Are concerns over plunge in foreign investment justified?

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It was widely reported in July that inward foreign investment into the United States took a nose dive in 2017. The 32% drop in capital inflows reinforced worries that the Trump administration was deterring global investors.

It’s true that Trump’s rhetoric and policies have generated greater uncertainty in global markets. However, 2017’s investment numbers aren’t necessarily proof of the market responding.

Let’s look at where the 32% number came from. It’s based on comparing 2017 inflows ($259.6 billion) to 2015 ($439.5 billion).

That comparison is misleading.

There are two things to note. First, FDI flows have been relatively volatile over the last 20 years. There was a dramatic upswing in late-90s investment. However, total annual inflows showed year-on-year declines on seven different occasions since 2001. Last year’s drop is nothing new when viewed in light of recent history.

Second, and most importantly, inflows in 2015, the basis for comparison, were abnormally high. In fact, 2015 levels were nearly double the 10-year average ($270 billion).

To be fair, the other large drops since 2000 were during recessions. The main cause for concern now is that the US economy has been doing well. There’s no apparent economic reason for the dip. That’s led to speculation that the market is wary of Trump. That may be true, but we need a few more years of data before inferring there’s a “political shock” to the marketplace.

 
 

Second, and most importantly, inflows in 2015, the basis for comparison, were abnormally high. In fact, 2015 levels were nearly double the 10-year average ($270 billion).

To be fair, the other large drops since 2000 were during recessions. The main cause for concern now is that the US economy has been doing well. There’s no apparent economic reason for the dip. That’s led to speculation that the market is wary of Trump. That may be true, but we need a few more years of data before inferring there’s a “political shock” to the marketplace.