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Capital expenditures by majority-owned foreign affiliates of U.S. companies, plans for 1992.

MAJORITY-OWNED FOREIGN affiliates of U.S. companies plan to increase capital expenditures 4 percent in 1992, to $65.8 billion, after an estimated 3-percent increase in 1991 (table 1, chart 1). (1) The slow rates of spending growth in 1991-92 follow 3 years of rapid expansion during 1987-90. The slowdown reflects sluggish economic activity abroad, as well as weakness in the U.S. economy, which has reduced corporate cash flow and constrained the ability of parent companies to finance overseas operations. The 4-percent increase in spending projected for 1992 is about in line with the 5-percent increase in domestic capital spending by all U.S. businesses projected by the Census Bureau. (2)

Revisions for 1991

The most recent estimates for 1991 are based on a BEA survey conducted in December 1991; the previous estimates were based on a survey conducted in June 1991. According to the latest survey, planned spending for 1991 was 6 percent lower than that reported 6 months earlier (table 2). The weakness in economic conditions worldwide appears to have had a greater impact on the most recent plans than on those made 6 months earlier, perhaps because these conditions have continued longer than expected. Estimates were revised downward for all industries except "other industries"; the largest revision was in manufacturing, particularly in "other manufacturing," chemicals, and transportation equipment. By area, estimates for all major areas except "Other Africa" and "International" were revised downward; affiliates in the European Communities (EC(12)) and Canada accounted for more than 80 percent of the total revision.

Plans for 1992

This section discusses the 1992 spending plans of majority-owned foreign affiliates in two ways--by area and by industry. In the analysis, information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

Area highlights

By major geographic area, projected spending changes in 1992 are quite mixed, ranging from a 15-percent increase in "Other Asia and Pacific" to a 6-percent decrease in "Australia, New Zealand, and South Africa." In no area is the 1992 growth rate projected to equal the average annual rate recorded during 1987-90 (table 3).

In "Other Asia and Pacific," affiliates plan to increase spending 15 percent in 1992, to $6.6 billion, after a 14-percent increase in 1991. Almost all of the 1992 increase is accounted for by petroleum affiliates, whose spending has been stimulated by the area's growing demand for energy resulting from its rapid economic development.

In the Middle East, affiliates plan to increase spending 11 percent, to $0.9 billion, after a 2-percent increase in 1991. More than 80 percent of the 1992 increase is accounted for by petroleum affiliates.

In Japan, affiliates plan to increase spending 9 percent, to $2.4 billion, after a 6-percent increase. Spending increases by affiliates in wholesale trade and "finance (except banking), insurance, and real estate" are partly offset by a decrease in manufacturing, mainly in chemicals and nonelectrical machinery.

[TABULAR DATA OMITTED]

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 5 percent, to $5.9 billion, after a 9-percent increase in 1991. Almost all of the increase is accounted for by affiliates in Mexico and Brazil. In Mexico, most of the increase is in manufacturing, particularly in transportation equipment. In Brazil, increases are projected in several manufacturing industries after decreases in 1991; the turnaround appears to be partly due to a relaxation of import controls and to other policies favorable to foreign direct investment.

In Europe, affiliates plan to increase spending 4 percent, to $36.1 billion, after a similar increase in 1991. In the EC(12), spending by affiliates is projected to grow only 3 percent in 1992, the same as in 1991. Within the EC(12), increases in spending in several countries--particularly Spain, Germany, France, and the Netherlands--are expected to be partly offset by a decrease in the United Kingdom. Although the dollar amounts involved so far are small, capital spending by affiliates in Europe has to some extent been stimulated by market-oriented economic reforms in Eastern Europe and the opening of the region to foreign direct investment. A few U.S. parent companies have begun to establish production facilities within the region; others have chosen to serve these markets initially by expanding existing affiliates located in Western Europe.

In Canada, affiliates plan to increase spending (1) percent, to $8.5 billion, after a 12-percent decrease in 1991. Sluggish economic conditions continue to restrain spending in several industries.

[TABULAR DATA OMITTED]

In "Australia, New Zealand, and South Africa," affiliates plan to decrease spending 6 percent, to $2.7 billion, after an 11-percent increase in 1991. Most of the decrease is in Australia, mainly in petroleum.

Industry detail

Petroleum. -- Petroleum affiliates plan to increase spending 6 percent in 1992, to $20.8 billion, after an 18-percent increase in 1991 and an average annual increase of 19 percent during 1987-90. The 1992 increase is in sharp contrast to a 14-percent decline in domestic capital spending projected by the Census Bureau for U.S. petroleum companies. (3) These spending patterns reflect a continuing emphasis by U.S. parent companies on overseas exploration and development; this emphasis has occurred partly because exploitable oil and gas reserves abroad are larger than those in the United States, partly in response to favorable financial incentives and production licenses by host governments, and partly because environmental regulations are less restrictive in some countries than in the United States. However, the recent weakness in oil pricess--a consequence of

[TABULAR DATA OMITTED]

the oil glut that has developed during the current period of weak worldwide industrial activity--apparently is constraining growth in planned spending abroad.

