U.S. Leads the Way in Inward Foreign Direct Investment

The United States led 112 economies in foreign direct investment (FDI) for 2021, increasing its position by 11.3%, according to data recently released by the International Monetary Fund (IMF). The average gain for the reporting countries was 7.1% in their national currencies, or 2.3% in U.S. dollars.

The U.S. inward FDI increase totaled $506 billion, according to the IMF’s Coordinated Direct Investment Survey. China advanced to take third place, and some smaller economies reached the top 10 despite their lower tallies in gross domestic product (GDP). These include the Netherlands, Luxembourg, Hong Kong, Singapore, Ireland, and Switzerland.

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FDI statistics show cross-border financial flows and positions between entities that are tied to each other by a direct or indirect ownership share of at least 10%. They can take the form of investments into such things as factories and machinery, or they can be purely financial investments that have no impact on the real economy. Such investments (i.e. offshore financial centers) are often created for tax or regulatory benefits and can inflate FDI numbers without affecting the host economy, according to the IMF.

The survey shows that offshore financial centers account for a high portion of global FDI, though the numbers have decreased since 2017. Certain policies may have contributed to the decline, the IMF said, including the 2018 U.S. Tax Cuts and Jobs Act, which reduced incentives to keep profits in low-tax jurisdictions and led to a substantial repatriation of funds to the U.S. from foreign subsidiaries.

Also, international efforts to reduce tax avoidance, such as the OECD/G20 Base Erosion and Profit Shifting Project, may have stopped some flows to offshore entities.

The IMF has been collecting data on special purpose entities and released a set of statistics earlier in 2022. It continues surveillance in collaboration with members and other international organizations.