Investments in the United States

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Investments in the United States

Introduction

Increase in a country’s level of national income is dynamics relating to the volume of aggregate products produced in a particular country during a certain financial year. Typically, economic growth is measure in terms of the Gross Domestic Product. The Gross Domestic Product can be defined as the total amount of goods and services produced in a given country without the double-entry of other units of products used for other outputs. All these entail investment goods as well as government services. In essence, the production goods entail all the goods produced in the United States. That is, the United States owned companies as well as the foreign-owned companies as long as it is located in the United States. Therefore, in order to boost a country’s economy, the policies put in place by the authorities should be tailored towards encouraging investments not only to the local residents but also to other multinational companies. Therefore, foreign direct Investments, as well as domestic investments, turns out to be the key factors that determine a country’s level of economic growth. Economic growth in several countries around the world has significantly been influenced by increased foreign investments coupled up by high levels of domestic investments (Sussilo 53). As a developed country, the United States economy has always been growing exponentially as a result of increased foreign direct investments as well as domestic investments. The thriving of Foreign Direct Investments and Direct investments in the United States has been as a result of enabling environment present in the country. Political stability in the country has attracted a significant pool of investors. Besides, the availability of the market for various products coupled up with favourable government policies has made the United States be an investment hub. In essence, the countries increased investment on good governance, improving the healthcare system, use of advanced technology as well as modernizing infrastructure is among the approaches embraced by the country to attract more investors.  As a result, the impulse of investments in the country has created a pool of job opportunities to various citizens in the United States; lowering unemployment rates in the country thereby improving the welfare of the United States citizens. Evidently, the impact of heavy investments in a country tends to spread in almost all sectors across a country’s economy.  The study of how Foreign Direct Investments and impact of Domestic Investments to the United States economy is vital because it offers insights on important sectors of their economy that countries should focus on in order to realize their economic growth rate goals.

Historical Background

With the presence of sophisticated and more advanced technological methods, globalization has been on the rise. The effort to make the world one global village has seen to it that there has increases trade integration among countries. In the same case, countries have worked hard on domestic investments with the quest for improving their economy in order to attract more investors. Just as Lipsey points out, Foreign Direct Investments involves the transfer of management as well as technical skills rather than a transfer of capital (112). This is evident in the United States as inflow of improved technology, and proper management skills have been witnessed. Either, as Lipsey adds that during the nineteenth century, the United States a little inflow of foreign direct investments into the country (113), during this period, the Europeans were the ones who exhibited a relatively high technology and other skills as compared to other countries. An explanation for this limited inflow of foreign direct investments into the United States can be as a result of primitive communication and transportation methods. Either, the greater form of foreign investments during this period was as a result of human immigration. An early form of foreign direct investments in the United States was in the form of “free-standing” enterprises. This meant that most foreign firms that were located in the United States were not owned by the foreign firm; rather, they were owned by foreigners. This, contrary to what is happening in recent years, whereby most companies in the United States are owned by foreign firms. During the nineteenth century period, most of the free-standing enterprises would naturalize and become domestic companies in the United States after they have adapted to the prevailing conditions experienced in the country (Lipsey 113). This trend is different from the current policies employed by the United States Federal Government regarding Foreign Direct Investment. In the 20^th century, the United States was a major supplier of foreign direct investments for other countries around the globe. As pointed out by Lipsey (115), the United States was a major supplier of direct investments because the country provided over half of the total world’s investment stocks. Thus, the country was offering a significant incentive for encouraging foreign investment into the country.

