July 15, 2024

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Kavan Choksi Discusses the Rank of the United States as the World’s Top Destination for Foreign Direct Investment

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Destination for Foreign Direct Investment

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The United States recorded the largest increase in inward foreign direct investment in 2021 among all economies on the planet. As per the latest release of the Coordinated Direct Investment Survey by IMF, the position of U.S. increased by $506 billion, or 11.3 percent. Leading finance expert Kavan Choksi further underlines that for the 112 economies that reported data, inward FDI positions rose by an average of 7.1% in national currencies. This global growth figure translates to only 2.3 % in dollar terms owing to the recent strengthening of the greenback.

Kavan Choksisheds light on the top drivers of foreign direct investment in the U.S.

Foreign direct investment has been an important source of economic strength for the United States for quite some time. An innovative economy, a strong dollar, rising rates, as well as the rule of law continued to magnetize considerable capital into corporations based in America in 2021. In fact, the flow of capital has become so strong in the nation that the U.S. is now considered to be the biggest destination for foreign direct investments. It has managed to move ahead of several of financial centers that have traditionally dominated the cross-border flow of investment.

For decades, the United States has trailed the Cayman Islands and Bermuda when it comes to foreign direct investment, which is defined as a minimum of 10% ownership in offshore businesses. According to an analysis by the International Monetary Fund, much of this category features purely financial investments that have little to no link to the real economy. However, even though offshore centers still remain major players for the capital, established economies like the United States are steadily attracting an increasing share. According to IMF, the exact drivers of this development can be complex to disentangle. However, it is pretty apparent that the Tax Cuts and Jobs Act in 2017 reduced incentives to keep profits in low tax jurisdictions, and eventually led to the substantial repatriation of funds from foreign subsidiaries. IMF analysis also cited efforts by the Organization for Economic Co-operation and Development to reduce profit shifting and tax base erosion, which might have prevented some flows to offshore financial centers. This became a boon for the American economy. FDI investments in U.S. corporations grew by around 11% subsequent to the stagnating in 2020 during the pandemic. This comes after the yearly growth rates averaged at almost 8% a year from 2009 to 2019. Kavan Choksi points out that in comparison, the total FDI for the world grew by an average yearly rate of 6.2% during that same decade.

There was almost $5 trillion of total investments in 2021 in American corporations from foreign sources. The countries of Japan, the Netherlands, Canada, the United Kingdom and Germany were additionally responsible for 56% of that total. The top 25 sources of inward foreign direct investment in the U.S. accounted for around 94% of the total, and just 4% came from financial centers like the Cayman Islands. At the same time, American corporations purchases shares of foreign companies, with nearly $6.5 trillion in outward FDI in 2021.

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