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Foreign Investment in the United States


FOREIGN INVESTMENT IN THE UNITED STATES. From colonial times to the early 2000s, investments from abroad contributed to the economic life of the American nation. The earliest investment was that of the Virginia Company, which in 1607 provided the basis for the English settlement in Jamestown, Virginia. The company's stockholders remained in London and hoped that the settlers would enrich them by discovering gold and silver. After several reorganizations, the Virginia Company came to an end in 1623 and was formally dissolved the next year. It was replaced by a Crown colony.

The years between the settlement of Jamestown and the Declaration of Independence witnessed many other transatlantic investments, made by chartered trading companies, merchant investors, and investors in land, mining, and even manufacturing. On the eve of the Revolution, British mercantile houses played an important role in American trade. British nonresident or temporarily resident owners dominated shipping except from New England. British navigation laws notwithstanding, Dutch and French traders also had outlets in America and engaged in commerce. British absentee land ownership was substantial. By 1776, however, most infant industries in America were small-scale and domestic, despite some large British involvements in the iron industry.

During the Revolution the assets of British loyalists (resident and nonresident) were confiscated. Later there were two sets of compensation, one for British direct investments in land and other assets and the second for commercial debts. The latter were far larger in monetary value. Excluding the commercial debts, investments from abroad came to roughly £1.1 million. If the aggregate physical wealth of the thirteen colonies is estimated at £110 million, this would equal a mere 1 percent of colonial wealth. Were the commercial debt included, the sum would rise to under 4 percent. Investments from abroad would rise in percentage, as well as in absolute terms, in the postcolonial era.

Prior to the revolution, British investments were all "direct investments," using modern terminology. "Direct investments" are those that carry with them some influence or element of control. These are to be differentiated from "portfolio investments," which are purely financial interests. Foreign investment always refers to investment by nonresident foreigners.

Pre-Civil War Investments from Abroad

The American Revolution brought political but not economic independence. To finance the Revolution, Americans turned to France, Spain, and Holland. By 1789, "foreign debt" (denominated in foreign currencies) came to 22 percent of the total federal debt. If domestic debt (denominated in U.S. dollars) and debt held abroad are included, 29 percent of U.S. federal government obligations was to foreign investors. In addition, substantial foreign investments existed in state debts, as well as in equity interests in certain American businesses (for example, in the Bank of North America, the nation's first bank).

In 1789, Dutch investment in the United States was the largest of any single nationality. This would not be true for long. By 1803, if not earlier, British investment in the United States exceeded Dutch. From this point on, British investment in the United States remained the largest of any single nationality. In 1803, some 56 percent of the U.S. federal government debt was in foreign hands, up substantially from 1789, and now with sizable British holdings. Although British investments were the greatest, there continued to be investments in varying amounts from the European continent, particularly Dutch and, to a lesser extent, French holdings.

There exist detailed estimates of 1803 foreign investments in the United States (provided by Samuel Blodget, writing in 1806). These show that 62 percent of the stock of the Bank of the United States and 35 percent of stock in state banks were held by foreigners in 1803. Roughly 5 to 6 percent of the stock in insurance, turnpike, and canal companies was owned by nonresident foreigners. These were "portfolio" investments—that is, financial interests. In addition, nonresident foreigners invested in trading activities, as merchant investors, as well as in land. Thus, in the decades after the Declaration of Independence, foreign investors were especially important in financing the Revolution, providing a market for federal debt, and aiding in the establishment of nation's banking institutions.

As the American nation took shape, the contribution made by foreign investment took on new characteristics. Whereas in 1803, 56 percent of the U.S. federal debt was held abroad, by 1853 this was down to 46 percent; and the federal debt itself was much smaller. The proportion of debt held abroad ebbed and flowed, but by 1853, foreign investment in the U.S. federal debt represented only about 12 percent of the total inward foreign investment.

