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The international investment position of the United States in 1988.

NOTE.-The sections on "U.S. Direct Investment Abroad" and on "Foreign Direct Investment in the United States' were written by Jeffrey H. Lowe and Alicia M. Quijano, respectively. Harlan King contributed to the data preparation for the accounts other than the direct investment accounts.

THE negative net international investment position of the United States increased $154.2 billion to $532.5 billion in 1988 from $378.3 billion (revised) in 1987 (table 1). Net capital inflows of $137.2 billion were accounted for by record inflows for foreign direct investment in the United States, by strong net foreign purchases of U.S. bonds, by large inflows to U.S. banks to meet the surge in U.S. credit demand, and by inflows for foreign official assets in the United States. Concurrently, net capital outflows from the United States of $82.1 billion were mostly accounted for by continued strength in U.S. banks' lending to the overseas interbank markets, by moderate outflows in U.S. direct investment abroad, and by U.S. net purchases of foreign bonds. Valuation adjustments added $17.0 billion to the negative net position, largely reflecting price appreciation of U.S. stocks held by foreigners and exchange rate depreciation of U. S.-held foreign securities and of U.S. official reserve assets. By yearend 1988, foreign assets in the United States increased to $1,786.2 billion from $1,548.0 billion (revised), and U.S. assets abroad increased to $1,253.7 billion from $1,169.7 billion (revised) (table 2).

Changes in U.S. Assets Abroad

Bank claims

Claims on foreigners reported by banks in the United States increased $54.4 billion to $603.8 billion, reflecting strength in dollar lending to the interbank market overseas in the second half of the year (line 19). Demand for dollar credits from U.S. banks was buoyed by a step-up in economic expansion abroad and by large-scale merger and acquisition activity The level of foreign currency lending was halved; most of the increase in claims was on Japan in the second half of the year. Customers' claims reported by banks increased strongly.

U.S. banks' own dollar claims on foreigners increased $30.4 billion to $490.2 billion; claims on own foreign offices increased $31.8 billion to $256.5 billion, primarily reflecting stepped-up dollar lending to offices in the United -Kingdom and the Caribbean. Funds were transferred to foreign offices in the United Kingdom, particularly in the fourth quarter, to accommodate the increased demand for dollars in the Eurodollar interbank market. Transfers of funds to offices in the Caribbean accommodated stepped-up lending from those offices to U.S. nonbank residents. These transfers were encouraged when interest rates favored borrowing from banks overseas and were especially large in the third quarter. Transfers of funds to offices in Japan were especially large in the second quarter, when demand for dollar credits accelerated in response to the dollar's appreciation against the yen.

U.S. banks' own dollar claims on unaffiliated foreign banks increased $1.9 billion to $129.5 billion; large repayments in the first quarter were more than offset by subsequent increases in claims.

U.S. banks' own dollar claims on other private foreigners and foreign public borrowers dropped $3.3 billion to $104.1 billion. Although claims on Japan continued to increase, because of strong loan demand in Japan, those on Latin America, which included a significant rundown in banks' claims on Mexico, were largely offsetting, Mexico has conducted an active policy of debt conversion, of which one part was an exchange of Mexican Government bonds for Mexico's public sector loans held by foreign commercial banks. U.S. banks' participation in this exchange (roughly a 10percent share) resulted in a drop in U.S. bank claims of $0.4 billion, of which $0.1 billion constituted a writedown of the value of loans. There was little new discretionary lending to other countries with debt-servicing problems. Brazil received some funds after signing a major debt reorganization program and becoming current with its previously suspended interest payments.

U.S. banks' claims payable in foreign currencies, which in the past 2 years have more than doubled, slowed to an increase of $14.8 billion to $66.5 billion. Banks in Japan drew heavily on foreign currency funds at their U.S. offices to meet expansion needs in Euroyen and Asian interbank markets in the third quarter and to accommodate strong domestic credit demand and deposit withdrawals by nonbank residents in the fourth.

