The United States is the world’s largest recipient of foreign direct investment (FDI) for many reasons, but trust in its ability to protect people’s investments is key.
With the world’s largest consumer market, highly productive workers, an innovative environment, legal protections and a predictable regulatory environment, the U.S. offers an attractive investment climate for individuals and businesses around the globe.
The U.S. consistently ranks as one of the top destinations in the world for FDI. The total stock of direct investment in the U.S. totaled $2.9 trillion in 2014[i].
America is an attractive destination for business investment. A.T. Kearney’s FDI Confidence Index found the U.S. has become the nation with the top FDI prospects globally. Since 2010, Japan, Canada, Australia, Korea, and seven European countries have accounted for more than 80 percent of new FDI, and FDI from China and Brazil are growing rapidly[ii].
Evaluating the Risk of a Nation’s Investment Climate
With respect to evaluating the risk of a particular foreign investment, a critical factor to consider may be the protections offered to investors in the country receiving the investment.
An early step in evaluating an investment in a particular country involves determining the riskiness of that nation’s investment climate. Country risk refers to the business, economic and political risks in a particular country that could result in unanticipated investment losses.
The most significant of the three are economic and political risk. Economic risk refers to a nation’s capacity to pay its debts. Thus, a nation with a strong economy and stable finances should offer more trustworthy investments than a country with a weak economy and unreliable finances. Political risk refers to how a nation’s political decisions could result in investment losses.
To measure these risks, Moody’s, Standard & Poor’s (S&P) and other agencies rate nations. In 2016, S&P, Moody’s and Fitch rating agencies gave the U.S. ratings that ranged from AA+ to Aaa to AAA, among the highest given.[iii]
Other important measures to evaluate include a nation’s GDP, Consumer Price Index (CPI) and inflation. In 2015, the U.S. had a GDP of $18 trillion and an inflation rate of less than 1 percent.[iv]
“The U.S. has the most technologically powerful economy in the world, with a per capita GDP of $54,800,” according to The World Factbook published by the CIA.[v] “U.S. firms are at or near the forefront in technological advances, especially in computers, pharmaceuticals, and medical, aerospace, and military equipment….”
In addition to these steps, investors should also evaluate a nation’s financial markets and the performance of its stock and bond markets. Newspapers, including The Wall Street Journal, The New York Times, and the Financial Times, are excellent sources of information on U.S. financial markets.
U.S. Regulatory Agencies Protecting Investors
The protections offered in the U.S. help ensure the safety of foreign investments. This includes oversight by the U.S. Securities and Exchange Commission, which enforces regulations that protect investors. The primary laws are the Securities Act of 1933 and the Securities Exchange Act of 1934, which require companies that sell securities to publicly and honestly disclose information about their businesses, the securities being sold and the risks of investing. The SEC monitors these businesses, along with investment advisors and brokers. [vi]
Another agency is the Financial Industry Regulatory Authority (FINRA), an independent, not-for-profit organization authorized by Congress to protect America’s investors by ensuring the securities industry operates fairly and honestly. It is the nation’s largest regulator of securities firms and oversees about 5,100 brokerages and more than 669,000 registered securities representatives. FINRA provides education to and registers industry participants, writes and enforces regulations and federal securities laws and examines securities firms. In addition, the organization provides education for investors, oversees a dispute resolution forum and offers trade reporting and similar industry utilities.[vii]
Thanks to robust regulations in the U.S., even though no investment marketplace is devoid of bad actors, foreign investors can make investment decisions knowing that there are regulatory and compliance measures in place intended to enhance investor safety.
[ii] https://www.whitehouse.gov/sites/default/files/2013fdi_report_-_final_for_web.pdf
[iii] http://www.tradingeconomics.com/country-list/rating
[iv] https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
[v] https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
[vi] http://ctainvest.org/home/investing/investor-protection/how-the-government-protects-investors.aspx
[vii] http://ctainvest.org/home/investing/investor-protection/how-the-government-protects-investors.aspx
