exports of goods and services. This reflected an overall

decline of 6 percent from 1999, when foreign affiliates purchased U.S. goods and services

valued at $246.3 billion.13

Total = $150.9 billion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad: Operations of U.S. Parent Companies and their Foreign Affiliates, table

III.I.9.

Canada 29.1%

European Union (15) 25.2%

Mexico 16.7%

Japan 5.7% Singapore 4.0%

Australia 2.6%

Switzerland 2.0%

Hong Kong 1.8%

Other 13.0%

Figure 4-1

U.S. parents’ exports of goods to majority-owned foreign affiliates, by

country, 2003
 14 Ibid.

4-6

How did the mix of goods and services in U.S. intrafirm exports

change during 1999-2003?

In 2003, goods accounted for three-fourths (74 percent) of total U.S. intrafirm exports, while

services accounted for the remaining one-fourth (26 percent) of such exports. However, the

proportion changed during 1999-2003, with the share of services in total U.S. intrafirm

exports increasing by 5 percent, and a corresponding decline in the share of goods. Over a

longer period beginning in 1993, the share of goods in intrafirm trade has declined by 9

percent. The same trend holds true for both U.S. exports by U.S. parent firms to foreign

affiliates, and by U.S. affiliates to their foreign parents.14 The predominance of goods among

intrafirm exports reflects the larger share of goods in overall U.S. exports. 

In 2003, intrafirm merchandise exports accounted for 33 percent of total U.S. merchandise

exports, and intrafirm service exports accounted for 27 percent of total U.S. services exports.

However, service providers clearly have demonstrated a growing reliance on

intrafirm exports in recent decades. Examination of services data from 1993

through 2003 reveals a gradual upward trend in the share of total services

exports accounted for by intrafirm service exports, from 17 percent to 27

percent (figure 4-3). This trend likely reflects the deregulation of service

industries such as telecommunications and finance, and recent technological

developments that make it more feasible to trade these and other services

Total = $39.0 billion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, Oct. 2005, p. 56.

United Kingdom 9.7%

Japan 9.2%

Switzerland 7.9% Canada 7.4%

Singapore 5.7%

Germany 5.6%

France 5.0%

Netherlands 3.5%

Mexico 2.8%

Italy 2.5%

Other 40.6%

Figure 4-2

U.S. parents’ receipts of royalties and license fees from foreign

affiliates, by country, 2004

The share of

services in U.S.

intrafirm exports is

increasing.
 15 Chapter 10 of this study presents an extensive review of the economic literature related to services

offshoring. 

 16 USDOC, BEA, U.S. Direct Investment Abroad.

 17 USDOC, BEA, Foreign Direct Investment in the United States. 

4-7

across borders. The upward trend for intrafirm exports of services also likely reflects

increased offshoring of services such as accounting, customer service, and payroll services

by many multinational corporations.15 By contrast, intrafirm exports of goods represent a

declining share of overall U.S. goods exports. This trend likely reflects the increased

outsourcing of production and the trend for MNCs to sell off non-core divisions, which

would result in fewer purchases of goods from within MNCs.

Which industries within the goods and services sectors account for

the largest shares of intrafirm exports?

In the goods sector, transportation equipment, primarily motor vehicles and parts, and

wholesale goods accounted for a combined 55 percent of U.S. parents’ exports of goods to

foreign affiliates in 2003 (figure 4-4). U.S. parents’ exports of chemicals, computers and

electronic products, and machinery also comprised significant shares of U.S. parents’

intrafirm exports.16 U.S. affiliates’ exports of goods to foreign parent firms predominantly

comprised the same industries, although the proportions are somewhat different, with

wholesale goods holding the greatest share, followed by transportation equipment, computers

and electronic products, machinery, and chemicals.17 Intrafirm U.S. exports of services

totaled $79.9 billion in 2003, of which 75 percent ($60.1 billion) was exports by U.S. parents

to foreign affiliates, and the remainder consisted of exports by U.S. affiliates to their foreign

parents. Royalties and license fees accounted for the largest share of such

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

5

10

15

20

25

30

35

40

Goods Services

Note.--Includes exports by U.S. parent to foreign affiliates and exports by U.S. affiliates to

foreign parents.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current

Business, Jan. 2006, p. 45.

Figure 4-3

Intrafirm exports as a share of total exports of goods and services, 1993-2003
 18 USDOC, BEA, Survey of Current Business, October 2005, 45; and January 2006, 45.

 19 Intangible intellectual property includes patented and unpatented techniques, processes, formulas, and

other intangible property rights used in the production of goods; transactions involving copyrights,

trademarks, franchises, broadcast rights, and other intangible rights; the rights to distribute, use, and

reproduce computer software; and the rights to sell products under a particular trademark, brand name, or

signature.

 20 USDOC, BEA, Survey of Current Business, Oct. 2005, 45 and 56.

4-8

exports (45 percent), followed by research and development and testing services

(10 percent), and financial services (7 percent).18

What is the role of intellectual property (royalties and license fees)

in intrafirm U.S. exports?

U.S. firms’ intrafirm exports of intangible intellectual property19 were valued at $39.0 billion

in 2004. These intrafirm exports represented just under three-fourths of total U.S. receipts

(exports) for royalties and license fees, illustrating the extent to which corporate intellectual

property is kept within the firm. Intrafirm service exports reflect, in part, U.S. parents’

research and development efforts and subsequent sale of intellectual property to their foreign

affiliates, in the form of royalties and license fees. Receipts for royalties and license fees

accounted for 16 percent of overall U.S. cross-border exports of services. By contrast,

receipts for intrafirm exports of royalties and license fees accounted for 46 percent of overall

intrafirm services exports, again illustrating the extent to which such intellectual property

is kept within the boundaries of multinational corporations. These data include intellectual

property exports from U.S. parents to their foreign affiliates, valued at $35.1 billion in 2004,

and from U.S. affiliates to their foreign parents, valued at $3.9 billion.20

Total = $150.9 billion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct

Investment Abroad, table III.I.2; and Foreign Direct Investment Abroad, table III.H.1.

Transportation equipment 27.4%

Wholesale trade 27.3%

Computers & electronic 12.0%

Chemicals 11.7% Machinery 3.8%

Other 17.8%

products

Figure 4-4

U.S. exports of goods shipped by U.S. parents to foreign majorityowned affiliates, 2003
 21 BEA does not publish data for goods trade on an industry-specific or a country-specific basis. Thus, for

the purposes of this discussion, cross-border imports were calculated by adding the value of cross-border

services imports, as reported by BEA, to the value of cross-border goods imports, as reported by the World

Trade Atlas.

4-9

Did U.S. parents or U.S. affiliates of foreign parents account for

more U.S. intrafirm exports during 1999-2003?

U.S. parents’ exports to their foreign affiliates account for 68 percent of all U.S. intrafirm

exports of goods and services. However, exports by foreign-owned, U.S. affiliates increased

from only 25 percent in 1999 to 32 percent in 2003. U.S. parent firms’ share of intrafirm

exports tends to be larger than U.S. affiliates’ share of such exports, as both U.S. and foreign

parents tend to maintain the majority of production assets in their home country. It also may

reflect parents’ exports of relatively high-value manufactures and services, a natural

consequence of the research and development (R&D) performed and the intellectual property

owned, in most cases, by the parent. The dollar value of R&D performed in the United States

by affiliates of foreign parents increased by a total of 23 percent during 1999-2003.

However, R&D as a share of U.S. affiliates’ assets and sales did not change significantly

during the period, so it does not appear that U.S. affiliates account for a greater share of

overall R&D performed in this country.

U.S. Imports 

What is the predominant mode of delivering foreign goods and

services to U.S. customers, cross-border imports or U.S. affiliate

sales? 

U.S. affiliate sales is the predominant mode of delivering foreign goods and services to U.S.

customers. In 2003, sales by foreign-owned affiliates located in the United States accounted

for 58 percent ($2.1 trillion) of total deliveries. The same year, cross-border imports of goods

and services accounted for $1.5 trillion.21 Affiliate sales accounted for a higher percentage

of services deliveries (61 percent) than goods deliveries (57 percent).

MNCs based in large developed countries typically deliver a higher-thanaverage share of goods and services through affiliates sales (table 4-4).

Prominent exceptions to this rule are Hong Kong and Singapore, for which

a large share of trade involves transshipment of goods, and Canada, whose

long border with the United States makes cross-border exports to this

country significantly easier than to other developed countries.

The majority of

foreign goods and

services are

delivered to U.S.

customers through

affiliate sales.
 22 Data reflect imports compiled on a balance of payments (BOP) bases by the Bureau of Economic

Analysis.

4-10

Table 4-4

U.S. affiliate sales as a share of total deliveries of foreign goods and services to U.S.

customers, by country, 2003

Goods Services Total

Percent of deliveries accounted for by affiliate sales

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.3 77.3 72.9

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.0 33.9 69.0

Bermuda . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) 60.7 82.3

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.4 17.3 27.7

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.7 67.5 35.7

Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) (1)

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) 1.2

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.1 83.1 79.9

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.3 72.7 78.1

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . 33.2 28.8 32.4

Hungary ........................... (1

) (1) (1)

Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) (1)

India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 31.1 7.3

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.7 (1

) 30.8

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.1 31.7 41.5

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76.5 56.8 75.7

Luxembourg ........................ (1

) (1) (1)

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 99.1 9.8

Netherlands . . . . . . . . . . . . . . . . . . . . . . . . 93.5 85.6 92.4

Panama ........................... (1

) (1) (1)

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) (1)

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) (1)

Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) (1) (1)

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 39.9 24.6

South Africa . . . . . . . . . . . . . . . . . . . . . . . . 50.6 18.6 46.9

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.1 33.1 40.5

Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.8 85.9 77.0

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . 86.6 82.3 86.5

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.4 8.5 21.1

UK Islands, Caribbean . . . . . . . . . . . . . . . . 99.0 (1

) 99.7

United Kingdom . . . . . . . . . . . . . . . . . . . . . 86.4 70.2 83.1

EU-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1

) 72.4 93.1

 All countries . . . . . . . . . . . . . . . . . . . . . . 56.8 62.9 59.0

Source: Compiled by the Commission based on data from U.S. Department of Commerce, Bureau of Economic

Analysis, and U.S. trade data as reported by the World Trade Atlas.

How did the growth of U.S. intrafirm imports compare to the growth

of total U.S. imports during 1999-2003?

Total U.S. imports of goods and services increased at an average rate of 5 percent per annum

during 1999-2003, from $1.2 trillion in 1999 to $1.5 trillion in 2003 (table 4-5).22 Intrafirm

imports grew at a slightly faster pace, posting average annual growth of 6 percent, from

$433.0 billion to $538.2 billion during the same period. U.S. parent firms’ imports of goods

and services from their foreign affiliates increased by an average of 3 percent per year, from

$184.8 billion in 1999 to $213.5 billion in 2003. U.S. affiliates’ imports from foreign parent
 23 USDOC, BEA, Survey of Current Business, Jan. 2006, 45.

 24 USDOC, BEA, Foreign Direct Investment in the United States, Table III.H.2.

 25 USDOC, BEA, U.S. Direct Investment Abroad, Table 3.I.1.

 26 Data reflects majority-owned affiliates only.

 27 Information for Canada for 2004 was suppressed to avoid disclosure of the data of individual

companies. In 2003, Canada accounted for 3 percent of total intrafirm payments for royalties and license

fees. However, during 2004, Manulife Insurance Corp. of Canada acquired U.S.-based John Hancock Life

Insurance Corp., which likely increased payments of such fees to Canada. USDOC, BEA, Survey of Current

Business, Oct. 2005, 57.

4-11

Table 4-5

Intrafirm imports as a component of total U.S. imports, 1999 and 2003

1999 2003 Average annual

growth, 1999-2003

Billions of

dollars

Percent of

total U.S.

imports

Billions of

dollars

Percent of

total U.S.

imports Percent

Total U.S. imports . . . . . . . . . . . . . . . 1,229.8 1,517.4 5.4

Total U.S. intrafirm imports . . . . . . . . 433.0 35.2 538.2 35.5 5.6

Imports by U.S. parents 

from their foreign affiliates .... 184.8 15.0 213.5 14.1 3.7

Imports by U.S. affiliates 

from their foreign parents . . . . . 248.2 20.2 324.7 21.4 6.9

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Jan. 2006, p. 45.

groups increased at an average annual rate of 7 percent to $324.7 billion in 2003. The

same year, U.S. intrafirm imports of goods and services represented 36 percent of total

U.S. imports, approximately the same share recorded in every year since 1990.23

In which countries did most intrafirm goods and services imports

originate during 1999-2003?

For U.S. affiliates of foreign parents, Japan was by far the largest source of total U.S.

affiliate imports from foreign parents, with a 43-percent share. The EU-15 accounted for 32

percent of intrafirm imports by U.S. affiliates, followed by Canada and Switzerland (figure

4-5).24 Within the EU, German and British parents shipped the largest shares of goods to

their U.S. affiliates, with $39.0 billion and $15.3 billion, respectively. Majorityowned foreign affiliates (MOFAs) located in Canada, Mexico, and the EU-15

accounted for the largest shares of intrafirm imports by U.S. parents in 2003, with

MOFAs in Singapore, Malaysia, and Hong Kong also well represented (figure 4-

6).25 Within the EU, Ireland was the source of the greatest share of U.S. intrafirm

imports in 2003, equal to $14.9 billion, followed by the United Kingdom, with $8.5 billion.

In 2003, total intrafirm U.S. goods imports were valued at $466.7 billion, of which 61

percent ($285.9 billion) represented imports by U.S. affiliates from their foreign parents, and

the remainder ($180.8 billion) represented imports by U.S. parents from their foreign

affiliates.26 

U.S. intrafirm imports of services are divided into two categories: payments for royalties and

license fees and payments for other services. U.S. payments for royalties and license fees

collected by overseas parents and affiliates were $18.8 billion in 2004, of which the EU-25

and Japan comprised 40 percent and 30 percent, respectively (figure 4-7).27 Such payments

Japan is the largest

source of U.S.

intrafirm imports.
4-12

Total = $285.9 billion

Source: U.S. Department of Commerce, Bureau of Economic Analsis, Foreign Direct

Investment in the United States, table III.H.2.

Japan 42.8%

European Union 32.3%

Canada 7.3%

Switzerland 2.4%

Other 15.2%

Figure 4-5

U.S.-majority-owned affiliates’ intrafirm imports of goods, by country,

2003

Total = $180.8 billion

Source: U.S. Department of Commerce, Bureau of Economic Analsis, U.S. Direct

Investment Abroad, table III.I.1.

Canada 35.1%

Mexico 20.6%

European Union (EU-15) 22.3%

Singapore 4.5%

Malaysia 4.1%

Hong Kong 2.5%

Other 11.0%

Figure 4-6

U.S. parents’ intrafirm imports of goods from majority-owned foreign

affiliates, by country 2003
 28 Ibid., 56.

 29 Ibid., 60.

 30 USDOC, BEA, Survey of Current Business, Jan. 2006, 45.

4-13

include $15.8 billion paid by majority-owned U.S. affiliates to their foreign parents, and

$2.9 billion paid by U.S. parents to their MOFAs. Other leading sources of such payments

were Canada, Singapore, Switzerland, and Mexico.28 U.S. parents and affiliates recorded

$90.7 billion in payments (imports) for other private services in 2004, but a breakdown by

country is not available.29

To what extent do foreign-owned U.S. affiliates incorporate foreignmade goods and services in their output?

U.S. imports of goods and services comprised an increasing share of value added by foreignowned U.S. affiliates during 1999-2003. In 2003, imports by U.S. affiliates comprised 67

percent of total U.S. affiliates’ output, a significant increase from 54 percent in 1999. U.S.

affiliates purchased foreign goods and services valued at $324.7 billion, representing 21

percent of total U.S. imports of goods and services. This reflected an overall decline of 6

percent since 1999, when U.S. affiliates purchased foreign goods and services valued at

$248.2 billion.30

Total = $51.0 billion

Source: U.S. Department of Commerce, Bureau of Economic Analsis, Survey of Current

Business, Jan. 2006, p. 45 and Oct. 2005, p. 57.

Royalties & 

licenses

fees 30.8%

Other 

 $9.7 billion

European Union

 $6.0 billion

Other

69.2%

Figure 4-7

U.S. intrafirm imports of services, 2004
 31 Intangible intellectual property includes patented and unpatented techniques, processes, formulas, and

other intangible property rights used in the production of goods; transactions involving copyrights,

trademarks, franchises, broadcast rights, and other intangible rights; the rights to distribute, use, and

reproduce computer software; and the rights to sell products under a particular trademark, brand name, or

signature.

 32 USDOC, BEA, Survey of Current Business, Oct. 2005, 33, 45, and 56.

 33 USDOC, BEA, Survey of Current Business, Jan. 2006, 45.

 34 Includes majority-owned affiliates only. USDOC, BEA, U.S. Direct Investment Abroad, table III.I.23.

4-14

What was the role of intellectual property (royalties and license

fees) in intrafirm U.S. imports during 1999-2004?

As is the case for U.S. exports of services, intrafirm service imports reflect, in part, foreign

parents’ research and development efforts and subsequent sale of marketable intellectual

property to their U.S. affiliates in the form of royalties and license fees. U.S. firms’ intrafirm

imports of intangible intellectual property,31 valued at $15.7 billion in 2003, constituted 31

percent of total U.S. intrafirm service imports in 2003. These intrafirm imports represent 79

percent of total U.S. payments (imports) for royalties and license fees, illustrating the extent

to which corporate intellectual property is kept within the boundaries of multinational

corporations. These data include both imports by U.S. affiliates from their foreign parents,

valued at $15.8 billion in 2004, and by U.S. parents from their foreign affiliates, valued at

$2.9 billion.32 As with U.S. exports, affiliates most commonly pay royalties and license fees

for intellectual property developed by the parent.

How did the mix of goods and services in U.S. intrafirm imports

change during 1999-2003? 

In 2003, imports of goods accounted for 90 percent of U.S. intrafirm imports, which totaled

$538.2 billion. The share of intrafirm imports of services recorded a steady increase from 4.4

percent in 1982 to 8.4 percent in 1999, then increased more slowly to 9.5 percent in 2003.33

The predominance of goods as a share of intrafirm imports reflects, in part, the dominant

share of goods in overall cross-border trade, and also may reflect manufacturers’ relatively

high reliance on intrafirm trade, compared to service providers.

Which industries within the goods and services sectors account for

the largest shares of intrafirm imports?

In 2003, U.S. parent firms’ intrafirm imports of goods from their majorityowned foreign affiliates predominantly comprised imports from transportation

equipment affiliates, representing 40 percent of such imports; computer and

electronic products affiliates, representing 17 percent; and wholesale trade

affiliates, representing 14 percent (figure 4-8). U.S.-owned foreign affiliates

in Canada and Mexico together accounted for at least 85 percent of intrafirm

imports from transportation equipment affiliates. Affiliates in Malaysia,

Mexico, and Singapore represented the largest share of intrafirm imports by

computer and electronics products affiliates. Foreign affiliates in the EU-15

countries accounted for 48 percent of U.S. intrafirm imports from wholesale

trade affiliates.34

Transportation

equipment

accounts for 40

percent of total

U.S. intrafirm

merchandise.
 35 Includes majority-owned affiliates only. USDOC, BEA, Foreign Direct Investment in the United

States, table III.H.7.

 36 For additional information on USDIA and FDIUS in computer services, see chapter 8 of this report.

 37 USDOC, BEA, Survey of Current Business, Oct. 2005, 59 and 66.

4-15

U.S. affiliates’ imports of goods from foreign parent groups overwhelmingly consisted of

imports by wholesale trade affiliates (figure 4-9). U.S. intrafirm imports by wholesale trade

affiliates were dominated by imports of goods related to motor vehicles, electrical goods, and

petroleum and petroleum products. Asia accounted for 63 percent of intrafirm goods imports

by wholesale trade affiliates in 2003. 

An additional 25 percent of intrafirm goods imports by wholesale trade affiliates originated

in Europe, and 7 percent originated in Latin American and Caribbean countries.35

Data on U.S. intrafirm trade in services are available only for total affiliated trade, which

includes imports by U.S. affiliates from foreign parents and by U.S. parents from foreign

affiliates. The largest share of such imports is business, professional, and technical services,

which accounted for 82 percent of total U.S. intrafirm imports of services in 2003. Within

this broad category, computer services;36 research, development, and testing services; and

management consulting and public relations comprised the largest shares of intrafirm service

imports, valued at $3.5 billion, $3.1 billion, and $2.8 billion, respectively.37

Total = $180.8 billion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad, table III.I.23.

Transportation equipment 39.6%

Computers & electronic products 17.1%

Wholesale trade 13.7%

Chemicals 7.9% Mining 4.7%

Other 17.0%

Figure 4-8

U.S. parents’ imports of goods from foreign affiliates by industry of

foreign affiliate, 2003
4-16

Total = $285.9 billion

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign

Direct Investment in the United States, table H-7.

Wholesale trade 61.7%

Transportation equipment 12.8% Computers & electronic products 7.0%

Chemicals 6.5%

Machinery 1.8%

Utilities 1.6%

Other 8.6%

Figure 4-9

U.S. majority-owned affiliates’ imports of goods from foreign parents,

by industry of U.S. affiliate, 2003
 1

 The copper mining industry generates refined copper metal from copper-bearing ores. The basic

production processes include mining; followed by concentrating, smelting, and refining; or leaching, solution

extraction (which bypasses the concentrating and smelting steps for some ores) and electrowinning (which

allows creation of refined copper from concentrated leach solutions). Though all processes are considered

part of the mining industry due to significant vertical integration by the dominant companies, government

statistics classify smelting and refining with the manufacturing sector.

 2

 The London Metal Exchange (LME) is the world’s primary metal commodity warehousing and trading

exchange. The New York Stock Commodity Metal Exchange (COMEX) and the Shanghai Futures Exchange

(SFE) are the other common exchanges, but they deal primarily with futures trading and maintain

significantly lower inventories. Premium and discounted grades and forms are normally benchmarked to the

exchange price for refined copper. Copper cathode is the predominantly traded form worldwide.

5-1

CHAPTER 5

Copper

Summary of Key Findings

Foreign investment into the U.S. copper sector has declined significantly over the last two

decades, largely due to an overall decline in available U.S. resources, government policies

that discourage exploration and development of new resources on public lands, and more

favorable investment opportunities in other countries. The number of domestic producers has

also declined significantly over the past two decades, along with domestic production and

the number of operating mines. The two remaining U.S.-based copper mine operators now

invest the bulk of their exploration capital abroad, largely in Latin America and Asia. FDI

in the mining industry, in the form of durable equipment goods and facilities, typically

follows the discover of new mineral deposits. 

The mining industry is characterized by high capital intensity and commodity price

cyclicality, which causes worldwide production adjustments, such as exploration for new

resources or closure of mines, to significantly lag changes in market prices. This reduces the

opportunities for investments with suitable returns, as explained in more detail below, which

has two effects. First, mining companies tend to invest in very large projects, which take a

long time to come on line and are difficult to close during cyclical lows, thus exacerbating

the cyclical peaks and valleys. Second, mining companies rely on significant consolidation

via mergers and acquisitions (M&A) and joint-venture projects to shed risk. Several

developed countries, including the United States, have significant regulatory hurdles that

extend the time needed to open new mines and contribute to the decline in domestic

investment.

Global Copper Market

The copper-producing industry is global, and is often located in remote undeveloped areas.1

Refined copper is the industry’s end product, and its price is determined on the major

inventory exchanges.2

 The availability of supply is the major determinant of copper prices.

The price is highly cyclical, in response to general manufacturing activity and inventory

levels, so copper (consumption and price) is often considered a prime leading indicator of

economic activity. The 1999-2004 period reviewed throughout this study began with a

continuation of one of the highest inventory levels and deepest price troughs in industry
 3

 World Bureau of Metal Statistics, World Metal Statistics, 40.

 4

 World Bureau of Metal Statistics, World Metal Statistics, 40.

 5

 London Metal Exchange, Copper - Industry Usage.

 6

 World Bureau of Metal Statistics, World Metal Statistics, 40.

 7

 London Metal Exchange, Copper - Industry Usage.

 8

 According to Pricewaterhouse Coopers, 40 percent of the global mining industry’s 2004 $461 billion

market capitalization is held by these four companies, and increased with BHP Billiton’s 2005 takeover of

WMC Resources. From The Business Analysts Group, Global Metals & Mining Industry, 5.

 9

 Noranda (Canada) obtained majority interest in Falconbridge in 2002; the amalgamation of the two

companies was completed in 2005, as Falconbridge Limited. INCO, also of Canada, is presently securing

common share ownership of Falconbridge.

 10 Many of these had a strong mining history but shifted focus into downstream processing and

manufacturing, largely due to declining or limited local resources.

5-2

history. However, as global economic activity accelerated in 2002, copper inventories fell

and prices recovered. The period ended with some of the highest prices on record in response

to near-record low inventories (figure 5-1).

World refined copper production was 15.8 million metric tons (MT) in 2004, up 9 percent

from 14.5 million MT in 1999.3

 World refined copper consumption increased

16 percent during 1999-2004, to 16.3 million MT.4

 In 2004, the primary

consuming regions were North and South America (41 percent combined

share, largely by NAFTA countries), Asia (31 percent, largely by China and

Japan), and Europe (21 percent),5

 with the United States accounting for 15

percent of the total in 2004 (table 5-1).6

 The principal end-use is conductive

wire, with consuming industries led by construction (48 percent), electrical

products (17 percent), and general engineering (16 percent).7

Competitive situation

The global copper mining industry is dominated by several major international mining

companies that produce the bulk of the world’s copper (table 5-2). The largest copperfocused companies include state-owned CODELCO (Chile), Phelps Dodge (U.S.), Grupo

Mexico (Mexico), and KGMH Polish Copper (Poland). However, the world’s largest mining

companies, which produce both energy and various metals, including copper, include BHP

Billiton (Australia/U.K.), Rio Tinto (U.K.), Anglo American (U.K.), and CVRD (Brazil).8

Other multinationals with significant copper interests include Norilsk Nickel Group (Russia),

Freeport McMoRan (U.S.), and Corporation Kazakhmys (Kazakhstan). Smaller

multinationals with multiple metal interests, along with copper, include Teck Cominco and

Falconbridge9

 (both of Canada) and Xstrata (Switzerland). Most of these mining companies

are vertically integrated from mine through product, operate in multiple countries, and

account for the bulk of foreign direct investment in the industry.