Banks' domestic customers' claims increased $9.3 bilhon to $47.9 billion. Money market mutual funds' step-Up of their depositing with and purchasing of Eurodollar certificates of deposit from banks overseas as interest rates rose sharply accounted for $3.2 bilhon of the increase. Other customers' claims increased $6.1 billion, largely from trust certificates issued in U.S. capital markets by foreign governments to fund prepayment of existing Foreign Military Sales (FMS) credits with the U.S. Government.

Foreign securities

Holdings of foreign securities in U.S. portfolios increased $10.0 bilhon to $156.8 billion; net purchases of $7.8 billion and price appreciation of $8.5 billion, mostly in foreign stock holdings, were partly offset by $6.3 billion in exchange rate depreciation (line 15).

Holdings of foreign bonds increased $2.0 billion to $94.0 bilhon; net purchases of $6.9 billion were partly offset by price and exchange rate depreciation of $4.9 billion (line 16). New issues of foreign dollar bonds in the United States were $6.9 billion; redemptions were $5.3 billion. Canadian issues, mostly by Provincial government entities, accounted for 40 percent of placements in the United States, where borrowing costs were substantially lower than in Canada. Several government and quasi-government entities in Western Europe accounted for another 20 percent; some of these borrowers participated in the U.S. market for the first time in several years. Japanese issuers stepped up their placements to 15 percent of the total, while also borrowing heavily in international bond markets. The Mexican govemment placed $0.3 billion of special bonds (with U.S. Government securities as collateral) with U.S. residents in exchange for public sector debt held by commercial banks in the United States. Tunisia placed $0.2 billion in bonds (also with U.S. Govemment backing) to fund prepayment of its FMS credits with the U.S. Govemment.

Strong U.S. purchases of outstanding foreign bonds, mostly Canadian and British gilt-edged bonds with yields substantially above those on U.S. bonds, accounted for $5.3 billion in net additions to U.S. portfolios.

Holdings of foreign stocks increased $8.1 billion; price appreciation of $8.9 billion and net purchases of $0.9 billion were partly offset by exchange rate depreciation of $1.7 billion (line 17). Holdings of Western European stocks increased $5.6 billion, reflecting both a strong recovery in stock prices and small net purchases; French, West German, Swiss, and Italian stocks were added to U.S. portfolios. Purchases of stocks of two large British companies that were denationalized by the British Government offset most of the net sales of other British stocks.

U.S. direct investment abroad and other private assets

U.S. direct investment abroad increased 6 percent or $18.9 billion to $326.9 billion-a slowdown from a 19percent growth rate (line 14). Capital outflows consisted of reinvested earnings of $15.2 billion, a decrease of 55 percent, intercompany debt outflows of $7.8 billion, and partly offsetting equity capital inflows of $5.5 bilhon, primarily reflecting several large liquidations. Substantial capital gains included in 1987 reinvested earnings, largely due to translation of appreciating foreign currencies, were absent in 1988, when the dollar's value in exchange markets stabilized. Operating earnings increased strongly, buoyed by a step-up in economic expansion abroad. A positive valuation adjustment of $1.4 bilhon resulted from the sale of several affiliates for more than book value. (Details on 1988 direct investment developments are in a separate section on "U. S. Direct Investment Abroad" in this article.)

Claims on unaffiliated foreigners reported by nonbanking concerns increased $1.7 billion to $32.9 billion (line 18). Financial claims increased $0.6 bilhon, to $21.0 billion, after falling sharply in 1987; U.S. corporations placed a large amount of funds at U.S. banks' offshore branches in the second quarter of 1988. The branches, in turn, lent the funds to borrowers in the United States. Commercial claims, mainly trade receivables, increased $1.1 billion to $11.9 billion, buoyed by strong growth in U.S. exports.