According to Desai et al., In the past decade, investment in the United States has changed tremendously with the country experiencing a heavy forward surge in terms of Foreign Direct Investments and Domestic Investments (33). The country has become an attractive destination for various multinational enterprises across the globe. Report from Obama White House Archives indicated how several elements present in the United States economy interact thereby promoting both domestic and foreign direct investments. The report written in 2013 mentioned the essence of the skilled labour force, an open investment regime and well-capacitated infrastructure all present in the United States have played a crucial role in promoting both private and foreign direct investment. Besides, the country’s top research Universities, the large economy containing both diverse and big consumer markets is making the country become an investment hub. As the report further states, over several decades, and across various presidential administrations, the United States Federal Government has always been upholding an open investment policy. The policy has seen to it that there is fair company treatment regardless of the country of origin. In 2011, for example, the United States president Barrack Obama reaffirmed the federal government’s commitment to enhance an open investment policy act. Despite the favourable government policies experienced in the United States, which has resulted in heavy investment into the country, increased domestic energy production in the United States has made prices of energy to go down. Investment, as a result, has been elicited with cheap costs of production. As of 2007 to 2012, the United States witnessed a significant drop in the prices of oil by almost 60%. This made production levels to rise, thereby uncovering new reserves (4). The availability of natural gas into the country has catalyzed both foreign and direct investment into the country primarily in steel and equipment needed for gas extraction. In essence, this is among the key factors that have seen to it that investments in the United States are on high levels. Above all, infrastructure development in the United States is significantly developed as compared to other countries. To help in the improvement of the country economy, Dunning and Narula wrote that, over the past decades, the United States federal government had channelled a significant amount of funds to help in the improvement of infrastructure (23). As a result, goods and services are easily moved across the country. The world-class ports, improved air transportation coupled up with better freight rails which have been developed over the last decade is among the major contributing factors to the increased levels of both domestic and foreign investments experienced in the United States as compared to other countries. These improved infrastructures have served not only the country’s huge market but also making the country to be the base for exports.

Data

            In order to have a discrete illustration of the impact of foreign direct investments and domestic investments on the Gross Domestic Product Growth in the United States, a significant amount of data illustrating the trends need to be employed. In essence, there exists a positive correlation between a country’s’ level of national income and the consequent levels of foreign direct investments and domestic investments. Bakari (2) agrees that investments determine a country level of economic growth. The table below illustrates the trends of the United States real GDP by year from 2010 – 2019.

Table 1: United States Real GDP since 2010. (Source; Macrotrends)

The data above derived from Macrotrends gives an explicit content of the various GDP recorded by the United States in each financial year since 2010. The essence of this data is that it will help in comparison to Investment trends experienced in the United States since 2010. Both Domestic Investments and other forms of Foreign Direct Investments. The strength of this data is that although they are secondary data, they are from government records; therefore, they are authentic. The data is also easy to read and interpret.

Figure 1: Trend of the United States level of Foreign Direct Investments since 2010. (Source: Trading Economics)

The figure above shows the trends in the level of Foreign Direct Investments in the United States since 2010. This figure is vital in this study since it will help in the onetime annual comparison between the country’s GDP and the level of foreign direct investments. Lack of control over this data is a major challenge since the line of best fit cannot be deduced since it is secondary data.

The United States seems to have experienced tremendous growth in terms of the country’s total domestic investment. To prove this, CEICDATA calculated the country’s total Gross Domestic Investment as a percentage in relation to the country’s Gross Domestic Product. The findings were illustrated in graphical form, and the data derived is as shown in the table illustrated below.

Figure 2: United States Domestic Investment in relation to its GDP. (Source: CEICDATA).

The essence of this data on this study is that it gives insights on the impact of Domestic Investment on the country’s level of national income. The strength of this data is that it is expressed in percentage form; thereby, trends can be easily highlighted. However, the figures for calculations are not provided, thereby making its authenticity questionable.

