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Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1989.

Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1989

MAJORITY-OWNED foreign affiliates of U.S. companies plan to increase capital expenditures 12 percent in 1989, to $48.1 billion, following a 24-percent increase in 1988 (table 1, chart 1). (1) The growth in expenditures in both years is widespread by area and industry. If realized, the 1989 increase will represent the third consecutive year of growth in capital expenditures abroad and a reversal of the declining trend of 1982-86. Factors that adversely affected spending during the earlier period included sluggish economic growth abroad in 1982-84 and dollar depreciation and weak petroleum prices in 1985-86. The spending increases that began in 1987 primarily reflect the influence of expanding foreign markets and efforts to keep up with international competitors.

In Europe, plans by the European Communities (EC-12) to dismantle internal trade barriers by 1992 have led to a surge in capital spending in 1988 and 1989 by U.S.-owned affiliates, in order to compete with domestically owned European companies to expand or maintain market shares. The expenditures also reflect concerns that lower barriers within the EC-12 may lead to increased protectionism against non-EC countries. In the newly industrialized countries of Asia, continued strong economic growth and lower production costs have encouraged affiliates to step up their spending plans. In Latin America, the growth in expenditures in several highly indebted countries is partly attributable to increased efforts by those governments to attract foreign direct investment.

In addition, much of the increase in expenditures planned by manufacturing affiliates has been facilitated by the restructuring of U.S. multinational companies in response to intense international competition. The companies have shed unprofitable operations and have modernized production systems here and abroad in order to lower costs through higher productivity. The resulting higher earnings have, in turn, encouraged further capital spending.

The latest spending estimates for both 1988 and 1989, which are based on a BEA survey taken in December 1988, are higher than those published 6 months ago, which were based on a survey taken in June 1988 (table 2). The revision for 1988 is small; the estimate is up 1 percent from that based on the earlier survey. The estimate for 1989 planned spending has been revised up 9 percent. Affiliates in all industries except petroleum revised their 1989 spending plans upward.

The largest revision occurred in manufacturing (particularly "other manufacturing" and chemicals). Most of the revision is accounted for by affiliates in the EC-12. Anticipation of the changes within the EC-12, described earlier, appears to have had a greater impact on the most recent estimate than on those made 6 months earlier.

Petroleum affiliates revised their 1988 spending plans up 3 percent and their 1989 spending plans down 2 percent. Several affiliates shifted their spending from 1989 to 1988, so that their 1988 spending is higher and their 1989 spending lower than reported 6 months earlier. In addition, a Canadian affiliate made a major acquisition in 1988 and cancelled projects planned for 1989. The cancelled projects were mainly expansions that were no longer needed because of the capacity added through the acquisition.

By area, affiliates in developed countries plan a 9-percent increase in expenditures in 1989, to $37.1 billion, following a 24-percent increase in 1988. Affiliates in developing countries plan a 23-percent increase, to $10.3 billion, following a 24-percent increase. Affiliates in "international"--those that have operations in more than one country and that are engaged in petroleum shipping, other water transportation, or operating movable oil and gas drilling equipment--plan to increase spending 30 percent, following a 54-percent increase.

Petroleum

Petroleum affiliates plan to increase capital spending 3 percent in 1989, to $13.7 billion, following a 36-percent increase in 1988. The 1988 increase was the largest year-to-year increase in the past decade. Despite declining crude oil prices in 1988, spending in exploration and development, as well as in refining and marketing, was strong. The high margins resulting from strong demand, firm product prices, and tight capacity justified continued spending. The 1989 planned increase is mainly in developing countries; spending in "international" will decline, and spending in developed countries will remain at 1988 levels.

In developed countries, affiliate spending, at $9.3 billion, will be virtually unchanged in 1989, after increasing 39 percent in 1988. The decline in Canada, mentioned earlier, and smaller declines elsewhere will offset increases in the United Kingdom and Norway. In the United Kingdom, affiliates plan a 9-percent increase, to $3.7 billion, following a 51-percent increase. In Norway, affiliates plan an 11-percent increase, to $1.0 billion, following a 26-percent increase. Expenditures in both years and both countries are primarily for exploration and development in the North Sea.