Several large international metals companies–including Sumitomo Metal Mining, Nippon

Mining & Metals, and Mitsubishi Metals (all Japan), Jiangxi Copper (China), Outokumpu

(Finland), and Norddeutsche Affinerie Group (Chile)–specialize in smelting, refining, and

fabrication of metals, including copper.10 These firms often purchase minority ownership in

foreign mining operations to secure sufficient raw-material feed stocks for their downstream

operations.

Record cyclical

highs and lows have

been experienced

since 2000.
5-3

Source: U.S. Geological Survey, Mineral Information Team.

0

200

400

600

800

1,000

1,200

1980 1985 1990 1995 2000 2005

U.S. Inventory (000 MT)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

U.S. Producer Prices ($/MT)

Figure 5-1

Copper: Global inventory versus price
5-4

Table 5-1

Copper production, trade, and consumption, refined and unrefined, 2004

1,000 metric tons

Unrefined Refined

Production Imports1 Exports1 Production Imports Exports2 Consumption2

Chile . . . . . . . . . 5,412.5 14.2 2,531.7 2,836.7 0 2,953.9 100.4

China . . . . . . . . 742.2 834.9 1.3 2,198.7 1,200.1 123.8 3,363.9

United States . . 1,160.0 171.8 70.7 1,310.0 703.9 127.1 2,410.0

Germany . . . . . . 3

541.2 297.1 12.4 652.6 584.9 137.2 1,100.2

Poland . . . . . . . 530.5 (4

) (4) 550.1 (4) 280.4 274.3

Russia . . . . . . . . 767.0 29.1 17.8 885.0 0.0 359.4 525.6

Japan ........ 3

1,465.4 1,280.9 8.1 1,380.1 87.7 194.6 1,278.6

South Korea . . . 3

390.0 380.5 (4) 496.0 487.7 46.7 939.5

Canada ....... 562.8 216.0 241.1 527.0 53.5 289.0 297.3

Peru . . . . . . . . . 1,035.6 (4

) 501.7 505.3 (4) 317.7 55.0

Australia . . . . . . 854.0 (4

) 296.0 490.0 0.5 322.9 168.5

Others . . . . . . . . 1,252.1 (5

) (5) 4,021.8 (5) (5) 6,231.2

World . . . . . . . . 14,713.3 (5

) (5) 15,853.3 (5) (5) 16,744.5

 1

 Unrefined imports and exports are the sum of concentrates (copper content) plus blister and anode copper,

where reported.

 2

 Reported exports and consumption; includes copper from inventory.

 3

 Smelter production only; no mining.

 4

 Not available.

 5

 Incomplete data for all countries .

Source: World Bureau of Metal Statistics, “World Metal Statistics,” April 2006, 37-44.
5-5

Table 5-2

Top ten world copper manufacturers, mining and refined copper production, 2004

Company Country of origin

Production

volume

Share in world

production

Thousand tons Percent

Mining production:

Codelco Chile . . . . . . . . . . . . . . . . . . . . . . . . Chile 1,876 12.8

BHP Billiton Group . . . . . . . . . . . . . . . . . . . . Australia 1,055 7.2

Phelps Dodge Corporation . . . . . . . . . . . . . . United States 1,054 7.2

Anglo American Plc. RPA . . . . . . . . . . . . . . . Great Britain 744 5.1

Rio Tinto Group . . . . . . . . . . . . . . . . . Great Britain 727 4.96

Grupo Mexico SA de CV . . . . . . . . . . . . . . . . Mexico 717 4.89

KGHM Polska Miedz S.A. . . . . . . . . . . . . . . . Poland 529 3.61

Norilsk Nickel Group . . . . . . . . . . . . . . . . . . . Russia 483 3.3

Freeport-McMoRan Copper & Gold Inc. . . . . United States 415 2.83

Corporation Kazakhmys . . . . . . . . . . . . . . . . Kazakhstan 377 2.57

Other manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,678 45.57

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,655 100.0

Refined production:

Codelco Chile . . . . . . . . . . . . . . . . . . . . . . . . Chile 1,550 9.74

Phelps Dodge Corporation . . . . . . . . . . . . . . United States 1,054 6.62

Nippon Mining & Metals Co., Ltd. ......... Japan 695 4.37

Grupo Mexico SA de CV . . . . . . . . . . . . . . . . Mexico 627 3.94

Norddeutsche Affinerie Group . . . . . . . . . . . . Germany 570 3.58

KGHM Polska Miedz S.A. . . . . . . . . . . . . . . . Poland 545 3.42

Mitsubishi Materials Corporation . . . . . . . . . . Japan 542 3.41

Norilsk Nickel Group . . . . . . . . . . . . . . . . . . . Russia 446 2.8

Corporation Kazakhmys . . . . . . . . . . . . . . . . Kazakhstan 427 2.68

Jiangxi Copper . . . . . . . . . . . . . . . . . . . . . . . China 415 2.61

Other manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,042 56.82

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,913 100.0

Source: CRU - Copper Quarterly Industry and Market Outlook.
 11 A copper smelter, for example, costs well over $1 billion in most developed countries. New milling

operations can cost in excess of $500 million for the mill alone, and the cost of mine-leach operations can

vary from $300 million to $1.2 billion. The project budget for one of the few mines expected to come online

in 2006–the Spence Mine in northern Chile (owned by BHP-Billiton)–is $990 million, for a mine-leach-SXEW facility. See BHP-Billiton, Escondida.

 12 The permitting process alone in the United States is now reported to average more than 7 years, with

the process in Australia approaching 5 years. There are no significant new mine developments in Western

Europe. Most Latin American, Asian, and African facilities report two- to three-year development timelines.

See U.S. International Trade Commission, International Trade and Technology Review, 1-20 and The Fraser

Institute, Annual Survey of Mining Companies.

 13 This effect often serves to accentuate the commodity cycle extremes, by delaying response to demand

increases and by serving as a return-on-investment disincentive to reduce production when demand drops.

5-6

Global investment mechanisms and timing

The high capital costs and long development times of new copper mines and processing

facilities encourage consolidation in the mining industry as a whole through either M&A or

joint ventures. Consolidation typically occurs at the leading edge of a downward price trend.

The 1990s saw the creation of mega-commodity corporations, such as Xstrata (Switzerland),

that had no historical mining base. Other large-scale mergers included the consolidation of

U.S. operations owned by Magma, Amax, Phelps Dodge, Cyprus, and Asarco. Partnerships

provide greater access to development capital and enable risk-shedding by large mine

producers. 

Due to the high capital intensity of the industry11 and long lead times12 associated with

bringing new production facilities online, most major mining companies establish portfolios

of land access rights and wait to make large investments until

technology and market conditions encourage new development. New

sites are generally identified by small exploration and development

companies, who often secure access rights and identify resources but

rarely operate a developed facility (text box 5-1). Therefore, new FDI

typically lags the cyclical rise in prices for three primary reasons: mines

are site-locality fixed and land access is often problematic; worldwide

increases in environmental regulations and legal challenges often delay

or prevent development of new resources; and the high capital costs and

long development times intrinsic to the industry restrain closure decisions and delay

investment into new mining facilities.13

Beyond investing in new mines and facilities, a significant share of annual FDI flows

represents the reinvestment of earnings into the modernization

or expansion of existing facilities. Such reinvestment occurs

during the early years of high copper prices and high incomes.

Expansion typically occurs at peak periods to meet demand,

whereas modernization is often driven by new regulation or by

efforts to reduce production costs in preparation for the next

down cycle. The composite effect of such expansion and

modernization often creates an oversupply, which leads to the

market exit of smaller and lesser-performing operations during the next downturn.

Mining company

consolidation usually

occurs on the

downward price trend.

Exploration and development

is a long process dependent

upon small companies.
 14 The perception of ready supply for consuming industries, as measured by exchange inventories, is

always a function of numerous supply and demand issues. As this section attempts to show, the actual supply

and demand causes are not as important as the inability of the industry to quickly respond. Thus, solutions

(either direction) always lag the consumptive indicators because of the high capital, personnel, legal, and

time ramifications of any decision. The effect is to increase the amplitude and length of the cycle.

 15 These decisions were largely based on trimming higher-cost operations. However, closure of these

high-cost operations created ripple effects to upstream and downstream facilities to maintain material flow

balances, causing other facilities to cut back or change their production mode. For example, Phelps Dodge

closed its high-cost Hidalgo smelter when confronted with significant rebuild expenditures, but this also

required the concentrating portion of the Morenci facility to close due to the reduction of in-house smelting

capacity and required the El Paso refinery to operate at half-capacity. Further, the loss of sulfuric acid

production from the smelter constrained leaching at several PD leaching operations, which was matched by a

cessation in new leach mining at Chino and Miami and a reduction in the leach mining rate at Morenci,

among other ripple effects.

 16 The LME copper price has increased sixfold to $3.98 per pound (May 12, 2006) from a low of $0.59 in

2001.

 17 Worldwide nonferrous exploration spending reached a 12-year low of $1.9 billion in 2002. The cyclical

high was $5.2 billion in 1997; 2004-2005's “meteoric increases” of exploration spending, largely by junior

companies, reached $4.9 billion. From “Corporate Exploration Strategies,” Metals Economics Group, as

reported in “Exploration Exploding, but U.S. Ranks Near End,” and Paydirt.”

5-7

Box 5-1 

Mine Development: Mid-Tier Mining Companies are Integral to the Development of New

Resources

Industry consolidation has removed many of the intermediate, or junior, mining companies that historically have

been responsible for finding new resources. There are thousands of smaller firms worldwide that are commonly

separated into two categories: “low-tiers” that concentrate on finding resources and “mid-tiers” that focus on

developing resources into bankable projects. These companies are not significant drivers of FDI, but they are an

essential link in facilitating FDI. Typically, as a project develops, a “senior” mining company purchases majority

ownership and operates the facility, with the original company maintaining a minority or royalty share. Very few of

these junior companies operate their own mines or processing facilities. In 2003, fewer than 10 percent of the

world’s 3,000 known mining firms actively engaged in actual mining. The junior international mining companies

engage primarily in exploration, with a few participating in advanced stages of mine development and expansion.

In 2003, over one-half of the world’s known mining companies were based in Canada. Many Canadian interests

have minority positions in facilities operated by larger firms worldwide, and are largely responsible for developing

new projects. There is no evidence that the situation has changed since then.

Sources: U.S. Geological Survey, The Mineral Industry of Canada; American Metal Market; Metal Bulletin; Platts

Metals Week; press releases; company reports; USITC staff interviews; and OCO Consulting, “Industry Trends,”

FDI Quarterly.

During the 1997-2003 price trough, no new facilities were needed due to oversupply of

copper on world markets.14 Rather, M&A activity increased at the front end of the downturn

while there were still acceptable cash flows, largely to streamline portfolios, increase

consumable purchasing power (volume discounting), decrease overhead costs, and

rationalize in-company intermediate production with in-company downstream consumption

during the price and earnings trough.15 This rationalization led to the closure of many

facilities and cutbacks at many others, mostly in the United States and Canada but also at

high-cost operations in other locations.

Despite the increase in the price of copper since mid-2003,16 there are few new mining

projects in the pipeline, largely because the recent price downturn was so long and severe

that copper mining firms cut investment in exploration dramatically in an effort to control

costs,17 but also because of the decline in small and mid-tier company activity. The bulk of

net worldwide mining investment since 2003 thus largely reflects reinvestment into existing

facilities. M&A activity also remains a prominent investment mechanism in the mining
 18 Andrew Dolbeck, “Consolidation in the Global Mining Industry” and “Median Values For Large Cap

Transactions in the Mining Industry.”

 19 Ibid.

 20 Import reliance is how much the United States must import to meet its consumption needs, as a

percentage of total consumption.

 21 To date, the United States remains the largest consumer of copper in end-use products, but China

consumes more refined (and scrap) copper to feed its export-oriented manufacturing industry.

 22 This was highlighted by Phelps Dodge Corporation’s CEO, J. Stephen Whisler, in 2000, when he stated

in a presentation to staff that his company operates mines in the United States, but makes its money in Chile.

 23 BEA data does not provide disaggregated data for copper mining and refining alone.

 24 These are direct values, and do not include indirect values such as varied government revenues,

personal and business income, or the effect on supporting industries. Estimates of the total impact vary

around 8 times the direct value. See Leaming, Mining and the American Economy, 21. That would make the

total contribution $659 billion, or 6.4 percent of the U.S. GDP in 2004. 

5-8

industry, and the level of such activity dramatically increased in 2004.18 The average value

of a single FDI transaction in the mining industry was $171 million during the downturn, but

in the first half of 2004 transactions averaged $1.7 billion, indicating a widespread surge in

high-value development projects.19

Official U.S. government data indicate the timing of the varied FDI mechanisms during

1999-2004 (table 5-3). Reinvested earnings into existing facilities–largely sustaining

capital–are less than half of total USDIA in mining during the price decline years of 1999

and 2001. However, reinvested earnings accounted for well over 90 percent of total mining

sector USDIA in the early boom cycle, as firms re-started shuttered facilities or increased

capacity at existing operations. A market price spike in 2000 generated enough cash to be

spent on existing facilities, but a large negative flow in USDIA also was recorded as U.S.

firms relinquished ownership positions through M&A activity. Reinvestment began in

earnest in 2003, when the longer-term recovery of prices began. The price increase in 2004

fueled so much reinvestment that reinvestment accounted for almost all USDIA capital

outflows. Based on historical patterns, as the boom period continues, greenfield investments

should begin to take precedence over M&A and reinvested earnings

U.S. Role

As of 2004, the United States produced approximately 8 percent and consumed

approximately 15 percent of the world’s refined copper. As a result, the implied U.S. net

import reliance20 for refined copper was 24 percent in 2004, up from 13 percent in 1990.

Chile replaced the United States as the largest producer of mined copper in 1990 and of

refined copper in 1999. In 2002, China supplanted the United States as the largest consumer

of refined copper.21 These trends illustrate both declining production in the U.S. copper

mining and refining sector and the increased movement by U.S. copper-producing companies

to invest internationally.22

The U.S. non-oil and gas mining and refining industry as a whole23 produced $81.5 billion

in direct value to the U.S. economy in 2004–less than one percent of the nations’s GDP, with

less than one percent of employment.24 However, both imports and exports of mining

industry products were more than 3 percent of the nation’s imports and exports in 2004.

Further, outbound USDIA capital flows in mining were nearly 3 percent of total USDIA, and

FDIUS represented almost 4 percent of the total (table 5-4). In 2004, the U.S. copper mining

industry produced unrefined copper valued at $3.4 billion and refined copper valued
 25 U.S. Geological Survey, Copper 2004, 1.

5-9

Table 5-3

Mining: Reinvested earnings as a share of total capital outflows

1999 2000 2001 2002 2003 2004

Average,

1999-2004

Reinvested earnings . . . . . . . . . 1,706 7,930 5,178 3,918 6,365 11,009 6,018

Total outflows . . . . . . . . . . . . . . 9,298 2,174 12,823 6,732 5,426 11,103 7,926

Reinvested earnings/total

outflows . . . . . . . . . . . . . . . . . . . 18.3% 364.8% 40.4% 58.2% 117.3% 99.2% 75.9%

Source: USDOC, BEA, Survey of Current Business, September 2004 and September 2005.

Table 5-4

Mining and refining in the U.S. economy, excluding oil and gas, 2004

Total Share of total U.S.

Percent

Gross product (billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.5 0.8

Employment (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . 675 0.6

U.S. exports (billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1 3.0

U.S. imports (billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.3 4.0

U.S. direct investment abroad (billions) . . . . . . . . . . . . . . . . 56.5 2.7

Foreign direct investment in the United States (billions). . . . 58.6 3.8

Sources: USDOC, BEA. Includes direct value for non-oil and gas mining and primary metal and nonmetallic

manufacturing. Detail for the copper segment is not provided.

at $3.7 billion, based upon the average LME price of $1.30 per pound. U.S. imports and

exports of unrefined and refined copper totaled $2.5 billion and $2.4 billion, respectively.

The U.S. copper mine and mill employment was approximately 7,000; copper manufacturing

(smelting and refining) employment was approximately 1,280.25

There are only two major U.S.-based copper mining companies: Phelps Dodge (PD,

Phoenix), the world’s largest private copper mining company, with operations in over 20

countries including the United States; and Freeport McMoRan (New

Orleans), which operates exclusively overseas, predominantly in

Indonesia and Papua New Guinea. Several large domestic companies

have been acquired by foreign firms in the past 20 years. Specifically,

Rio Tinto (U.K.) purchased Kennecott in 1986, BHP (Australia)

purchased Magma in 1993, and Grupo Mexico purchased Asarco in

1999. Key events affecting the U.S. copper industry during 1999-2004

included the completion of Grupo Mexico’s Asarco acquisition, the

2002 reorganization of Asarco’s Southern Peru Copper Corp. assets to

a Grupo Mexico subsidiary, the gradual write-off of BHP Billiton’s former Magma assets

Only one US-based

mining company still

operates in the United

States.
 26 PD announced plans to invest $850 million in the expansion of the Cerro Verde mine in 2004-07.

 27 Permitting times in the U.S. are often near a decade or more, which exceeds any price cycle boom

period. For example, the Safford Mine Project (AZ) began permitting in 1993 and secured its final Federal

permits in 2005. It anticipates securing its State permits in 2006 and to begin construction in 2007, 50 years

after discovery.

 28 Dramatic increases in capital intensity and legacy costs have slowed industry reaction time to

significant pricing events, causing extreme over-corrections in prices. The longer cycle times this behavior

creates practically ensures that the behavior will continue, with ever higher peaks and lower troughs and

longer cycle times. 

 29 Owned by Freeport McMoRan Copper & Gold Inc. and subsidiaries (U.S.), the Government of the

Republic of Indonesia, and Rio Tinto (U.K.).

 30 Owned by PD (U.S.) and Sumitomo (Japan).

 31 For example, the El Abra mine (Chile) was developed in conjunction with Cyprus (U.S.), now an asset

of Phelps Dodge (U.S.).

5-10

during 2001-04, PD’s buyout of Mitsui’s stake in the Chino (New Mexico) property in 2003,

and PD’s 2004 reinvestments in its El Abra (Chile) and Cerro Verde (Peru) facilities.26

Incentives to New Investment

The high capital cost and the cyclical nature of commodity prices, coupled with recent land

access and environmental issues, have significantly altered the global copper mining industry

and its principal FDI destinations worldwide. These factors, coupled with the lengthening

lead times to bring a U.S. project on-line (due to access and permitting issues),27 have caused

the focus of strategic investment to move outside the United States.

Over the last 20 years, two different “boom” and “bust” cycles occurred that were more

extreme than any on record.28 The first bust, in the mid-1980s, led to the collapse of many

international mining companies, including several U.S. companies. The following 1986-1996

boom witnessed the greatest expansion of copper mining capacity in history, and the buildup

of substantial worldwide inventories. The principal destinations for new FDI in the

international copper mining industry during the latter part of the boom were South America

(especially Chile, but also Peru and Argentina) and Australasia (particularly Indonesia and

Papua New Guinea, but also Australia). New, very large mines were brought on-line and,

unlike during previous boom periods, most involved shared multinational ownership. For

example, the Escondida copper-gold-silver mine in Chile, which is now the world’s largest

copper-producing mine, is owned by a consortium of BHP Billiton (Australia), Rio Tinto

(U.K.), Jeco Corporation (a consortium of Japanese companies led by Mitsubishi), and the

International Finance Corp. (part of the World Bank Group). Other notable joint ventures

include the Grasberg copper-gold mine in Indonesia29 and the La Candelaria copper-gold

mine in Chile.30 State-owned mining enterprises also entered into joint ventures. Several

large Chilean mines were developed with shared CODELCO (Chilean Government) and

international private ownership,31 and several state-owned mining companies in Africa (e.g.,

Gecamines in DROC and ZCCM in Zambia) began to privatize with international ownership,

selling equity stakes to private joint venture partners.

The price collapse during 1997-2003 initiated another industry contraction. Some higher-cost

operations were closed indefinitely or permanently, while others were downsized. For

example, BHP (Australia) closed its Magma (U.S.) facilities; Phelps Dodge bought Cyprus

(U.S.) and then shut down higher-cost operations; and Grupo Mexico bought Asarco (U.S.)

and downsized its operations. Meanwhile, Xstrata (a Swiss holding company) began buying
 32 Similar effects have been seen in other metals, ferrous and nonferrous. Significant ownership changes

have occurred in the domestic iron ore industry. In nickel, Noranda bought Falconbridge, and now INCO is

trying to purchase Noranda. In gold, Newmont, AngloGold, and Barrick have all been buying, jockeying for

position as the number one producer worldwide. Barrick completed the takeover of Place Dome on January

24, 2006, making it the world’s largest gold mine.

 33 Worldwide consumption growth of copper in end use forms has averaged over 2 percent per annum for

decades, and accelerated to over 3 percent per annum since 1993 with the consumer electronics boom. The

development of electric and hybrid cars is expected to further accelerate copper demand due to the increased

electronic controls and electrification of that technology, even without the rapidly growing new Asian

markets.

 34 From “Corporate Exploration Strategies,” Metals Economics Group, as reported in “Exploration

Exploding, but U.S. Ranks Near End,” and Paydirt.

 35 The extremely rich resources of sub-Saharan Africa (SSA) are well-known, and in this time of high

cash flow, numerous companies worldwide have begun allocating portions of their exploration and

development budgets toward opportunities in SSA, despite the political risks. “Sub-Saharan Africa Economy:

Digging Deep.”

 36 From “Corporate Exploration Strategies,” Metals Economics Group, as reported in “Exploration

Exploding, but U.S. Ranks Near End,” and Paydirt.

 37 See Minerals and Metals, U.S. Trade and Investment with Sub-Saharan Africa, issues 2002-2004,

Chapter 5: Industry Sector Profiles.

 38 Keynote Session, Annual Conference of the Society for Mining, Metallurgy, and Exploration, Feb.

2002.

5-11

properties and firms internationally; and BHP (Australia) merged with Billiton (U.K.).32 As

a result, there are far fewer independent mining companies, and almost no mid-tier firms

(except in Canada), which as noted above has contributed to a sharp decline in new

exploration and development, thereby delaying the industry’s capacity to quickly respond

to the recent increased demand.33 Firms began cutting their greenfield exploration budgets

as the price fell in 1997,34 so the last decade has witnessed very few new discoveries. Few

project opportunities thus exist to meet growing demand, allowing copper prices to climb to

record levels. The industry is meeting extant demand by reinvesting in existing facilities to

enlarge them. The potential drawback to this approach is that it makes facilities less nimble

in responding to market signals. Since the industry can never respond as fast as the

supply-demand balance changes, the increased size of facilities may force the mining

industry to endure the extremes of price fluctuations. 

However, in response to high prices, companies are once again investing in exploration. The

target regions for new exploration are Latin America, Australia, Canada, and Africa;35 the

United States and Pacific/Southeast Asia rank last.36 Many developing countries, especially

in the Copperbelt region of the Congo (Zambia and the Democratic Republic of the Congo)

are rapidly privatizing national holdings and developing mining-friendly laws to entice

international investment.37

Disincentives to new investment

Despite the recent, substantial price increases, there are several factors that may discourage

investment in the copper mining industry. For example, the cyclical nature

of the business may discourage many non-industry investors. This is

because average returns on investment often trail other industries for many

years, or until the next boom period. As such, access to financing is

difficult and expensive, with investment decisions often dependent on

predictions of whether the boom period will last long enough to secure a

suitable return on investment.38 This situation leads to the development of

mega-sized mines with extremely high capital costs in an attempt to recover

The price cyclicality of

copper discourages

investment.
 39 Bolivia nationalized its oil and gas industry in May 2006. Observers are also closely monitoring the

2006 presidential elections in Peru for the same reason. Staff interviews with industry representatives at the

Society of Mining, Metallurgy, and Exploration Annual Conference, indicated that a reversion to past

policies is likely the only near-term effect that could stifle FDI into Peru.

 40 See AMIRA International, the Australian mining industry association, at www.amira.com.au/, and the

Australian Bureau of Agricultural and Resource Economics, at www.abareconomics.com/, for detailed

information. A brief summary of the business conditions is also found in Christopher B. Mapes, “Major

Contraction of the Domestic Refined Copper Industry,” 1-20. 

 41 A patent granting title to specific public land for specific purposes is issued by the owning government

entity. A mining patent issuance is contingent upon site due diligence and permitting. See

www.teamlaw.org/LandPatents.htm for more detail.

 42 Then-Secretary of the Interior Bruce Babbitt instructed the Bureau of Land Management (BLM), in

Memorandum No. 95-01 dated Oct. 4, 1994, to only process applications that were pending in Washington,

DC, as of September 30, 1994, and let all others remain idle. See John D. Leshy, “Entitlement to a Mineral

Patent Under the Mining Law of 1872.”

 43 One exception is Nevada, which is primarily a gold-producing area. See Fraser Institute, Composite

Policy and Mineral Potential, Annual Survey of Mining Companies, 48-9. For additional examples, see

Mapes, “Major Contraction of the Domestic Refined Copper Industry,” 1-20.

