Foreign businesses invested 15% less in the United States last year, but it’s not a sign America has suddenly become a less attractive place to invest.
Direct foreign investment in the U.S. fell to $373.4 billion in 2016 from $439.6 billion in the prior year, the Bureau of Economic Analysis said Wednesday.
The slowdown in foreign investment largely reflects a crackdown by the outgoing Obama administration on American companies seeking to move their headquarters outside the country to escape high U.S. corporate taxes.
The controversial tactic, used by Burger King and other large companies, is known as a corporate inversion. The Obama White House sought to block inversions by tightening tax rules to make it more costly — and the approach appears to have worked.
“BEA estimates that newly inverted U.S. corporations accounted for a significant share of first-year [foreign] expenditures in 2015, but not in 2016,” the report said.
The effects of the law are illustrated by Ireland. Irish companies spent a sizable $35.4 billion last year in the U.S., but that was down 80% from a huge $176 billion investment in 2015.
A large chunk of the Irish “investment” in 2015 consisted of American firms buying Irish rivals and moving their headquarters across the Atlantic. Some of those companies include Medtronic and Johnson Controls.
Virtually none of the investment in either 2015 or 2016 reflected spending on new or existing Irish-owned businesses in the U.S.
The stricter U.S. rules on inversions, however, are under review by the Trump White House and they could be dropped. President Trump has pressured American companies to keep jobs and headquarters in the U.S. and he’s promised to cut taxes and reduce regulations to entice them to stay.
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Although the White House has had some success in culling regulations, tax reform is on dicier political ground. Even if Republicans push through tax cuts, businesses are unlikely to reap the benefits until 2018 at the earliest.
In 2016, the U.K. invested the most in the United States at $54.5 billion. The U.K. was followed by Ireland, Switzerland ($34.9 billion), China (27.6 billion) and Japan ($18 billion).
Almost 98% of the investment in 2016 involved acquisitions of American companies, the government said. Just $5.6 billion was spent by foreign firms to start up new businesses in the U.S. and $2.2 billion was spent to expand existing U.S. operations.
The breakdown in investment in not unusual, though. Most firms seek to enter foreign markets by acquiring domestic companies instead of starting their own from scratch.
The amount of foreign investment in the U.S. in 2015 was probably a record, but it’s impossible to know for sure since funding for the annual government survey was cut from 2009 to 2013.