Results

According to the OECD report, it is reported that in the year 2014, 11% of the country GDP depended on foreign direct investments. In essence, based on the data illustrated in the table and the figures above, the report by OECD, therefore, holds water.  However, from a historical perspective, the real GDP recorded in the United States has been experiencing a consistent rise. This can be deduced from illustrating the data level of the country GDP. As of 2010, the United States real GDP was at $15.599. This figure has risen exponentially with the country recording $19.073 in 2019. In a quick analysis of the data presented above, the country is recording an average of $0.6Trillion annual rise in the GDP. There has been a persistent increase with no decline recorded at the course of the ten years period. Either, a positive linear curve can be deduced from the trend on the level of Foreign Direct Investments in the United States. The rate at which multinational countries are willing to invest in the United States is high; thereby, the country recording a persistent annual rise. An all high $55,831Million level of Foreign Direct Investments was recorded in the second quarter of 2018 financial year. However, as seen from Figure 2 above, Domestic investment in the United States has accounted for almost a quarter of the country’s total GDP. As of 2019, for example, Domestic Investments in the United States accounted for 20.5% of the United States total Gross Domestic Product. Since 2010, it is evident from the data that the level of Domestic foreign Investments in the country has been rising exponentially. From the data, figures and trends illustrated above, it is evident that as the level of Gross Domestic Product in the United States grows, and so is the levels of Foreign Direct Investments and Domestic Investments. Backtracking to the historical background of the United States economy, the country has heavily invested in infrastructure as well as formulating policies which attract multinational companies. In essence, this move has elicited not only foreign direct investments but also catalyzed domestic investments.  On this study, Economic Growth in the United States is a dependent variable, Foreign Direct Investments and Domestic Investments being independent variables, it is axiomatic that a Foreign Direct Investments and Domestic Investments are the main factors determining economic growth in the United States.

Conclusion

From this study, I have realized that Foreign Direct Investments contribute significantly to economic growth not only of the United States but of any country around the globe. Most countries tend to discourage foreign investors by enacting bottleneck policies and another stringent measure. These countries discourage foreign investors with the urge of protecting local infant industries. What a country needs to realize before discouraging foreign investors is that these investors bring with them a pool of management skills as well as resources that might help the subject country. The United States has all along been encouraging foreign investors into the country, and as a result, domestic investment has also been catalyzed as a result. Above all, infrastructural development is a crucial factor to be embraced in order to realize economic growth. Investors will be more willing to invest in country’s which have taken a step to improve their infrastructure from roads to communication systems.

Works cited

Bakari, Sayef. “The impact of domestic investment on economic growth: New evidence from Malaysia.” (2017).

CEICDATA. “United States Investment: % Of GDP [1947 – 2020] [Data & Charts]”. Ceicdata.Com, https://www.ceicdata.com/en/indicator/united-states/investment–nominal-gdp

Desai, Mihir A., C. Fritz Foley, and James R. Hines Jr. “Foreign direct investment and the domestic capital stock.” American Economic Review 95.2 (2005): 33-38.

Dunning, John, and Rajneesh Narula. Foreign direct investment and governments: catalysts for economic restructuring. Routledge, 2003.

Lipsey, Robert E. “Foreign direct investment in the United States: Changes over three decades.” Foreign direct investment. University of Chicago Press, 1993. 113-172.

Macrotrends. “U.S. Economic Growth 1947-2020”. Macrotrends.Net, https://www.macrotrends.net/countries/USA/united-states/economic-growth-rate

Obama Whitehouse Archives. Obamawhitehouse.Archives.Gov, 2013, https://obamawhitehouse.archives.gov/sites/default/files/docs/cea-doc_2013_foreign_direct_investment_in_the_us.pdf.

OECD. “United States Trade And Investment Statistical Note”. Oecd.Org, 2017, http://www.oecd.org/investment/USA-trade-investment-statistical-country-note.pdf

Susilo, Donny. “The Impact of Foreign Direct Investment on Economic Growth (a Causal Study in the United States).” BISE: Jurnal Pendidikan Bisnis dan Ekonomi 4.1 (2018).

Trading Economics. “United States Foreign Direct Investment | 1994-2019 Data | 2020-2022 Forecast”. Tradingeconomics.Com, https://tradingeconomics.com/united-states/foreign-direct-investment.