Why do foreigners invest in the United States?

Kristin Forbes

No 2008-27, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Why are foreigners willing to invest almost $2 trillion per year in the United States? The answer affects if the existing pattern of global imbalances can persist and if the United States can continue to finance its current account deficit without a major change in asset prices and returns. This paper tests various hypotheses and finds that standard portfolio allocation models and diversification motives are poor predictors of foreign holdings of U.S. liabilities. Instead, foreigners hold greater shares of their investment portfolios in the United States if they have less-developed financial markets. The magnitude of this effect decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets, and there is no evidence that foreigners invest in the United States based on diversification motives. The empirical results showing a primary role of financial market development in driving foreign purchases of U.S. portfolio liabilities supports recent theoretical work on global imbalances.

Date: 2008
New Economics Papers: this item is included in nep-cba and nep-opm
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Related works:
Journal Article: Why do foreigners invest in the United States? (2010)
Working Paper: Why do Foreigners Invest in the United States? (2008)
Working Paper: Why Do Foreigners Invest in the United States? (2008)
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