U.S. official reserve assets and other U.S. Government assets

U.S. official reserve assets increased $2.0 billion to $47.8 bilhon, mostly from acquisitions of foreign currencies (line 3). Large purchases of West German marks and Japanese yen in foreign exchange markets by U.S. authorities in the third quarter accounted for most of the $4.3 billion increase to $17.4 billion of foreign currency holdings. Negative valuation adjustments of $1.5 billion reflected a small decline in foreign currency values and in the market basket of currencies used to value special drawing rights and the U.S. reserve position in the International Monetary Fund.

U.S. Government assets other than official reserve assets decreased $3.0 billion to $85.5 billion; credit disbursements were substantially exceeded by repayments in 1988 (line 8). Disbursements were up slightly: Capitalization of a large amount of unpaid interest by the Government of Egypt was largely offset by a contraction in lending by all major U.S. Government lending agencies. Prepayments of FMS credits accelerated sharply under a new program to ficilitate replacement of outstanding FMS credits with credits at current (lower) interest rates.

Changes in Foreign Assets in the United States

Bank liabilities

Liabilities to private foreigners and international financial institutions reported by U.S. banks increased $68.8 billion to $609.5 billion, reflecting a substantial increase in positions with banks' own foreign offices (line 35). Liabilities to own foreign offices payable in dollars increased $40.4 billion to $288.2 billion; liabilities to unaffiliated foreign banks, which had increased strongly in 1987, decreased $3.6 billion to $120.1 billion. U.S. banks borrowed especially heavily in the second and fourth quarters, when an interest rate differential favored borrowing from abroad, to meet a surge in loan demand to finance large acquisitions in the United States, Funds were drawn heavily from offices in the Caribbean and, to a lesser extent, the United Kingdom and Japan. In addition, funds were borrowed, particularly in the second half of the year, to finance lending abroad, especially to meet the demand for dollar credits from banks in Japan and in the United Kingdom.

Liabilities to other private foreigners and international financial institutions increased $7.7 billion to $77.0 billionthe strongest increase since 1984. Inflows from Latin America accounted for 85 percent of the increase in spite of a substantial rundown of the position with Panama that reflected deteriorating political developments.

Banks' liabilities payable in foreign currencies increased $15.6 billion to $52.6 billion, mostly to meet accelerated demand for yen by banks in Japan in the second half of the year.

Banks' custody liabilities increased $8.8 billion to $52.9 billion, mainly because of significant offshore borrowing from banks in the Caribbean by U.S. nonbank residents in the first and third quarters. As the U.S. prime lending rate increased more than Eurodollar rates, U.S. borrowers elected to switch to overseas sources of funds priced at the London Interbank Offering Rate (LIBOR).

U.S. Treasury securities

Strong foreign demand for marketable Treasury bonds contributed to a 24-percent increase to $96.6 billion in U.S. Treasury securities held by private foreigners and intemational financial institutions (line 30). Net purchases of $20.1 billion, following net sales in the previous year, were partly offset by $1.9 billion in depreciation due to falling U.S. bond prices. As the dollar stabilized in exchange markets, the considerable interest rate differential favoring U.S. bonds over West German and Japanese bonds and a narrowing of the differential of British rates over U.S. rates attracted foreign investors to U.S. bonds. Treasury securities also appealed to investors interested in liquidity and concerned with the risk associated with many corporate securities. Foreign holdings of marketable bonds increased $19.9 billion to $85.4 billion; holdings of shortterm obligations dropped $1.7 billion to $11.3 bilhon. Westem Europeans purchased $11.7 billion of U.S. Treasury securities, and Japanese and other Asian investors purchased most of the remaining $8.4 billion.

Other U.S. securities

Foreign holdings of U.S. securities other than U.S. Treasury securities increased $49.4 billion to $393.6 billion; the increase reflected both net purchases of U.S. corporate and agency bonds and price appreciation of U.S. corporate stocks (line 31).

