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Capital expenditures by majority-owned foreign affiliates of U.S. companies, latest plans for 1991.

Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, Latest Plans for 1991

Majority-owned foreign affiliates of U.S. companies plan to increase capital expenditures 6 percent in 1991, to $61.2 billion (table 1, chart 1).(1) This increase is considerably less than the 19-percent average annual increase that occurred in 1987-90. The 1991 projected slowdown in growth reflects several factors: Rapid spending increases during the past few years, which have reduced the need for additional overseas capacity; sluggish economic conditions in the United States, which have constrained parent companies' ability to finance overseas projects; and weakening economies in some host countries.

Although the growth in affiliate spending is expected to slow, the historically high level of spending combined with its strength relative to domestic capital spending by all U.S. businesses indicates that U.S. parent companies continue to emphasize overseas operations.(2) Since the latter part of the 1980's, petroleum firms--prompted by relatively low worldwide oil prices compared with the early 1980's--have concentrated their exploration and development efforts abroad, where new oil and gas fields are often larger than those in the United States and can be developed more economically. Manufacturers have been attracted abroad by markets that are expanding, or are expected to expand, faster than those in the United States. Much of manufacturers' spending has been directed towards Europe, where markets are expanding as a result of economic liberalizations, such as the 1992 single-market initiative of the European Communities (EC(12)) and the market-oriented economic reforms in Eastern Europe. Spending has also been directed towards the Far East, where economic growth continues to exceed that in the West.

Organization of the article.--The remainder of this article consists of three sections. The first section discusses revisions from prior estimates for 1990 and 1991. The remaining sections discuss area highlights and industry detail for 1991; in developing the analysis for these sections, information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

Revisions for 1990 and 1991

The most recent estimates for 1990 and 1991 are based on a survey conducted in December 1990; the earlier estimates were based on a survey conducted in June 1990. It should be noted that both surveys were taken before the commencement of military action against Iraq and the subsequent liberation of Kuwait. Thus, any influence of these events on capital spending plans--such as might result from altered expectations about the price and availability of crude oil or from the emergence of new business opportunities in connection with the reconstruction of Kuwait--are not reflected in the current survey results. When such developments are reflected in the results of subsequent surveys, further revisions to 1991 spending plans may occur.

According to the latest BEA survey, capital spending in 1990 was 4 percent higher than reported 6 months ago (table 2). The upward revision in spending comes mainly from affiliates that either (1) updated their capital budgets since last June, (2) failed to report last June and have now reported spending that is higher than BEA had estimated, or (3) were established after June 1990 and have been added to the survey sample. Partly offsetting these revisions were downward revisions that mainly reflected cancellation or postponement of projects in response to deteriorating economic conditions in some host countries.

Planned spending for 1991 has been revised up 8 percent from the last survey. Most of the revision is in petroleum, where unusually high spending was reported for several large affiliates that did not report in the June survey. In addition, as is usually the case for the second estimate for a given year, the revision is related to differences in the timing of BEA's surveys and of reporters' capital budgets. In general, few reporters have completed their capital budgets at the time of the first survey; instead they base their estimates on the best information available, such as prior-year spending, preliminary multiyear spending projections, or strategic plans that disaggregate global capital spending by line of business but not by geographical area. Data reported in the second survey are generally much more accurate because they are based on recent affiliate-level capital budgets.

Area Highlights

Spending in all major geographical areas is expected to grow slower than the 1987-90 average. In Europe, although spending is expected to decelerate, it will grow faster than in other major geographical areas. In "other Asia and Pacific" and "Latin America and other Western Hemisphere," spending will increase much less than in 1987-90. In Canada, spending is expected to fall for the first time in 4 years.

In Europe, affiliates plan to increase spending 11 percent, to $34.7 billion, after an average annual increase of 21 percent in 1987-90. Expanding consumer markets have been attracting new affiliates and encouraging existing affiliates to increase their capacity. The market growth is largely the result of economic liberalizations, such as the reduction of trade impediments under the 1992 single-market initiative in the EC(12) and the economic reforms in Eastern Europe.

