Real Foreign Investment in Perspective

Abstract

Much concern regarding recent negative net foreign investment of the United States is misguided. It has frequently reflected misunderstanding of the nature of foreign investment and of misleading official measures. The extent of negative net foreign investment and, all the more so, its sum over the years, which is the presumed debt of the United States to the rest of the world, have been exaggerated. Correctly measured, which means taking into account changes in the value of the U.S. assets abroad that are usually ignored, they are not and do not threaten to be large relative to total income and wealth. Net foreign investment in the long run reflects relative growth and portfolio choices among nations. If the monetary authority does not prevent the fall of interest rates and exchange rates, rates of foreign investment can be expected, within a reasonable time, to be self-adjusting. They will then reflect underlying preferences and economic forces, interference with which is likely to do more harm than good.

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References

1. The BEA points out that the total “net international position” figures have been based on “summations of components that reflected a mix of valuations” that do “not provide a useful indicator of the...net position and of the total positions abroad and in the United States.” It indicates that it is “reviewing...approaches to revaluing direct investment to reflect current-period prices and will present estimates using one or more of them. BEA will also revalue other components of the position to the extent that is appropriate and feasible.”Survey of Current Business, June 1990, p. 54.

Michael Ulan and William G. Dewald , “The U.S. Net International Investment Position,” in Dollars, Deficits and Trade, ed. James A. Dorn and William A. Niskanen (Boston: Kluwer Academic, 1989).

3. To formalize this relation, let a = foreign investment in the United States as a percentage of foreign GNP, let b = U.S. investment abroad as a percentage of U.S. GNP, let Y = GNP, let g = the growth rate of GNP, and let the superscripts f and us denote foreign and U.S., respectively. We can then write U.S. net foreign investment as a percentage of U.S. GNP as NFI = bg^us - ag^fY^f/Y^us .

4. This assumes that the negative net international investment position is in the form of debt, not equity. If the negative international investment position is in the form of equity, its equilibrium ratio to GNP will equal minus the net foreign investment ratio divided by the real growth rate. The debt assumption is more likely to hold in practice; in 1989 the U.S. net international investment position on equity items was a positive $175 billion.

5. By a broader measure, including the claims to human as well as financial capital, increases in the total net wealth of the United States may be all the more understated.