Foreign Direct Investment Inflows and the US Economy: An Empirical Analysis

Over the last two decades, the U.S. has attracted more inflows of foreign direct investment (FDI) than any other country. General indications have pointed to FDI inflows as being a positive contributing factor to key US macroeconomic indicators. This study examines two categories of macro variables over the period 1980-2003. First, various employment and wage measures of the US affiliates of foreign firms are analyzed. The results show a rising share of the American labour force as being employed by these affiliates, and that FDI inflows favour high-wage industries and sectors. Second, regression estimates confirm the existence of a positive and significant relationship between FDI and US economic growth rates. In light of the expected rise in economic interdependence among countries, it is becoming increasingly critical for the U.S. to maintain its living standards and advantages vis-a-vis others through sustained economic growth. The findings reported here imply that, as an economy lacking enough domestic savings and running ever-rising current account deficits, it is imperative for the U.S. to continue to attract foreign capital, especially FDI.