Foreign Investment

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Foreign Investment
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Main Points to Learn

• What is the connection between investment and
  economic growth?
• What is net foreign investment?
• What factors move capital from one country to
  another?
• Why does NFI NX?
• The difference between being a net borrower and
  being a net lender (Which is the U.S.?)

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Stolen from Greg Mankiws Blog(he stole it from
John Taylor)
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Net Foreign Investment

• Net foreign investment is the purchase of foreign
  assets by domestic residents minus the purchase
  of domestic assets by foreigners.
• Capital inflows Foreign money coming into the
  U.S., including loans made to the U.S.
• Capital outflows U.S. dollars leaving the
  country to be invested abroad

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Net Foreign Investment

• National Saving. Whenever a nation saves a
  dollar, it can use that dollar to finance the
  purchase of domestic capital or to finance the
  purchase of an asset abroad. Thus the supply of
  loanable funds comes from national saving.
• Saving Domestic Investment Net Foreign
  investment.
• NFI NX

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Direct vs. Portfolio Investment

• Foreign Direct InvestmentA capital investment
  that is owned and operated by a foreign entity.
• e.g. If Ford Motor Company builds and operates a
  plant in Mexico, that represents foreign direct
  investment.
• Foreign Portfolio InvestmentAn Investment
  financed with foreign money, such as investors
  buying stock in a foreign company run by people
  in that country.

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Factors that Influence Net Foreign Investment

• The real interest rates being paid on foreign
  assets
• The real interest rates being paid on domestic
  assets
• The perceived economic and political risks of
  holding assets abroad
• Government policies that affect foreign ownership
  of domestic assets (like corporate tax rates)

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Corporate Tax Rates in Other Nations
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Trade Surplus and Trade Deficit

• trade surplus output gt spending and exports
  gt imports Size of the trade surplus NX
• trade deficit spending gt output and imports
  gt exports Size of the trade deficit NX

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U.S.Worlds Largest Debtor

• Every year since 1980s huge trade deficits and
  net capital inflows, i.e. net borrowing from
  abroad
• As of 12/31/2008
• U.S. residents owned 19.9 trillion worth of
  foreign assets
• Foreigners owned 23.4 trillion worth of U.S.
  assets
• U.S. net indebtedness to rest of the world3.5
  trillion--higher than any other country, hence
  U.S. is the worlds largest debtor nation

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Should we worry?