Far more significant were the foreign holdings of state government debts. There had been a dramatic surge in foreign investment in state debt starting in the late 1820s, and peaking in the late 1830s, before the major defaults of the early 1840s. In an era when communications were still slow, foreign investors were highly reluctant to invest in private companies of which they knew little. They were more willing to invest in state government securities. As a result, American state governments turned abroad to fund their banking and transportation industries. In the early 1840s, with many of these state debts in default, there were cries of outrage abroad at American perfidy. Nonetheless, in 1853, the largest foreign investments in the United States remained in state debts. That year, state debts constituted about half of the total foreign investments in the United States. Some 58 percent of American state government debt was held abroad. Foreign investment in land, banking, and transportation continued. When Andrew Jackson vetoed the renewal of the charter of the Second Bank of the United States, one reason was the heavy foreign investment. The veto changed American banking history. In the 1830s, railroads began to attract a growing amount of funding from abroad. By the early 1850s, railroad bonds had already become a substantial part of the foreign investment in the United States. These bonds were backed by mortgages on the railroads themselves. British companies had arranged to sell iron rails in the United States, but because the railroads would not earn money until they became operational, the rail sellers accepted bonds as payment. British merchant bankers created a market for the bonds. The bonds were sold not only in Britain, but in Holland and, to a lesser extent, elsewhere on the European continent. In 1853, a survey indicated that some 26 percent of American railroad bonds issued were held abroad. That year railroads represented about a quarter of the inward foreign investment in the United States.

The investments in federal, state, and railroad bonds, as well as in the Second Bank of the United States, were all "portfolio" investments (financial interests). At the same time foreigners also made direct investments, those that carried management and control. Throughout the first half of the nineteenth century, there were trade related foreign investments, by trading firms. In the 1820s Scottish and English manufacturers began to appoint their own agents for the first time and even sent salaried men to sell in the United States. Yet not until the 1850s were there significant sales networks by foreign manufacturers in the United States. From the early nineteenth century onward, British insurance companies made direct investments in the United States, typically in providing fire and marine insurance.

The discovery of gold in California in 1848 turned new foreign attention to the United States and influenced foreign investment patterns, stimulating new investments from Europe in everything from gold mining companies to transportation facilities. By the 1850s Americans were talking about (although not yet building) transcontinental railroads.

From the Civil War to World War I

During the Civil War, the South was able to float a large loan to the Confederacy, backed by investors in England and on the European continent. By contrast, the North depended mainly on domestic finance. Banking houses in the North developed expertise while raising large sums to finance the war. This expertise was later used in cooperation with British and other foreign financial institutions to draw huge sums of foreign capital to American railroads. After the war, some of the Northern federal government debt also drifted abroad. In fact, until roughly 1875, public sector securities—state as well as federal—got the largest share of inward foreign investment. Thereafter, the bulk of the foreign investment in the United States went to the private sector.

Foreign capital poured into the United States in the period from the mid-1870s to 1914, the so-called first time of globalization. As the world's largest recipient of foreign capital, the United States was the world's greatest "debtor nation." Foreign capital contributed in a very positive fashion to the economic growth of the country. The greatest part went into building American railroads. The investments were no longer linked with the import of iron rails. Now, there was a market in London and Amsterdam (and in Paris and Frankfurt) for American railroad securities. The foreign investments were both in new issues and traded securities. The amounts were awesome. In London, a section of the stock market was set aside for American "rails." The huge amount of funding required to construct the American transcontinental railroad system was provided by international sources. Every student of economic development reads of "capital shortages," but this was not an issue in American economic growth. Readily available foreign capital complemented domestic capital. American entrepreneurs established the railroad systems using foreign finance.

There were also inward portfolio investments in other corporate securities, especially in such giant enterprises as United States Steel Corporation. As of 14 June 1914, one quarter of U.S. Steel's shares were held abroad; but these securities were widely held and did not represent in any way "foreign control" over America's largest steel company.

More important than the portfolio investments in America's new and big businesses were the many inward foreign direct investments (FDI). In the late nineteenth and early twentieth centuries, inward FDIs were prevalent. The FDI took two forms. First, there were "freestanding companies," companies set up in a source of capital country (such as Britain, France, or Holland) that invested abroad and transferred management with the investment. In the United States, these numerous companies were involved in mining, cattle raising, meatpacking, breweries, and mortgage lending. Second, there were the companies headquartered in Britain, Germany, Switzerland, and elsewhere that did business at home, developed new products and processes and unique trademarks, and integrated economic activities. Then with their internalized knowledge and advantages they moved abroad not only to the United States but to other countries as well. Companies such as Lever Brothers, the big German chemical companies, Nestlé, Shell, and many others established themselves in the United States before the start of World War I.