 44 The orebody was discovered in 1957. Several unsuccessful attempts have been made to develop it. The

present land consolidation, permitting, engineering, and development process began in 1993. The mine is

scheduled to open in 2007, 14 years after the permitting process began and 50 years after discovery.

 45 For a review of South Africa’s significant legal changes, see Minerals and Metals, U.S. Trade and

Investment with Sub-Saharan Africa, issues 2002-2004, Chapter 5: Industry Sector Profiles. 

5-12

the orebody’s value faster. However, the situation also serves to oversupply the

market and constrain the ability of firms to cut back in periods of oversupply and still pay

off their financing debt.

Political and social unrest during 2005 and 2006 caused temporary closures at some existing

Peruvian and Indonesian facilities and may slow new FDI into those countries. Further,

political changes in Latin American countries, including Venezuela and Bolivia, have raised

concerns related to resource nationalization which may discourage new international FDI

into those countries.39

Regulatory and land-access measures are increasing in some developed countries, including

Australia and the United States. Australia is confronting native lands issues that are delaying

the development process.40 The United States restricts access to most public lands for the

purpose of exploration. In addition, the U.S. imposed a mining patent (land-use title)41

moratorium in 1994 that remains in effect.42 An annual survey of mining executives ranks

most U.S. mining states as difficult mining investment destinations, with overlapping and

overly restrictive mining policies, despite numerous world-class resources.43 Therefore, the

United States is not a significant destination for inbound FDI in the copper industry with

regard to exploration or new development. M&A activity and reinvested earnings thus

generate the overwhelming majority of FDIUS capital inflows in this industry. Domestic and

foreign producers are actively reinvesting in existing U.S. facilities, with most facilities

having been returned to full production and some previously shuttered facilities being

evaluated for reopening to take advantage of the current record-high prices. As of 2006, only

one large new U.S. copper mine– PD’s Safford Project –appears headed for development.44

Recent tightening of mining and financial laws in several key copper mining countries is

creating global investment uncertainty. Notable among these countries are Peru, South

Africa, and Chile. South Africa has also introduced royalty, health and safety, ownership,

and other laws that are reportedly devaluing mining assets, inhibiting their domestic

producers’ expenditures abroad, and stifling mining-related FDI inflows into the country.45

Political instability and the significant disrepair of existing facilities continue to inhibit
 46 Ibid.

 47 A royalty is a direct tax imposed by the government taken on the value of the extracted metal from

government lands. There are many types of royalties, but the typical royalty in the metal mining industry is

imposed on the value of the metals after smelting or refining. In the United States, royalties are typically

imposed on continental shelf (oil & gas) production and from government lands that were obtained from

private interests (e.g., Appalachian coal and Missouri lead/zinc). Most western U.S. lands do not have this

history of private ownership, so are rarely subject to royalties, though numerous efforts to impose a royalty

have been proposed in the U.S. Congress. As with all taxes, a royalty increases mining cost, thus lowering

the effective venture profitability and thus the mines reserves and operating life and value.

 48 Multiple sources, including varied issues of the Santiago Times, Business News Americas, and Mining

Engineering.

 49 Multiple sources, including Steve James, “Peru Royalty Plan Unpopular with Mining Companies.”

 50 USDOC, BEA, “Foreign Direct Investment in the United States,” Sept. 2005, 79-116, and “U.S. Direct

Investment Abroad,” Sept. 2005, 117-161. U.S. government statistics separate the electrowinning, smelting,

and refining functions of a mining company into the manufacturing metal processing category. 

 51 Includes nickel, lead, and zinc ores. No major outlays for the other metals were found, so the bulk is

presumed to be copper-related.

 52 Includes all nonferrous metal manufacturing, except aluminum.

 53 Negative values reflect a net inflow of FDI during the period.

 54 Includes oil and gas.

 55 See Tenke Mining Corporation

5-13

mining-related FDI in many sub-Saharan African countries.46 Chile is currently debating

royalty47 laws and tightening capital repatriation laws,48 and Peru enacted mining royalty

laws in 2004.49

U.S. Direct Investment Abroad50

USDIA net capital outflows in the U.S. copper mining51 and processing52 industries totaled

$2.1 billion and negative $13 million,53 respectively, during 1999-2004. The USDIA position

in 2004 stood at $6.6 billion in the mining segment and $406 million in the processing

segment.

In 2003, U.S. parent firms maintained 918 overseas mining54 affiliates, including 55 affiliates

in the metal mining segment and 27 affiliates in the combined copper, lead, zinc, and nickel

mining segment. U.S.-owned foreign affiliates in the metal mining segment (for seven U.S.-

parent companies) reported employment of 47,100, assets of $25.8 billion, sales of $9.7

billion, and net income of $1.3 billion in 2003. Copper and gold facilities account for the

majority of such affiliate data.

The near future for the U.S. copper industry’s direct investment abroad appears strong. For

example, PD is spending $850 million (from 2004-07, with Sumitomo Metal Mining) to

build a concentrator at its Cerro Verde mine in Peru. PD has also obtained a Letter of

Agreement to acquire 70 percent ownership and develop the Tenke Fungurume coppercobalt orebody in the Democratic Republic of the Congo and has personnel on-site

performing the engineering feasibility study.55
 56 USDOC, BEA, “Foreign Direct Investment in the United States,” Sept. 2005, 79-116; and “U.S. Direct

Investment Abroad,” Sept. 2005, 117-161. U.S. government statistics separate the electrowinning, smelting,

and refining functions of a mining company into the manufacturing metal processing category. 

 57 Includes oil and gas.

 58 Not counting processing facilities.

5-14

Foreign Direct Investment in the United States56

FDIUS net capital inflows into the United States during 1999-2003 totaled $2.2 billion in

copper, lead, zinc, and nickel mining, with an end-of-period FDIUS position of $694 million;

and $3.6 billion in nonferrous (and non-aluminum) processing, with an end-of-period FDIUS

position of $2.1 billion. The data also confirm the growing importance of the processing

segment of the U.S. copper market as compared to the diminishing mining portion. As

evidence of this trend, the world’s two largest copper refineries– in El Paso and Amarillo,

Texas– must import smelter anodes to operate at full capacity. Grupo Mexico’s acquisition

of Asarco’s Amarillo facility is a significant component of total foreign FDI into the U.S.

copper industry; the Mexican ownership provides a vital source of foreign raw material and

an important outlet for sales as Asarco’s U.S. mining operations close.

Foreign-owned affiliates in the U.S. mining sector57 accounted for assets of $70.3 billion,

sales of $24.2 billion, and net income of $1.7 billion in 2003. The capitalized portions of

these assets– plant, property, equipment (PPE)– totaled $51.9 billion, with new expenditures

of $4.1 billion in 2003. Foreign-owned U.S. affiliates in the mining sector recorded total

employment of 72,300, which is dominated by employment in the oil and gas industry. The

metal mining segment reported employment of 9,500, and the copper, nickel, lead and zinc

sub-segment accounted for fewer than 5,000 employees.58

The likelihood of inbound FDI directed at the development of new facilities in the U.S.

copper mining industry in the near future is small. Few resources

that have been discovered in the past two decades have secured

approval, and in many cases the projects were foreign-investment

driven (largely from Canada). The massive writedown of the U.S.

Magma assets after BHP’s acquisition has served as a warning to

foreign acquisition FDI. Grupo Mexico did acquire U.S.-based

Asarco, but has closed some facilities, and is currently reported to

be contemplating additional closures. In contrast, the Rio Tinto

Kennecott assets are receiving significant FDI directed at

sustaining and expanding the existing facilities. Thus, acquisition

and reinvested earnings are likely the only mechanisms of inbound FDI into the U.S. copper

mining and refining sector in the foreseeable future.

Future FDIUS in copper

is likely to consist of

reinvested earnings and

acquisitions.
 1

 There were three Maine producers in 2005: Heritage and Atlantic Salmon, both owned by the same

Canadian firm, and Marine Harvest, owned by a Norway-Netherlands joint venture. There is also one

producer in Washington State, American Gold (formerly Cypress Island), owned since 2004 by a U.S. firm

and before that by a Norwegian firm.

 2

 U.S. International Trade Commission (USITC), Fresh and Chilled Atlantic Salmon From Norway,

(Second Review), 181-182 (testimony of economic consultant Stern).

 3

 “Risk-Based Consumption Advice for Farmed Atlantic and Wild Pacific Salmon Contaminated With

Dioxins and Dioxin-Like Compounds.” There is significant disagreement, however, as to the actual danger

posed by toxins in salmon. “Group files FTC complaint over farmed salmon ads” (describing efforts by the

National Environmental Trust to ban ads by industry advocate Salmon Of The Americas touting the health

benefits of eating farmed salmon).

 4

 Farmed salmon consumption grew slightly during the same period, from 158 million pounds in 2000 to

164 million pounds in 2003. 

6-1

CHAPTER 6

Whole Farmed Salmon

Summary of Key Findings

The U.S. whole farmed salmon industry is small (2004 shipments of $49.6 million) and

consists of four firms, three in Maine and one in Washington State. Three of the firms were

owned for many years by Norway-based salmon farming/marketing firms. As of 2006, three

firms are Canadian-owned and one is U.S.-owned. Norwegian interest in investing in the

U.S. farmed salmon industry appears to have been spurred by significant U.S. countervailing

and antidumping duties in 1991. The recent divestitures by Norway appear to be driven

largely by the high costs of U.S. environmental regulations. While still supplying the U.S.

market, such firms have shifted much of their productive capacity to Chile and other lowercost locations. The interest by Canada-based firms in U.S. salmon farming investment

appears to be driven by both the proximity of the large U.S. market, and scale economies

(the Canadian salmon farms and the Canadian-owned U.S. farms are separated by only a few

miles and the U.S.-Canada border). There is no known direct investment abroad by U.S.-

based firms, apparently because the large U.S. market encourages domestic firms to

concentrate on their home market.

The Farmed Salmon Industry in the U.S. Economy 

The whole farmed salmon industry is a tiny part of the overall U.S. economy, but in Maine,

where the bulk of the industry is located, it is an important local industry, accounting for

much of the economy and employment in Washington County and elsewhere along the

coast.1

 The industry consists of firms that hatch salmon eggs into fry, and raise salmon to

marketable size in ocean pens. The firms sell their whole salmon to processors and

distributors for sale to restaurants, supermarkets, and other retail sellers. The rapid growth

experienced by the U.S. industry and market in the 1990s has slowed in recent years, in part

because the market has matured,2

 but perhaps also due to recent consumer fears that salmon

is contaminated with PCBs, mercury or other toxins.3

 Total domestic production in 2003, the

latest year reported by the U.S. Department of Commerce, reached $49.6 million, down from

$99 million in 2000 (table 6-1).4

 The 2003 total output represented a fraction of the
 5

 National Marine Fisheries Service, “Fisheries of the United States 2004,” 16. The bulk of the output of

the U.S. farmed fish industry is catfish, followed by oysters, salmon, and trout. Production of farmed

seafood is generally limited by environmental and cost factors.

 6

 U.S. industry sources reported to Commission staff that such wages are roughly comparable with those

paid in major competing nations, but statistics on competing nations’ wages in this industry are not available.

 7

 Exports are probably overstated , however, as a significant but unknown portion of such exports to

Canada (the only significant export market) are simply processed and reimported. USITC, Fresh and Chilled

Atlantic Salmon from Norway, (Second Review).

 8

 See, e.g., "Fuel Drives Costs Up," 1, 20-22; and USITC, "Fresh and Chilled Atlantic Salmon From

Norway," II-5.

6-2

Table 6-1

Fisheries in the U.S. economy, 2003

Total Share of total U.S.

Gross product (millions) . . . . . . . . . . . . . . . . . . . . . . . . . . 49.6 (1)

Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 (1

)

U.S. exports (millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.0 (1

)

U.S. imports (millions)............................ 247.0 (1

)

U.S. direct investment abroad . . . . . . . . . . . . . . . . . . . . . . (2

) (2)

Foreign direct investment in the U.S. (millions) . . . . . . . . . 24 (1)

 1 Less than 0.05 percent.

 2

 Not available.

Sources: Official statistics of the U.S. Department of Commerce; USITC, Fresh and Chilled Salmon From Norway,

Inv. Nos. 701-TA-302 and 731-TA-454 (Second Review), USITC Publication 3835, January 2006, appendix C; and

company financial statements and press releases.

total output of the broader U.S. farmed fish/shellfish industry of about $961 million in that

year.5

As a share of U.S. employment, likewise, the salmon farming

industry is small, accounting for a tiny fraction of total U.S.

employment. Average wages in the industry, at $6.57 per hour,

are about 45 percent lower than the average Maine hourly income

of $14.41 in 2004.6

The U.S. farmed salmon industry has traditionally focused on serving the domestic market,

but since 1999, the ratio of exports to production has increased; a 19-percent decline in

domestic production and a 3-percent increase in exports raised this ratio to just over 50

percent in 2004 (figure 6-1).7

 Reasons for the decline in production likely include lower

retail salmon prices, court-imposed cutbacks on pen capacity utilization (because of

violations of environmental laws, described below), and industry consolidation. Imports,

which account for the bulk of U.S. consumption, grew steadily for several years until they

reached a record $299 million in 2002, then declined to $247 million by 2004. The decline

is due in part to rising global fuel costs, temporary production cut-backs caused by

environmental problems in Canada, and a shift by foreign exporters from shipping whole fish

to shipping salmon fillets to the U.S. market (figure 6-2).8

The U.S. whole farmed

salmon industry exports 50

percent of its production.
6-3

1998 1999 2000 2001 2002 2003 2004

0

50

100

150

200

250

300

350

Consumption Imports

Millions of dollars

Source: Official statistics of the U.S. Department of Commerce; USITC, Fresh and Chilled

Salmon From Norway, Inv. Nos. 701-TA-302 and 731-TA-454 (Second Review), USITC

Publication 3835, January 2006, appendix C; and company financial statements and press

releases.

Figure 6-2

Farmed salmon: U.S. consumption and imports, 1998-2004

1998 1999 2000 2001 2002 2003 2004

0

20

40

60

80

100

Production Exports

Source: Official statistics of the U.S. Department of Commerce; USITC, Fresh and

Chilled Salmon From Norway, Inv. Nos. 701-TA-302 and 731-TA-454 (Second

Review), USITC Publication 3835, January 2006, appendix C; and company

financial statements and press releases.

Millions of dollars

Figure 6-1

Farmed salmon: U.S. production and imports, 1998-2004
 9

 U.S. production data include production by foreign-owned firms.

 10 Salmon farming in Alaska is technologically feasible, but it is forbidden by state law. The same is true

in California, although ideal natural conditions are less abundant there. In both cases, the reasons for the

bans appear to include concerns about competition with the wild fishery and about environmental

degradation (including waste build-up under pens, and the accidental release of farmed salmon that then

interbreed with wild salmon). “California Bans Salmon Farming in State Waters.”

 11 The cost of sites for salmon pens is related to physical capacity. If residential/commercial development

has raised the cost of land near attractive ocean locations for pens, the cost of operating pens in those

locations may be prohibitive.

6-4

The Global Market and Major Investors 

Major market actors

Norway is by far the world’s largest farmed salmon producer and the largest source of FDI

in salmon farming markets around the world. Norwegian firms, including Fjord,

Stolt-Nielsen, Pan Fish, and Cermaq, operate salmon farms not only in Norway but

elsewhere in the world, including Chile, the EU, and the United States (table 6-2). Most

production from these subsidiaries goes to the world’s two principal markets for farmed

salmon, the EU and the United States. 

Japan is another source of FDI. In recent years, Japan has channeled FDI into Chile (the

world’s second largest producer) for production that in turn is destined for the Japanese

market. There is no known Japanese FDI in the U.S. farmed salmon industry. Canada, the

world’s third largest producer of farmed salmon, is another source of FDI, primarily in the

U.S. industry. 

Most other producers around the world, including all U.S.-owned

firms in this industry, operate only in their own country. U.S.

salmon producers are small players in the global market,

accounting for less than 2 percent of world production of farmed

salmon in recent years. Figure 6-3 shows total farmed salmon

production by major producing nations.9

Investment strategies

The principal factor influencing global FDI in the farmed salmon industry is the availability

of a conducive natural environment: salmon are farmed best in areas where cold flowing

saltwater is present, in areas protected from large waves (to protect the pens as well as to

facilitate harvesting from the pens). Norway’s fjords are ideal locations, as is much of the

coast of northern Europe (Faeroe Islands, Scotland, Ireland, Iceland), as well as Canada, the

northern Atlantic and Pacific coasts of the United States,10 and Chile.

In addition to the natural environment, FDI decisions are influenced by factors such as cost

and capacity. When farm capacity is reached in the home country, the incentive for FDI

increases.11 The industry in New Brunswick, Canada, for example, has reached capacity in

terms of available space to place salmon pens; this constraint, according to industry sources,

was a factor behind the move by Canada-based George Weston, Ltd. southward into Maine

and into the Chilean industry. Economies of scale also play a role when the two nations

Norway is by far the largest

source of global FDI in the

farmed salmon industry.
6-5

Table 6-2

Fisheries: Largest companies in the global market, 2004

Company Home country Total revenue

Total

employment

Host countries

of affiliates

Marine Harvest Netherlands $2 billion (approx.) 6,000 Norway, Chile,

Canada, UK

Cermaq Norway $1,129 million 2,960 Norway, Chile, UK

Fjord Norway $550 million 1,250 Norway, Chile, UK

Pan Fish Norway $350 million 1,173 Norway, Chile,

Canada, UK

Cooke Aquaculture Canada (1

) 100-200 (U.S.) USA, Canada

 1 Not available.

Source: Companies’ annual reports.

1998 1999 2000 2001 2002 2003

0

1000

2000

3000

4000

5000

Other Chile

Canada Norway

Source: U.N. Food and Agriculture Organization.

Millions of dollars

Figure 6-3

Farmed salmon: Production by major producers, 19998-2003
 12 Ingvald Loeyning, managing director of Marine Harvest’s salmon business group, quoted in “Salmon

Farmers Seek Strategy for Taking Profits to Next Level,” 5.

 13 “Pan Fish Abandons U.S. Farms.” These limitations appear to have been addressed, with a

reorganization that included the sale of the U.S. operation and acquisitions of European value-added

production. “Results of the Fourth Quarter 2005.”

 14 “Salmon Farmers Seek Strategy for Taking Profits to Next Level,” 5.

 15 Based on company press releases.

6-6

involved are adjacent to one another; if capacity is reached in the home country, a natural

expansion would be into the industry across the border. 

The existence of marketing economies of scale also plays a role. When a firm has operations

in different parts of the world -- particularly in both the Northern and Southern Hemispheres

-- it has more assurance that it can supply a dependable volume of fish to its customers yearround. According to one industry source, “companies that own farms in both the Northern

and Southern hemispheres have a huge production advantage because they have regular

supply with fairly regular volume.”12 Although salmon is harvested year-round in most

locations, harvesting is easier in warm months than cold months. In addition, having multiple

locations helps spread the risk of disease or other problems that might limit production at any

one site. Another factor behind recent FDI decisions -- particularly behind divestment -- has

been the financial stability of the parent firm. Norway-based Pan Fish recently sold its U.S.

subsidiary in Washington State because of cash-flow problems.13 The buyer, Smoki Foods,

is an American seafood producer and marketer.

The regulatory environment is one of the most significant factors influencing FDI decisions

in the farmed salmon industry. Foreign firms may view particular regulations as particularly

burdensome including, for example, the number of pens

allowed at one site, restrictions on feed additives, or a

requirement to tag salmon to identify their source if a pen

break allows an escape. Too many regulations may offset

the natural cost advantages of an ideal natural

environment. Market proximity is also important: it is less

expensive to ship salmon to New York from Maine than

from New Brunswick or Norway. Long-standing

restrictions on the size of salmon farms in Norway, meant

to encourage individual rather than conglomerate farms,

reportedly have spurred some Norwegian salmon farms to expand by investing overseas,

becoming the farmed-salmon giants they are today.14 Similar restrictions on farm size apply

in Maine, where salmon farms are limited to 250 acres.

U.S. Direct Investment Abroad and Foreign Direct

Investment in the United States

There is no known USDIA associated with the U.S. farmed salmon industry. Likely reasons

include the proximity of the large U.S. market, as well as substantial competition from wellestablished competitors in other major producing regions, such as Norway, the United

Kingdom, and Chile.

The stock of FDIUS in the farmed salmon industry was at least $24 million in 2004.15 During

2000-2004, BEA statistics, which are disaggregated only to the “Animal Production” level,

Capacity constraints, marketing

economies of scale, and regulatory

issues all influence FDI in farmed

salmon.
 16 Between 1983 and 1993, according to Department of Commerce data, U.S. production of farmed

salmon grew, on average, by 30 percent annually in quantity and by 39 percent annually in value. Between

1993 and 2004, such production grew, on average, by only 4 percent annually in quantity and declined by 2

percent annually in value. 

 17 “Cooke Aquaculture Plans to Consolidate Aquaculture Industry in North America.”

 18 Antidumping duties are intended to remedy sales at less than fair value (“dumping”), while

countervailing duties are intended to offset government subsidies in the exporting country. Investigations of

both alleged trade practices are initiated by the USITC and Commerce Department upon receipt of a petition

therefor from a domestic industry producing a like or directly competitive product. In the case of Norwegian

salmon, a petition was filed by a group of Maine salmon farming firms, which ultimately led to the

imposition of both antidumping and countervailing duties on U.S. imports of fresh Atlantic salmon from

Norway in 1991. See USITC, Fresh and Chilled Atlantic Salmon from Norway, (Final).

6-7

show that FDIUS flows in that sector ranged from a high of almost $1.4 billion in 2001 to

a low of $873 million in 2002 (figure 6-4). This BEA category, however, includes

production of cattle and other more traditional agriculture animals, and farmed salmon

(indeed, all fish) is a small component of the total.

Norway was a large source of FDI in the U.S. industry for several years, but its share of

FDIUS has diminished sharply within the last two years due to divestments by Fjord and Pan

Fish. Currently, Canada-based Cooke Aquaculture, which purchased the bulk of Norway’s

U.S. divestments, is the primary foreign investor in the U.S. industry. A Netherlands firm,

Nutreco, in association with a Norwegian firm, Stolt-Neilsen, is also present in the U.S.

industry (table 6-3). The U.S. industry has shrunk in size over the years, corresponding with

a decline in FDIUS. 

There are several factors that influence the FDI decisions of these firms. Market potential is

one. The early growth of the U.S. industry (in the 1970s and 1980s) was fueled in part by

Canadian and Norwegian FDI in an effort to tap into the small but rapidly growing U.S.

market.16 Canadian FDI has recently been more significant than Norwegian FDI and is said

by industry sources to be oriented more toward achieving marketing scale economies, as the

industries of both Canada and the United States serve the U.S. market. This effort to achieve

scale economies apparently continues, with Cooke Aquaculture’s purchase of farms in

Maine.17

Countervailing and antidumping duty orders on U.S. imports of whole farmed salmon from

Norway issued by the U.S. Department of Commerce in 1991 were another factor driving

inbound FDI.18 Norwegian salmon exports to the United States, Norway’s second-largest

market, immediately declined and have remained low ever since (equal to 1.4 percent of total

U.S. farmed salmon imports in 2004). Partly as a result, Norwegian-owned firms increased

their investment in the U.S. industry in the late 1990s to the point where, in 2000, more than

one-quarter (based on output) of the U.S. farmed salmon industry was Norwegian-owned.

Thus the share of the U.S. market held by Norwegian-owned firms did not decline as much

as Norway’s export shipments did, because production by Norwegian-owned firms shifted

from Norway to the United States.
6-8

Table 6-3

Farmed salmon: Ownership structure in the U.S. industry, 2004

Producer name

(location)

Parent company

(location)

Year acquired and

seller Comments

Atlantic Salmon of Maine

(U.S.-Maine)

Cooke Aquaculture

(Canada)

2004, from Fjord (Norway) Atlantic is a subsidiary of

Horton’s of Maine, a

Cooke subsidiary. 

Horton’s also owns two

smaller Maine producers,

Treat’s Island and Island

Aquaculture, also

acquired from Fjord.

Heritage (formerly known

as Connors) (U.S.-Maine)

Cooke Aquaculture 2005, from George

Westin (Canada)

Marine Harvest (U.S.-

Maine)

Nutreco (Netherlands)

and Stolt Nielsen

(Norway)

Formed as a joint venture

in 2004, combining two

existing firms 

Until May 2005, Marine

Harvest was called Stolt

Sea Farm, the name of

Stolt Nielsen’s U.S.

producing subsidiary. It

was merged in 2004 with

Nutreco’s U.S. marketing

subsidiary, Marine

Harvest.

American Gold (formerly

known as Cypress Island)

(U.S.-Washington)

Smoki Foods, Inc. (U.S.-

Washington)

2005, from PanFish

(Norway) 

Sources: Company press releases and financial statements.

2000 2001 2002 2003 2004

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Source: U.S. Department of Commerce, Bureau of Economic Analysis,

U.S. Direct Investment Abroad.

Billions of dollars

Figure 6-4

Animal production: Foreign direct investment stock, 2000-2004
 19 Fjord Seafood, 2003 Annual Report, 8.

 20 Such environmental effects were said to be caused by (a) creating the risk that farmed salmon might

accidentally escape from their pens and interbreed with wild Atlantic salmon, hindering the latter’s recovery

from its current endangered state (because of genetic weakening caused by the interbreeding), and (b)

creating algae and other problems around and below salmon pens. See generally, Atlantic Salmon in Maine,

ch. 3.

 21 Fjord Seafood, Quarterly Report, First Quarter 2004, 3.

 22 USITC, “Fresh and Chilled Atlantic Salmon from Norway,” (Second Review). This trade refers to

fresh, whole or dressed Atlantic salmon classified in HTS subheading 0302.12, which is the principal product

of both the U.S. and Canadian farmed salmon industries.