Foreign holdings of U.S. bonds increased $24.4 billion on net purchases of $26.9 bilhon, partly offset by small price and exchange rate depreciation in the second half of the year (line 32). International demand for U.S. dollar bonds recovered after the first quarter of 1988. Demand strengthened as the dollar stabilized, reducing the exchange risk on U.S. bonds with relatively high yields, particularly in comparison to yields on West German and Japanese bond. Although the rise in interest rates discouraged some longterm borrowing, new U.S. bond issues overseas were reduced less than at home because of buoyant intemational demand for dollar bonds and the slower rise in Eurobond interest rates than in domestic rates.

New issues overseas were $19.4 billion in 1988; those denominated in dollars decreased 42 percent to $10.7 bilhon. Issues denominated in foreign currencies nearly doubled to $8.6 bilhon, primarily in currencies of countries with comparatively high interest rates-United Kingdom, Australia, New Zealand, and Canada. Industrial firms using straight fixed-rate bonds accounted for two-thirds of new issues; their use of bonds convertible into stocks declined. Nonbank financial firms, mainly using floating-rate notes, accounted for most of the remaining new issues.

Net purchases of outstanding U.S. corporate bonds increased five fold to $2.7 billion, and net purchases of outstanding U.S. federally sponsored agency bonds nearly doubled to $4.8 bilhon. Demand from West Germany and Japan was strong, reflecting the dollar's stability, the substantial interest differential favoring dollar bonds, and West German investors' anticipation of a withholding tax to be placed on German securities.

Foreign holdings of U.S. stocks increased $25.0 billion to $198.4 billion: A $25.5 billion price appreciation, reflecting a 14-percent advance in U.S. stock prices, overwhelmed net sales of $0.5 billion (line 33). Net sales by Europeans were almost offset by purchases from Canada and Japan; the latter's buying dropped sharply from 1987 levels. Foreign demand for U.S. stocks had been depressed since the October 1987 market collapse, and subsequent recovery in U.S. prices was less than that in Japan, West Germany, France, and Switzerland. Rising U.S. short-term interest rates, attractive yields on fixed-income securities, and concerns over a possible acceleration of inflation were deterrents to an expansion of foreign holdings of U.S. stocks.

Foreign official assets

Foreign official assets in the Unite States increased $38.6 billion to $322.1 billion (line 21). The large increase reflected the repositioning of deposits from the Eurodollar market by foreign monetary authorities early in the year and intervention purchases of dollars later in the year. Positive and negative valuation adjustments were nearly offsetting. Most of the increase in foreign official holdings was in U.S. Treasury bonds and bills; holdings of bank deposits and corporate securities declined slightly. Dollar assets of industrial countries increased $30.2 billion; dollar assets of OPEC members decreased $3.1 billion, a smaller decline than in recent years; and dollar assets of other countries increased $11.8 billion, mostly accounted for by the newly industrialized countries in the Far East and a few Latin American countries-Argentina, Brazil, and Chile-that were able to replenish some of their depleted dollar holdings.

Foreign direct investment in the United States and other liabilities

Foreign direct investment in the United States increased 21 percent, or $57.1 billion, to $328.9 billion, because of heavy foreign acquisition activity in the United States financed from abroad (line 29). Capital inflows increased to a record $58.4 billion. Equity inflows were substantial-$40.4 billion-and reinvested earnings quadrupled to $6.6 billion; intercompany debt inflows slowed to $11.5 billion but remained strong. Negative valuation adjustments of $1.4 billion were made to restate the value of newly acquired investments to book value. The strong inflow of funds was mainly from the United Kingdom and Japan, including five acquisitions of over $2 .0 billion each, (Details on 1988 direct investment developments are in a separate section o"Foreign Direct Investment in the United States" in this article.)