Although American industry developed principally as a domestic activity, it was far from exclusively domestic. Indeed, in a few industries, from thread to rayon, foreign companies were the first movers. Rayon, the pioneer synthetic fabric, was a new "high tech" industry before World War I and the British company Courtaulds was the only significant producer in the U.S. domestic market. German dyestuffs companies sold and to a small extent manufactured in the United States; they took out numerous significant U.S. patents and registered their trademarks. The British Marconi company led in wireless telegraphy in the United States and worldwide. The German Telefunken built radio towers in America. Foreign multinational enterprises had a significant presence in "high tech" innovative activities. They presented branded, trademarked goods.

World War I, the Inter-War Years, and World War II

During World War I, America was transformed from a "debtor" to a "creditor" nation. On the eve of World War I, some $7 billion in foreign investment was present in the United States, while U.S. investments abroad totaled $3.5 billion. This meant that the United States had larger obligations to foreigners than foreigners had to it, the definition of a debtor nation. At the end of World War I inward foreign investment was actually lower than in 1914, while U.S. investments abroad had surged. America had become a creditor nation—a status it would continue to hold until the late 1980s. Yet all the time the United States was a creditor nation, inward foreign investment was present, following an uneven course.

During the war years, inward foreign investment dropped for a number of reasons. First, Europeans sold American securities to finance their own war effort. Second, after U.S. entry, an Alien Property Custodian took over "enemy" (principally German) assets in the United States. Nonetheless, many inward foreign investments remained. British direct investments in the United States were untouched by the British government mobilization of "American securities." British insurance companies continued as significant participants in providing American fire and marine insurance.

In the immediate aftermath of World War I, the United States placed new restraints on foreign direct investment. Americans believed it was inappropriate to have the new radio industry under foreign control. The U.S. government encouraged the formation of Radio Corporation of America to take over the assets of Marconi, the British controlled company that had innovated in radio communications. With Prohibition, the large British investments in breweries came to an end. The Mineral Lands Leasing Act of 1920 put restrictions on the ability of foreign oil companies to lease public land if their nations did not give Americans reciprocal rights.

After 1923, inward foreign investment in the United States rose. And as American lending and outward foreign direct investments expanded globally, inward foreign portfolio and direct investments also mounted. Inward investments were far overshadowed by the large outward U.S. foreign investments. The crash of 1929 meant sizable losses for foreign, as well as domestic, investors in Wall Street. As the world economy collapsed after the panic of 1929, capital export restrictions multiplied in Europe. But by 1933 liquid monies from all over the world flowed into America for safety from the unsettled conditions around the world. The monies went into corporate securities, equities rather than bonds. Railroads were passé and the position of railroad securities in the portfolios of foreigners shrunk. The new monies coming into the United States during the 1930s alarmed Americans, who feared that monies that flowed in would just as rapidly flow out, upsetting a fragile stock market and the fragile recovery path of the American economy. Investments were no longer associated with "new issues." Instead they were typically traded securities.

Throughout the inter-war period foreign multinational enterprises regularly entered and exited the United States. Some German direct investors restored operations that had been taken over during World War I. By 1929 some German companies were taking on a more impressive role in America than before the war, introducing new technology and developing vast multiproduct, multiproduction, and distribution networks. Some foreign investors disguised their transfer of capital into the United States. They did this for tax reasons, to avoid their home nations' capital export restrictions, and to be able to escape U.S. takeover in the event of another war. This last reason was applicable specifically to German investments. Some multinational companies that had started to manufacture in the United States before World War I persisted through the war and the 1920s, but could not survive the adverse conditions following the 1929 crash. Michelin, for example, exited in 1930. On the other hand, Dunlop, a newcomer to tire manufacture in the United States in the 1920s, managed to stay on (losses notwithstanding). In the 1930s, with adverse political and economic conditions in Europe, in relative terms Canadian investors became more important in the United States. Canadian brokers had long traded on behalf of their nationals on the New York Stock Exchange. With the end of Prohibition in 1933, the Canadian company, Seagrams was able to enter the United States, becoming by 1937 the leading whiskey producer in the country.