 23 Ibid.

 24 Ibid. See also, National Research Council, Atlantic Salmon in Maine, 81-90.

6-9

As noted, the level of environmental and other regulations is also a significant FDI factor.

One large Norwegian salmon producer and investor in the U.S. industry, Fjord, pulled out

of the U.S. industry expressly because “court rulings in 2003 relating to the Endangered

Species Act and the Clean Water Act have caused tight conditions for fish farming in the

state of Maine.”19 These court actions resulted from complaints by U.S. environmental

groups that salmon farming operations were causing adverse environmental effects.20 Fjord

stated that it would make up the lost supply from this divestiture with increased sales from

its Chilean operations.21

Direct Investment and Cross-border Trade 

U.S. exports of farmed salmon are directly influenced by FDIUS, particularly through

Canadian ownership of U.S. producers. About 99 percent by both value and quantity of U.S.

exports of whole farmed salmon are shipped to Canada, almost all for processing into

“dressed” (gutted) product, and are then re-imported into the U.S. market.22 Much of this

trade is between subsidiaries of related parties,23 but some re-imports are misclassified as

U.S. imports. In addition to re-imports, there is a substantial but unknown volume (because

of misclassification) of U.S. imports of Canadian-origin farmed salmon. Table 6-4 shows

recent trends in U.S.-Canadian trade in farmed salmon (in thousands of U.S. dollars). The

large drop in U.S. exports to Canada after 2001 was due to U.S. court orders requiring

temporary closures of some U.S. salmon farm pens because of disease infestations.24

Table 6-4

U.S. farmed salmon trade with Canada, 2000-2004

Item 2000 2001 2002 2003 2004

Percent

change,

2000-2004

U.S. exports to Canada (reported) . . . . . . . 32,253 35,178 14,534 21,767 23,759 -26.3

U.S. imports from Canada (reported) ..... 219,296 248,810 265,529 207,112 199,320 -9.1

Source: U.S. Department of Commerce.

 1

 Petroleum refining and smelting of metal ores are excluded from this study, as they are normally

classified with the petroleum and metal mining industries, respectively.

7-1

CHAPTER 7

Chemical Industry

Summary of Key Findings

The U.S. chemical industry supplies the largest domestic market for chemicals and related

products in the world, with 2004 shipments of $516.2 billion. As a result, several U.S. firms

are among the largest in the world. Not only do they supply the U.S. market, but they also

supply most foreign markets either through exports or through affiliates established in those

markets. Canada was the largest recipient of USDIA in the chemicals industry, primarily

due to the highly developed infrastructure connecting it with the United States and its

abundant supplies of raw materials. In 2003, U.S.-based chemical firms had more than 2,000

foreign affiliates, with assets of $414.2 billion and sales of $286.1 billion. European firms

were the largest foreign investors in the U.S. chemical industry, with an FDIUS position of

$148.0 billion in 2004. The major investing countries were based in Switzerland, the United

Kingdom, the Netherlands, and Germany. A total of $253.2 billion in assets was held by the

U.S. affiliates of foreign parents in 2003, with the pharmaceuticals segment accounting for

approximately 47 percent of the industry.

Cross-border trade in chemicals involving U.S.-owned firms and their affiliates during 1999-

2004 was mainly with its NAFTA partners, Canada and Mexico. The free trade provisions

of the NAFTA and the common borders have greatly facilitated this trade. Because of the

abundant natural gas and crude petroleum in these two countries, U.S. imports from U.S.-

owned affiliates in Canada and Mexico consist mainly of basic chemicals, which are used

to produce higher valued, more complex chemicals. U.S. exports to these affiliates consist

mainly of higher valued, intermediate and specialty chemicals.

Introduction

The chemical industry is a manufacturing industry that provides basic and intermediate

chemicals and a variety of finished products to other consuming industries and the public.

Chemical plants manufacture these products from raw materials such as crude petroleum,

natural gas, or ores, which they transform into the desired products through a series of

reactions. In many cases, the products manufactured by one chemical plant are used by

another plant to produce a finished product for consumption (e.g., ethylene to polyethylene

to plastic film for packaging).1

The complexity of this industry makes it difficult to define. In its broadest sense, it includes

all firms manufacturing products produced by chemical synthesis or formulation. For the

purposes of this study, however, Commission staff will follow the definitions and groupings

for the chemical industry used in official U.S. Government statistics: basic chemicals, resins,

pharmaceuticals, soaps, pesticides, paints, and chemical preparations. Plastics and rubber
 2

 Swift, “Guide to the Business of Chemistry 2005,” 5.

 3

 “Facts & Figures for the Chemical Industry,” 63.

 4

 U.S. Department of Commerce, BEA, www.bea.gov, table 6.4 D, 2005.

7-2

 products are not included in the official data, but are included as needed to compare official

data with data from other sources.

U.S. Chemical Industry

In the United States, large corporations account for the majority of domestic chemical

shipments. Many of these corporations are large, non-petrochemical firms with

manufacturing facilities in a number of countries. U.S. chemical manufacturing firms invest

abroad to attain greater access to foreign markets; to take advantage of lower energy,

feedstock, and labor costs; or to operate under industry-friendly environmental regulations.

As shown in table 7-1, the value of U.S. chemical shipments increased from $449.2 billion

to $516.2 billion during 1999-2004. According to industry analysts, the chemicals industry

generates 2 percent of overall U.S. GDP.2

 

U.S. exports of chemicals also rose during this period, from $80.1 billion to $120.1 billion,

mainly because of increasing world demand for higher valued, specialty chemicals such as

pharmaceuticals, plastics, and pesticides. Despite this increase, the United States recorded

its first trade deficit in chemicals in 2001, which continued through 2004. This deficit was

due to rising energy and feedstock costs, declining domestic demand, growing inventories,

and the high value of the U.S. dollar compared with other major currencies.

U.S. employment in the chemical industry declined during 1999-2004 from 978,000 to

886,000 workers, or by 9 percent. This decrease was due mainly to efforts by chemical firms

to improve their bottom lines by lowering costs. An important aspect in lowering costs was

the continued reduction of jobs at many chemical firms. In 2004, employment of chemical

workers fell by 2.6 percent as compared with the previous year. In comparison, overall

employment in the U.S. manufacturing sector declined by 1.2 percent.3

 U.S. chemical

manufacturing employment represented 0.9 percent of total U.S. private sector employment,

and 6.2 percent of total manufacturing employment in 2004.4

The Global Market and Major Investors

For a number of decades, U.S. chemical producers have been increasing their commercial

presence outside the United States. In 2004, U.S.-based firms such as Dow Chemical,

Dupont, Exxon/Mobil, Huntsman, and Koch were among the world’s largest chemical

producers with three U.S.-based firms ranked in the top ten globally (table 7-2). The U.S.

chemical industry is an integral part of the worldwide chemical industry and is affected by

global events both on the demand and supply side, as more than 50 percent of the products

it manufactures serve as inputs for other industries.
 5

 Swift, “Year-End 2004 Situation & Outlook, 1-2.

7-3

Table 7-1

U.S. chemical industry: Shipments, employment, wages, exports, imports, FDIUS, and USDIA,

1999-2004

Source 1999 2000 2001 2002 2003 2004

Shipments (million dollars) .............. 449,159 438,410 460,451 460,451 477,380 516,215

Employment (1,000 employees) . . . . . . . . . . 978 986 959 928 909 886

Wages (dollars per year) . . . . . . . . . . . . . . . 55,415 58,984 58,050 57,306 59,040 60,334

Exports (million dollars) . . . . . . . . . . . . . . . . . 80,140 91,491 90,197 91,256 101,617 120,092

Imports (million dollars) . . . . . . . . . . . . . . . . . 75,285 89,372 93,238 100,900 117,276 132,384

FDIUS (flows)(million dollars) . . . . . . . . . . . . 7,435 25,466 16,823 -6,629 7,775 7,485

USDIA (flows)(million dollars) . . . . . . . . . . . . 9,007 3,812 10,210 8,087 7,201 11,488

FDIUS (position)(million dollars) .......... (1

) 120,413 128,630 123,341 136,466 147,952

USDIA (position)(million dollars) .......... (1

) 75,807 79,186 82,543 96,283 107,908

1

 Data are not available.

Source: T. Kevin Swift, American Chemistry Council, Guide to the Business of Chemistry, 2004; U.S. Department of

Commerce, Survey of Current Business, Sept. 2005, and USITC Dataweb.

During 1999-2004, the global chemical industry, including the U.S. industry, was affected

by a number of events that led to significant changes in production and sales. In the first part

of this period, a global economic downturn adversely affected

demand for chemicals, which resulted in the industry’s global

growth declining by nearly 50 percent by December 2001. The

chemical industry was also adversely affected by volatile energy and

feedstock prices throughout the world, unrest in Iraq and Nigeria,

and the appreciation of the U.S. dollar. During the latter part of the

period, demand for chemicals increased despite higher energy and

feedstock costs as firms replenished their depleted inventories. This

shift in the business cycle led to a 9-percent increase in U.S. chemical industry shipments

in 2004, to $500 billion, as well as increases in both exports and imports. Moderating

feedstock costs (i.e., natural gas) and the decline of the U.S. dollar also contributed to

expanded sales by U.S.-based firms.5

Three U.S. firms ranked

among the top ten global

chemical producers.
7-4

Table 7-2

Top global chemical companies, by sales, 2004

Rank Company Country 2004 sales

Number of

countries with

operations

Billion dollars

1 BASF . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 40.8 90

2 Dow Chemical . . . . . . . . . . . . . . . . . . . . . United States 40.5 51

3 Bayer . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany 40.2 49

4 Exxon Mobil . . . . . . . . . . . . . . . . . . . . . . United States 28.4 (1

)

5 DuPont . . . . . . . . . . . . . . . . . . . . . . . . . . United States 26.7 (1

)

6 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . France 26.7 20

7 Royal Dutch/Shell . . . . . . . . . . . . . . . . . . Netherlands/United Kingdom 21.5 68

8 BP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 20.4 72

9 Sinopec . . . . . . . . . . . . . . . . . . . . . . . . . . China 16.0 (2

)

10 Sabic . . . . . . . . . . . . . . . . . . . . . . . . . . . . Saudi Arabia 15.9 (2

)

Next top 10 U.S. firms:

17 Huntsman . . . . . . . . . . . . . . . . . . . . . United States 11.5 40

21 Koch Industries . . . . . . . . . . . . . . . . United States 10.0 32

23 Equistar Chemicals . . . . . . . . . . . . . United States 9.3 (2

)

24 CP Chem . . . . . . . . . . . . . . . . . . . . . United States 9.2 5

25 General Electric . . . . . . . . . . . . . . . . United States 8.3 41

30 PPC Industries . . . . . . . . . . . . . . . . . United States 7.3 7

31 Rohm and Haas . . . . . . . . . . . . . . . . United States 7.3 15

34 Air Products . . . . . . . . . . . . . . . . . . . United States 7.1 32

38 Praxair . . . . . . . . . . . . . . . . . . . . . . . United States 6.6 39

39 Eastman Chemical . . . . . . . . . . . . . . United States 6.6 25

1

 Not available. However, firm is known to have international operations. 2

 Not available. Primarily a domestic operating company.

Source: “Billion Dollar Club,” Chemical Week, Sept. 14, 2005, pp. 17-26; except “Foreign Operations” from company

web sites, where available.

U.S. Direct Investment Abroad

During 1999-2004, the U.S. direct investment position abroad in chemicals increased from

$81.7 billion to $107.9 billion, or by slightly less than 6 percent per year, on average (table

7-3). In contrast, total USDIA grew at an annual rate of 11 percent. The major recipients of

such USDIA were Canada, the United Kingdom, the Netherlands, and Ireland. Canada, the

largest recipient, has historically been a primary destination for U.S.

investment, mainly because of the highly developed infrastructure

connecting Canada and the United States (i.e., pipelines, highways, and

ports) and the abundant supplies of raw materials, particularly natural gas

and crude petroleum. In one particularly large transaction in July 2003,

U.S.-based Dupont paid $1.1 billion to acquire the 26 percent equity share

in Dupont Canada that it did not already control. In smaller acquisitions

Canada is the largest

recipient of USDIA in

chemicals.
 6

 Zephyr Mergers and Acquisitions database.

 7

 Ibid.

7-5

Table 7-3

USDIA: Direct investment in chemicals on a historical-cost basis, selected countries, 1999 and

2004 

Country 1999 2004

Percent of 

total, 2004

Average annual

growth, 1999-2004

———Million dollars———— Percent

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,288 14,280 13.2 14.4

United Kingdom . . . . . . . . . . . . . . . . . . . . 14,863 12,755 11.8 -3.0

Netherlands . . . . . . . . . . . . . . . . . . . . . . . 12,437 12,069 11.2 -0.6

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,195 10,019 9.3 25.7

France . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,109 5,954 5.5 13.9

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,951 5,273 4.9 1.3

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,206 3,809 3.5 -2.0

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,001 3,560 3.3 -6.6

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . 2,944 3,337 3.1 2.5

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,783 2,858 2.6 -5.5

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995 1,643 1.5 10.6

All countries . . . . . . . . . . . . . . . . . . . . . . . 81,727 107,908 5.7

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Sept. 2005 and

Sept. 2003.

of Canadian companies by U.S. chemicals firms, Bayer Crop Science acquired a 50 percent

stake in Gustafson to become the sole owner, at a price of $124 million, and United

Industries Corporation acquired Nu-Gro Corporation for $140 million in March 2004. In all,

U.S. firms acquired 52 Canadian chemical companies during 1999-2004.6

The United Kingdom, another major recipient of USDIA in chemicals during this period, has

a chemical industry characterized by highly skilled workers. Since most of the investment

in the U.K. chemical industry is believed to be in the higher valued specialty chemicals area

such as pesticides or polymers, the country’s highly skilled workers are likely to be a major

factor in the investment decisions of U.S.-based firms. In addition, direct investment in the

United Kingdom is valuable as a way for U.S. firms to access the EU market. The

cumulative stock of USDIA was highest in the pharmaceuticals sub-sector, which registered

$44.6 billion in 2004, or 41 percent of total USDIA in the chemicals industry (table 7-4). 

The focus on pharmaceuticals was also apparent in new outflows of investment from the

United States. During 1999-2004, the pharmaceuticals segment received U.S.

capital outflows of $25.1 billion, more than half of the $49.8 billion that U.S.

firms invested in the broader chemicals manufacturing industry. In April 2004,

U.S.-based General Electric purchased British pharmaceuticals firm

Amersham in a $10.4 billion transaction, accounting for a large share of

overall capital outflows.7

 Ireland received U.S. outflows of $3.2 billion in

2002, $1.4 billion in 2003, and $1.5 billion in 2004. In 2003, the Industrial

Pharmaceuticals

accounted for 41

percent of USDIA

stock in chemicals.
 8

 Van Arnum, “U.S. Faces Rising Pharmaceutical Trade Deficit,” 14.

7-6

Table 7-4

USDIA: Direct investment, by chemical sub-sectors, all countries, 1999 and 2004 

Item 1999 2004

Percent of

total, 2004

Average

annual

growth,

1999-2004

——Million dollars—

Basic chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,588 17,018 15.8 4.6

Resins and synthetic rubber, fibers, and filaments . . . . . . . . . . . 11,677 15,217 14.1 5.4

Pharmaceuticals and medicines . . . . . . . . . . . . . . . . . . . . . . . . . 29,661 44,623 41.4 8.5

Soap, cleaning compounds, and toilet preparations . . . . . . . . . . 8,800 10,469 9.7 3.5

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,001 20,580 19.1 2.7

 Pesticides, fertilizers, and other agricultural chemicals . . . . . . 3,781 3,177 2.9 -3.4

 Paints, coatings, and adhesives . . . . . . . . . . . . . . . . . . . . . . . 2,734 4,013 3.7 8.0

 Other chemical products and preparations . . . . . . . . . . . . . . . 11,487 13,390 12.4 3.1

Chemicals, total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,727 107,908 5.7

Source: U.S. Department of Commerce, BEA, Survey of Current Business, Sept. 2005.

 Development Agency of Ireland identified six new pharmaceutical facilities in the country,

including a $1 billion expansion project by U.S.-based Wyeth Labs.8

In 2003, U.S.-based parent firms in the global chemical industry had more than 2,000 foreign

affiliates, with assets of $414.2 billion and sales of $286.1 billion. The major chemical

segments were pharmaceuticals and basic chemicals, with 435 and 431 affiliates,

respectively. Foreign affiliates in Europe accounted for 59 percent of U.S. firms’ global

sales, followed by affiliates in the Asia-Pacific region, with 19 percent. By segment,

pharmaceuticals comprised 38 percent of global sales by chemicals affiliates, followed by

basic chemicals with 21 percent, soaps and cleaning compounds with 12 percent, and resins

with 11 percent.

Foreign chemical industry affiliates of U.S.-based multinational companies (MNCs)

employed 660,300 workers around the world in 2003. Almost half of these were in Europe,

with the largest shares in France (59,300), the United Kingdom (56,600), and Germany

(43,200). Ireland, which has received the largest share of new investment in recent years,

employed 12,200 workers in U.S. firms’ affiliates. U.S.-owned chemicals affiliates also

employed 52,600 workers in Brazil and 48,600 in Mexico. In France, approximately one-half

of employees of U.S.-owned chemical industry affiliates worked in the pharmaceuticals

segment, which also employed the largest share of chemicals workers in the United

Kingdom, Germany, and Mexico. In Brazil, the largest share of employees worked in the

basic chemicals segment.
 9

 Includes majority-owned U.S. affiliates (MOUSAs) only. USDOC, BEA, FDIUS, Table No. 3.I.6.

7-7

Foreign Direct Investment in the United States

During 1999-2004, the foreign investment position in the U.S. chemical industry increased

from $96.6 billion to $148.0 billion, or by 9 percent per year, compared with 10-percent

growth in FDIUS stock overall (table 7-5). The major investing

countries were Switzerland, the United Kingdom, the Netherlands,

and Germany. The EU-25 countries together accounted for 67

percent of total foreign investment stock. During 2003 and 2004,

the two most recent data years, German- and Swiss-owned firms

were the largest investors in the U.S. chemical industry, with capital

flows of $4.5 billion and $8.8 billion, respectively, in the two years

combined. Most foreign firms that invest in the U.S. chemical

industry are large MNCs, including BASF and Bayer (Germany),

Ciba and Sandoz (Switzerland), Royal Dutch/Shell (the Netherlands), and BP (the United

Kingdom). These firms tend to invest in the United States principally because it is the

world’s largest chemical market. Foreign firms generally establish a chemical or petroleum

affiliate in the United States and, as a result, develop an intimate knowledge of the U.S.

market and a staff that can quickly respond to the U.S. customers’ requests.

In 2003, U.S. affiliates of foreign parents held $253.2 billion in total assets in the U.S.

chemical industry, of which 47 percent were accounted for by pharmaceutical firms. The

pharmaceutical segment also accounted for more than 83 percent of the $10 billion in U.S.

research and development spending by foreign-owned U.S. affiliates during this period.

As of 2003, foreign-owned U.S. chemicals affiliates held $115.8 billion in gross property,

plant and equipment in the United States, of which 84 percent is owned by firms based in

Europe. Three chemical industry segments accounted for the majority of U.S. affiliate

operations in 2003: pharmaceuticals (31 percent), basic chemicals (29 percent), and resins

(22 percent). Foreign-owned U.S. chemicals affiliates employed 331,800 U.S. workers in

2003, with the largest shares employed by Swiss, British, and German-owned firms.

Pharmaceutical firms accounted for 51 percent of foreign firms’ U.S.-based affiliate’s

employees. A total of 29,200 employees of foreign-owned U.S. chemicals affiliates were

engaged in research and development (R&D) jobs.9

 The extent of such R&D employment

is significant, as R&D positions tend to be highly paid positions requiring skilled workers,

and most MNCs perform the largest share of their R&D in their home countries.

Direct Investment and Cross-border Trade

U.S. imports of chemicals shipped by U.S.-owned foreign affiliates increased at an average

annual rate of 7 percent during 1999-2003, to $16.6 billion (table 7-6), which was faster than

the growth rate of 6 percent for all intrafirm U.S. imports. Affiliates in Ireland were the

largest exporters of chemicals to the United States during this period, accounting for 28

percent ($4.6 billion) of the total in 2003. Canadian owned affiliates ranked second, with

$4.1 billion and Mexican-owned affiliates ranked third, with $1.1 billion of such imports.

Chemical firms based in

Germany and Switzerland

were the largest investors

in the U.S. industry.
7-8

Table 7-5

FDIUS: Direct investment in the chemical industry on a historical-cost basis, selected countries,

1999 and 2004

Country 1999 2004

Percent of 

total, 2004

Average annual

growth, 1999-

2004

——Million dollars—— Percent

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,326 5,066 3.4 16.8

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,455 18,482 12.5 -1.0

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,548 24,389 16.5 5.6

Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,054 24,641 16.7 19.6

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,841 29,954 20.2 16.7

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . 17,864 25,416 17.2 7.3

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,944 6,072 4.1 4.2

All countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,614 147,952 100.0 8.9

 1

 Data are not available.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Sept. 2005 and

Sept. 2003.

Table 7-6

USDIA: U.S. imports of chemicals shipped by foreign affiliates, by major country, 1999 and 2003

Country 1999 2003

Percent of 

total, 2003

Average annual

growth, 1999-

2003

—Million dollars— Percent

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,444 4,058 24.4 4.2

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 736 4.4 17.0

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 455 2.7 10.0

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . 1,005 1,094 6.6 2.1

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,006 1,072 6.5 1.6

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 121 0.7 -10.1

Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,830 4,591 27.6 4.6

All countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,743 16,610 100.0 6.8

1

 Data are not available.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad, table II.I.19,

1999-2003.

During 1999-2003, U.S. chemical exports to U.S.-owned, foreign affiliates increased at an

average annual rate of 4 percent, to $20.9 billion (table 7-7), compared with an average

annual growth of 2 percent for all intrafirm exports. Canada and Mexico were the leading

markets for these exports in 2003, with exports valued at $5.3 billion and $1.8 billion,

respectively. In general, exports of chemicals to U.S.-owned affiliates in the NAFTA

countries mainly consist of higher valued, intermediate and specialty chemicals. Exports to

U.S.-owned affiliates in 2004 accounted for 17 percent of total U.S. exports of chemicals in

2004. This figure, however, likely underestimates the extent of intrafirm exports, as total

U.S. chemical exports include plastics and rubber products, which are not included in

affiliate data.
7-9

Table 7-7

USDIA: U.S. exports of chemicals shipped to foreign affiliates, by major country, 1999 and 2003

Country 1999 2003

Percent of 

total, 2003

Average annual

growth, 1999-2003

——Million dollars— Percent

Canada ................................. (1) 5,302 25.3 (1)

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106 1,084 5.2 -0.5

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . 1,741 1,505 7.2 -3.6

Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,576 1,782 8.5 3.1

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,361 1,225 5.9 -2.1

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890 673 3.2 -6.7

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513 481 2.3 -1.6

All countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,057 20,926 100.0 3.8

 1

 Data are not available.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad, USDIA, table

II.I.5, 1999 and 2003.

Canada and Mexico together accounted for 31 percent of chemical imports shipped by

affiliates in 2003. Chemicals trade between the United States and its NAFTA partners is

facilitated by the NAFTA free-trade provisions and by Canada’s and Mexico’s common

borders with the United States. Further, access to an extensive infrastructure of pipelines,

highways, and ports enables Canada and Mexico to efficiently move their products to the

U.S. markets. These two countries have abundant natural gas and crude petroleum, the raw

materials used to produce basic chemicals such as primary olefins (e.g., ethylene) and

aromatics (e.g., benzene, toluene, and xylenes). As a result, chemical imports from U.S.-

owned affiliates located in Canada and Mexico consist mainly of basic chemicals, which are

then used to produce more complex and higher valued chemical products at plants in the

United States.

 1

 Computer services encompasses a wide variety of activities, and may be defined differently by different

firms. Consequently, the portfolio of services provided by the firms discussed in this chapter may not

exactly coincide with the services included as part of the industry’s definition.

 2

 U.S. BEA, Gross Domestic Product by Industry Accounts.

8-1

CHAPTER 8

Computer Services

Summary of Key Findings

U.S.-based firms provide the majority of FDI within the global computer services industry,

and the United States is the single largest recipient of such investment. Computer services

firms generally invest in foreign markets either to acquire new clients or to access resources

that contribute to the production, delivery, and servicing of their products. Multinational

computer services providers operate in foreign markets

through subsidiaries, joint ventures, and branch offices,

which provide immediate market access, local language

skills, and knowledge of the local business culture and

regulatory environment. Globally, USDIA and FDIUS in

computer services face relatively few significant barriers.

Government legislation and regulatory policies such as taxes

and subsidies are generally not considered major hurdles.

However, certain factors that affect international trade in

computer services, such as intellectual property rights and

data protection issues, are often actual or potential constraints on FDI as well. 

Introduction

For this study, computer services include computer-systems design and related information

technology (IT) services such as systems integration, consulting, and custom programming.1

Most of the world’s major computer services markets are highly fragmented. They generally

include numerous small and medium sized firms that are often very specialized, and a few

very large firms that account for a large share of a country’s domestic and international

business. Large U.S.-based firms are present in most major international markets, where they

often dominate the local computer services market.

The Computer Services Industry in the U.S. Economy

The total size of the U.S. computer services market increased in every year from 1995 to

2004, achieving a 10.5-percent average annual rate of growth during the period.2

 This growth

was achieved despite the global high-tech market crash in 2000-01, when the information

technology (IT) sector not only slowed down in terms of job growth, but

Incentives for FDI in computer

services include improved

market access abroad and lower

labor costs. 
 3

 In the United States, the average annual number of computer-related jobs rose sharply in absolute and

relative terms throughout the end of the last decade. However, in 2002, the number of computer jobs

contracted sharply, then began to recover in 2003. By the end of 2004, employment growth in computer jobs

exceeded growth in all other occupations. Industry wages also recovered. For example, wages of computer

systems analysts recorded stronger increases than those for all occupations, on average, between September

1997 and July 2003. World Trade Organization, World Trade Report 2005.

