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

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

Majority-owned foreign affiliates of U.S. companies plan to increase capital expenditures 10 percent in 1991, to $67.3 billion, after a 19-percent increase in 1990 (table 1, chart 1).(1) The projected slowdown in growth reflects several factors: Rapid growth in spending during the past few years, which has moderated 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. [Tabular Data Omitted]

Although growth in spending by affiliates is expected to be slower in 1991 than in 1990, it will be significantly faster than that in domestic spending, as U.S. multinational companies continue to emphasize foreign operations. The 1991 increase will represent the fifth consecutive year of growth in capital expenditures abroad and substantially exceeds the projected 1991 increase of 0.5 percent in domestic capital spending by all U.S. businesses.(2) As discussed in the section "Industry Detail," the emphasis on foreign operations is particularly evident in petroleum and, to a lesser extent, in manufacturing.

Organization of the article. - The remainder of this article consists of three sections. The first section discusses revisions to the previously published estimates for 1989, 1990, and 1991. (In the past, this article also presented spending projections for the year ahead; however, a study of affiliate budget cycles showed that a survey in June, timed to permit presentation of results in September, was too early to obtain reliable capital spending plans for the year ahead. As a result, the first estimates of spending for 1992 will be published in March 1992 (see the box on page 34).) The remaining sections discuss area highlights and industry detail for 1991; in the analysis, information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

Revisions

The estimates of capital expenditures for 1989-91 have been revised to incorporate information from BEA's 1989 benchmark survey of U.S. direct investment abroad.(3) In addition, the estimates for 1990-91 were revised to incorporate information from the latest survey of capital expenditures.

Benchmark survey information. - The revised estimates for 1989-91 incorporate expenditures data for foreign affiliates that were reported in the 1989 benchmark survey and that should have been reported, but were not, in the capital expenditures surveys for 1989. Incorporating data for these newly identified affiliates, while improving the spending estimates for 1989-91, has resulted in a break in series between 1988 and 1989; therefore, comparisons between the 1988 and 1989 estimates should be made with caution.

As a result of adding expenditures by the newly identified affiliates, the estimate of actual capital spending for 1989 has been revised up 7 percent, to $51.5 billion; nearly two-thirds of the total revision is in manufacturing and services. For 1990 and 1991, these affiliates added about 7 percent to the estimate of total spending for 1990 and 6 percent to the estimate for 1991.

Information from the latest capital expenditures survey. - The incorporation of information from the latest BEA survey, which was conducted in June, lowered the estimate of total capital expenditures for 1990 by 1 percent and raised the estimate for 1991 by 4 percent. This information and the information for newly identified affiliates from the benchmark survey together have raised the estimates of spending for 1990 and 1991 by 6 percent and 10 percent, respectively, from the estimates published in March (table 2). For 1990, more than one-half of the total revision is in "other industries" and in finance (except banking), insurance, and real estate. For 1991, more than one-half of the total revision is in petroleum and in "other industries."

Table : Table 2. - Revisions to Capital Expenditures

Table : Estimates, 1990-91
 Percent change
 from preceding
 1990 1991 year
 1990 1991
 Billions of dollars


Date of BEA survey:(1)
 June 1989 49.9 2
 December 1989 54.9 13
 June 1990 56.0 56.6 17 1
 December 1990 58.0 61.2 21 6
 June 1991 61.2 67.3 19 10
 Percent


Addenda:

Revision from previous

to most recent 6 10

estimate

Revision from first to most

recent estimate 23 19

(1). The results of each survey are published in the Survey of Current Business issued 3 months after the month of that survey.

Area Highlights

By major geographic area, changes in planned spending in 1991 are quite mixed: In Europe in "Other Asia and Pacific," and in "Latin America and Other Western Hemisphere," spending is expected to grow more slowly in 1991 than in 1990. In Japan, it is expected to grow faster. In "Australia, New Zealand, and South Africa," spending is expected to increase sharply, after a substantial decrease in 1990.

In Europe, affiliates plan to increase spending 12 percent in 1991, to $37.6 billion, after a 29-percent increase in 1990. These increases may partly reflect U.S. multinational companies' expectations that the moves toward greater economic integration within the European Communities (EC(12)) and the market-oriented economic reforms in Eastern Europe will result in an expansion in consumer markets. This potential for expansion may have encouraged both the establishment of new affiliates and the expansion of existing ones. The potential for market growth is particularly high for automobile producers in Eastern Europe and for computer producers throughout Europe, because the market for these goods is less saturated in those areas than in the United States. In addition, manufacturing affiliates throughout Europe are striving to improve production efficiency and to develop improved products in response to growing competition from Japanese-owned European producers.