With the outbreak of war in Europe in 1939, the British once again sought to mobilize American securities to obtain dollars. Under U.S. pressure, British direct investment also became vulnerable. During 1940 and 1941, Americans introduced foreign fund control regulations, freezing a large portion of the sizable foreign assets in the country (British and Canadian assets were exempted). In 1941 a U.S. Treasury Department census of foreign investment in the United States was conducted. The size of foreign direct investments was far larger than the U.S. Department of Commerce, which had been reporting on the subject, had estimated.

During the period that the United States was at war, German direct investments were once again sequestered by the Alien Property Custodian. British investments in the United States declined further. At war's end, however, there still remained foreign investments in the United States.


From the end of World War II through the 1960s, U.S. investment abroad far surpassed foreign investment in the United States. America led the world in investment abroad. The aftermath of the war saw the final exit of some of the nineteenth century inward foreign investments that had been linked with the opening up of the West (gone were the cattle ranches and the mortgage lenders). On the other hand, British investment trusts gradually resumed their American investments. The British insurance companies survived intact and continued on. Lever, Shell, and Seagrams maintained their business, as did Swiss multi-national enterprises such as Ciba, Sandoz, Geigy (as of 1996 combined into Novartis), and Hoffmann-La Roche.

In the 1960s, as the American balance of payments worried American public policymakers, the United States began to consider encouraging inward foreign investment.


Between 1973 and 1989, inward foreign investments in the United States (both portfolio and direct investments) rose steadily and rapidly. In 1973 and 1974, the Organization of Petroleum Exporting Countries (OPEC) raised the price of oil. The result was "a transfer of wealth," and surpluses were reinvested in the United States. Americans expressed alarm that the Arabs were taking over America. Likewise, Japan, which had witnessed spectacular growth rates at home in the 1950s and 1960s, emerged as a major actor on the world stage in the 1970s and 1980s, precipitating serious debates in the United States over a Japanese economic invasion. Foreign investment in the United States suddenly became a subject of major consequence with a proliferation of government hearings, books and articles attempting to reevaluate the position of the United States in the international economy.

The Arab investment was mainly of a portfolio nature. While unprecedented, it never represented more than a small portion of the inward foreign investment. The first wave of Japanese investments were direct investments. Then, in December 1980 the Japanese passed a Foreign Exchange Control Law that sharply reduced Japanese restraints on capital outflows. After this occurred, and when the yen strengthened against the dollar, there were sizable Japanese portfolio as well as the direct investments in the United States. The Japanese had long invested in the United States, but in small amounts. As late as 1976, Japanese direct investment in the United States never exceeded 4 percent of the total inward foreign direct investment. After 1976 the share rose annually. Soon Japanese direct investment in the United States was second only to that of the British. By 1989, Japanese direct investment represented roughly 17 percent of the total foreign direct investment in the United States. Japanese investments flowed into the electronics industry—into consumer products (TV production, for example) and producer ones (semiconductor manufacturing, for instance). By 1989 and 1990, Sony and its rival, Matsushita, were participants in $4.8 to $6.6 billion takeovers of American icons in Hollywood. This was all without precedent. And then there were the Japanese car companies: Honda built its first car at Marysville, Ohio, in 1982. Nissans, Toyotas, Mazdas came to be made in America, with production methods different from those used by the top three U.S. auto manufacturers. Ultimately, the American consumer got better quality cars not only from the Japanese, but from American producers as well. The Japanese also entered into American banking. By 1988, U.S. affiliates of Japanese banks and bank holding companies held 10.1 percent of U.S. banking assets. The Japanese became active in American government securities markets. The Japanese companies Nomura Securities, Daiwa Securities, Nikko Securities, and Yamaichi Securities served as primary dealers in the buying and selling of U.S. Treasury bonds.

The Japanese investments were large and conspicuous, and to many Americans seemed threatening. Yet they never surpassed those of the long-standing and also growing British investments. The Dutch were also important investors. But the relative position of Canadian investors shrunk as European and Japanese investment in America soared. With the vast influx of foreign investment in the late 1980s, the United States once again became a debtor nation in world accounts. It had been in this role before 1914, when foreign investment contributed mightily to American prosperity.

From 1990

The United States continued to be a debtor nation in world accounts, attracting more long term inward investments than it made outward investments. Both inward foreign portfolio and direct investments continued to grow, in an uneven manner to be sure. America's debtor nation status was not identical to that of many developing nations. By this time all America's foreign obligations were in its own currency, the dollar.