In developing countries, affiliates plan to increase spending 16 percent in 1989, to $4.1 billion, following a 28-percent increase. The increases in both years are concentrated in Asian countries, particularly Indonesia, Singapore, and Thailand. Expenditures are for exploration and development as well as for refinery expansions. The strong economic growth in the region has caused a surge in demand for oil and gas for both transportation and power generation. This increased demand has prompted several affiliates there to upgrade or expand refinery capacity.

Affiliates in "international" plan to decrease spending 5 percent in 1989 after a sharp increase in 1988. The 1988 increase reflected spending for tankers and offshore drilling rigs in response to increased exploration and development. Although spending for these activities will be up slightly, the demand for tankers and rigs is expected to level off in 1989.

Manufacturing

Manufacturing affiliates plan to increase spending 17 percent in 1989, to $24.5 billion, following a 21-percent increase. Affiliates in all manufacturing industries plan increases. The largest dollar increases are in "other manufacturing," nonelectrical machinery, and chemicals. These industries were also among those with the largest increases last year.

Affiliates in "other manufacturing" plan to increase spending 29 percent this year, to $5.3 billion, following a 36-percent increase in 1988. The spending in both years is mainly in the paper and rubber industries, in which consumer and industrial demand is strong. In addition, rubber manufacturers are facing increasing competition in international markets and are responding by upgrading facilities and building new plants to expand capacity.

In nonelectrical machinery, affiliates plan to increase spending 21 percent, to $4.3 billion, following a 20-percent increase. Both increases primarily reflect expenditures by computer manufacturers for facilities to produce new or improved product lines in an effort to maintain their share of the highly competitive computer market.

Chemical affiliates plan to increase spending 16 percent, to $5.2 billion, following a 19-percent increase. Since 1983, spending in this industry has been growing substantially. In general, the expenditures reflect the need to expand capacity to meet the continued strong demand for chemical products.

In transportation, affiliates plan to increase spending 8 percent, to $4.4 billion, following a 19-percent increase. Expenditures in both years are for the construction of new plants, the expansion of existing plants, and product development.

Affiliates in primary and fabricated metals and in food products also plan significant increases. In primary and fabricated metals, affiliates plan to increase spending 28 percent, to $1.2 billion, following a 16-percent increase. A large portion of the spending will be by affiliates in aluminum can production. In food products, affiliates plan to increase spending 11 percent, to $2.0 billion, following a 19-percent increase. The increases in both years partly reflect efforts by tobacco producers to expand their operations in the food industry as demand for tabacco products declines. The increases also reflect expenditures by beverage manufacturers for new plants and expansions of existing ones, in the face of increased competition.

Affiliates in electrical machinery plan to increase spending 9 percent, to $2.1 billion, following a 15-percent increase. The increases in both years, which are related to those in nonelectrical machinery, are mainly to meet demand for semiconductors and other electrical components for computers.

By area, manufacturing affiliates in developed countries plan to increase spending 16 percent, to $20.1 billion, in 1989, following a 21-percent increase in 1988. A substantial portion of the increase in both years is in Europe, particularly in the EC-12 where, as mentioned earlier, affiliates are stepping up investments in anticipation of the dismantling of internal trade barriers by 1992. Increases in the EC-12 in both years are widespread by country and industry.

Among individual developed countries, the largest 1989 dollar increases are in the United Kingdom and Japan. British affiliates plan to increase spending 18 percent, to $3.7 billion, following a 23-percent increase last year. The largest increases are in transportation equipment and nonelectrical machinery. In transportation equipment, an automobile manufacturer plans a major expansion of productive capacity. The expenditures in nonelectrical machinery are for new facilities to manufacture computer equipment.

Japanese affiliates plan to increase spending 41 percent, to $1.7 billion, following an even more robust increase--70-percent--last year. In 1988, the largest increases were in nonelectrical machinery, chemicals, and electrical machinery. In 1989, the increase is concentrated in nonelectrical machinery; in that industry, a manufacturer of computer equipment is expanding its operations in an attempt to capture a larger share of the Japanese market.