Liabilities to unaffiliated foreigners reported by nonbanking concerns in the United States increased strongly-$6.1 billion to $35.5 billion-as U.S. borrowing overseas and foreigners' prepayments on dollar credits accelerated (line 34). Financial liabilities, mostly to Western Europe and Caribbean banking centers, surged $3.0 billion to $14.7 billion; larger increases in the U.S. prime rate than in Eurodollar loan rates induced borrowing from banks overseas. Commercial liabilities also increased substantially, $3.6 billion to $20.8 billion, as foreign buyers of U.S. aircraft, mostly in Westem Europe and Asia, made substantial progress payments in the second half of the year.

Direct Investment

U.S. direct investment abroad

The U.S. direct investment position abroad increased 6 percent ($18.9 billion) in 1988, to $326.9 billion, compared with 19 percent in 1987 (table 3). The 1988 rate of increase-the slowest since 1984-reflected a sharp drop in reinvested earnings and a shift to equity capital inflows; intercompany debt outflows increased slightly.

Reinvested earnings declined $19.1 billion, to $15.2 billion, primarily because of two factors. First, the U.S. dollar stabilized in 1988, after having generally depreciated against major foreign currencies since 1985. The depreciation had resulted in large capital gains from translating affiliates' foreign-currency-denominated assets and liabilities into U.S. dollars; these gains became part of affiliates' reinvested earnings, because they were not available for distribution. In 1987, capital gains were a record $16.2 billion, almost all of which were from translation; in contrast, in 1988, there were very small capital losses due to the relative stability of the dollar.

Second, the portion of operating earnings (earnings, excluding capital gains and losses) that was reinvested declined substantially. The sharp decline may have been in response to higher U.S. interest rates. U.S. parent companies may have found it more cost effective to finance domestic expansion and corporate restructuring by repatriating a larger portion of their increased overseas profits rather than by borrowing in the United States. (Overseas operating profits rose $8.9 billion in 1988, to a record $50.0 billion.) Some U.S. parent companies may have also felt that the dollar had reached a low against foreign currencies and that it would be advantageous to accelerate repatriation of earnings before a strengthening dollar resulted in a lower conversion value.

The $9.1 billion shift to equity capital inflows of $5.5 billion contributed to the slower growth in the position. Equity increases to acquire new affiliates or to increase parents' equity in existing affiliates were smaller, while equity decreases from partial or total sales of affiliates or retums of capital were larger, than in 1987. Petroleum and finance affiliates accounted for nearly all of the shift. In petroleum, the shift mainly reflected selloffs of whole or partial interests in four affiliates; in 1987, in contrast, two large affiliates were acquired. In finance, the shift was due to the absence in 1988 of the very large capital contributions to Bermudan affiliates that had occurred in 1987 and to the liquidation of a Netherlands Antillean affiliate in 1988.

In contrast to the decline in reinvested earnings and the shift to equity capital inflows, intercompany debt outflows increased $1.6 billion, to $7.8 billion. A $2.2 billion shift to outflows in petroleum and a $0.8 billion increase in outflows to other nonmanufacturing affihates were partly offset by a $1.4 billion shift to inflows in manufacturing. In petroleum, the shift to outflows partly reflected a decrease in U.S. parents' payables to their affiliates due to lower crude oil prices in 1988. In other nonmanufacturing industries, the increase in outflows was more than accounted for by an unusually large loan to a British affiliate to help finance its investment banking and securities trading activities throughout Europe. In 1987, the affiliate had borrowed from other European affiliates of its parent and had used the funds to repay loans from its parent. In manufacturing, the partly offsetting shift to inflows reflected affiliates' repayments-out of their sharply higher operating earnings-of outstanding loans from U.S. parents.

By account.-The $18.9 billion increase in the position consisted of capital outflows of $17.5 billion and valuation adjustments of $1.4 billion. Capital outflows consisted of reinvested earnings of $15.2 billion and intercompany debt outflows of $7.8 bilhon, partly offset by record equity capital inflows of $5.5 billion. (For estimates of capital outflows by account, see table 5 in "U.S. International/Transactions, First Quarter 1989," on page 78 of this issue.)

