What Is Inward Investment?
An inward investment involves an external or foreign entity either investing in or purchasing the goods of a local economy. It is foreign money that comes into the domestic economy. Inward investment stands in contrast to outward investment, which is an outflow of investment capital from local entities to foreign economies.
Key Takeaways
- An inward investment consists of foreign entities investing in local economies bringing in foreign capital.
- Foreign direct investment is a specific type of inward investment, consisting of mergers and acquisitions or establishing new operations for existing businesses.
- Inward investments improve local economies by bringing wealth, job creation, and infrastructure development.
Understanding Inward Investment
Inward investments typically stem from multinational corporations investing capital in foreign markets to grow their own presence or to meet specific demand of the local economy. This can take the form of new demand for products or increased development of a region.
A common type of inward investment is a foreign direct investment (FDI). This occurs when one company purchases another business or establishes new operations for an existing business in a country different than the one of its origin.
Inward investments or foreign direct investments often result in a significant number of mergers and acquisitions. Rather than creating new businesses, inward investments often occur when a foreign company acquires or merges with an existing company. Inward investments tend to help companies grow and open borders for international integration.
Recent Statistics on Inward Investments
According to the Bureau of Economic Analysis (BEA), which tracks expenditures by foreign direct investors into U.S. businesses, total foreign direct investments into U.S. businesses were $120.7 billion in 2020. Due to COVID-19, this was down more than 45% from the level seen in 2019 and below the annual average of $333.0 billion for 2014–2018.
Manufacturing investment at $63.3 billion was the largest industry expenditure for new direct investments. Within manufacturing, the largest investments consisted of $26.9 billion from chemical manufacturing, primarily pharmaceuticals and medicines. Other large contributing expenditures came from IT & communications at $17.4 billion and computers & electronic devices at $14.8 billion.
By region, Europe contributed over half of new investments in 2020.The largest expenditures came from Germany ($20.5 billion) and Canada ($15.2 billion). The third-largest contributor was Switzerland with investments of $13.8 billion.
In regards to recipients of investments, Texas received the largest investment, with expenditures of $18.6 billion, followed by California ($17.8 billion) and New Jersey ($14.1 billion).
Disadvantages of Inward Investments
While many believe that inward investment brings an influx of wealth into a country, helping diversify its base of revenues, potentially generating additional tax revenue, and creating jobs and the opportunity to build skills for many of its residents, some argue that new investments can also come with unwanted changes. These changes can take the form of unsustainable development, such as poorly planned and rapidly built infrastructure projects and/or a lack of regard for local practices and customs.
Critics also note that local economies that seek to attract inward investments do so at the detriment of local small businesses. Smaller businesses cannot match the scope and price of existing, larger corporations and therefore their growth and existence tend to be threatened.
