Asymmetric Returns to U.S. Assets American Superiority or Accounting Fiction? Essays on U.S. Foreign Direct Investment

Do U.S. firms enjoy asymmetrically higher returns on aggregate foreign direct investment? There is considerable controversy about this 'exorbitant privilege' (Gourinchas and Rey 2005) as highlighted in the 'global imbalances' literature. We investigate the comparative profitability of U.S. foreign direct investment abroad (USDIA) relative to U.S. based foreign direct investment (FDIUS) using a sector-based analysis. We find---using both the average and, arguably, a more reliable measure, the incremental rates of return (Shaikh 2005)---superior returns to USDIA relative to FDIUS across different measures of profitability. Our results are robust across two different iterations - the first including all Non-FIRE sectors and the other excluding sectors which are 'sheltered' from international competition. Excess returns to U.S. capital are particularly pronounced for new sectoral investment. Surprisingly, the risk-return trade-off does not appear to explain the higher returns to the U.S.-owned direct investment portfolio. Despite a relatively higher tax burden, U.S. multinationals exhibit higher levels of greater profit share in value added and 'capital productivity' across most sectors. A comparative analysis of other industrial characteristics is also consistent with excess returns to U.S. capital. Our panel data analysis also compares the profitability and industrial dynamics of U.S. out-bound and inward foreign direct investment against domestic based U.S. production for the aggregate non-financial data as well as for the 'narrow measure of value added' which excludes industries lacking proper output measures (Foley and Basu, 2011; Foley 2011). On aggregate, foreign direct investment in the U.S performs remarkably poorly relative to U.S. direct investment abroad but also poorly compared to domestic industries. However, for new investment in manufacturing, domestic industries are the worst performers recording the lowest profitability as well as greatest volatility compared to both inward and out-bound U.S. direct investment. For the period tested (1999-2005), like U.S. based investment, inward foreign direct investment isn't employment generating while U.S. direct investment abroad produces the fastest gains in value added, investment and employment. We close by commenting on the implication of our findings for the stability of U.S. external balance of payments.