Equity capital inflows, although widespread by industry, were particularly large in petroleum and in finance and insurance. In petroleum, the inflows mostly resulted from the previously mentioned selloffs of four affiliates-one each in Germany and the United Kingdom and two in Colombia-by four different U.S. parents. The sale of the German affiliate and one of the Colombian affiliates reflected restructuring of their U.S. parents' worldwide operations. The sale of the German affiliate followed its U.S. parent's emergence from bankruptcy. The sale of the Colombian affiliate, together with several other smaller affiliates elsewhere of the same U.S. parent, reflected the parent's decision to leave the oil and gas business. Proceeds from these sales were used to reduce the parent's debt, The sale in the United Kingdom and the other one in Colombia were of minority interests. In the United Kingdom, a U.S. parent sold its interest in a large affiliate shortly after the interest was purchased in late 1987; it used some of the proceeds to acquire a smaller British company with sizable petroleum reserves. In Colombia, the sale was of a partial interest in an affiliate that owns oil and gas fields.

In finance and insurance, the equity inflows were more than accounted for by retums of capital from, or liquidations of, Netherlands Antillean affiliates.' Partly offsetting were outflows to establish and finance a holding company in the United Kingdom. The holding company, in turn, used the funds to acquire the remaining shares of an insurance company in which its U.S. parent had held a minority interest.

About two-thirds of the intercompany debt outflows were for U.S. parents' repayments of loans to their Netherlands Antillean finance affiliates. Most of the remaining outflows were also in finance, the largest of which was the loan to a British affiliate mentioned earlier.

Reinvested earnings, at $15.2 bilhon, were at their lowest level since 1984, despite record operating earnings. One factor was the absence in 1988 of capital gains due to dollar depreciation that had characterized the 1985-87 period. In addition, some large affihates, paiticularly in petroleum and machinery manufacturing in Europe, had negative reinvested earnings-that is, their distributed earnings exceeded their current-period profits. The sizable distributions by these affiliates may have reflected their parents' need for funds in the United States for capital investment, corporate restructuring, and payment of dividends. By industry, manufacturing affiliates accounted for just under one-half of reinvested earnings, and other nonpetroleum affiliates combined accounted for the remainder. Reinvested earnings of petroleum affiliates were near zero, partly because of several unusually large dividend payments.

Valuation adjustments were $1.4 billion. Positive adjustments resulted from the above-mentioned sales of petroleum affiliates and of several small manufacturing affiliates for more than book value. These adjustments were partly offset by negative adjustments, which mostly reflected corrections of errors in the ownership classification of three affiliates-two in petroleum and one in "other industries."

By country.-The position rose 6 percent ($12.8 billion), to $245.5 billion, in developed countries. Among these countries, the largest increase $6.0 bilhon-was in the United Kingdom. Much of the increase reflected the unusually large loan to a finance affiliate mentioned earlier and the reinvestment of petroleum affiliates' earnings. In addition, equity outflows to the United Kingdom, although small, were larger than those to any other country. They were mostly related to the previously mentioned purchase of the remaining shares in an insurance company. Moderate increases in position in most other European countries, mostly attributable to reinvested eamings, were offset by a substantial decline in position in Germany and a smaller decline in Switzerland. The $3.1 billion decline in Germany was due to the previously mentioned sale of a petroleum affiliate and to negative reinvested earnings of machinery affiliates. In Switzerland, the $0.8 billion decline in position resulted from negative reinvested earnings of a petroleum trading affiliate that paid an unusually large dividend.

Among other developed countries, the largest increases in position were in Canada ($2.9 billion), Japan ($2.2 billion), and Australia ($1.9 billion). In all three countries, the increases largely reflected growth in manufacturing affihates' operating eamings, most of which were reinvested.