 4

 From the supply side, products are often standardized so as to reach a greater number of customers, and

from the demand side, many clients often require virtually identical products. However, this leads to

commodization and a marketplace in which it is difficult to gain a competitive advantage.

 5

 IBM Global Services remained the world’s leading IT services company in 2005; worldwide revenues

from services increased 2 percent in 2005. IBM implemented a new management system in Europe in 2005

that nearly doubled the number of executives that were working in-country, as opposed to out of offices in

the United States. IBM is expected to replicate this strategy in the Asia-Pacific region, and Central and

South America in coming years. Further, IBM tripled the number of employees working in or serving

emerging markets such as China, India, Brazil and Russia. IBM, IBM Annual Report 2005.

 6

 Fujitsu, Corporate Profile.

8-2

experienced a decline in wages.3 Both the gross product of the U.S. computer services

industry and the number of employees within the industry accounted for less than two

percent of total U.S. gross product and employment, respectively, in 2004 (table 8-1).

U.S. cross-border exports of computer services have increased steadily since 1997, reaching

$8.5 billion in 2004. U.S. cross-border imports of computer services have increased at a

faster pace, and their share of total U.S. services imports more than doubled during 1997-

2004.

Global Market & Major Investors

The global computer services market includes a large number of participants and is highly

competitive. Computer services firms face competition from other firms within the industry,

as well as from large accounting and other professional services firms such as law firms and

management consultants, telecommunications companies, and packaged software vendors

and resellers, among others. Large multinational computer services firms also experience

competition from numerous smaller, niche-oriented, and regional service providers. In

addition to intense industry competition, several other factors may have an

adverse effect on revenues and profit margins. For example, while the IT

outsourcing market continues to grow, many industry segments are

increasingly considered “commodity” services. Such services are no longer

considered to have competitive differentiation, resulting in standard,

interchangeable products that are purchased primarily based on cost. This

trend is decreasing profit margins on many core offerings.4

 Further, the competition from

companies based in India is increasing due to the abundance of highly skilled workers in that

country, policy changes that have created a regulatory environment that increasingly

supports business, and lower labor costs compared to the United States and much of the

European Union.

Five of the six leading IT services firms, by revenue, are U.S. companies (table 8-2).5

 These

firms are also the most significant sources of FDI in the industry, although revenue levels

do not reflect their level of international investment activity. For example, Fujitsu, the

world’s third-largest IT services provider, derives most of its business from the Japanese

market, and thus is not a major competitor in the United States or other international

markets.6

Five of the six leading IT

services firms are U.S.

companies.
8-3

Table 8-1

Computer services in the U.S. economy, 2004

Total Share of total U.S.

Percent

Gross product (billion dollars) ...................... 133.1 1.3

Employment (millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1

1.4

U.S. exports (billion dollars) . . . . . . . . . . . . . . . . . . . . . . . 8.5 2

2.6

U.S. imports (billion dollars) . . . . . . . . . . . . . . . . . . . . . . . 5.8 2.3

U.S. direct investment abroad (billion dollars) . . . . . . . . . . 33.2 1.6

Foreign direct investment in the U.S.(billion dollars) . . . . 13.8 0.9

 1 As a percentage of total private employment.

 2

 As a percentage of total cross-border trade of private services.

Source: USDOC, BEA, Gross Domestic Product by Industry Accounts, Gross Domestic Product (GDP) by Industry,

Summary data for trade in private services by type, U.S. Direct Investment Abroad: Balance of Payments and Direct

Investment Position Data, and Foreign Direct Investment in the U.S.: Balance of Payments and Direct Investment

Position Data.

Table 8-2

Computer services: Largest companies in the global market, 2005

Company Home country Total revenue

Total

employment

Host countries

of affiliates

IBM Global Services USA $47.4 billion 1198,000 worldwide

Electronic Data

Systems

USA $19.8 billion 117,000 worldwide

Fujitsu Limited Japan $19 billion (services

& software)

2

151,000 worldwide

Computer Sciences

Corporation

USA $14.6 billion 80,000 worldwide

Hewlett Packard

Services

USA $15.6 billion 2

150,000 worldwide

Accenture Inc. USA $15.6 billion 126,000 worldwide

 1

 Revenue from services activities only.

 2

 Revenue from all activities.

Source: Company websites and annual reports.
 7

 Swiss Import Promotion Programme (SIPPO) and the Centre for the Promotion of Imports from

Developing Countries (CBI), 7.

 8

 Outsourcing is a generalized term that covers many different applications in many different industries. 

IT outsourcing commonly refers to the practice of contracting out internal functions, ranging from low-skill

services such as data entry to more complex functions such as payroll, invoicing, or the management of a

client’s telecommunication and computer networks.

 9 BPO Insight, “Europe Takes Centre Stage.”

8-4

The total market for IT services in the EU-15 was valued at $146 billion in 2004, comprising

implementation services ($60 billion), support services ($39 billion), operations

management, ($31 billion) and consulting ($13 billion). The United Kingdom was the largest

EU market for IT services in 2004, followed by Germany, France, Italy, the Netherlands,

Sweden, Spain, and Belgium. The combined IT services market in the ten new EU members

in Central and Eastern Europe was valued at $3.7 billion in 2004.7

IT outsourcing is one of the fastest growing market segments within the global computer

services industry, particularly in Europe.8

 In 2004, the EU, led by the United Kingdom and

Germany, surpassed the United States as the world’s leading market for new outsourcing

contracts. Europe accounted for almost half of the total value of major outsourcing contracts

(those worth over $53 million) awarded worldwide in 2004, surpassing the United States (44

percent) and the Asia/Pacific region (7 percent).9

 The industry’s largest service providers

(IBM, CSC, EDS, Accenture, Affiliated Computer Services (ACS), and HP -- all U.S. firms)

maintained their dominant position in the European outsourcing market in 2004. However,

smaller European-based companies such as Capgemini, Siemens, Xchanging, Atos Origin,

and T-systems were some of the fastest growing firms in Europe during the year. This was

accomplished without diminishing the market leaders’ positions, as the overall market

expanded.

Cross-border mergers and acquisitions (M&A) are the most common form of international

investment in the computer services industry, as firms seek to expedite access to local

markets. Computer services firms generally invest abroad in order to increase sales or to

lower the costs associated with supplying their services. In seeking the greatest return on

their investment, such firms invest in markets that are believed to have high demand for their

services, as well as the ability to support high profit margins. Large multinational computer

services firms tend to derive the bulk of their sales from wealthier, more mature markets.

Although such firms often explore unproven markets, major investments are generally

preceded by associations with local firms.

Supply issues, such as access to competitively priced labor, are another driver of foreign

investment within the computer services industry. Increasingly, investment strategies

focusing on supply issues involve outsourcing or offshoring. The objective is not to recruit

clients, but to access skills and technology that are superior in quality and/or lower in cost

than in one’s home market. To minimize such costs, computer services suppliers invest in

low-cost markets such as India, the Philippines, and China. Generally, the services produced

under such arrangements are provided to clients outside of the country that is supplying the

services.
 10 USDOC, BEA, U.S. Direct Investment Abroad.

 11 Includes all firms classified within NAICS industry code 5415, computer systems design and related

services.

 12 Bureau van Dijk, Zephyr Mergers and Acquisitions database.

 13 Bureau van Dijk, Zephyr Mergers and Acquisitions database.

 14 Bureau van Dijk, Zephyr Mergers and Acquisitions database, Dec. 2005.

 15 The deal was valued at approximately $3.5 billion in cash and stock. IBM, “IBM,

PricewaterhouseCoopers Complete Sale of PwC Consulting.”

8-5

U.S. Direct Investment Abroad

U.S.-based firms are the leading international investors within the

global computer services industry. Leading targets for USDIA

include the United Kingdom, Germany, Canada, and Japan. During

1999-2004, the U.S. direct investment position (historical-cost basis)

in computer services increased from $15 billion to $22 billion,10

reflecting average annual growth of 8 percent. U.S. outbound

investment stock decreased slightly in 2002, following the

contraction of the information technology sector in 2001 (figure 8-

1), but recovered quickly. Investment in the computer services

industry abroad as a percentage of total USDIA stock remained

fairly consistent during the period, ranging between 1 and 2 percent.

The number of foreign computer services firms11 acquired by U.S. firms rose rapidly during

1999 and 2000, then decreased during the next two years, reflecting the growth and

subsequent downturn in the global market for IT services. In 2003, the number of

acquisitions rebounded sharply, moving from a 27 percent decrease in 2002 to a 47 percent

increase in 2003 (figure 8-2).12 U.S. firms most often acquired computer services companies

in the United Kingdom, followed by Germany, France, Canada, and Israel.13 Of particular

significance was IBM’s acquisition of PwC Consulting UK, valued at $1.1 billion and

completed in October 2002.14 IBM’s acquisition of these UK operations was part of the

firm’s overall acquisition of PwC Consulting, the global management consulting and

technology services unit of PricewaterhouseCoopers. The sale created IBM Business

Consulting Services (part of IBM Global Services), which became the world’s largest

consulting services organization, with operations in more than 160 countries.15

Similar factors drove U.S. outbound and inbound investment in the computer services

industry during 1995-2004. The late 1990s were a period of worldwide economic expansion

and global computer services markets were boosted by rapidly rising IT and

telecommunication stock prices, which encouraged additional investment in both sectors.

The high-tech stock market crash that began in 2000 ushered in a broad economic slowdown

that lasted more than two years. By 2003, the strengthening U.S. economy, as measured by

GDP, contributed to a recovery in the computer services industry.

The majority of USDIA in the computer services industry is located in Europe. The highly

competitive environment within the European IT sector relies on U.S.-based companies

primarily due to their technical sophistication, broad range of products and services, strong

marketing, long-term presence, and reliable image. Many U.S. companies are already

established in related European markets, such as hardware or software, and can take

advantage of their strong local presence, name recognition, and existing sales force to enter

USDIA in the computer

services industry has

recovered rapidly from the

bursting of the IT bubble

in 2001.
8-6

1997 1998 1999 2000 2001 2002 2003 2004

0

5

10

15

20

25

30

35

USDIA FDIUS

 1 1997 data is not available for FDIUS.

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of

Current Business, 

Figure 8-1

USDIA and FDIUS:1

 Direct investment position, computer services, 1997-2004

1999 2000 2001 2002 2003 2004

0

100

200

300

400

500

600

Acquirors Targets

Source: Bureau van Dijk, Zephyr Mergers and Acquisitions database.

Figure 8-2

Cross-border computer services mergers and acquisitions by U.S. firms as

acquirers and targets, 1999-2004
 16 EDS, “EDS To Announce Conditional Open Offer To Acquire Majority Stake In Indian Outsourcer.”

 17 Gartner, Inc, Worldwide IT Services Forecast by Region (2002).

 18 Bureau van Dijk, Zephyr Mergers and Acquisitions Database.

 19 USDOC, BEA, Foreign Direct Investment in the United States.

 20 Bureau van Dijk, Zephyr Mergers and Acquisitions database.

 21 Bull has major business operations, as well as research and development centers in the United States.

Bull corporate website.

 22 In 2000, Capgemini acquired Ernst & Young Consulting in a $11.5 billion takeover, tripling the size of

the firm's operations in North America and strengthening its position in Europe. Capgemini corporate

website.

8-7

the computer services sector. While competition from local companies exists, U.S.-based

firms are often perceived as having superior IT experience. However, U.S.-based computer

services companies are likely to encounter growing competition in price, service, and

technology from European firms, particularly those from the United Kingdom, Germany,

France and the Netherlands, as such firms benefit from the deepening of the EU’s common

market. India’s computer services industry also has attracted an increasing amount of

USDIA. For example, EDS recently announced its offer to acquire a majority stake in a

leading applications and business process outsourcing (BPO) services company based in

Bangalore, India. The offer is part of the firm’s overall strategy to enhance their presence and

capabilities in India.16

Foreign Direct Investment in the United States

As of 2002, the United States was the world’s largest consumer of computer services,

exceeding the combined size of Western Europe and Japan, the next largest markets.17 The

U.S. industry is also the world’s largest provider of computer services. Consequently, while

abundant opportunity exists, the U.S. computer services market is intensely competitive,

which often limits FDIUS. Since the IT market crash, FDIUS in the computer services

industry has not recovered as quickly as USDIA. Instead, such investment has decreased

steadily since 2001 (figure 8-1). Foreign direct investment in the U.S. computer services

industry has also decreased as a percentage of total FDIUS, dropping from a high of 2.4

percent in 2000 to 0.9 percent in 2004.

As was the case for outbound FDI, acquisitions of U.S. computer services firms by foreign

investors rose rapidly from 1999 through 2001, then

fluctuated through 2004 (figure 8-2).18 During 2000-2004,

overall FDIUS stock in the computer services industry

decreased from $29.5 billion to $13.8 billion, registering an

average annual decline of 17.2 percent.19 During 1999-2004,

firms based in the United Kingdom accounted for the largest

share of such acquisitions, followed by Canada, France,

Switzerland, the Netherlands, Spain, Japan, Australia,

Germany, and Bermuda.20 Major European-based firms with

investments in the U.S. computer services market include

Bull Group SA (France),21 Capgemini SA (France),22 and Siemens AG (Germany).

Strong competition in the U.S.

computer services market has

contributed to the slow recovery

of FDIUS since 2001.

 1

 Overseas development assistance (ODA) and remittances may also, in part, be sources of capital

formation. These are somewhat different from the capital flows mentioned in the text, in that ODA and

remittances are usually considered to be part of the current account in the balance of payments, while FDI,

portfolio investment, and international loans are considered to be part of the capital (or financial) account.

9-1

CHAPTER 9

Effects of Foreign Direct Investment (FDI) on

Host-Country Economies

Summary of Key Findings

U.S. direct investment abroad (USDIA) contributes to economic growth in recipient

countries both by adding to the capital stock and by providing access to advanced

technology. The United States is the main supplier of FDI in many countries, and FDI in turn

is an important component in overall capital formation in many countries. Manufacturing

wages paid by foreign affiliates of U.S.-owned firms operating abroad are generally higher

than wages paid by local firms, with the difference being largest in low-wage countries.

Introduction

This section focuses on the impact of FDI in general, and USDIA in particular, on the

economies of host countries. It considers, in turn, the effects of FDI on capital formation, on

the level of manufacturing wages, and on overall economic growth. While the focus is on

developing economies which are hosts to USDIA, some data is presented for developed

economies as well, for comparison purposes.

Capital formation, wages, and economic growth are interlinked. Investment in plant,

equipment, and inventories can be financed either by domestic savings or by foreign

investment. FDI is one form of foreign capital, along with portfolio investment and

borrowing.1

 The level of wages is determined in part by the productivity of labor, which

increases both with improved technology and with growth in capital per worker. Since FDI

brings with it both capital and technology to the host economy, it may be associated with

higher wages in host countries. Similarly, increases in the rate of investment and in the level

of technology have been associated with more rapid rates of economic growth. Since FDI

brings with it both capital investment and technology, one might also expect FDI to be more

strongly associated with economic growth than domestically financed investment.

This section makes use of both of the available literature and data from a variety of sources

including the Department of Commerce's Bureau of Economic Analysis (BEA), the World

Bank, and the United Nations Industrial Development Organization (UNIDO), as analyzed

by USITC staff. There are significant challenges involved in comparing FDI data from

different sources as well as in comparing FDI data with other economic data. These

challenges are addressed in the footnotes below.
 2

 Cumulative data are presented for the four-year period 2000-2003, in nominal dollars. This period is

chosen in order to provide coverage of a broader range of countries. Extending the comparison to include

data from 1999 or earlier would restrict the sample to a subset of the approximately 50 countries appearing in

most public BEA tabulations on FDI. Data on USDIA are taken from U.S. Department of Commerce, Direct

Investment: U.S. Direct Investment Abroad, while data on total net FDI from the world and gross capital

formation (i.e. investment) are taken from World Bank, World Development Indicators.

 3

 E.g. France, Indonesia, Ireland, Russia, Taiwan, and the United Arab Emirates.

 4

 These figures are related to each other in the following manner:

U.S. outbound FDI in country x Total FDI inflows in country x U.S. outbound FDI in

country x

_________________________ * ___________________________ = 

___________________________

Total FDI inflows in country x Gross capital formation in country x Gross capital formation in

country x

or, (1)*(3) = 2. 

 5

 The totals above include intra-EU FDI. The relative importance of USDIA in developing economies

compared to FDI from other developed countries or region varies considerably by geography. USITC staff

calculations based on OECD data, covering FDI originating in OECD countries, indicate that for the period

1999-2001, the primary sources for developing-country FDI were as follows:

Latin America and Caribbean: 55 percent EU, 31 percent United States, 14 percent other OECD

Africa: 77 percent EU, 17 percent United States, 6 percent other OECD

North Africa and Middle East: 64 percent United States, 30 percent EU, 6 percent other OECD

Developing Asia: 46 percent United States, 30 percent EU, 18 percent Japan, 6 percent

other OECD.

Comparisons for years after 2001 are made more difficult by changes in the reporting of FDI for

Luxembourg, which accounted for approximately 27 percent of FDI outflows from the European Union

during 2002-04 (USITC staff calculation based on UNCTAD data). Through 2001, FDI data for the

Belgium-Luxembourg Economic Union (BLEU) were reported by the Belgium National Bank. The

dissolution of BLEU caused Belgium and Luxembourg to report their FDI data separately, using

methodologies which are not comparable with the earlier period. See also footnote 6.

9-2

Effects on Capital Formation

Table 9-1 looks at USDIA outflows as a share of total FDI and overall capital formation, for

a selected group of countries.2

 Data are presented for all countries for which data on USDIA

outflows, total FDI, and gross capital formation were available for the years 2000-2003 as

well as for Canada, for which gross capital formation data was missing. Since this excludes

some significant economies3

, the totals presented for regions should be considered as

indicative rather than definitive. Nonetheless, the available sample of 90 countries plus

Canada represents a significant portion of the global economy. Three indicators of the

importance of FDI are calculated: (1) The share of U.S. outbound FDI in total FDI inflows;

(2) the share of USDIA in total capital formation; and (3) the share of total FDI inflows in

totalcapital formation.4

For the full sample, USDIA capital outflows account for 18 percent of FDI inflows (16

percent excluding Canada). For the sample excluding Canada, 21 percent of gross capital

formation is financed through inbound FDI, and thus 3.3 percent is financed through inflows

of FDI from the United States.5

 While domestic savings is the most important component

of domestic investment worldwide, in particular countries and regions USDIA is a significant

source of overall FDI and a non-trivial source of overall capital formation.
9-3

Table 9-1

USDIA: Relative importance of capital outflows, 2000-2003

USDIA

capital

outflows

Total net

FDI from

world

U.S.

share

Gross

capital

formation

Share of

USDIA in

gross

capital

formation

Share of

total FDI

inflows in

capital

formation

Millions of dollars Percent

Millions of

dollars Percent

All selected countries ......... 391,216 2,196,792 17.8 (1

) (1) (1)

All selected countries,

except Canada ............ 327,449 2,075,905 15.8 9,840,147 3.3 21.1

Canada . . . . . . . . . . . . . . . . . . 63,767 120,886 52.7 (1

) (1) (1)

Europe and former Soviet

Union, selected countries .... 227,919 1,369,189 16.6 3,405,788 6.7 40.2

Austria . . . . . . . . . . . . . . . . . 1,393 22,024 6.3 104,312 1.3 21.1

Czech Republic . . . . . . . . . . 597 21,639 2.8 75,048 0.8 28.8

Denmark . . . . . . . . . . . . . . . . 2,793 50,915 5.5 77,481 3.6 65.7

Finland . . . . . . . . . . . . . . . . . 590 24,458 2.4 55,336 1.1 44.2

Germany . . . . . . . . . . . . . . . 20,628 312,363 6.6 786,968 2.6 39.7

Greece . . . . . . . . . . . . . . . . . 386 3,438 11.2 77,056 0.5 4.5

Italy . . . . . . . . . . . . . . . . . . . . 13,688 59,287 23.1 524,209 2.6 11.3

Luxembourg . . . . . . . . . . . . . 40,967 213,273 19.2 10,178 402.5(2

) 2095.5

Netherlands . . . . . . . . . . . . . 41,983 159,174 26.4 85,807 48.9 185.5

Norway . . . . . . . . . . . . . . . . . 1,646 10,472 15.7 75,958 2.2 13.8

Poland . . . . . . . . . . . . . . . . . 744 23,308 3.2 122,913 0.6 19.0

Portugal . . . . . . . . . . . . . . . . 1,162 21,246 5.5 30,870 3.8 68.8

Spain . . . . . . . . . . . . . . . . . . 8,446 126,912 6.7 384,445 2.2 33.0

Sweden . . . . . . . . . . . . . . . . 12,839 50,186 25.6 88,748 14.5 56.5

Turkey . . . . . . . . . . . . . . . . . 625 6,848 9.1 171,596 0.4 4.0

United Kingdom . . . . . . . . . . 75,455 222,227 34.0 550,542 13.7 40.4

Armenia . . . . . . . . . . . . . . . . 0 406 0.0 2,065 0.0 19.6

Azerbaijan . . . . . . . . . . . . . . 1,068 5,034 21.2 10,195 10.5 49.4

Belarus . . . . . . . . . . . . . . . . . -1 634 -0.2 10,680 0.0 5.9

Bosnia and Herzegovina . . . -2 914 -0.2 4,171 0.0 21.9

Bulgaria . . . . . . . . . . . . . . . . 30 4,139 0.7 12,858 0.2 32.2

Croatia . . . . . . . . . . . . . . . . . -47 5,770 -0.8 24,694 -0.2 23.4

Estonia . . . . . . . . . . . . . . . . . -11 2,105 -0.5 8,366 -0.1 25.2

Kazakhstan . . . . . . . . . . . . . 1,701 8,789 19.4 24,975 6.8 35.2

Kyrgyzstan . . . . . . . . . . . . . . -4 53 -7.6 591 0.0 8.9

Macedonia . . . . . . . . . . . . . . 0 788 0.0 2,969 0.0 26.6

Moldova . . . . . . . . . . . . . . . . 0 404 0.0 1,320 0.0 30.6

Romania . . . . . . . . . . . . . . . . 173 5,182 3.3 40,465 0.4 12.8

Slovakia . . . . . . . . . . . . . . . . 888 8,204 10.8 26,251 3.4 31.3

Slovenia . . . . . . . . . . . . . . . . -16 2,662 -0.6 20,909 -0.1 12.7

Turkmenistan . . . . . . . . . . . . 71 481 14.8 2,812 2.5 17.1

Ukraine . . . . . . . . . . . . . . . . . 75 3,504 2.1 31,256 0.2 11.2

See footnotes at end of table.
9-4

Table 9-1—Continued

USDIA: Relative importance of capital outflows, 2000-2003

USDIA

capital

outflows

Total net

FDI from

world

U.S.

share

Gross

capital

formation

Share of

USDIA in

gross

capital

formation

Share of

total FDI

inflows in

capital

formation

Millions of dollars Percent

Millions of

dollars Percent

South America, selected

countries . . . . . . . . . . . . . . . . . 4,926 133,025 3.7 510,815 1.0 26.0

Argentina . . . . . . . . . . . . . . . -1,410 14,698 -9.6 58,696 -2.4 25.0

Brazil . . . . . . . . . . . . . . . . . . 3,904 81,970 4.8 295,332 1.3 27.8

Chile . . . . . . . . . . . . . . . . . . . 1,662 13,930 11.9 54,306 3.1 25.7

Colombia . . . . . . . . . . . . . . . 550 8,780 6.3 38,669 1.4 22.7

Ecuador . . . . . . . . . . . . . . . . 238 4,880 4.9 21,046 1.1 23.2

Peru . . . . . . . . . . . . . . . . . . . -56 5,487 -1.0 34,754 -0.2 15.8

Bolivia . . . . . . . . . . . . . . . . . . 22 2,286 1.0 3,193 0.7 71.6

Uruguay . . . . . . . . . . . . . . . . 16 994 1.6 4,817 0.3 20.6

Central America and

Caribbean, selected 

countries . . . . . . . . . . . . . . . . 35,663 82,074 43.5 469,180 7.6 17.5

Costa Rica . . . . . . . . . . . . . . 592 2,101 28.2 11,089 5.3 18.9

Honduras . . . . . . . . . . . . . . . 4 845 0.5 3,826 0.1 22.1

Mexico . . . . . . . . . . . . . . . . . 30,751 68,999 44.6 413,125 7.4 16.7

Panama . . . . . . . . . . . . . . . . 2,927 1,974 148.3(2

) 10,157 28.8 19.4

Belize . . . . . . . . . . . . . . . . . . 28 143 19.6 432 6.5 33.0

El Salvador . . . . . . . . . . . . . . 28 1,011 2.8 7,405 0.4 13.7

Nicaragua . . . . . . . . . . . . . . . 154 822 18.7 4,541 3.4 18.1

Dominican Republic . . . . . . . 290 3,259 8.9 12,591 2.3 25.9

Trinidad and Tobago . . . . . . 889 2,921 30.4 6,015 14.8 48.6

Africa, selected countries . . . . 4,958 42,066 11.8 317,150 1.6 13.3

Egypt . . . . . . . . . . . . . . . . . . 1,032 2,629 39.3 42,103 2.5 6.2

Nigeria . . . . . . . . . . . . . . . . . 712 4,516 15.8 40,411 1.8 11.2

South Africa . . . . . . . . . . . . . 618 9,794 6.3 83,811 0.7 11.7

Algeria . . . . . . . . . . . . . . . . . 2,212 3,333 66.4 61,315 3.6 5.4

Angola . . . . . . . . . . . . . . . . . 122 6,111 2.0 5,534 2.2 110.4

Benin . . . . . . . . . . . . . . . . . . 0 200 0.0 1,971 0.0 10.2

Botswana . . . . . . . . . . . . . . . 7 569 1.2 5,958 0.1 9.6

Central African Republic . . . . 0 16 0.0 319 0.0 5.0

Ghana . . . . . . . . . . . . . . . . . 42 451 9.3 5,313 0.8 8.5

Guinea . . . . . . . . . . . . . . . . . 0 121 0.0 1,150 0.0 10.5

Lesotho . . . . . . . . . . . . . . . . 0 358 0.0 1,339 0.0 26.7

Madagascar . . . . . . . . . . . . . 0 197 0.0 2,670 0.0 7.4

Mauritania . . . . . . . . . . . . . . 0 464 0.0 165 0.0 280.4

Morocco . . . . . . . . . . . . . . . . 122 5,991 2.0 30,553 0.4 19.6

Mozambique . . . . . . . . . . . . . 13 1,079 1.2 3,293 0.4 32.8

Seychelles . . . . . . . . . . . . . . 20 203 9.8 343 5.8 59.3

Sierra Leone . . . . . . . . . . . . . 8 54 14.9 447 1.8 12.0

Sudan . . . . . . . . . . . . . . . . . . 1 3,029 0.0 9,945 0.0 30.5

See footnotes at end of table.
Table 9-1—Continued

USDIA: Relative importance of capital outflows, 2000-2003

USDIA

capital

outflows

Total net

FDI from

world

U.S.