The 1992 initiative in the EC(12) seeks to eliminate the remaining trade impediments between EC(12) member countries. Two of its provisions are the establishment of uniform product standards and the deregulation of shipments between member countries. By widening markets, expediting shipments, and lowering transportation costs, such measures are encouraging affiliates to expand capacity.(3) In some member countries, additional economic liberalizations, such as the privatization and deregulation of the British communications industry, are also attracting investment.

The economic reforms in Eastern Europe are encouraging parent companies to expand their EC(12) affiliates to service Eastern Europe and, less commonly, to establish production facilities within the region itself. In 1991, for the first time since this survey began in 1957, Czechoslovakia, Hungary, the Soviet Union, and the former East Germany are expected to host majority-owned affiliates of U.S. companies. Although operating in this region may entail unusual constraints and risks, for some companies these factors are outweighed by the potentially vast future growth in the local market. At this early stage, most of the new affiliates are slated for eastern Germany, largely because German unification has reduced uncertainty and improved prospects for the development of infrastructure and for growth in consumer incomes in eastern Germany.

In "other Asia and Pacific," affiliate spending is projected to increase 7 percent, to $5.2 billion, after a 30-percent average annual increase in 1987-90. Petroleum affiliates, attracted by the region's growing energy demand and host government efforts to lessen dependence on Middle Eastern oil, account for most of the 1991 increase. Although capital spending by manufacturing affiliates will continue to be attracted by rising consumer incomes in 1991, it will be significantly dampened by project completions in Hong Kong, South Korea, and Taiwan. These three countries, along with Singapore, have accounted for roughly two-thirds of the spending in recent years. By far the largest decline will occur in South Korea, where spending may be dampened by rising labor costs, as well as project completions.

In "Latin America and other Western Hemisphere," spending by affiliates is expected to increase 5 percent, to $5.5 billion, after growing at an average annual rate of 17 percent in 1987-90. Although recent economic reforms in some host countries have attracted capital spending, the favorable impact of these reforms in 1991 may be largely offset by weakening economic conditions. In Mexico, spending is projected to slow in many industries, perhaps partly in response to sluggish conditions in the U.S. market.(4) In Brazil and Argentina, where affiliates are more dependent on the local market, 1991 spending will also be dampened by weak economic conditions. In addition, a significant portion of the 1991 slowdown in spending is related to the completion or postponement of a few large projects.

In Canada, affiliates plan to decrease spending 11 percent, to $8.0 billion, after an average annual increase of 11 percent in 1987-90. Decreases are planned in most industries in 1991, largely because of deteriorating economic conditions.

Industry Detail

Petroleum

Petroleum affiliates plan to increase spending 13 percent in 1991, to $18.6 billion, after an average annual increase of 19 percent in 1987-90. Spending growth is projected to be equally rapid at both the "downstream" end of the industry--which consists of transportation, refining, and distribution--and the "upstream" end--which consists of exploration, development, and extraction. However, the upstream projects account for the bulk of the overall increase. Upstream spending is being boosted by host government policies, in the form of production licenses and financial incentives, and by the cash flow generated from rising crude oil prices. Toward the end of 1990, host governments gave approval to a number of ambitious oil extraction projects. In addition, the near-doubling of crude oil prices following the Iraqi invasion of Kuwait led some firms to expand or accelerate exploration and development. These price increases tended to make projects more affordable--by providing ready funds--but not necessarily more profitable, because they were seen as likely to be only temporary.(5) For this reason, the oil-price effect on affiliate spending may be short lived.

Although increases in planned spending are geographically widespread, affiliates in the United Kingdom, Norway, Australia, "other Asia and Pacific," Nigeria, and "international" account for most of the overall increase.(6) Spending by British and Norwegian affiliates will add to the recent upsurge in activity in the North Sea; some of the upcoming projects include building new offshore oil rigs, pipelines, and onshore storage facilities. In Southeast Asia, affiliates in all parts of the petroleum industry are being attracted by the region's rapid economic development; some inland projects in this region, such as the development of oil reserves in Papua New Guinea, require large expenditures because of the remote and rugged terrain. In Nigeria, an affiliate plans to begin a large offshore oil-extraction project following recent financial agreements with its partner, the State-owned petroleum corporation. In "international," increased construction of oil tankers--driven by rising demand for tanker services--accounts for most of the increase.