In "Other Asia and Pacific," affiliates plan to increase spending 18 percent, to $6.0 billion, after a 22-percent increase. Most of the 1991 increase is accounted for by an increase in spending by petroleum affiliates; these affiliates are attracted by the area's growing demand for energy and by host-government efforts to lessen dependence on Middle Eastern oil. Spending increases are planned by affiliates in "other industries" and in manufacturing in response to rising consumer incomes. Almost all of the increase in "other industries" is in Hong Kong. In manufacturing, increases in Singapore and Taiwan are partly offset by decreases in Hong Kong and South Korea. These four countries have accounted for roughly two-thirds of the spending by affiliates in recent years.

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 9 percent, to $5.6 billion, after a 13-percent increase. In Mexico, affiliates plan to increase spending 20 percent, to $1.2 billion, perhaps in response to the prospect of a free-trade agreement with the United States and Canada and an improving climate for foreign direct investment. In Brazil, affiliates in many industries are planning to reduce spending.

In Japan, affiliates plan to increase spending 11 percent, to $2.3 billion, after a 3-percent increase. Most of the 1991 increase is in manufacturing, mainly in chemicals and in food products.

In "Australia, New Zealand, and South Africa," affiliates plan to increase spending 29 percent, to $3.3 billion, after a 25-percent decrease. Almost all of the increase is in Australia, where affiliates in petroleum and in "other industries" plan large spending increases.

In Canada, affiliates plan to hold spending constant at $9.6 billion, after an 8-percent increase.

Industry Detail

Petroleum

Petroleum affiliates plan to increase spending 23 percent in 1991, to $20.5 billion, after a 27-percent increase in 1990. Both increases reflect a continuing emphasis by U.S. parent companies on overseas exploration and development. This emphasis has resulted from several factors. First, oil and gas reserves abroad are potentially larger and can be developed more economically than those in the United States. Second, host governments have policies that offer favorable production licenses and financial incentives, including recent changes in the basis for taxing petroleum operations in several countries in the North Sea area. Third, lower development and transportation costs in the North Sea area have improved the potential returns on investment. Fourth, the recent crisis in the Persian Gulf has spurred petroleum firms to locate and develop sources of crude oil outside the Middle East. Fifth, environmental concerns in the United States have tended to restrict the areas where petroleum resources can be developed; in Europe, environmental concerns have encouraged investment in production facilities for natural gas (also classified in the petroleum industry), which is displacing coal and oil in power generation.

The increase in planned spending by petroleum affiliates is geographically widespread. Nearly one-half of the total increase is accounted for by affiliates in the United Kingdom, which plan a 34-percent increase in spending, to $6.8 billion. British and Norwegian affiliates are increasing exploration and development activity in the North Sea from levels that were already record-high. In Southeast Asia, affiliates continue to increase spending in response to the growing energy needs stemming from the area's rapid economic development. In Nigeria, an affiliate plans to begin a large gas project following recent financial agreements with its partner, the State-owned petroleum corporation. In "International," affiliates plan to increase spending for the construction of oil tankers.(4)

One stimulus to spending in the North Sea area may be the recent restructuring of taxes on the petroleum industry so that mainly profits, rather than gross revenues, are taxed. Under this sytem, which has been adopted by the United Kingdom, Denmark, Norway, and the Netherlands, firms may be more willing to invest because they will not incur significant tax liabilities unless the operations are profitable and because the taxes that are assessed will generally come later in a project's life. Spending in the North Sea area may also have been encouraged by the reductions in exploration and transportation costs that have resulted from advances in undersea exploration and development techniques and from the availability of an extensive pipeline system connecting major producing areas with inland terminals and refineries. Some of the planned North Sea projects involve exceptionally large expenditures, including those for the construction of offshore oil rigs, pipelines, and onshore storage facilities.

Manufacturing

Manufacturing affiliates plan to increase spending 5 percent in 1991, to $30.9 billion, after a 16-percent increase. By area, most of the increase will occur in the EC(12). Spending is also expected to increase in Japan, Australia, and Central America. A decrease in spending is expected in Canada. By industry, increases in spending are planned in all major manufacturing industries except primary and fabricated metals and nonelectrical machinery.