share

Gross

capital

formation

Share of

USDIA in

gross

capital

formation

Share of

total FDI

inflows in

capital

formation

Millions of dollars Percent

Millions of

dollars Percent

9-5

Swaziland . . . . . . . . . . . . . . . 11 229 4.8 1,017 1.1 22.5

Togo . . . . . . . . . . . . . . . . . . . 2 179 1.1 977 0.2 18.3

Tunisia . . . . . . . . . . . . . . . . . 36 2,545 1.4 18,517 0.2 13.7

Middle East, selected

countries . . . . . . . . . . . . . . . . . 3,449 16,833 20.5 246,304 1.4 6.8

Israel . . . . . . . . . . . . . . . . . . 2,974 14,361 20.7 58,968 5.0 24.4

Bahrain . . . . . . . . . . . . . . . . . 87 1,178 7.4 3,988 2.2 29.5

Iran . . . . . . . . . . . . . . . . . . . . 3 490 0.6 159,898 0.0 0.3

Lebanon . . . . . . . . . . . . . . . . 62 358 17.3 11,751 0.5 3.0

Oman . . . . . . . . . . . . . . . . . . 166 260 63.7 5,992 2.8 4.3

Yemen . . . . . . . . . . . . . . . . . 157 187 84.1 5,707 2.8 3.3

Asia and Pacific, selected

countries . . . . . . . . . . . . . . . . . 50,534 432,717 11.7 4,890,911 1.0 8.8

China . . . . . . . . . . . . . . . . . . 6,036 185,453 3.3 1,880,712 0.3 9.9

Hong Kong . . . . . . . . . . . . . . 10,703 109,007 9.8 108,666 9.8 100.3

India . . . . . . . . . . . . . . . . . . . 1,595 14,233 11.2 253,621 0.6 5.6

Japan . . . . . . . . . . . . . . . . . . 11,382 29,744 38.3 1,980,780 0.6 1.5

Korea, Republic of . . . . . . . . 6,255 18,425 33.9 336,885 1.9 5.5

Malaysia . . . . . . . . . . . . . . . . 1,698 10,018 16.9 69,092 2.5 14.5

Philippines . . . . . . . . . . . . . . 293 4,445 6.6 41,398 0.7 10.7

Singapore . . . . . . . . . . . . . . . 9,658 49,306 19.6 53,382 18.1 92.4

Thailand . . . . . . . . . . . . . . . . 2,819 10,161 27.7 110,355 2.6 9.2

Bangladesh . . . . . . . . . . . . . 76 514 14.8 36,488 0.2 1.4

Cambodia . . . . . . . . . . . . . . . 1 530 0.2 2,872 0.0 18.4

Laos . . . . . . . . . . . . . . . . . . . 0 102 0.0 1,270 0.0 8.1

Nepal . . . . . . . . . . . . . . . . . . 0 9 0.0 2,850 0.0 0.3

Sri Lanka . . . . . . . . . . . . . . . 18 770 2.3 12,540 0.1 6.1

 1

 Not available.

 2

 Luxembourg's FDI data includes transactions made by special-purpose entities (SPEs) such as holding

companies and similar financial vehicles, although not investment by and from SPEs. The very high ratios reported

for Luxembourg are probably due to the fact that most of these transactions represent FDI which ultimately

originates outside Luxembourg and is destined for a location outside Luxembourg, thus not becoming part of

Luxembourg's capital stock proper. The figure of 148.3 percent for the share of FDI in Panama's gross capital

formation might arise as a result of FDI data being gathered independently from the national income accounts.

Sources: BEA, World Bank, and USITC staff calculations.
 6

 The cumulative value of intra-EU FDI during 1999-2001 was approximately $1.15 trillion. During this

period approximately 56 percent of FDI for which an EU country was the source was invested in the EU, and

approximately 77 percent of FDI for which an EU country was the destination originated in an EU country

(USITC staff calculation based on OECD data. These data exclude FDI originating in the six non-OECD

members of the EU - Cyprus, Estonia, Malta, Latvia, Lithuania, and Slovenia.)

 7

 Luxembourg's FDI data includes transactions made by special-purpose entities (SPEs) such as holding

companies and similar financial vehicles, although not investment by and from SPEs. The very high ratios

reported for Luxembourg in Table 9-1 are probably due to the fact that most of these transactions represent

FDI which ultimately originates outside Luxembourg and is destined for a location outside Luxembourg, thus

not becoming part of Luxembourg's capital stock proper. The figure of 148.3 percent for the share of FDI in

Panama's gross capital formation might arise as a result of FDI data being gathered independently from the

national income accounts.

 8

 Borenszentein, et al., “How Does Foreign Direct Investment Affect Economic Growth?”, 115-135.

9-6

In the NAFTA partners, USDIA accounts for 53 percent and 45 percent of total FDI inflows

in Canada and Mexico respectively. In Mexico, USDIA accounts for 7

percent of total capital formation. The share of USDIA in total FDI is

above average in most of Central America and the Caribbean, in certain

European countries, and in some oil exporting countries. Within Europe,

the share of USDIA in total FDI inflows ranges from 20-35 percent in

Italy, the Netherlands, Sweden, and the United Kingdom. For three oilexporting countries, Algeria, Oman, and Yemen, the share of USDIA in

total FDI is in the range of 60-85 percent. Within Asia, the share of USDIA in total FDI is

relatively high for Korea, Japan, and Thailand, in the 25-40 percent range.

Countries vary widely in their dependence on FDI in total capital formation. A high

dependence on FDI may be associated either with a low rate of national savings, national

policies which encourage FDI, or both. Regionally, overall dependence on FDI for capital

formation is about twice as high in Latin America than in Africa, Asia, or the Middle East,

due largely to differences in national savings rates. The high measured share of FDI in

Europe's capital formation is probably due to the presence of intra-European FDI.6

A large role for USDIA in total capital formation depends on the coincidence of high overall

FDI dependence and, within that dependence, a high degree of orientation towards the

United States. USDIA outflows account for 10 to 20 percent of total

capital formation in Sweden, the United Kingdom, Azerbaijan, Trinidad

and Tobago, and Singapore, and even higher shares in Luxembourg, the

Netherlands, and Panama. In the case of these very open economies, the

high apparent degree of penetration reflects both statistical anomalies and

economic realities.7

 The United Kingdom, Azerbaijan, and Trinidad and

Tobago are also significant energy producers.

It may not necessarily be the case that FDI inflows make a dollar-for-dollar contribution to

national capital formation. One can imagine situations in which FDI either “crowds out”

domestic investment, discouraging projects funded with domestic savings that would

otherwise be undertaken, so that $1 of FDI means less than $1 of total gross capital

formation, or “crowds in” domestic investment, perhaps stimulating related projects so that

$1 of FDI leads to more than $1 of total gross capital formation. One study found that,

during the 1970s and 1980s, “crowding in” was most likely, with $1 of FDI being associated

with perhaps $1.50 to $2.30 of total investment.8

USDIA accounts for

about 50 percent of total

FDI inflows to Canada

and Mexico.

USDIA is more than 10

percent of total capital

formation in 8 countries.
 9

 Due to data limitations, this chapter addresses wages in foreign affiliates; chapters 2 and 3 include

discussions of employee compensation. Employee compensation is equal to wages plus benefits paid to

employees.

 10 This measure does not include benefits.

 11 The ratio presented, which compares wages in U.S. majority-owned affiliates to wages in all firms,

understates to some extent the difference in wages between U.S. affiliates and other firms, since the affiliates

are included in both totals. 

 12 USITC, Examination of U.S. Inbound and Outbound Direct Investment, 4-26 to 4-31. The above

calculation includes all sectors of the economy. Results for sub-sectors imply that compensation in foreign

multinationals was 20.9 percent higher in services, 5.9 percent higher in manufacturing, 60 percent higher in

agriculture, 171.7 percent higher in mining, and 6.7 percent lower in petroleum than overall U.S.

compensation. The comparisons for FDI in the United States are for total compensation, while those for U.S.

direct investment abroad are for wages and salaries, given differences in data coverage.

 13 USITC staff calculation. FDI capital inflows were taken from U.S. Department of Commerce, “Foreign

Direct Investment in the U.S”. Gross private domestic investment was taken from Council of Economic

Advisers, Economic Report of the President 2006, Table B-1, p. 280.

9-7

Wages in U.S. Manufacturing Affiliates Abroad9

Table 9-2 contains a comparison of the levels of wages in U.S. manufacturing affiliates

abroad, taken from the BEA data, with overall wages in manufacuring in different countries

taken from the UNIDO data. Wages per employee are calculated by dividing total payments

for wages and salaries by the number of employees. The most recent data for wages in U.S.

majority-owned affiliates are for the 1999 benchmark survey. The annual surveys for 2000-

2002 contain data on employees and total compensation, but not wages. In order to obtain

more recent estimates and expand the sample of countries, wages in U.S. majority-owned

affiliates were estimated by assuming the share of wages in total compensation in 2000-2002

was the same as in 1999.

In 34 of the 38 countries for which data are available, wages and salaries per employee10 in

U.S. majority-owned affiliates in manufacturing exceed local

wages. Table 9-2 presents the ratio of wages in U.S. majorityowned firms to wages in all firms.11 The difference in wages is in

fact substantial, exceeding 50 percent in 22 countries, 100 percent

in 12 countries, and 200 percent in four countries (Colombia, India,

Indonesia, and Russia). In general, the premium for working in U.S.

multinationals is greater in instances in which the general wages in

the home country are lower, though there are exceptions. This

pattern, which is illustrated in Figure 9-1, is strongly consistent with the observation that

U.S. multinationals are likely to possess superior technology and be more capital-intensive

than comparable domestic firms. Both capital intensity and technology intensity are

associated with higher wages.

Even in advanced economies, the technological edge associated with direct investment may

lead to higher wages in affiliates as compared to domestically-owned firms. In the U.S. labor

market, affiliates of foreign-owned firms with operations in the United States typically pay

higher wages than domestic firms. Analysis by USITC staff shows that in 1997, total

compensation paid in all U.S. firms was 80.9 percent of the level paid by foreign affiliates

in the United States. Stated differently, wages paid to Americans by foreign multinationals

were 34 percent higher than wages economywide. High wages in foreign affiliates, in turn,

were positively correlated with capital intensity and productivity in those affiliates.12 By

comparison, U.S. capital inflows associated with foreign direct investment were

approximately 11 percent of U.S. gross private domestic investment during 1999-2003.13

In most countries, wages

are higher in U.S.-owned

firms than in local firms.
9-8

Table 9-2

Wages and salaries per employee in manufacturing, by year

Country All firms

U.S. majorityowned

affiliates Ratio Year

Current dollars

Luxembourg . . . . . . . . . . . . . . . . 37,216 10,000 0.27 1999

Israel . . . . . . . . . . . . . . . . . . . . . . 32,108 24,825 0.77 2001

Denmark . . . . . . . . . . . . . . . . . . . 30,208 27,069 0.90 2000

Mexico . . . . . . . . . . . . . . . . . . . . 8,048 8,869 1.10 2000

Singapore . . . . . . . . . . . . . . . . . . 20,267 22,665 1.12 2002

Finland . . . . . . . . . . . . . . . . . . . . 25,750 28,843 1.12 2000

Norway . . . . . . . . . . . . . . . . . . . . 33,174 40,151 1.21 2001

Canada . . . . . . . . . . . . . . . . . . . . 26,346 33,291 1.26 2001

Germany . . . . . . . . . . . . . . . . . . . 31,070 40,237 1.30 2000

Ecuador . . . . . . . . . . . . . . . . . . . 3,534 5,022 1.42 2002

Czech Republic . . . . . . . . . . . . . . 4,127 5,976 1.45 1999

Austria . . . . . . . . . . . . . . . . . . . . 27,076 39,846 1.47 2000

Spain . . . . . . . . . . . . . . . . . . . . . 17,395 26,130 1.50 2000

Korea . . . . . . . . . . . . . . . . . . . . . 14,971 22,747 1.52 2001

Belgium . . . . . . . . . . . . . . . . . . . . 26,140 40,933 1.57 2000

Portugal . . . . . . . . . . . . . . . . . . . 7,916 12,770 1.61 2000

Italy . . . . . . . . . . . . . . . . . . . . . . . 18,524 30,731 1.66 2000

Malaysia . . . . . . . . . . . . . . . . . . . 4,686 7,843 1.67 2001

Argentina . . . . . . . . . . . . . . . . . . 14,343 25,583 1.78 1999

Poland . . . . . . . . . . . . . . . . . . . . 4,850 8,712 1.80 2000

Thailand . . . . . . . . . . . . . . . . . . . 2,759 5,063 1.83 2000

South Africa . . . . . . . . . . . . . . . . 6,362 11,921 1.87 2002

Hungary . . . . . . . . . . . . . . . . . . . 3,889 7,772 2.00 2000

Japan . . . . . . . . . . . . . . . . . . . . . 30,086 60,154 2.00 2001

Netherlands Antilles . . . . . . . . . . 17,019 38,397 2.26 2001

Philippines . . . . . . . . . . . . . . . . . 2,563 5,822 2.27 1999

Egypt . . . . . . . . . . . . . . . . . . . . . 2,155 4,988 2.31 2002

Turkey . . . . . . . . . . . . . . . . . . . . . 7,478 18,670 2.50 2000

Panama . . . . . . . . . . . . . . . . . . . 5,332 14,297 2.68 2001

Brazil . . . . . . . . . . . . . . . . . . . . . . 4,164 11,900 2.86 2002

Indonesia . . . . . . . . . . . . . . . . . . 1,142 3,617 3.17 2002

Colombia . . . . . . . . . . . . . . . . . . 4,096 13,804 3.37 2000

India . . . . . . . . . . . . . . . . . . . . . . 1,343 4,929 3.67 2001

Russia . . . . . . . . . . . . . . . . . . . . . 1,699 8,133 4.79 2002

Note.--Wages in U.S. majority-owned affiliates for 2000-2002 are estimates: see text for

details.

Source: UNIDO, BEA, and USITC staff calculations.
 14 The theory of economic growth, and its empirical determinants, are discussed in U.S. International

Trade Commission, The Dynamic Effects of Trade Liberalization,, ch. 2. For a more comprehensive

treatment, see Barro and Sala-i-Martin, Economic Growth.

 15 This literature is reviewed in U.S. International Trade Commission, The Dynamic Effects of Trade

Liberalization, 3-13 and 3-14.

9-9

Effects on Economic Growth

The rate of technological change is a primary determinant of the rate of economic growth.

In developing countries, where productivity levels lag behind international best practice,

there is substantial scope for rapid “catch-up” economic growth through technology transfer.

Poorer countries which benefit from higher rates of technology transfer are thus likely to

grow faster.14 This fact has led to research into the role that multinational firms play in

technology transfer, either to their own affiliates or to other firms via either contractual

transfer or “spillover” effects. Previous literature15 has shown that affiliates of multinational

firms receive technology of more recent vintage than other firms, as well as ongoing support

for the technology on a flow basis. Technical efficiency in domestically-owned firms may

improve as a result of competition with foreign multinationals, providing one form of

“spillover.” Another arises as a result of managers moving from affiliates of foreign-owned

firms to their domestic competitors, taking the expertise acquired in the foreign-owned firm

Average manufacturing wage in host economy

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

0

1

2

3

4

5

Colombia

Russia

India

Turkey

Italy

Japan

Norway

(U.S. dollars per years)

Note.--Wages for U.S. majority-owned affiliates for 2000-2002 are estimates, see text

for details.

Sources: UNIDO, BEA, and USITC.

Figure 9-1

Ratio of wages and salaries per employee in manufacturing paid by U.S. affiliates

abroad to wages and salaries paid by all manufacturing firms, by country
 16 Balasubramanyam, et al., “Foreign Direct Investment and Economic Growth in EP and IS Countries,”

92-105; Blömstrom, et al., “Is Fixed Investment the Key to Economic Growth?”, 269-276; Borenszentein, et

al., “How Does Foreign Direct Investment Affect Economic Growth?”, 115-135.

 17 Nair-Reichert and Weinhold, “Causality Tests for Cross-Country Panels.”

 18 Khawar, “Foreign Direct Investment and Economic Growth.”

 19 Chowdhury and Mavrotas, “FDI and Growth: What Causes What?”

 20 Nair-Reichert and Weinhold, “Causality Tests for Cross-Country Panels.”

9-10

with them. Earlier studies making broad country-comparisons found that high rates of FDI

are associated with high rates of economic growth, and that the contribution of FDI to

growth may exceed that of domestically-funded investment. The positive growth effects of

FDI tend to manifest themselves only when the host country has achieved a certain threshold

of development, which may be defined variously by per capita income, export orientation,

or other country attributes.16 These findings are consistent both with the idea that foreignowned enterprises are likely to be more technologically advanced on average than their

domestic counterparts, and that the ability of multinational firms to transfer technology to

overseas locations depends on the capacity of the host country to absorb new technologies.

More recent results confirm the finding that open economies are more likely to experience

growth effects from FDI.17 The direction of causation is between FDI and growth is an open

question: do countries which attract FDI experience more growth, or do growing countries

attract more FDI? Results analyzing growth rates over a broad pattern of countries have

been inconclusive.18 Another study, focusing on three countries, found that the causal

relationship between FDI and growth was bi-causal in Malaysia and Thailand, but that GDP

growth caused FDI in Chile.19 Yet another approach, combining cross-country analysis with

causation testing, found that the experiences of countries were very heterogeneous.20
 1

 “Offshoring generally refers to the practice, by either U.S. companies or government entities, of

replacing goods or services previously produced domestically with goods and services produced abroad,”

U.S. Government Accountability Office (GAO), Offshoring of Services, 1. “A company may offshore

services either by purchasing services from another company based overseas or by obtaining services inhouse through an affiliate located overseas,” U.S. GAO, Offshoring of Services, 5. In this chapter offshoring

refers to both outsourcing the production of goods and services inputs to another firm outside of the United

States, and the production or use of goods and services produced at offshore locations but within the firm.

Outsourcing refers to a firm’s purchasing of material inputs from outside of the firm, and may be domestic or

offshore. 

 2

 In 2003, U.S. offshoring of services measured 0.4 percent of GDP, while U.S. material offshoring

amounted to 27 percent of GDP, Amiti and Wei, “Fear of Service Outsourcing,”13.

10-1

CHAPTER 10

Offshoring of Services and Foreign Direct

Investment1

Summary of Key Findings

Although expanding rapidly in recent years, services offshoring remains small compared to

manufacturing offshoring.2

 Most of the attention on services offshoring has been focused on

services that traditionally were considered non-tradeable: white-collar, professional services

associated with high-paying jobs. Advances in communications, the digitalization of

information, the widespread use of the Internet, and the availability of a lower-wage, well

educated labor force abroad have made possible the recent increase in services offshoring.

Other factors promoting the offshoring of services include the liberalization of international

trade in services, the international convergence of legal and regulatory systems, and the

increasing ease of foreign direct investment (FDI). Services offshoring has a positive effect

on labor productivity of the home country but a small negative effect on employment in

certain sectors of the economy, which is absorbed at the aggregate level. However, overall

job losses are small compared to those that occur in the normal course of a business cycle.

Offshoring of services is a distinctive characteristic of contemporary globalization, and is

expected to continue to grow as firms strive to minimize production costs and establish

foreign affiliates to remain globally competitive. The United States has historically

maintained a trade surplus in services and U.S. firms are considered world leaders in FDI

related to services offshoring.

Introduction

Recently, much attention and extensive public debate have focused on the rapid growth in

the offshoring of services to foreign countries with lower wages and well educated segments
 3

 Between January and May 2004, there were 2,634 reports in U.S. newspapers on services outsourcing,

mainly focusing on the fear of job losses. Amiti and Wei, “Fear of Service Outsourcing,”4. In addition, the

U.S. GAO, in response to widespread congressional interest, prepared two reports on offshoring of services

analyzing its data limitations and some of its benefits and costs. U.S. GAO, International Trade, and

Offshoring of Services. Also, the National Academy of Public Administration prepared a report for the U.S.

Congress and the Bureau of Economic Analysis, Off-Shoring: An Elusive Phenomenon.

 4

 Empirical evidence suggests that increased employment at the foreign subsidiaries of U.S. firms also

increases employment in the U.S. parent company. Research also shows that one dollar of spending in

foreign direct investment is associated with an additional $3 of spending on capital investment at home.

Council of Economic Advisers, Economic Report of the President,180. 

 5

 U.S. GAO, Offshoring of Services, 3. 

 6

 The growing role of manufacturing outsourcing in the world economy has been documented extensively,

Borga and Zeile, “International Fragmentation of Production.” See a recent survey by Feenstra and Hanson,

“The Impact of Outsourcing.” Important theoretical research includes Deardorff, “Fragmentation Across

Cones,” Deardorff, “A Trade Theorist’s Take on Skilled-Labor Outsourcing,” Jones and Kierzkowski,

“Globalization,” and the collection of papers in Arndt and Kierzkowki, Fragmentation: New Production

Patterns in the World Economy.

 7

 Hanson, Mataloni, and Slaughter, “Expansion Strategies,”1-2.

 8

 Markusen, “Multinationals.”

 9

 Helpman, “A Simple Theory of International Trade. If FDI is vertical, multinationals may reduce

absolute wage differentials across countries, whereas if it is horizontal, multinationals contribute to rising

income in each country where they operate, Hanson, Mataloni, and Slaughter, “Expansion Strategies,” 3.

10-2

of their labor force.3 The growth in services offshoring is a relatively recent phenomenon.

Services traditionally have been considered non-tradeable and certain services are

characterized as high-paying jobs. For instance, professional services such as accounting or

engineering could not be supplied economically to U.S. firms from overseas until the

Internet and other technological developments facilitated cross-border communications.

Potential benefits for the home country associated with offshoring include lower consumer

prices, increases in productivity, and increased employment,4

 while the costs of offshoring

may include job displacement in certain sectors of the economy.5

Offshoring in the global manufacturing sector has been increasing over several decades and

remains substantially larger than offshoring of services,6

 providing economists with a fairly

clear understanding of the phenomenon. In contrast, offshoring of services is not fully

understood, mainly because its analysis is subject to data limitations. Despite its rapid

growth rate, offshoring of services continues to account for a small portion of overall

services trade. Because services account for more than 70 percent of U.S. employment and

output, the offshoring of certain services potentially may have important effects on the U.S.

economy. This chapter presents the likely effects of the offshoring of services through a

review of recent literature. With few exceptions, the discussion presented here is applicable

to both manufacturing and service offshoring. The empirical evidence is presented first,

followed by a brief review of the theoretical literature.

Foreign Direct Investment and Trade in Services

Firms invest abroad for many reasons: to take advantage of resources that are unique to

another country, to be more cost-effective, and to gain access to foreign markets.7

Multinational corporations (MNCs) are characterized in the theoretical literature as arising

through either horizontal or vertical FDI. In the horizontal-FDI view, firms build production

plants both at home and abroad to avoid high trade costs.8

 In the vertical-FDI view, firms

locate production where manual labor costs are low. 9

 The empirical literature on FDI

provides stronger support for horizontal FDI than for vertical FDI. However, recent work

that addressed the question of why MNCs invest abroad suggests that vertical FDI is more
 10 Hanson, Mataloni, and Slaughter, “Expansion Strategies,”1.

 11 Jensen and Kletzer, “Tradable Services.”

 12 Data refer to sales of services to foreign and U.S. markets through cross-border trade, U.S. Department

of Commerce (USDOC), Bureau of Economic Analysis (BEA), Survey of Current Business, 26. 

 13 Ibid. Further analysis of U.S. trade in services can be found in U.S. International Trade Commission,

Recent Trends in U.S. Services Trade. 

 14 Technical services include advertising services; computer and data processing services; research,

development, and testing services; management, consulting, and public relations services; legal services;

construction, engineering, architectural, and mining services; and medical services, among others. 

 15 Council of Economic Advisers, Economic Report of the President,178.

 16 Ibid., and Amiti and Wei, “Fear of Service Outsourcing,”14, and UNCTAD, The Shifts Towards

Services.