Smaller increases are planned in Canada, the Netherlands, France, and Germany in 1989. In Canada, the increase in expenditures is mainly in chemicals and "other manufacturing," in the Netherlands, Germany, and France, increases are largest in "other manufacturing."

In Canada, manufacturing affiliates plan to increase spending 11 percent, to $4.0 billion, following a 21-percent increase. Several Canadian chemical affiliates plan to expand capacity; expenditures in "other manufacturing" are mainly by affiliates in paper and rubber manufacturing. In France, the large expenditures in "other manufacturing" are by several affiliates in paper products that are expanding capacity; in Germany and the Netherlands, in contrast, expenditures in that industry are mainly by affiliates in photographic equipment and supplies and in miscellaneous plastics.

In developing countries, manufacturing affiliates plan to increase spending 24 percent, to $4.4 billion, following a 26-percent increase in 1988. The 1989 increase is mostly in Latin America; the 1988 increase was largest in "other Asia and Pacific." In 1988, manufacturing affiliates in Asia began construction of new plants, primarily in electrical equipment; these affiliates plan smaller increases for these purposes in 1989.

In Latin America, the largest increases in planned spending in both years are in Brazil and Mexico. In these countries, government programs to attract foreign direct investment may have contributed to the increases in expenditures by providing low-cost funds and other incentives to direct investors. Brazilian affiliates plan to increase spending 23 percent, to $1.7 billion, following an 11-percent increase. Affiliates in "other manufacturing," chemicals, and nonelectrical machinery plan to expand capacity by constructing new plants and upgrading existing plants. In Mexico, affiliates plan to increase spending 33 percent, following a 20-percent increase. The increase is primarily in transportation equipment, in which automobile manufacturers are expanding operations.

Other industries

Affiliates in all other industries combined plan a 14-percent increase in spending, to $9.9 billion, following a 16-percent increase in 1988. Wholesale trade affiliates plan to increase spending 16 percent, to $3.7 billion; the largest increases are in France and Japan. In France, the increase is accounted for by a wholesale trade affiliate of an automobile company and by a computer company that is expanding its leasing operations. In Japan, affiliates of chemical, computer, and photographic supply companies are building new distribution facilities. In Singapore and Switzerland, large expenditures are mainly by a chemical company that plans to double its storage capacity.

Affiliates in services plan to increase spending 7 percent, to $2.2 billion, following a 21-percent increase. In Europe, a rental car company is expanding operations. In the Caribbean, expenditures are for the construction of a hotel and casino.

Affiliates in "other industries"--agriculture, construction, public utilities, mining, and retail trade--plan a 19-percent increase, to $3.2 billion, in 1989, following a 26-percent increase last year. In developing countries, Chilean affiliates plan large expenditures for mining operations and a Hong Kong affiliate is expanding its power generation capacity. In international shipping, the increase is mostly attributable to the expansion of a cruise line's fleet. 1. Capital expenditures estimates are for majority-owned nonbank foreign affiliates of nonbank U.S. parents. (An affiliate is majority owned when the combined ownership of all U.S. parents exceeds 50 percent.) For affiliates other than those engaged in natural resource exploration and development, capital expenditures include all expenditures that are charged to capital accounts and that are made to acquire, add to, or improve property, plant, and equipment. For affiliates engaged in natural resource exploration and development, capital expenditures also include the full amount of exploration and development expenditures, whether capitalized or expensed. Capital expenditures are on a gross basis; sales and other dispositions of fixed assets are not netted against them. They are reported to BEA in current dollars; they are not adjusted for price changes in host countries or for changes in the value of foreign currencies, because the necessary data are unavailable.

Table : 1.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1984-89

Table : 2.--Revisions to Capital Expenditures

Table : Estimates, 1988-89

Table : 3.--Capital Expenditures by Majority-Owned Affiliates of U.S. Companies in 1987(1)

Table : 4.--Capital Expenditures by Majority-Owned Affiliates of U.S. Companies in 1988(1)

Table : 5.--Capital Expenditures by Majority-Owned Affiliates of U.S. Companies in 1989(1)
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Author:Quijano, Alicia M.
Publication:Survey of Current Business
Date:Mar 1, 1989
Words:2249
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