The Balance of Payments Effects of Direct Investment in Western Europe

Abstract

Between the years 1950 to 1964 portfolio investments resulted in a net dollar outflow, in every year except 1953. On the other hand, direct foreign investments have shown a net inflow of dollars in every one of those same years ranging from a low of seven million dollars to a maximum of $2.4 billion. It appears, then, that overall, the United States may be portfolio investing beyond its international means, but it has not been direct investing beyond its international means. Looking at direct investment flows to specific areas, however, one notes that direct investments in Western Europe, particularly in the Common Market, have resulted in substantial net outflows. These net outflows would lead one to believe that curtailment of direct investments in Europe would be of help in alleviating the current United States' balance of payments problem. However, balance of payments statistics show only direct investment outflows and income returns. They do not indicate what effects these transactions have on United States exports, nor do they show what the future trends in investment and income returns will be. The purpose of this paper is to make such an analysis; specifically with regard to direct investments in Europe.