10-3

common than previous research suggested.10 The study examined three types of foreign

activities of U.S. multinationals: global outsourcing, the use of export platforms, and

wholesale trading, and showed that foreign affiliates respond to the policies and

characteristics of host countries in very different ways. Both the theoretical and the empirical

literature help to explain why MNCs and FDI have played a significant role in the process

of globalization of production, which is evolving from manufacturing into services.11

Advances in communications technology, the digitalization of information, and the

development of the Internet, among other factors, have made it possible for trade in services

to almost double during 1994-2004. Over this period, U.S. exports of services increased 73

percent to $323 billion, while imports of services rose 114.5 percent to $258 billion (figure

10-1).12 Although it declined slightly relative to2003, the U.S. trade surplus in services

reached $65 billion in 2004, in contrast to the widening and persistent U.S. trade deficit in

goods, which reached $665 billion in the same year (figure10-2).13

The United States exports services when a U.S. firm provides services to residents of foreign

countries in the form of education, financial, insurance, telecommunications, business,

professional, and technical services.14 U.S. exports of business,

professional, and technical services alone increased by almost $25

billion during 1989-2004. When a U.S. firm outsources services that

were previously performed in-house to a foreign firm, the parent

firm’s resulting purchase of those services becomes cross-border

imports of services, which rose by $10 billion in the same period.15

The U.S. trade surplus in services underscores the United States’

comparative advantage in services, but the growth in cross-border

services imports likely reflects increased offshoring of services by

U.S.-based MNCs. The United States is the world leader in services

offshoring, followed by Germany.16

The United States is the

world leader in services

offshoring, followed by

Germany.
10-4

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0

50

100

150

200

250

300

350

U.S. exports of services

U.S. imports of services

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Billion dollars

U.S. trade balance of services

Figure 10-1

U.S. trade in services, 1986-2004

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-700

-600

-500

-400

-300

-200

-100

0

100

U.S. services trade balance

U.S. goods trade balance

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Billion dollars

Figure 10-2

U.S. trade balance in goods and services, 1986-2004
 17 Outsourcing is not new. David Landes, in The Wealth and Poverty of Nations, describes outsourcing

dating back to the 13th century in Europe. He describes it as “the putting out system” whereby urban textile

firms would employ cheap labor in the countryside as part of the production process. Irwin, “Comments on

James Markusen,” 2.

 18 Arm’s length international outsourcing refers to purchases of inputs from a foreign firm which is

independent of the firm buying the inputs, whereas intra-firm international outsourcing includes purchases of

inputs from a foreign provider which is owned by the firm buying the inputs

 19 Amiti and Wei, “Fear of Service Outsourcing,”6.

 20 Ibid., 13.

 21 Egger and Egger, “International Outsourcing.”

 22 Feenstra and Hanson,“Globalization,” and Feenstra and Hanson,“The impact of Outsoucing.”

 23 These firms are commonly know as maquiladoras.

 24 Watkings and Tafoya, “Production Sharing,” 9.

10-5

Offshoring of services

In general, outsourcing refers to a firm’s purchase of material inputs or services from outside

of the firm.17 Outsourcing can be domestic or international. Domestic outsourcing, for

instance, takes place when a U.S. auto maker contracts out the production of some of its parts

to another firm located within the United States. In the service sector, the automaker might

choose to have an outside firm handle its customer service call center, or payroll data

processing. International outsourcing, or “offshoring,” takes place when a firm procures a

service or material input from a source located in a foreign country. International outsourcing

is part of a country’s imports of goods and services and includes both intra-firm and arm’s

length18 international outsourcing.19 For the United States and the United Kingdom, services

offshoring has been steadily increasing at a fast rate. However, it is still at very low levels

compared to offshoring by manufacturing firms.20

International outsourcing of material inputs (i.e., offshoring) has been practiced over many

decades and has several recognized economic effects. For instance,

studies have found important contributions of international

outsourcing to productivity, but only in the long-run.21 Others have

found that international outsourcing increases the demand for skilled

labor in the United States, thus increasing U.S. wages.22 The study

focused on U.S. outsourcing to foreign assembly plants created by

U.S. firms and located on the U.S.- Mexico border producing less

skill-intensive parts.23 Here, the demand for skilled labor rises as a

firm relocates the unskilled-intensive parts of the production process

from the relatively skill-abundant countries to unskilled-abundant countries. Investments in

outsourcing, or alternatively production sharing operations, have contributed to cross border

integration of manufacturing in North America and helped its industrial competitiveness.24

Services offshoring is a relatively new phenomenon, so there is not yet a consensus as to its

extent or its impact on the U.S. economy. In many instances, the general empirical effects

of services offshoring are in line with traditional trade theory, e.g. services offshoring

involves benefits and costs with benefits exceeding costs in the aggregate. But costs,

There is not yet a

consensus on the impact

of services offshoring on

the U.S. economy.
 25 Recent contributions include Amiti and Wei, “Fear of Service Outsourcing,” Amiti and Wei, “Service

Offshoring,”Arora and Gambardella, “The Globalization of the Software,” Bardhan and Kroll, “The New

Wave of Outsourcing,” Bhagwati, Panagariya, and Srinivasan, “The Muddles over Outsourcing,” Brainard

and Litan, “Offshoring Service Jobs,” Bronfenbrenner and Luce, “The Changing Nature,” Dossani and

Kenney, “Went for Costs,” Dossani and Kenney, “The Next Wave of Globalization,” U.S. GAO, “Offshoring

of Services,” Jensen and Kletzer, “Tradable Services,” Mann, “Globalization,” Kirkegaard, “Outsourcing,”

Samuelson, “Where Ricardo and Mill,” and Schultze, “Offshoring.”

 26 The U.S. GAO provides recommendations to improve the collection of data on offshoring of services,

U.S. GAO, “International Trade.” Existing data sources on offshoring for the United States are found in U.S.

GAO, “International Trade,” and Appendix D of National Academy of Public Administration, “OffShoring.”

 27 Amiti and Wei, “Fear of Service Outsourcing.”

 28 Bhagwati, Panagariya, and Srinivasan, “The Muddles over Outsourcing.”

 29 Amiti and Wei, “Service Offshoring.”

 30 For a discussion of alternative definitions of offshoring, see National Academy of Public

Administration, Off-shoring and U.S. GAO, Offshoring of Services..

 31 Gorg and Hanley, “International Outsourcing.”

 32 Girma and Gorg, “Outsourcing.”

 33 Mann, “Globalization.”

 34 The study also found that material inputs contribute to productivity growth but only by approximately 5

percent. Amiti and Wei, “Service Offshoring.”

10-6

primarily the loss of domestic jobs, are narrowly concentrated on specific industries and

local communities.25

Measuring services offshoring is difficult because official data are not available to measure

the parts of the production process that are contracted out.26 Thus, researchers rely on

indirect measures. For instance, one study measures services offshoring as imports of

computing and computer software design, in addition to other business services including

accounting and other back-office operations.27 Another defines offshoring of services as

those of Mode 1 in the language of the World Trade Organization, under its General

Agreement on Trade in Services.28 In that terminology, trade in services involves arm’slength supply of services with both the supplier and the buyer remaining in their respective

countries. Those services are provided by independent designers, architects, consultants,

firms that manage call centers, back offices, and programmers that sell their services

electronically. Others use input-output tables and trade data to calculate offshoring of

services.29 So far, there is no consensus in the literature on the definition of services

offshoring nor on its measurement.30 However, several examples are presented in table 10-1.

Nevertheless, the empirical research on services offshoring and FDI provides some evidence

of its effects on productivity and employment.

Most empirical studies find a positive effect of services offshoring on productivity in the

home country. A study for Ireland shows that international outsourcing of services had a

positive effect on productivity in the electronics industry between 1990 and 1995.31 Another

for the United Kingdom finds positive evidence of services offshoring on labor productivity

between 1980 and 1992.32 A study focusing on the U.S. information technology (IT) sector

documented that offshoring by IT industries translated into high job growth and higher

productivity during the period from 1995-2002.33 Similarly, empirical estimation of the

effects of services offshoring on productivity in U.S. manufacturing industries between 1992

and 2000 found that services offshoring accounts for approximately 11 percent of

productivity growth during this period.34

Some empirical research on services offshoring and employment provides evidence of a

negative effect. Research for the United States concluded that there is a small negative effect
 35 Ibid.

 36 Amiti and Wei, “Fear of Service Outsourcing.”

 37 Shultze, “Offshoring,” 6.

 38 McKinsey Global Institute, “Offshoring,” McKinsey Global Institute, “The Emerging Global Labor

Market,”and Deloitte Touche Tohmatsu, “Global Financial Services.” 

 39 Brainard and Litan, “Offshoring Service Jobs.” 

10-7

Table 10-1

Definitions of export-oriented FDI projects related to offshore services

Contact center services Back-office services IT services

Help desk Claims processing Software development

Technical support/advice Account processing Application testing

After-sales support Transaction processing Content development

Employee enquires Query management processing Engineering and design

Claims enquires Customer administration processing Product optimization

Customer support/advice HR/payroll processing Other High-End

Market research Data processing Regional Headquarters

Answering services IT outsourcing Architectural services

Prospecting Logistics processing Biotech and pharma R&D

Information services Quality assurance Radiology, X-ray

Customer relationship management Supplier invoices Distant education

Source: Trefler (2005) with information from UNCTAD.

of less than one-half of one percent on the employment rate in U.S. manufacturing industries

when considering disaggregated data for 450 industries. However, this effect disappears at

a more aggregated level of 96 industries, indicating that there is sufficient growth in

employment demand in other industries to offset any overall negative effects.35 A related

paper for the United Kingdom found no evidence to support the notion that higher growth

in services offshoring leads to slower job growth.36 Similarly, an analysis of U.S. imports

of business, professional, and technical services provides evidence of some job losses related

to services offshoring but finds the effect to be small relative to the size of the U.S. labor

market and the magnitude of annual job creation and destruction in the United States.37

Other studies on services offshoring and employment have been conducted by management

consultants including McKinsey and Deloitte Touche Tohmatsu. For the most part, those

studies also conclude that overall job losses are small compared to those of the normal course

of a business cycle.38 A review of most of those consultant studies point out that low paid

jobs are being replaced by higher-paying jobs.39

Recently, two well defined trends have emerged in manufacturing and services offshoring.

First, the rise of China as the world’s manufacturer has allowed MNCs based in the United
 40 Studies dealing with international outsourcing in China include Feenstra and Hanson,“Ownership and

Control,”Feenstra and Hanson,“Intermediaries,” Feenstra, Hai, Woo, and Yao, “Discrepancies,” Cheng and

Kierzkowski, “Global Production,” and Bronfenbrenner and Luce, “The Changing Nature.” India’s success

in offshoring of services has been studied by Dossani and Kenney, “Went for Cost,” Dossani and

Kenney,”The Next Wave,” Dossani, “Globalization,” Srinivasan, “Information Technology,” and Greene,

“Growth in Services.”

 41 Trefler, “Offshoring: Threats and Opportunities,” 4.

 42 Most of the concern is based on wage differentials given that wages in China and India are low

compared to those of developed countries. But, it is unit labor costs that matter not wage differentials,

Krueger, “Comments,” 2. “Even Japan, whose wages in 1959 were 10 percent of U.S. levels, has yet to

devastate the United States and never will.” Trefler, “Offshoring: Threats and Opportunities,” 2.

 43 Dossani, “Globalization,”Trefler, “Offshoring: Threats and Opportunities,” Krueger, “Comments,”

Panagariya, “Discussion,” and Aspray, Mayadas, and Vardi, “Globalization.”

 44 Dossani, “Globalization,” 3.

 45 Trefler, “Offshoring: Threats and Opportunities,” 3.

 46 Panagariya, “Discussion,” 3. The product cycle of trade in goods was pioneered by Vernon,

“International Investment.”

 47 Notably, only in the application development, which is the standardized component of many services,

does India have a significant presence. In addition, only few complex tasks such as systems integration and

IT education and training have been outsourced to India, Panagariya, “Discussion,” 4. 

 48 Panagariya, “Discussion,” 5. 

10-8

States and elsewhere to offshore significant manufacturing work to Chinese factories.40

Second, the growth of traded services involving technology-intensive processes and

employing highly-paid white collar workers has resulted in India becoming a leading

provider of information technology services for non-Indian companies.41 The success of

these countries has raised some concern that the abilities of China and India to undertake

high-end services work, such as semiconductor design and information technology (IT), may

threaten employment, income, and wages in developed countries.42 The available empirical

evidence does not support such a claim, however.43 One study concluded that the

development of skills and the high growth in Indian IT was due to a high level of infant

industry protectionism and local entrepreneurship, but that the bulk of the work done by the

Indian IT industry is low value-added and relatively low-skilled.44 Another study points out

that although there have been improvements, institutions that protect property rights, provide

a fully functional legal framework, and balance the needs of innovators inside the

corporations against the needs of investors are only beginning to take shape in both China

and India. Further, the study emphasizes, as those institutions are not likely to evolve

rapidly, China and India are a long way from being world innovators.45

Another argument suggests that the pattern of international outsourcing to India follows, to

some extent, the product cycle of trade in goods.46 According to such a cycle, products would

be innovated in the country where they are potentially demanded and will be first sold and

debugged there. Eventually, the innovator country becomes an importer of the product as the

production process moves to a location with the lowest production costs, once the product

process has been completely standardized. But, in outsourcing to India, only some specific

components of services appear to be standardized; therefore, various components remain

non-traded.47 Finally, India’s capacity to create the skills to sustain the high growth of

offshoring is limited, as, with few exceptions, India’s higher education system can only

provide a small workforce for employment in the country’s offshoring activities.48

Incentives for services offshoring

Offshoring has been referred to in the literature as international production sharing,

fragmentation, international outsourcing, globalized production, de-localization, intra-
 49 Arndt and Kierzkowski, Fragmentation, 2.

 50 Jones and Kierzkowski, “The Role of Services.”

 51 Arndt and Kierzkowski, Fragmentation, 4.

 52 Cheng and Fung, “The Globalization of Trade and Production.”

 53 Cheng, Qiu, and Tan, “Foreign Direct Investment,” and Cordella and Grilo, “Globalization.”

10-9

product specialization, middle products, and slicing up of the production chain. When the

production stage abroad is owned by the same firm buying the input it is referred to as

vertical foreign direct investment or intra-firm trade; when the production stage abroad is

owned by a foreign firm it is referred to as arm’s-length trade. The literature on services

offshoring FDI evolved from the literature on manufacturing outsourcing and the literature

on where the firm locates the different stages of production. This section will review each

of these in turn.

Manufacturing offshoring, or trade of intermediate inputs, has become an important

component of both U.S. imports and exports. On the import side, computer makers import

semiconductors, screens and motherboards, while airplanes designed in Europe or the United

States are assembled using components from various countries. On the export side, consumer

appliances and automobiles are assembled in Mexico with parts designed and made in the

United States. This requires the phases of the production process to be physically separable

or subject to fragmentation. This type of fragmentation and outsourcing in the

manufacturing process “probably represent one of the most important distinguishing features

of contemporary globalization.”49

When the production process is fragmented, the various phases of production can be

separated and undertaken at locations where production costs are the lowest. But the physical

dispersion of production implies certain costs such as coordination

and communication, or more generally, coordination and related costs

called “service links.” A pioneer article provided a framework

involving alternative production processes with various degrees of

fragmentation.50 In Figure 10-3, the upper panel shows the traditional

production process in which inputs are combined to produce final

products in one location. The middle and lower panels show two

examples of fragmentation, one simple and one more complex. Here,

coordination and related services are provided through “service links.”

“A service link is a composite of activities such as transportation,

insurance, telecommunications, quality control, and management

coordination to ensure that the production blocks interact in the proper

manner.”51 The speed and efficiency with which service links operate is important to

minimize costs of production. In the past, the cost and availability of “service links” were

such that they were easier to establish and cheaper to operate domestically. This, in effect,

acted as a barrier to trade preventing the proliferation of international outsourcing of

services.

In recent years, however, technological innovations, liberalization of international trade in

services, and convergence of legal and regulatory systems have significantly reduced the

costs of “service links.” As cross-border service links become cheaper, more reliable, and

more readily obtainable, outsourcing has turned international.52 The liberalization of FDI

regulations in developing countries, particularly in East and South East Asia, have also

played an important role in the international fragmentation of production.53

When the production

process can be

fragmented, there is a

greater incentive to

employ offshoring of

services. 
10-10

Moreover, in a fragmented system, production activities may be separated not only spatially

but by ownership as well. Separability of ownership is an important determinant in crossborder production sharing, which may result in either FDI or arm’s-length operations. Where

separation of ownership is not feasible, the result of international outsourcing is MNCs and

FDI operations, as MNCs establish affiliates abroad to perform certain production activities.

Where separation of ownership is feasible, the result of international outsourcing is arm’slength operations and FDI will be less important. 

The literature on manufacturing offshoring is based on traditional trade theory that explains

and assesses trade in final products, but has been augmented to allow for cross-border

fragmentation and trade in intermediate and final products, as well as technological change

and the costs of service links. In international outsourcing and fragmentation models, as in

the traditional models, the principle of comparative advantage

carries through to trade in components and parts. Factor

endowments and factor intensities determine the allocation of

production blocks, but the relative cost and efficiency of service

links play a crucial role in determining such a comparative

advantage. Production blocks will be undertaken in the lowestcost country, and since service links often exhibit increasing

returns to scale, they may determine specialization among

countries with identical factor endowments. In addition, high

Input Markets

Input

Production

Block

Service

Link

Production

Block 1

Production

Block 2

Production

Block 4

Production

Block 2

Production

Block 3

Production

Block 1

Markets

Markets

Service

Link Service

Link

Service

Link

Service

Link

Figure 10-3

Fragmentation and service links

Source: Jones and Kierzkowski (1990) as reported in Arndt and Kierzkowki (eds) (2001).

Offshoring can increase the

competitiveness of an industry

facing competition from imports,

leading to increased

employment, output, and wages.
 54 Dixit and Grossman, “Trade and Protection,” Krugman and Venables, “Globalization,” 

Arndt,“Globalization,” Jones and Kierzkowsky, “The Role of Services,” Jones and Kierzkowsky,

“Globalization,” Deardorff, “Fragmentation,” Deardorff, “Fragmentation Across Cones,” Deardorff, “A trade

theorist,” Cheng, Qiu, and Tan, “Foreign Direct Investment,” and Yi, “Can Vertical Specialization.”

 55 Jones, Kierzkowski, and Lurong,”What does evidence tell.”

 56 An example of agglomeration in services is the case of financial services and insurance.

 57 Fujita, Krugman, and Venables, The Spatial Economy, Amiti, “Service Offshoring,”and Jones and

Kierzkowski, “International Trade and Aglomeration.”

 58 Grossman and Helpman, “Integration,” and Grossman and Helpman, “Outsourcing.”

 59 Trefler,”Offshoring,”6.

 60 Deardorff, “Financial Crisis,” 9.

 61 For instance Bhagwati, Panagariya, and Srinivasan, “The Muddles over Outsourcing,” Samuelson,

“Where Ricardo and Mill,” Deardorff, “A trade theorist’s take,” and Markusen, “Modeling the Offshoring.”

10-11

wage countries can increase output and employment and raise workers’ wages by offshoring

the most labor intensive parts of the production process to lower wage countries. Thus,

offshoring can increase the competitiveness of the industry facing competition from imports,

and with increased competitiveness, employment, output, and wages increase as well. In

general, these models are welfare-enhancing for the entire home economy in the long run,

but some industries and individuals will see increasing levels of unemployment.54 One

important prediction of the product fragmentation and international outsourcing models is

that income and intra-industry trade will increase with the lowering of service link costs.55

This result, however, stands in contrast to the prediction of the new geography and trade

theory that agglomeration56 increases with economic growth.57

The product fragmentation and offshoring models assumed implicitly that reliability of

goods or service providers is assured in order to focus on the cost-price relationship. But in

the case of international outsourcing, factors such as contractual arrangements, firm

structures, organization structures, incentives systems, and networks between the contracting

parties are particularly important to the costs of service links, and thus to offshoring and FDI

decisions. In this context, the next set of outsourcing models were developed based on

transaction cost theory.58 In dealing with the firms’s decision to “make-or-buy,” these new

theories conclude that if a project is sufficiently well known that it can be fully described to

the input or service provider then offshoring or arm’s-length trade will be the appropriate

decision. If, however, the project is difficult to describe, then the decision should be to

produce it in-house, albeit offshore, using FDI.59

The literature reviewed so far in this discussion relies on microeconomic factors. However,

macroeconomic factors, such as exchange rate crises and longer-term exchange rate trends,

also have an impact on fragmentation decisions. Research that explores the link between the

international financial performance of a country and its international goods trade observes

that the Asian crisis of 1997 caused contraction in the affected countries’ trade, i.e. both their

imports and exports declined.60 By contrast, conventional theory suggests that exchange rate

depreciation causes imports to decrease but exports to increase. Based on a model of

financial crisis, trade, and fragmentation, the study notes that fragmented trade appears to

make the economy more sensitive to international financial crises, while at the same time it

expands the gains from trade. Referring to the Asian economies, the study suggests that the

most successful of such economies achieved rapid economic growth by exploiting

opportunities offered by fragmentation. By doing so, however, they increased their

vulnerability to international financial crises. The study suggests that the world economy

needs to find better ways to prevent such crises. There are few theoretical models dealing

specifically with offshoring of services.61 One study, after defining offshoring of services

as Mode 1's arm’s-length trade of services, notes that services offshoring arises in two
 62 Bhagwati, Panagariya, and Srinivasan, “The Muddles over Outsourcing,” 94.

 63 For a discussion on the effects of international trade on labor, see Chapter 7 in U.S. International Trade

Commission, The Economic Effects.

 64 Deardorff, “A trade theorist’s take on skilled-labor outsourcing.”

10-12

ways.62 First, new technology may convert previously nontraded services into traded

services. Second, information technology skills accumulate in countries such as China and

India that can augment internationally traded services. The main conclusion of the study is

that services offshoring is a trade phenomenon leading to gains from trade, with its effects

on jobs being the same as for conventional trade in goods.63

Another study on skilled-labor international outsourcing addressed the recent concern that

firms in developed countries utilize the services of skilled workers in developing counties

for activities that were once performed domestically.64 The study notes that within the

fragmentation model of trade one would expect offshoring of activities that intensively use

unskilled, not skilled, labor. The study departs from the standard model by allowing

differences in technology, while maintaining differences in skills and wages in a one sectortwo activity model. Further, the study asks, why did offshoring not take place long ago and

erase the differences in technology and wages? The argument is that wages in the skillabundant country are higher not because all technologies in that county are superior but

because enough different sectors have such superiority. Thus, when offshoring becomes

possible, only those activities that had no superior technology in the home market will

relocate overseas. The study concludes that offshoring will generate gains to all factors if

differences in factor endowments generate substantially more trade.
B-1

Bibliography

American Metal Market, various issues. American Metal Market website, http://www.amm.com. 

Amiti, Mary, and Shang-Jin Wei. “Fear of Service Outsourcing: Is it Justified.” IMF Working Paper,

WP/04/186. Washington, DC: International Monetary Fund, 2004.

______. “Service Offshoring, Productivity and Employment: Evidence form the United States.” IMF

Working Paper, WP/05/238. Washington, DC: International Monetary Fund, 2005.

______. “Location of Vertically linked Industries: Agglomeration versus Comparative Advantage.” 

European Economic Review 49, no. 4 (2005): 809-832.

Antras, Pol. “Firms, Contracts, and Trade Structure.” The Quarterly Journal of Economics, November

(2003):1375-1418.

______. “Incomplete Contracts and the Product Cycle.” American Economic Review, September (2005).

______, and Elhanan Helpman. “Global Sourcing.” Journal of Political Economy 112, no. 3 (2004):552-

580.

Arndt, Sven W. “Globalization and the Open Economy.” North American Journal of Economics and

Finance 8, no. 1 (1997):71-79.

______, and Henryk Kierzkowski (eds.). Fragmentation: New Production Patterns in the World Economy.

New York, NY: Oxford University Press, 2001.

Arora, Ashish and Alfornso Gambardella. “The Globalization of the Software Industry: Perspectives and

Opportunities for Developed and Developing Countries.” NBER Working Paper Series, Working

Paper 10538. Cambridge, MA: National Bureau of Economic Research, 2004.

Aspray, William, Frank Mayadas, and Moshe Y. Vardi (eds). Globalization and Offshoring of Software. A

Report of the ACM (Association for Computing Machinery) Job Migration Task Force, New

York, NY, 2006. http://www.acm.org/globalizationreport/ (accessed March 7, 2006). 

Balasubramanyam, V.N.; M. Salisu, and D. Sapsford, “Foreign Direct Investment and Economic Growth

in EP and IS Countries,” The Economic Journal 106, January (1996), 92-105. 

Bank for International Settlements, Committee on the Global Financial System, Foreign Direct Investment

in the Financial Sector of Emerging Market Economies, March 2004,

http://www.bis.org/publ/cgfs22.pdf (accessed May 11, 2006).

Bardhan, Ashok Deo and Cynthia A. Kroll. “The New Wave of Outsourcing.” Fisher Center for Real

Estate and Urban Economics. Berkeley, CA: University of California Press, 2003.

Barro, Robert, and Xavier Sala-i-Martin, Economic Growth, 2nd edition. Cambridge, MA: MIT Press,

2003.

Bernard, B. Andrew, J. Bradford Jensen, and Peter K. Schott. “Importers, Exporters, and Multinationals:
B-2

A Portrait of Firms in the U.S. that Trade Goods.” Working Paper Series, Number WP 05-10.

Washington, DC: Institute for International Economics, 2005.

Bhagwati, Jagdish, Arvind Panagariya, and T.N. Srinivasan. “The Muddles over Outsourcing.” Journal of

Economic Perspectives 18, no. 4 (2004): 93-114.

BHP-Billiton. “Escondida.” 

www.bhpbilliton.com/bbContentRepository/Reports/BHPBEDReport24Jan06.pdf (accessed

January 19, 2006). 

“Billion Dollar Club,” Chemical Week, September 14, 2005.