Decreases in capital spending are significant in only a few regions, including Canada, "other Western Hemisphere," and "other Sub-Saharan Africa." In Canada and "other Sub-Saharan Africa," the decreases follow unusually large expenditures in 1990 that were not matched in 1991. In "other Western Hemisphere," the decrease reflects the completion of new facilities in 1990.

Manufacturing

Manufacturing affiliates plan to increase spending 4 percent in 1991, to $29.8 billion, after a 19-percent average annual increase in 1987-90. By area, most of the overall increase will occur in the EC(12). Spending is also expected to increase in Japan, South America, Australia, and "other Asia and Pacific." These increases will be partly offset by lower spending in Canada. By industry, increases are planned in all major manufacturing industries except primary and fabricated metals and chemicals.

Affiliates in food products plan a 20-percent spending increase, to $2.7 billion, after an average annual increase of 13 percent in 1987-90. The increase is centered in Europe, where U.S. soft drink and breakfast cereal producers are seeking to expand their presence. Expansions are planned both in the highly developed parts of Europe and in the less-developed parts, such as Turkey and eastern Germany. In the Far East, some producers of soft drinks and candy are increasing their capacity.

In electrical and electronic equipment, spending is projected to increase 14 percent, to $2.7 billion, after increasing at a 12-percent average annual rate in 1987-90. Particularly robust spending is planned by household appliance producers in the EC(12), some of whom intend to market their products in Eastern Europe, and by semiconductor producers in "other Asia and Pacific."

Affiliates in nonelectrical machinery plan to increase spending 6 percent, to $4.7 billion, after an average annual increase of 14 percent in 1987-90. As in recent years, much of the 1991 increase is attributable to the overseas expansions of computer manufacturers seeking to offset weak market conditions in the United States. Virtually all of the worldwide increase is projected to occur in the EC(12). Personal computer manufacturers in Ireland and the United Kingdom are expanding their facilities in response to growing demand throughout the EC(12), and, on the continent, plants are being constructed to produce semiconductors.

Transportation equipment producers plan to increase spending 8 percent, to $6.1 billion, after an average annual increase of 19 percent in 1987-90. The increase is centered in the EC(12), where 6 years of rising sales have brought affiliates to full productive capacity. Even during the latter part of 1990, when European car sales began to taper off, some producers were adding extra shifts in order to fully utilize their facilities. In addition, automobile producers are seeking to expand their presence in Eastern Europe, both by increasing the capacity of their EC(12) affiliates and by establishing new Eastern European affiliates. Throughout Europe, affiliates are also spending large amounts to improve manufacturing efficiency and to develop improved products in response to growing competition from Japanese-owned European producers. Elsewhere, spending in Brazil is projected to increase following 2 years of decline.

Affiliates in "other manufacturing" plan to increase spending 2 percent, to $5.6 billion, after a 22-percent average annual increase in 1987-90. Increased spending by producers of consumer nondurables in the EC(12) and in "Latin America and other Western Hemisphere" are partly offset by decreases in Canada.

Affiliates in primary and fabricated metals and in chemicals plan to decrease capital spending in 1991. In primary and fabricated metals, affiliates plan a 15-percent decrease in spending, to $1.3 billion, after an average annual increase of 24 percent in 1987-90. The decrease mainly results from project completions in the Canadian aluminum industry; it is partly offset by project expansions in the Latin American copper industry.

Spending by chemical affiliates is projected to decrease 4 percent, to $6.6 billion, after growing at an average annual rate of 23 percent in 1987-90. Virtually all of the decrease is accounted for by industrial chemical producers, who are experiencing weak demand for their products, problems with overcapacity, and rising petroleum feedstock prices. In drugs and toiletries, however, spending plans are robust.

