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Why do foreigners invest in the United States?

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  • Forbes, Kristin J.

Abstract

Why are foreigners willing to invest over $2Â trillion per year in the United States? 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 that trade more with the United States also have greater portfolio shares in U.S. equity and bond markets. These results support recent theoretical work on the role of financial development in sustaining global imbalances and have important implications for whether the United States can continue to attract sufficient financing from abroad without major changes in asset prices and returns, especially in bond markets.

Suggested Citation

  • Forbes, Kristin J., 2010. "Why do foreigners invest in the United States?," Journal of International Economics, Elsevier, vol. 80(1), pages 3-21, January.
  • Handle: RePEc:eee:inecon:v:80:y:2010:i:1:p:3-21
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    More about this item

    Keywords

    Home bias Foreign investment Portfolio flows Capital flows U.S. current account deficit Global imbalances Financial development Return chasing;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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