Blömstrom, Magnus, Robert E. Lipsey and Manuel Zejan, “Is Fixed Investment the Key to Economic

Growth?”, Quarterly Journal of Economics 111, no. 1 (1996): 269-276.

Borenszentein, E., J. de Gregorio and J. Lee, “How Does Foreign Direct Investment Affect Economic

Growth?”, Journal of International Economics 45 (1998): 115-135.

Borga Maria and William J. Zeile. “International Fragmentation of Production and the Intrafirm Trade of

the U.S. Multinational Companies.” WP2004-02. Washington, DC: Bureau of Economic Analysis,

2004.

BPO Insight, “Europe Takes Centre Stage,” April 2005,

http://www.nelson-hall.com/bpo-insight/september2005/vtpi_04.html (accessed Jan. 19, 2006).

Brainard, Lael and Robert Litan. “Offshoring Service Jobs: Bane or Boon and What to Do?” The

Brookings Institution Policy Brief No. 132. Washington, DC: The Brookings Institution, 2004.

Bronfenbrenner, Kate, and Stepahnie Luce. “The Changing Nature of Corporate Global Restructuring: The

Impact of Production Shifts on Jobs in the U.S., China, and Around the Globe. US-China

Economic and Security Review Commission, 2004.

Bull Corporation website, http://www.bull.com/us/about/index.html (accessed Nov. 21, 2005).

Bureau van Dijk, Zephyr Mergers and Acquisitions Database.

https://zephyr.bvdep.com/cgi/template.dll?product=24 (accessed May 30, 2006).

The Business Analysts Group. Global Metals & Mining Industry, 2005. 

“California Bans Salmon Farming in State Waters,” Intrafish, October 15, 2003.

Campa, Jose and Linda S. Goldberg. “The Evolving External Orientation of Manufacturing Industries:

Evidence from Four Countries.” NBER Working Paper Series, Working Paper 5919. Cambridge,

MA: National Bureau of Economic Research, 1997.

Capgemini Corporation website, http://www.capgemini.com/about/history/ (accessed Nov. 21, 2005).
B-3

Cheng, Leonard K., Larry D. Qiu, and Guofu Tan. “Foreign Direct Investment and International

Fragmentation of Production.” In Fragmentation: New Production Patterns in the World

Economy, edited by Sven W. Arndt and Henryk Kierzkowski, 165-86. New York, NY: Oxford

University Press, 2001.

______, and William K. Fung. “The Globalization of Trade and Production: A Case Study of Hong

Kong’s Textile and Clothing Industries,” in Global Production and Trade in East Asia, Leonard

K. Cheng and Henryk Kierzkowski, eds., 227-43. Boston, MA: Kluwer Academic Publishers,

2001.

______, and Henryk Kierzkowski (eds). Global Production and Trade in East Asia, Boston, MA: Kluwer

Academic Publishers, 2001.

Chowdhury, Abdur, and George Mavrotas, “FDI and Growth: What Causes What?” Paper presented at the

WIDER Conference on “Sharing Global Prosperity,” Helsinki, Finland, September 6-7, 2003.

Congressional Research Service, Trade Integration in the Americas, Nov. 22, 2005, found at

http://opencrs.cdt.org/rpts/RL33162_20051122.pdf, retrieved May 11, 2006.

“Cooke Aquaculture Plans to Consolidate Aquaculture Industry in North America,” Intrafish, April 5,

2004. 

Cordella, Tito and Isabel Grilo. “Globalization and Relocation in a Vertically Differentiated Industry.”IMF

Working Paper, WP/98/48. Washington, DC: International Monetary Fund, 1998.

Council of Economic Advisors. Economic Report of the President, 2005.

Deardorff Alan V. “Fragmentation in Simple Trade Models.” Discussion Paper No. 422, Research Seminar

in International Economics, University of Michigan. Ann Arbor, MI, (1998).

______. “Financial Crisis, Trade, and Fragmentation,” in Global Production and Trade in East Asia,

Leonard K. Cheng and Henryk Kierzkowski, eds., 9-31. Boston, MA: Kluwer Academic

Publishers, 2001.

______. “Fragmentation Across Cones,” in Fragmentation: New Production Patterns in the World

Economy, Sven W. Arndt and Henryk Kierzkowski, eds., 35-51. New York, NY: Oxford

University Press, 2001.

______. “A trade theorist’s take on skilled-labor outsourcing.” International Review of Economics and

Finance 14 (2005a): 259-271.

______. “Comments on Markusen, Modeling the Offshoring of White-Collar Services: From Comparative

Advantage to the New Theories of Trade and FDI.” Brookings Trade Forum 2005: Offshoring

White-Collar Work-The Issues and the Implications.” May 12-13, 2005, Washington, DC, The

Brookings Institution, (2005b).

 http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm (accessed March

6, 2006). 
B-4

Deloitte Touche Tohmatsu. “Global Financial Services Offshoring: Scaling the Heights.” Deloitte Touche

Tohmatsu Global Financial Services Industry Group, November, 2005.

Dixit, Avinash K., and Gene M. Grossman. “Trade and Protection with Multistage Production,” Review of

Economic Studies, XLIX (1982):583-94.

Dolbeck, Andrew, “Consolidation in the Global Mining Industry,” The Weekly Corporate Growth Report,

NVST Private Equity Network, no. 1316, November 22, 2004.

Dossani, Rafiq. “Globalization and the Offshoring of Services: The Case of India.” Brookings Trade

Forum 2005: Offshoring White-Collar Work-The Issues and the Implications.” May 12-13, 2005,

Washington, DC, The Brookings Institution, 2005.

 http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm (accessed March

6, 2006).

______, and Martin Kenney. “Went for Cost, Stayed for Quality? Moving the Back Office to India.”

Stanford, CA: Asia-Pacific Research Center, Stanford University, 2003.

______. “The Next Wave of Globalization? Exploring the Relocation of Service Provisions to India.”

Working Paper 156. Stanford, CA: Asia-Pacific Research Center, Stanford University, 2004.

Economist Intelligence Unit. “Sub-Saharan Africa Economy: Digging Deep,” Viewswire via NewsEdge

Corporation, January 30, 2006 

http://www.viewswire.com/index.asp?layout=VWArticleVW3&article_id=1579884543.

EDS, “EDS To Announce Conditional Open Offer To Acquire Majority Stake In Indian Outsourcer,”

http://www.eds.com/news/releases/2918/ (accessed Mar. 27, 2006).

Egger, Hartmut and Peter Egger. “International Outsourcing and Productivity of Low-Skilled Labor in the

EU,” Working Paper 152/2001, Austrian Institute of Economic Reseach (WIFO) Viena, 2001.

“Facts & Figures for the Chemical Industry,” Chemical & Engineering News, July 11, 2005.

Feenstra, Robert C., and Gordon H. Hanson. “Globalization, Outsourcing, and Wage Inequality.” 

American Economic Review LXXXVI (1996): 240-45.

______. “The Impact of Outsourcing and High Technology Capital on Wages: Estimates for the United

States, 1979-1990.” Quarterly Journal of Economics 114 (3) (1999): 907-940.

______. “Global Production Sharing and Rising Inequality: A Survey of Trade and Wages.” 

Handbook of International Trade, 2001.

______. “Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the

Firm.” NBER Working Paper Series, Working Paper 10198, Cambridge, MA: National Bureau of

Economic Research, December, 2003.

______. “Intermediaries in Entrepot Trade: Hong Kong Re-Exports of Chinese Goods.” Journal of

Economics and Management Strategy 13, issue 1 (2004).
B-5

Feenstra, Robert C., Wen Hai, Wing T. Woo, and Shunli Yao. “Discrepancies in International Data: An

Application to China-Hong Kong Entrepot Trade,” American Economic Review, May (1999):338-

343.

Fjord Seafood, 2003 Annual Report, p. 8.

______. Quarterly Report, First Quarter 2004, p. 3.

The Fraser Institute. Annual Survey of Mining Companies, 2004/2005.

fraserinstitute.ca/admin/books/files/Mining04.pdf (accessed March 9, 2005). 

"Fuel Drives Costs Up," Seafood Business Report, January 2005. 

Fujita, Masahisa, Paul Krugman, and Anthony Venables. The Spatial Economy: Cities, Regions, and

International Trade. Cambridge, MA: MIT Press, 1999.

Fujitsu, Corporate Profile, http://www.fujitsu.com/global/about/profile/ (accessed Feb. 16, 2006).

Gartner, Inc, Worldwide IT Services Forecast by Region (2002),

http://www.dataquest.com/press_gartner/quickstats/services.html (accessed Jan. 19, 2006).

Girma, Sourafel and Holger Gorg. “Outsourcing, Foreign Ownership and Productivity: Evidence from

United Kingdom Establishment Level Data.” Discussion Paper 361. German Institute for

Economic Research, 2003.

Gorg, Holger and Aoife Hanley. “International Outsourcing and Productivity : Evidence from Plant Level

Data.” Research Paper 2003/20. University of Nottingham, 2003.

Greene, William. “Growth in Services Outsourcing to India: Propellant or Drain on the U.S. Economy?”

Office of Economics Working Paper, No. 2005-12-A, U.S. International Trade Commission,

Washington, DC, January, 2006.

Grossman, Gene M., and Elhanan Helpman. “Integration versus Outsourcing in Industry Equilibrium.” 

The Quarterly Journal of Economics, February (2002):85-120.

______. “Outsourcing Versus FDI in Industry Equilibrium.” Journal of the European Economic

Association, April-May (2003):317-327.

______. “Outsourcing in a Global Economy.” Review of Economic Studies, 72 (2005):135-159.

“Group Files FTC Complaint over Farmed Salmon Ads,” Intrafish, February 24, 2006.

Hanson H. Gordon, Raymond J. Mataloni Jr., and Matthew J. Slaughter. “Expansion Strategies of U.S.

Multinational Firms.” NBER Working Paper Series, Working Paper 8433, Cambridge, MA:

National Bureau of Economic Research, 2001.

______. “Vertical Production Networks in Multinational Firms.” NBER Working Paper Series, Working

Paper 9723. Cambridge, MA: National Bureau of Economic Research, 2003.
B-6

Helpman, Elhanan. “A Simple Theory of International Trade with Multinational Corporations.” Journal of

Political Economy 92 (1984): 451-72.

Hummels David, Ishii Jun and Kei-Mu Yi. “The Nature of Growth of Vertical Specialization in World

Trade.” Journal of International Economics 54, no. 1 (2001): 75-96.

IBM, IBM Annual Report 2005, ftp://ftp.software.ibm.com/annualreport/2005/2005_ibm_annual.pdf

(accessed Mar. 7, 2006).

IBM, “IBM, PricewaterhouseCoopers Complete Sale of PwC Consulting,” Press Releases, Oct. 2, 2002,

http://www-03.ibm.com/press/us/en/pressrelease/491.wss (accessed Nov. 21, 2005).

Irwin, Douglas A. Comments of James Markusen, “Modeling the Offshore of White Collar Services: From

Comparative Advantage to the New Theories of Trade and FDI.” Brookings Trade Forum 2005:

Offshoring White-Collar Work-The Issues and the Implications.” May 12-13, 2005, Washington,

DC, The Brookings Institution, 2005.

James, Steve, “Peru Royalty Plan Unpopular with Mining Companies,” Reuters, June 3, 2004. 

Jensen J. Bradford and Lori G. Kletzer. “Tradable Services: Understanding the Scope and Impact of

Services Outsourcing.” Working Paper Series, Number WP 05-9. Washington, DC: Institute for

International Economics, 2005.

Jones, Ronald W., and Henryk Kierzkowski. “The Role of Services in Production and International Trade:

A Theoretical Framework,” in The Political Economy of International Trade, Ronald W. Jones

and Anne O. Krueger, eds., 31-48. Cambridge, MA: Basil Blackwell, 1990.

______. “Globalization and the Consequences of International Fragmentation,” in Money, Capital

Mobility and Trade: Essays in Honor of Robert A. Mundell, Rudi Dornbusch and Maurice

Obstfeld, eds., 365-83, Cambridge, MA: MIT Press, 2001.

______. “International Trade and Agglomeration: An Alternative Framework.” Journal of Economics,

(2005).

______, Henryk Kierzkowski, and Chen Lurong. “What Does Evidence Tell Us About Fragmentation and

Outsourcing?” International Review of Economics and Finance, 14 (2005): 305-316. 

Khawar, Mariam, “Foreign Direct Investment and Economic Growth: A Cross-Country Analysis,” 

Global Economy Journal 5, no. 1, 1-11. (2005).

Kirkegaard, Jacob F. Outsourcing-Stains on the White Collar. Washington, DC: Institute for International

Economics, 2004.

Krueger, Anne. Comments on Srinivasan, T.N. “Information Technology Enabled Services and India’s

Growth Prospects.” Brookings Trade Forum 2005: Offshoring White-Collar Work: The Issues and

the Implications.” May 12-13, 2005, Washington, DC, The Brookings Institution, 2005. (accessed 

March 6, 2006). http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm 
B-7

Krugman, Paul and Anthony J. Venerables. “Globalization and the Inequality of Nations,” Quarterly

Journal of Economics, 110 (1995):857-80.

Landes, David S. The Wealth and Poverty of Nations: Why Some are Rich and Some So Poor. New York,

NY: W.W. Norton & Company, Inc, 1999.

Leaming, George. Mining and the American Economy. Marana, AZ: Western Economic Analysis Center,

1999. 

Leshy, John D., “Entitlement to a Mineral Patent Under the Mining Law of 1872,” internal memorandum

to the Director of the Bureau of Land Management, November 12, 1997,

http://www.doi.gov/sol/M36990.pdf. 

London Metal Exchange, Copper - Industry Usage. http://www.lme.co.uk/copper_industryusage.asp

(accessed November 28, 2005).

Mapes, Christopher B. “Major Contraction of the Domestic Refined Copper Industry,” Industry Trade and

Technology Review, USITC Publication 3574. Washington, DC: USITC, December 2002. 

http://hotdocs.usitc.gov/docs/pubs/industry_trade_technology_review/pub3574.pdf.

Markusen James R. “Multinationals, Multi-plant Economies, and the Gains from Trade.” Journal of

International Economics, 16, no.1 (1984): 341-356.

______. “Contracts, Intellectual Property Rights, and Multinational Investment in Developing Countries.”

Journal of International Economics, 53, no. 1 (2001): 189-204.

______. “Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New

Theories of Trade and FDI.” NBER Working Paper Series, Working Paper 11827. Cambridge,

MA: National Bureau of Economic Research, 2005.

McKinsey Global Institute. “Offshoring: Is it a Win-Win Game?” San Francisco, CA, 2003.

______. “The Emerging Global Labor Market.” San Francisco, CA, 2005.

Mann, Catherine L. “Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity

Growth.” International Economics Policy Briefs, 03-11. Washington, DC: Institute for

International Economics, 2003.

“Median Values For Large Cap Transactions in the Mining Industry, Comparing First Half of 2003 versus

First Half of 2004,” http://dealretriever.nvst.com (accessed Nov. 30, 2005).

Metal Bulletin, various issues. Metal Bulletin website. http://www.metalbulletin.com.

Metals Economics Group, “Corporate Exploration Strategies,” in “Exploration Exploding, but U.S. Ranks

Near End,” Mining Week, December 2, 2005.

Nair-Reichert, Usha, and Diana Weinhold, “Causality Tests for Cross-Country Panels: New Look at FDI

and Economic Growth in Developing Countries,” revised 2000, processed.
B-8

National Academy of Public Administration. “Off-Shoring: An Elusive Phenomenon.” A Report of the

Panel of the National Academy of Public Administration for the U.S. Congress and the Bureau of

Economic Analysis, Washington, DC 2006.

National Research Council, Atlantic Salmon in Maine, Committee on Atlantic Salmon in Maine, Board on

Environmental Studies and Toxicology, and Ocean Studies Board (Washington, DC: National

Academies Press, 2004).

Nunn, Nathan. “Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade.”2005. Mimeo,

University of Toronto, Toronto, Canada.

OCO Consulting, "Industry Trends," FDI Quarterly, Qtr 2, 2005, Issue One.

Office of the United States Trade Representative, 2005 National Trade Estimate Report on Foreign Trade

Barriers,

http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_NTE_Report/asse

t_upload_file427_7478.pdf, (accessed Mar. 21, 2006). 

Organisation for Economic Co-operation and Development, OECD Member Countries,

http://www.oecd.org/document/58/0,2340,en_2649_201185_1889402_1_1_1_1,00.html,

(accessed Nov. 27, 2005).

“Pan Fish Abandons U.S. farms,” Intrafish, January 17, 2005. 

Pan Fish, “Results of the Fourth Quarter 2005,” press release, February 14, 2006.

Panagariya, Arvind. “Discussion of Dossani, Rafiq, Globalization and the Outsourcing of Services: The

Impact of Indian Offshoring.” Brookings Trade Forum 2005: Offshoring White-Collar Work-The

Issues and the Implications, May 12-13, 2005, Washington, DC, The Brookings Institution, 2005.

http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm (accessed March

6, 2006). 

Paydirt, December 2005.

Platts Metals Week, various issues.

“Risk-Based Consumption Advice for Farmed Atlantic and Wild Pacific Salmon Contaminated With

Dioxins and Dioxin-Like Compounds,” Environmental Health Perspectives, May 2005. 

“Salmon Farmers Seek Strategy for Taking Profits to Next Level,” Seafood Business Report, June 2001.

Samuelson, Paul A. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists

Against Globalization.” Journal of Economic Perspectives, 18, No. 3 (2004):135-146.

Schultze, Charles L. “Offshoring, Import Competition and the Jobless Recovery.” The Brookings

Institution Policy Brief, no. 136. Washington, DC: Brookings Institution, 2004.
B-9

Srinivasan, T.N. “Information Technology Enabled Services and India’s Growth Prospects.” Brookings

Trade Forum 2005: Offshoring White-Collar Work-The Issues and the Implications, May 12-13,

2005, Washington, DC, The Brookings Institution, 2005.

http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm (accessed March

6, 2006).

Swift, Kevin T., American Chemistry Council, “Guide to the Business of Chemistry 2005,” July 2005.

______. American Chemistry Council, “Year-End 2004 Situation & Outlook, December 2004.

Swiss Import Promotion Programme (SIPPO) and the Centre for the Promotion of Imports from

Developing Countries (CBI), Software, IT Services, and Outsourcing, Aug. 2005.

Tenke Mining Corporation website, http://www.tenke.com/s/CopperCobaltDeposit.asp?reportid=84635 

(accessed May 18, 2006).

Trefler, Daniel. “Offshoring: Threats and Opportunities.” Brookings Trade Forum 2005: Offshoring

White-Collar Work-The Issues and the Implications, May 12-13, 2005, Washington, DC: The

Brookings Institution, 2005.

http://www.brookings.edu/es/commentary/journals/tradeforum/agenda2005.htm (accessed March

6, 2006).

UNCTAD. World Investment Report 2004: The Shift Towards Services. New York, NY: United Nations,

2004.

U.S. Census Bureau, “FT-900: U.S. International Trade in Goods and Services,” October, 2005. 

http://www.census.gov/foreign-trade/Press-Release/ (accessed March 15, 2006). 

U.S. Department of Commerce, Bureau of Economic Analysis, “Direct Investment Positions for 2002:

Country and Industry Detail,” Survey of Current Business, July 2003. 

______. “Direct Investment Positions for 2004: Country and Industry Detail,” Survey of Current Business,

July 2005.

______. Foreign Direct Investment in the United States: Selected Items by Detailed Industry of U.S.

Affiliate, “Direct Investment Position on a Historical-Cost Basis.”

http://www.bea.gov///bea/di/fdilongind.xls (accessed Nov. 21, 2005).

______. Gross Domestic Product by Industry Accounts,

http://www.bea.gov/bea/industry/gpotables/gpo_action.cfm?anon=262&table_id=12752&format

type=0 (accessed Nov. 11, 2005).

______. “Direct Investment: U.S. Direct Investment Abroad,” 

http://www.bea.gov/bea/di/home/directinv.htm (accessed May 12, 2006) 

______. “Foreign Direct Investment in the United States: Balance of Payments and Direct Investment

Position Data,” http://www.bea.gov/bea/di/fdi21web.xls (accessed May 12, 2006)

______. “Foreign Direct Investment in the United States: Detail for Historical-Cost Position and Related

Capital and Income Flows, 2002,” Survey of Current Business, September 2003. 
B-10

______. “Foreign Direct Investment in the United States: Detail for Historical-Cost Position and Related

Capital and Income Flows, 2004,” Survey of Current Business, September 2005.

______. “Foreign Direct Investment in the United States: Financial and Operating Data for U.S.

Multinational Companies, “All Foreign Affiliates - Selected Data by Country 1999-2003.”

http://www.bea.gov/bea/di/di1fdiop.htm, accessed March 21, 2006.

______. “U.S. Direct Investment Abroad: Detail for Historical-Cost Position and Related Capital and

Income Flows,” 2002, Survey of Current Business, September 2003. 

______. “U.S. Direct Investment Abroad: Detail for Historical-Cost Position and Related Capital and

Income Flows, 2004,” Survey of Current Business, September 2005.

______. “U.S. Direct Investment Abroad: Financial and Operating Data for U.S. Multinational

Companies,”All Foreign Affiliates - Selected Data by Country 1999-2003.

http://www.bea.gov/bea/di/usdop/all_affiliate_cntry.xls (accessed March 21, 2006).

______. U.S. Direct Investment Abroad: Industry Detail for Selected Items, “Direct Investment Position

on a Historical-Cost Basis,” http://www.bea.gov///bea/di/usdindy/longindy.xls (accessed Nov. 21,

2005).

______. “U.S. Multinational Companies: Operations in 2003,” Survey of Current Business, July 2005.

U.S. Department of Commerce. National Marine Fisheries Service, National Oceanic and Atmospheric

Administration,“Fisheries of the United States 2004,” Nov. 2005. 

U.S. Department of State, “2005 Investment Climate Statement: France,” 

http://www.state.gov/e/eb/ifd/2005/42036.htm (accessed Nov. 27, 2005).

______. “2005 Investment Climate Statement: Ireland,” http://www.state.gov/e/eb/ifd/2005/42063.htm

(accessed Nov. 27, 2005).

U.S. Geological Survey, Minerals Information. “Copper 2004,” Mineral Commodity Summaries, 2006.

http://minerals.usgs.gov/minerals/pubs/commodity/copper/coppemcs06.pdf.

______. Minerals Information. “The Mineral Industry of Canada,” Mineral Commodity Summaries, 2006.

http://minerals.usgs.gov/minerals/pubs/country/2003/camyb03.pdf.

U.S. Government Accountability Office. International Trade: Current Government Data Provided Limited

Insight into Offshoring of Services. Report to Congressional Requesters, GAO-04-932.

Washington, DC, 2004.

______. Offshoring of Services: An Overview of the Issues. Report to Congressional Committees, GAO06-5. Washington, DC, 2005.

U.S. International Trade Commission, The Dynamic Effects of Trade Liberalization: An Empirical

Analysis, Publication 3069. Washington, DC: USITC, 1997.

______. The Economic Effects of Significant U.S. Import Restraints: Third Update 2002, Publication 3579.

Washington, DC: USITC, 2002.
B-11

______. Examination of U.S. Inbound and Outbound Direct Investment, Publication 3383. Washington,

DC: USITC, 2001. 

______. “Fresh and Chilled Atlantic Salmon from Norway,” Inv. Nos. 701-TA-302 and 731-TA-454

(Final), Publication 2371. Washington, DC: USITC, April 1991.

______. “Fresh and Chilled Atlantic Salmon from Norway,” Inv. Nos. 701-TA-302 and 731-TA-454

(Second Review), Publication 3835. Washington, DC: USITC, January 2006. 

______. Recent Trends in U.S. Services Trade: 2004 Annual Report, Publication 3703. Washington, DC:

USITC, 2004. 

______. U.S. Trade and Investment with Sub-Saharan Africa: Third Annual Report. Publication 3552.

Washington, DC: USITC, 2002. 

______. U.S. Trade and Investment with Sub-Saharan Africa: Fourth Annual Report. Publication 3650.

Washington, DC: USITC, 2003. 

______. U.S. Trade and Investment with Sub-Saharan Africa: Fifth Annual Report. Publication 3741.

Washington, DC: USITC, 2004. 

Van Arnum, Patricia, “U.S. Faces Rising Pharmaceutical Trade Deficit,” Chemical Marketing Reporter,

December 8, 2003

Vernon, Raymond. “International Investment and International Trade in Product Cycle,” Quarterly

Journal of Economics, 80, no. 2 (1966):190-207. 

Watkins, Ralph and Audry Tafoya. “Production-Sharing Update: Developments in 2003.” Industry Trade

and Technology Review, Office of Industries, U.S. International Trade Commission, Publication

3762, December/January, (2005):9-34.

Wolfl, Anita. “The Service Economy in OECD countries.” STI Working Paper 2005/3, Statistical Analysis

of Science, Technology and Industry, DSTI/DOC(2005)3, Paris: OECD, 2005.

World Bank,”World Development Indicators. http://devdata.worldbank.org/dataonline (accessed May 12,

2006).

______. GNI per capita 2004: Atlas method and PPP.

http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf, (accessed

November 17, 2005).

______. Data & Statistics - Country Classification.

http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20420458

~menuPK:64133156~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html (accessed

November 27, 2005).

______. The World Bank Annual Report 2003. http://www.worldbank.org/annualreport/2003/pdf/v1.pdf

(accessed May 11, 2006).

World Bureau of Metal Statistics. World Metal Statistics 59, no.4 (2006): 37–44.
B-12

World Trade Organization, World Trade Report 2005.

http://www.wto.org/English/res_e/booksp_e/anrep_e/wtr05-3c_e.pdf (accessed May 11, 2006).

Yi, Kei-Mu. “Can Vertical Specialization Explain the Growth in World Trade?” Journal of Political

Economy 111, no. 1 (2003): 52-102.