All other industries

In all other industries combined, affiliate spending is projected to remain virtually constant at $12.8 billion, after a 19-percent average annual increase in 1987-90. Wholesale trade affiliates plan a 4-percent increase, to $4.4 billion, following an average annual increase of 17 percent in 1987-90. The largest increases are in Germany, France, and Japan. A particularly large increase in Germany reflects a soft drink affiliate's planned construction of production and distribution facilities in the eastern part of that country.(7) In France, affiliates selling consumer durables are expanding their distribution facilities. In Japan, affiliates with ancillary manufacturing operations plan to increase their productive capacity.

In finance (except banking), insurance, and real estate, affiliates plan to increase spending 14 percent, to $1.4 billion, after an average annual increase of 5 percent in 1987-90. Roughly one-half of the overall increase is in the real estate industry: One affiliate is developing an office building complex, another affiliate--in real estate leasing--is building factories to produce machinery, and a third affiliate is purchasing sites for fast food restaurants.

Services affiliates plan to increase spending 1 percent, to $3.1 billion, after an average annual increase of 22 percent in 1987-90. EC(12) affiliates in various services industries plan increases. In the United Kingdom, the Government's privatization and deregulation of the communications industry continues to attract affiliates providing services such as fiber-optic cable transmission services, cable television, and voice messaging. In Belgium and Germany, leasing companies are undertaking expansions. Partly offsetting these increases are declines in Japan, Switzerland, and Australia, where large expenditures in 1990 are not expected to be repeated in 1991.

Affiliates in "other industries" plan to decrease spending 7 percent, to $4.0 billion, after a 26-percent average annual increase in 1987-90.(8) The fall in spending largely reflects some sizable equipment purchases in 1990 that were not matched in 1991. These large declines are partly offset by the establishment of fast food restaurants in the EC(12).

Note.--Laura A. March prepared the estimates of expenditures using computer programs designed by Jane M. Fry. [Tabular Data 1 & 2 Omitted] [Chart 1 & 2 Omitted]

(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. Capital expenditures 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. (2)In 1991, domestic capital spending of all U.S. businesses is expected to grow 2 percent, compared with the 6-percent increase for majority-owned foreign affiliates of U.S. firms. In 1987-90, domestic capital spending of all U.S. businesses grew, on average, at less than one-half the rate of capital spending by affiliates (9 percent compared with 19 percent). Estimates of domestic capital spending by all U.S. businesses are from recent surveys conducted by the Census Bureau. (Although the Census Bureau data cover all U.S. businesses rather than only U.S. parent companies, the available data on capital spending of parent companies (covering 1977 and 1982-88) are significantly correlated with spending by all U.S. businesses.) (3)The prospect that the single-market initiative of the EC(12) will result in new and expanded business opportunities appears to be having more impact on 1991 spending than are concerns that new barriers to trade might be erected against non-EC(12) countries. Most of the spending in the EC(12) represents expansion of operations by U.S. parent companies that already have a presence in the EC(12). There is little indication of firms establishing local production facilities to produce goods they now supply to the EC(12) through exports. One possible exception is semiconductor producers, which have recently added production facilities in the EC(12), perhaps in response to a new rules-of-origin policy that imposes customs duties on "non-European" computer chips. (Under this policy, for a computer chip to be considered "European," its circuit must be etched in Europe.) (4)Based on BEA's latest survey of affiliate operations, sales to the United States accounted for 27 percent of total sales by majority-owned Mexican affiliates of U.S. companies in 1988. The U.S. market is particularly important to Mexican affiliates that are located near the U.S. border and are taking part in the Mexican Government's maquiladora program. Under this program, U.S. producers can export components free of customs duties to Mexican affiliates for assembly if at least 80 percent of the finished goods are exported back to the United States. U.S. duties on the goods are levied only on the value added in Mexico. (5)By mid-February 1991--before the conclusion of Operation Desert Storm--oil prices had returned to about their pre-invasion levels (chart 2). (6)"International" comprises affiliates 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. (7)Some affiliates that are classified in wholesale trade because that industry accounts for the largest part of their total sales may also have operations in other industries, such as manufacturing. (8)"Other industries" consists of agriculture, forestry, and fishing; mining; construction; transportation, communication, and public utilities; and retail trade.
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Author:Mataloni, Raymond J., Jr.
Publication:Survey of Current Business
Date:Mar 1, 1991
Words:3326
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