FDI in the North American Neighborhood: Cross-Border Direct Investment in the U.S.

Foreign direct investment (FDI) of Mexican majority-owned bank and nonbank affiliates in the U.S. had total assets of 41.1 billion dollars in 2012, while direct investment in Mexico by U.S. majority owned affiliates had total assets of 377.3 billion dollars. ¹ However, this nationwide data does not provide any detail about direct effects of Mexican FDI on the Arizona economy. For the first time in 25 years, Bureau of Labor Statistics (BLS) released estimates of U.S. employment in establishments with foreign ownership in the United States. ^2,3 The BLS data details employment and wages of foreign-owned establishments in the U.S., by state and industry. This new information provides more insight into the origin of foreign direct investment (FDI) in Arizona, as well as direct effects of multinational enterprise activity on the state’s economy.

Similar to the reasons for FDI in Mexican border states measured on the Arizona-Mexico Economic Indicators website , FDI trends at the U.S. state level are a composite indicator of each state’s attractiveness for multinational activity. Several factors contribute to that attractiveness including population levels, wages, educational attainment, infrastructure, and proximity to the investing entity. Additionally, U.S. states vary significantly in local tax and business law, making some states more financially and logistically attractive than others for commercial investment.

Mexican direct investment in the U.S. is not highest in the border states. Due to proximity, one would expect the southern border states of Arizona, California, New Mexico, and Texas to have the highest levels of employment in Mexican-owned establishments. This does not hold true for any of the border states; Arizona had only 0.11% of the state’s private employment in Mexican-owned establishments. While border state employment levels are higher than most other states, the highest employment by Mexican-owned businesses occurs in Oklahoma at 0.20% and then Kentucky at 0.18% of total private business employment in each state. Figure 1 displays all states with reported employment in Mexican-owned establishments.

Note: All maps in this article are interactive – scroll over each state for more detailed information. States in gray do not have data for FDI from the applicable country or region.

Figure 1. Mexican FDI in the U.S. by State (2012)

Regional data provides more insight when country specific data cannot be reported. A noticeable limit in the data is that some states seemingly do not report establishments with “Mexican ownership”; more than half the U.S. map in Figure 1 demonstrates this situation. Non-reporting could occur for two reasons: First, there may be no Mexican-owned establishments in the state. For example, Alaska, Hawaii, and Maine are three of the states that do not have data for FDI from Mexico; given these states’ distance from the border, this may not be surprising. The second reason non-reporting may occur is that the state may have so few Mexican-owned establishments that the BLS cannot publish data that might violate their mandated confidentiality requirement to protect responding businesses’ identities. For example, the data do not specifically identify Mexican-owned establishments in the state of New Mexico, which is contrary to expectation given the state’s contiguity with the southern border. It is very likely that New Mexico does have some establishments with Mexican ownership, but that the confidentiality rules preclude BLS from identifying the data in that state.

The BLS data categorizes foreign business ownership at both country specific and regional level. To identify states that may have Mexican-owned establishments that cannot be identified for confidentiality concerns, Figure 2 displays all states with reported employment in Latin American-owned establishments. For this BLS data, Latin America includes Mexico, the British Caribbean Islands, the Bahamas, Bermuda, Brazil, Chile, and Colombia. ⁴ Notably, all but 11 states exhibit Latin America as a source of FDI, including all states along the southern border; Arizona reports 0.33% of private employment in Latin American-owned etablishments. A legitimate assumption is that many of these Latin American FDI sources include Mexican-owned establishments, particularly in those states closer to the southern border. States besides Alaska and Hawaii that do not report any FDI from Latin America are in the northern Midwest and Northeast where the expectation for Canadian sourced FDI is more likely.

Figure 2. Latin American FDI in the U.S. by State (2012)

Canada has more direct investment in Arizona and nationwide. A logical follow-up question is: how does Mexican or Latin American sourced FDI compare to Canadian sourced FDI nationwide? ⁵ Figure 3 shows the prevalence of employment in Canadian-owned establishments across the U.S. (scroll over each state for details). Notably, Canadian-owned establishments are numerous enough that all states show some level of employment in them. Arizona employment in Canadian-owned establishments is far higher than in either Mexican-owned or Latin-American owned establishments at 0.68%. In fact, the BLS data shows that Canada was the largest international employer in Arizona in 2012. Furthermore, the maximum level of employment in Canadian-owned establishments (2.39% of private employment in Kansas) is much higher than either Mexican-owned establishments (0.20% of private employment in Oklahoma) or Latin American-owned establishments (0.67% in West Virginia). Canada has some fundamental advantages over Mexico in terms of direct investment in the U.S. including significantly higher share of publicly traded companies and much higher GDP per capita as well as a shared language and longer history of bilateral cooperation. ⁶

Figure 3. Canadian FDI in the U.S. by State (2012)

Notes

1. Bureau of Economic Analysis (BEA) https://apps.bea.gov/iTable/index_MNC.cfm
2. Bureau of Labor Statistics (BLS) https://www.bls.gov/fdi/tables/home.htm This data covers only the year 2012 (BLS is considering publishing additional years of data dependent on public interest in this series).
3. Both BEA and BLS define foreign ownership as ownership by a foreign investor of at least 10 percent of a U.S. business.
4. Latin America is generally understood to be the entire continent of South America, plus Mexico, Central America, and the Caribbean islands whose primary language is Spanish, Portuguese or French. This BLS data series also includes the British Caribbean Islands, the Bahamas, and Bermuda in the Latin America regional classification.
5. Comparatively, FDI of Canadian majority-owned bank and nonbank affiliates in the U.S. had total assets of 1.64 trillion dollars in 2012, while direct investment in Canada by U.S. majority owned affiliates had total assets of 1.35 trillion dollars. (BEA https://apps.bea.gov/iTable/index_MNC.cfm )
6. The World Bank, World Development Indicators https://databank.worldbank.org/data/source/world-development-indicators