In developing countries, the position increased 9 percent ($6.2 billion), to $76.9 billion. Most of the increase $4.4 billion-was in Latin America, particularly in the Netherlands Antilles and Brazil. In the Netherlands Antilles, the increase reflected U.S. parents' repayments of loans from their finance affiliates, partly offset by related reductions in their equity stakes. In Brazil, the increase resulted from reinvested earnings of manufacturing affiliates and may reflect restrictions by that country on repatriation of earnings. Dampening the increases elsewhere in Latin America was a sharp dechne in the position in Colombia, which reflected the previously mentioned sales of petroleum operations.

The remainder of the increase in developing countries was more than accounted for by "other Asia and Pacific." It mostly resulted from reinvested earnings and reflected strong regional economic growth. The increase was widespread by country, except for declines in Thailand and Indonesia, and was mainly in electrical machinery manufacturing, banking, and finance. In contrast, the position grew slightly in "other Africa" and declined in the Middle East.

Foreign direct investment in the United States

The foreign direct investment position in the United States increased 21 percent ($57.1 billion) in 1988, to $328.9 billion, following a 23-percent increase in 1987 (table 4)." The strong growth primarily reflected the large number and size of acquisitions of new U.S. affiliates financed from abroad. The improved performance of existing U.S. affiliates, whose higher eamings were largely reinvested, also contributed to the growth.

In recent years, many foreign multinational companies have increased their investments in the United States as a means of pursuing a strategy of rapid global expansion and diversification. By acquiring U.S. companies, foreign multinationals can gain access to the large U.S. market, increased manufacturing capacity, and new technology.

The growth in investment may have also been encouraged by concerns over possible U.S. restrictions on foreign merger and acquisition activity here. Other factors include the brisk pace of economic growth in the United States and in many other developed countries. Economic growth here attracts foreign direct investors because of the potential profitability of their U.S. affiliates' operations; economic growth abroad contributes to the foreign parant's profitability and provides the funds needed for investment.

Capital inflows increased $11.5 billion, to a record $58.4 bilhon, in 1988. A substantial increase in equity inflows and a quadrupling of reinvested earnings more than accounted for the increase; in contrast, intercompany debt inflows declined.

Equity capital inflows increased $9.7 billion, to $40.4 billion. The increase was from the already high levels of the previous 2 years. It primarily reflected acquisitions of U.S. businesses by foreign direct investors. The largest increases occured in wholesale trade, "other manufacturing," and insurance.

Reinvested earnings increased $5.1 billion, to $6.6 billion. The increase resulted from a combination of factors-widespread increases in operating earnings, a shift to capital gains from capital losses, acquisitions of new U.S. affiliates, and an increase in the share of affiliate earnings that was reinvested rather than distributed to foreign parents. Operating earnings increased $4.8 bilhon, to $11.2 billion, primarily in banking, manufacturing (especially chemicals), and wholesale trade. Capital gains were $0.9 billion, a shift of $1.2 billion from capital losses in 1987. The shift was more than accounted for by affiliates in manufacturing and finance. In manufacturing, a U.S. affiliate in food products realized large capital gains from the sale of some operationsand used the proceeds to finance further acquisitions.

Intercompany debt inflows declined $3.3 billion, to $11.5 billion. Sizable inflows during the year, mostly to finance acquisitions, were partly offset by several affiliates' repayments of debt incurred during 1987.

By account.-The $57.1 billion increase in the position in 1988 consisted of capital inflows of $58.4 billion and negative valuation adjustments of $1.4 billion. Capital inflows consisted of equity capital inflows of $40.4 billion, intercompany debt inflows of $11.5 billion, and reinvested earnings of $6.6 billion.

Equity capital inflows mainly financed acquisitions of U.S. businesses. Such financing by foreign parents may be structured in several ways. The foreign parent may purchase all or part of the equity of a U.S. business directly, or it may contribute capital to an existing U.S. affiliate that, in turn, acquires the U.S. business.