With some rare exceptions, America's foreign obligations were denominated in U.S. dollars throughout the post–World War II decades. The nature of America's foreign obligations in the 1990s, however, contrasted sharply with that of the period 1973 to 1990. In the 1990s foreign portfolio investments flowed into the United States on three streams, one that took advantage of rising stock market prices, another that went into federal government securities, and a third that blended with the easy movement of monies over borders. Mutual funds and investment companies multiplied, providing advice to foreigners on U.S. investments. Foreign pension funds invested in America. The American government imposed no barriers to foreign capital inflows into U.S. securities (there had never been any previously, but now it was much easier to make investments). Around the world restrictions on capital flows fell and the United States seemed an immensely attractive place to make investments. Prosperity in America in turn attracted further inward foreign portfolio investments.

As for foreign direct investment, foreign multinational enterprises in the early 1990s absorbed and rationalized their new businesses after the surge of mergers and acquisitions in the late 1980s. Many bad investments had been made but the United States was too critical a locale for foreign multinationals to neglect. After a brief slowdown, inward foreign direct investment resumed. Foreign direct investments stimulated changes in the domestic banking sector, opening the way to interstate banking. With deregulation, other long-standing barriers to foreign direct investments came tumbling down. The Federal Communications Commission's decision in April 2001 to allow Deutsche Telekom's takeover of Voice-Stream represented an openness and a legal interpretation very much at variance with past policies.

Poor returns and bad investments by foreigners did not deter new entries in the 1990s and 2000–2001; by the late 1990s huge cross border mergers and acquisitions were occurring, with dollar sums that staggered the imagination. The new investments were different from prior ones. In the 1990s, with Internet and electronic transfers, the world economy became truly "global." Many authors pointed out that it was globalization comparable to that before 1914. Yet the speed with which new technologies allowed monies to move from one stock market to another was without precedent. As the computer came of age, multi-national enterprises restructured, down-sized, and then expanded, and new products and processes proliferated.

At the start of the twenty-first century, the promise of new telecommunications and Internet industries, the "dot-com bubble," brought foreign capital to the United States in large amounts. In the 1990s, the Japanese economy had faltered; the Japanese "Big Bang" (its much heralded financial deregulation in April 1998) did little to aid its economy. The Japanese had not invested wisely in America. This was particularly true of their spectacular investments in the movie business, in California golf courses, and in Rockefeller Center in New York, but it was also true of a range of other investments. By 2000, Japanese investment in the United States was no longer at front stage. Yet, as a consequence of Japanese entries in the 1970s and 1980s, American industry had become more competitive and stronger. In the late 1990s, U.S. affiliates of foreign companies accounted for roughly 6 percent of U.S. private industry gross product and slightly less than 4 percent of civilian employment; on the other hand, they accounted for about 20 percent of American exports and 30 percent of America's foreign trade.

When the long-standing U.S. budget deficit turned to a surplus at the advent of the twenty-first century, the International Monetary Fund examined the global financial implications of a shrinking supply of U.S. Treasury securities. Throughout the years foreign investors bought these U.S. obligations, confident that in a high risk world they would never go into default. The inward investments in U.S. Treasury bonds had fluctuated over the years, but throughout the 1970s, 1980s, and 1990s, they were attractive to investors from around the world. In April 2001, some 22 percent of U.S. Treasury securities were held abroad.

At the start of the twenty-first century, the United States was deeply involved in the world economy. Foreign financial institutions had large commitments in the country and mergers of companies outside the United States affected conditions at home. Business was thoroughly international. As the North American Free Trade Agreement (NAFTA) and the European Union evolved, and as the euro was introduced, foreign multinational enterprises engaged in sizable amounts of truly international intracompany trade. Such trade within multinational enterprises was far more important than arms length transactions, trade between otherwise independent buyers and sellers. When the dot-com bubble burst, foreign investors (along with domestic ones) were affected.


Throughout its history the United States has attracted investments from abroad—both financial ones (portfolio investments) and direct investments (investments by multinational enterprises). The nation has had restrictions of various sorts on the inward foreign investments; overall, however, the United States allowed inward foreign investments. Exceptions that had long existed in sectors such as wireless communication were disappearing in 2001.