In food products, affiliates plan a 30-percent spending increase, to $2.8 billion, after a 9-percent increase in 1990. The 1991 increase is centered in Europe, where U.S. soft drink and breakfast cereal producers are seeking to expand their presence; these expansions are planned both in the highly developed areas of Europe and in the less-developed areas, such as Turkey and eastern Germany. Producers of soft drinks also are expanding their capacity in South America.

In electric and electronic equipment, affiliates plan to increase spending 13 percent, to $2.9 billion, after a 14-percent increase. Semiconductor producers plan sizable increases in spending in "Other Asia and Pacific" and, to a lesser extent, in Japan.

In "other manufacturing," affiliates plan to increase spending 8 percent, to $5.8 billion, after a 1-percent decrease. Increases in spending by producers of consumer nondurables in the Netherlands, Germany, and France are partly offset by decreases in spending by affiliates in Canada.

In transportation equipment, affiliates plan to increase spending 4 percent, to $6.2 billion, after a 29-percent increase. Increases in spending by affiliates in Canada and in South America are expected to more than offset a slight decrease in spending by affiliates in Europe. In Canada, the increase reflects retooling expenses for production of a new line of midsized cars. In South America, almost all of the increase is in Brazil, where an industrial-competitiveness incentive program was recently introduced; the program will lower taxes and capital costs. In Europe, spending is expected to decrease 1 percent, after sharp increases in recent years, but the level of spending remains high by historical standards. Within the EC(12), an increase in spending by affiliates in Germany is more than offset by significant declines in spending by affiliates in the United Kingdom, Spain, and Italy, where auto sales currently are sluggish. Automobile producers are undertaking projects to introduce new models and to increase production efficiency, partly in response to rising competition from Japanese-owned European producers. They are also increasing capacity in response to the high level of demand in Germany and the expansion and development of auto markets in Eastern Europe. They are seeking to expand their presence in Eastern Europe both by increasing the capacity of their EC(12) affiliates to serve the Eastern European market and by establishing new affiliates in Eastern Europe itself.

In chemicals, affiliates plan to increase spending 3 percent, to $6.9 billion, after a 24-percent increase. An expected increase in drugs and toiletries will more than offset an expected decrease by industrial chemical producers, who are experiencing weak demand, overcapacity, and rising raw material costs.

In nonelectrical machinery, affiliate spending is projected to remain virtually constant, at $4.7 billion, after a 13-percent increase.

In primary and fabricated metals, affiliates plan to decrease spending 15 percent, to $1.5 billion, after a 28-percent increase. The decrease mainly results from project completions in the Canadian aluminum industry.

All other industries

In all other industries combined, affiliates plan to increase spending 4 percent in 1991, to $15.8 billion, after an 18-percent increase in 1990. Wholesale trade affiliates plan a 14-percent increase, to $5.0 billion, after a 13-percent increase. The largest increase is in Germany, partly reflecting a soft drink affiliate's plans to construct production and distribution facilities in the eastern part of the country.(5) Sizable increases are also planned in Spain and France.

In "other industries," affiliates plan to increase spending 8 percent, to $5.5 billion, after a 26-percent increase.(6) About three-fourths of the increase is in Canada, mainly in mining and in retail trade.

In finance (except banking), insurance, and real estate, affiliates plan to decrease spending 2 percent, to $2.0 billion, after a 30-percent increase. Most of the decrease is in the EC(12) and Canada; affiliates in "other Europe" and in "Latin America and Other Western Hemisphere" plan increases in spending.

In services, affiliates plan to decrease spending 8 percent, to $3.3 billion, after a 5-percent increase. About two-thirds of the decrease is in "Latin America and Other Western Hemisphere," where affiliates in the hotel industry plan to reduce spending.

[Tabular Data 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.) 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 those exploration and development expenditures that are expensed on the books of the affiliates. Capital expenditures are measured 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.

(2.) The projected increase in capital spending by all U.S. businesses is from a survey conducted in July by the Bureau of the Census. 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.) An article presenting the preliminary results of the 1989 benchmark survey is scheduled for the October 1991 Survey of Current Business. Following the release of final data from the 1989 benchmark survey, scheduled for the summer of 1992, the capital expenditures series will be revised further to incorporate more complete information from that survey.

(4.) "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.

(5.) 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.

(6.) "Other industries" consists of agriculture, forestry, and fishing, mining; construction; transportation, communication, and public utilities; and retail trade.
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Author:Fahim-Nader, Mahnaz
Publication:Survey of Current Business
Date:Sep 1, 1991
Words:2772
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