In 1988, there were five acquisitions of over $2.0 billion each, four of which were partly financed by equity inflows from the foreign parent; the fifth was mostly financed through intercompany debt. The largest of the equity inflows was from the United Kingdom, the others were from Japan. The British inflow involved a printing, publishing, and communications concern's acquisition of a publishing and information services concern. The largest Japanese inflow was a capital contribution to a U.S. wholesale trade affiliate of a Japanese manufacturer of electronics products that purchased a record company. The next largest inflow partly financed the acquisition of a large U.S. tire manufacturer. Finally, a Japanese construction company purchased a hotel chain based in Seattle.

Reinvested earnings were widespread by industry. In manufacturing, U.S. chemical affiliates of European companies accounted for over one-half of the reinvested earnings. Over 90 percent of these affiliates' operating earnings were reinvested, probably in order to finance research and development and to expand productive capacity. In food products, the reinvested earnings mostly reflected capital gains from the sale of affiliate assets. In wholesale trade, reinvested earnings were largely accounted for by U.S. affiliates of British and Japanese parents. In contrast, reinvested earnings were negative in real estate an"other industries."

One-half of intercompany debt inflows were in "other manufacturing," mainly in publishing. A substantial portion of the inflows helped finance acquisitions of U.S. affiliates by an Australian publishing and communications company and by British publishing companies. In retail trade, a British conglomerate loaned its U.S. affiliate funds to purchase a U.S. insurance company. Other large inflows in real estate and wholesale trade financed existing operations as well as acquisitions. Partly offsetting were large intercompany debt outflows in petroleum and finance. In petroleum, the U.S. affiliate of a British company repaid debt incurred in 1987. This debt was used to raise the parent's ownership share of the affiliate to 100 percent. In finance, several U.S. affiliates of European banks loaned funds to their foreign parents.

Negative valuation adjustments of $1.4 billion resulted from offsets to purchases of U.S. affiliates for more than book value, The adjustments were primarily in manufacturing, particularly in food products, chemicals, and "other manufacturing."

By country.-In 1988, as in previous years, the United Kingdom accounted for the largest share of the increase in the position-39 percent. Japan's share was second largest, at 32 percent. Germany and Canada each accounted for 6 percent of the increase.

The position of British parents increased $22.2 billion, to $101.9 billion. All industries except finance had substantial increases. The largest increases occurred in "other manufacturing" and retail trade and were mostly attributable to the acquisitions mentioned earlier. There were several other significant acquisitions, although not as large, in "other industries" and banking. A valuation adjustment in petroleum also contributed to the increase. The ownership of a U.S. affiliate of an Anglo-Dutch concern was transferred from a Netherlands holding company to the British parent. This transfer caused the British position to increase and the Netherlands position to decrease by the same amount.

The position of Japanese parents increased $18.2 billion, to $53.4 billion. The largest increase was in manufacturing and is mostly attributable to acquisitions in "other manufacturing," primary and fabricated metals and machinery. Other large increases, which reflected the sizable acquisitions mentioned earlier, occurred in real estate, "other industries," and wholesale trade.

The increases in the positions of German and Canadian parents were substantially smaller than those of British and Japanese parents. The position of German parents increased $3.5 billion, to $23.8 billion. The increase was primarily in manufacturing, reflecting several medium-sized acquisitions in machinery and a valuation adjustment in chemicals. The large valuation adjustment occurred as a result of the liquidation of the Netherlands Antillean company owned by a German chemical manufacturer, which caused ownership of the Netherlands Antillean company's U.S. affiliate to shift to the German parent. The position of Canadian parents increased $3.3 billion, to $27.4 bilhon. Increases were widespread by industry; the largest were in manufacturing and "other industries." The increase in "other industries" primarily reflected acquisitions by two Canadian transportation companies.
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Author:Scholl, Russell B.
Publication:Survey of Current Business
Date:Jun 1, 1989
Previous Article:U.S. multinational companies: operations in 1987.
Next Article:U.S. international transactions, first quarter 1989.

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