Not only have foreign investors been attracted by American prosperity, they have also contributed to it, not only with capital, but more importantly, by being conduits for new technologies and ideas, and by stimulating a competitive vigor within the United States. The impact of foreign multinational enterprises has been far greater than the macroeconomic percentages suggest. Indeed, it is hard to imagine that the 1990s would have been so prosperous for the United States without this global competition, which was expressed not so much in trade, but in foreign direct investment. Globalization has perils; it creates vulnerabilities. American stock markets have experienced extraordinary volatility. Yet both inward foreign direct and portfolio investments had more benefits than costs.


Adler, Dorothy R. British Investment in American Railways, 1834– 1898. Charlottesville: University Press of Virginia, 1970.

Davis, Lance E., and Robert E. Gallman. Evolving Financial Markets and International Capital Flows: Britain, the Americas, and Australia, 1865–1914. Cambridge, U.K.: Cambridge University Press, 2001.

Graham, Edward M., and Paul R. Krugman. Foreign Direct Investment in the United States. 1st ed., 1989; 2d ed., 1991; 3d ed., Washington, D.C.: Institute for International Economics, 1995.

Faith, Nicholas. The Infiltrators: The European Business Invasion of America. London: Hamish Hamilton, 1971.

International Monetary Fund. IMF Survey. Washington, D.C.: International Monetary Fund, 1972–2002.

Jackson, W. Turrentine. The Enterprising Scot: Investors in the American West after 1873. Edinburgh: Edinburgh University Press, 1968.

Jenks, Leland H. The Migration of British Capital to 1875. New York: Barnes and Noble, 1973.

Jones, Geoffrey, and Lina Gálvez-Muñoz, eds. Foreign Multi-nationals in the United States. London: Routledge, 2002.

Kerr, William G. Scottish Capital on the American Credit Frontier. Austin: Texas State Historical Association, 1976.

Lewis, Cleona. America's Stake in International Investments. Washington, D.C.: Brookings Institution, 1938.

Lipsey, Robert. "Foreign Direct Investment in the United States: Changes over Three Decades." In Foreign Direct Investment. Edited by Kenneth A. Froot. Chicago: University of Chicago Press, 1993.

Spence, Clark C. British Investments and the American Mining Frontier, 1860–1901. Ithaca, N.Y.: Cornell University Press, 1958.

Veenendaal, Augustus J., Jr. Slow Train to Paradise: How Dutch Investment Helped Build American Railroads. Stanford, Calif.: Stanford University Press, 1996.

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Wilkins, Mira. "The Free-Standing Company, 1870–1914: An Important Type of British Foreign Direct Investment." Economic History Review, 2d ser., 41 (May 1988): 259–282.

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See alsoBanking .

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Foreign Investment in the United States (Issue)


Since World War II (19391945), and especially in the 1950s and 1960s, the United States dominated world-wide foreign investment. But with the advent of the energy crisis and the oil shortages in the early 1970s the situation was reversed. The United States became the recipient of large investments from Great Britain, the Netherlands, and especially Japan. Although the 1980s witnessed unusually rapid growth in worldwide foreign direct investment, from approximately $55 billion in 1980 to $137 billion in 1987, world output rose by only 20 percent and the volume of world trade by 28 percent. During the 1980s the United States became the largest recipient of foreign direct investment and Japan became the leader in direct investment abroad. Since 1985 foreigners, especially the Japanese, have increased their acquisitions in the United States or have expanded or established businesses in the United States.

The reasons for this surge in investments were varied and complex. Some foreign companies felt they must have a position in the U.S. market, which was still the richest and largest consumer market in the world. U.S. political stability and the appreciation of foreign assets made U.S. assets relatively attractive and cheap. For example, Mitsubwashi purchased Rockefeller Center in downtown Manhattan (New York) for approximately $850 million, a fraction of what a similar piece of real estate in downtown Tokyo would have cost. In addition the lure of overseas profits pushed many multinational companies into staking out international claims. Exporting countries could frequently work around other countries' protective legislation by establishing factories within that country's borders. Honda, a case in point, now produces more cars in the United States than it does in Japan.

Another attractive feature for foreign investment was that the new global economy emphasized consolidation and bigness. Mergers and acquisitions occurred six times more frequently in the United States than in foreign counties. Mammoth deals in pharmaceuticals, media, and food industries helped set a new record of $144 billion for the combined value of the fifty largest annual acquisitions and mergers in 1989. Moreover the scientific, industrial, managerial, marketing, financing, advertising, insurance, and especially research and development systems in the United States had all developed and matured to make the United States very attractive for investors.

Foreign investment in research and development experienced especially explosive growth. From 1987 to 1995 investment in research and development rose from $700 million to more than $17 billion. In addition to investment foreign companies by the end of the 1990s employed more than 150,000 U.S. citizens in research and development activities at hundreds of research laboratories and manufacturing facilities across the country. The growing presence of foreign companies conducting research and development in the U.S. reflected a fundamental trend in the world economy, the globalization of innovation. Multinational enterprises had long operated international networks of manufacturing plants, but during the 1990s these multinational companies added a new dimension to their activitiesan increasing capacity for research and development and innovation in various locations outside their home countries.

In addition to the debate over foreign investment in general, the relatively new phenomenon of foreign-owned, U.S.-based research and development programs also provoked controversy. Proponents believed foreign-owned laboratories contributed to the U.S. science and technology base, and that the government should encourage their development. Critics however argued that the facilities were merely skeleton research operations designed to monitor the U.S. research scene, or even pirate ideas developed within U.S. borders. Part of the controversy stemmed from the startlingly rapid growth of foreign research and development programs. Until recently most multinational companies conducted virtually all of their research and development at home. The 1990s however saw an explosion of international research and development activities by large multinational firms. The magnet that drew research and development to the United States was talent. Companies opened labs in the United States to gain access to world-class researchers. (Thus, the proximity of many labs to major research universities, which were regarded as a key source of commercial innovation.) The NEC Research Institute, for example, was able to recruit renowned computer scientists partly because it was adjacent to Princeton University. When Canon established a research center for work on optical character recognition, image compression, and network systems, the company chose Palo Alto to be close to Stanford University and Xerox's famed Palo Alto Research Center. Mitsubwashi Electric Research Laboratory, which conducted research and development on a range of information technology including computer vision, was next door to MIT.

In the automotive industry foreign laboratories geared their work to supporting U.S. manufacturing plants and customizing products for the U.S. market. Nissan Design International's close ties to the U.S. market enabled them to realize that Nissan could attract U.S. car buyers by adding a stylish body to a pickup truck platform. The result, the Pathfinder, launched the sport utility craze and transformed the entire automotive market.

While the funding for these research labs came from abroad, the style of work in them was very U.S.oriented. Offshore companies generally recognized that to recruit and retain U.S. researchers required adoption of a U.S. style of management. In this respect these labs differed markedly from foreign-owned manufacturing facilities. Japanese companies that ran U.S. factories, for example, typically sought to transfer and transplant to their U.S. facilities manufacturing practices honed at home. On the other hand foreign laboratories in the United States were organized much like leading research centers of U.S. universities. These labs encouraged scientific and technical staff to work autonomously and publish widely. They sponsored visiting scholars and hosted seminars and symposia.

But critics saw a threat to U.S. technological leadership by giving international companies easy access to U.S. technology. For them foreign research and development facilities were skeleton operations designed to monitor and pirate U.S. ideas. They believed that federal policymakers should tilt the rules of innovation to benefit U.S. companies over foreign competitors, or develop rules and regulations that reward "good" U.S. companies (those that invest in the United States) over "bad" ones (those that invest abroad). Proponents of foreign investment counter this argument and believe that although such policy proposals were well-intentioned and sought to protect U.S. investments, they were completely out of touch with the reality of a global system of innovation. According to proponents of foreign investment, financing of U.S. research and development by foreign corporations strengthened U.S. science and technology, especially when government and private sponsorship of U.S. research was being cut back. Proponents also pointed out that these labs churned out patents at rates that exceeded those of U.S. industrial research and development. They also argued that foreign laboratories also added considerably to the stock of new scientific and technical knowledge by reporting their findings in scientific and technical journals. They claimed that they published an average of 10 journal articles per 100 scientists and engineers per year, better than the rate for industrial research and development by U.S.-owned companies.


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Nawasbitt, John. Megatrends 2000. New York: Morrow, 1990.

Porter, Michael. The Competitive Advantage of Nations. New York: The Free Press, 1990.

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