Spending increases by affiliates in petroleum are planned in "Other Asia and Pacific," Europe, and the MIddle East. More than 80 percent of the total increase is accounted for by affiliates in "Other Asia and Pacific," which plan to increase spending 34 percent, to $3.9 billion. An increase in oil exploration and development activity in Indonesia, the expansion of refineries in Thailand and Singapore, and the development of natural gas fields in Malaysia have all contributed to the region's spending increase. In Europe, affiliates plan to increase spending 2 percent, to $10.1 billion; affiliates in the Netherlands and Germany more than account for the increase. In the North Sea area, exploration and development activity is expected to continue at about the record levels set in 1991, as an increase in spending by Norwegian affiliates is projected to slightly more than offset a decrease by British affiliates. In the Middle East, the planned spending increase is mainly for the exploration and development of oil reserves in Yemen.

Spending decreases are planned by affiliates in Australia and Canada. In Australia, affiliates plan to decrease spending 10 percent, to $0.9 billion. In Canada, affiliates plan to decrease spending 5 percent, to $2.0 billion. In both countries, the decreases mainly reflect postponement of investment projects until business conditions have improved.

Manufacturing.--Manufacturing affiliates plan to increase spending 5 percent in 1992, to $29.6 billion, after a 4-percent decrease in 1991 and a 20-percent average annual increase during 1987-90. The 1992 increase i above the 3-percent increase in domestic capital spending projected by the Census Bureau for all U.S. manufacturing companies (excluding petroleum manufacturing). By area, most of the increase will occur in the EC(12); an increase is also expected in "Latin America and Other Western Hemisphere." Decreases are expected in Canada and Japan.

Increases in spending are planned in all major manufacturing industries except nonelectrical machinery. In "other manufacturing," affiliates plan to increase spending 11 percent, to $5.6 billion, after a 7-percent decrease in 1991. Large spending increases are planned by producers of consumer nondurables in Germany, France, and the Netherlands for a variety of projects, including the modernization of a formerly State-owned cigarette factory in eastern Germany that was recently acquired by a U.S. company.

In primary and fabricated metals, affiliates plan to increase spending 11 percent, to $1.3 billion, after a 34-percent decrease. Manufacturers of primary aluminum in Brazil and of fabricated products in Spain account for a large portion of the overall increase.

In food products, affiliates plan to increase spending 9 percent, to $2.8 billion, after a 19-percent increase. The increase is centered in Europe, where U.S. producers of soft drinks and breakfast cereals continue to expand their presence. Soft drink producers also are expanding their capacity in Japan.

In electric and electronic equipment, affiliates plan to increase spending 7 percent, to $2.9 billion, after a 5-percent increase. Particularly large spending is planned in the household-appliance industry in the EC(12), where production facilities are being overhauled to produce new standardized products for sale throughout the EC(12) in response to provisions of the EC(12)'s 1992 single-market initiative. (Previously, each country had its own technical standards for goods sold within its borders.) Producing for a wider market should yield economies of scale and, ultimately, lower costs, which, if passed on to consumers, could increase affiliates' market share.

In transporation equipment, affiliates plan to increase spending 6 percent, to $6.1 billion, after a 2-percent decrease in 1991. In Europe, spending is expected to increase only 1 percent, after sharp increases in recent years. Automobile producers are continuing projects to introduce new models and to increase production efficiency, partly in response to rising competition from Japanese-owned producers in Europe. Within the EC(12), sizable increases are planned by affiliates in Spain and Germany. A large decrease is planned by affiliates in the United Kingdom, where recessionary conditions have weakend sales. Outside Europe, affiliates in Mexico and, to a much lesser extent, Brazil plan increases. In Mexico, factors that appear to have stimulated spending include a booming auto market, more favorable government policies toward foreign investment, and the prospects for a free-trade agreement with Canada and the United States.

In chemicals, affiliates plan to increase spending 1 percent, to $6.6 billion, after a 3-percent decrease. The small 1992 increase is the net result of increases in drugs and toiletries and decreases in industrial chemicals. Industrial chemical producers have been experiencing overcapacity, as rapid expansion during 1987-90 has been followed by a weakening of demand resulting from sluggish worldwide industrial activity.

In nonelectrical machinery, affiliates plan to decrease spending 3 percent, to $4.2 billion, after a 7-percent decrease. The decreases in both years mostly reflect reductions planned by computer-manufacturing affiliates, particularly in Canada and Japan.

All other industries.--In all other industries combined, affiliates plan to increase spending 1 percent in 1992, to $15.4 billion, after virtually no change in 1991. In wholesale trade, affiliates plan to increase spending 9 percent, to $4.9 billion, after little change in 1991; the largest increases are in Canada and Japan.

In services, affiliates plan to increase spending 8 percent, to $3.5 billion, after a 9-percent decrease. More than one-half of the increase is in the United Kingdom.

In finance (except banking), insurance, and real estate, affiliates plan to increase spending 5 percent, to $1.8 billion, after an 18-percent decrease. Most of the increase is in Japan and Canada; affiliates in the EC(12) plan decreases.

In "other industries," affiliates plan to decrease spending 10 percent, to $5.2 billion, after a 13-percent increase. (4) About 80 percent of the planned decrease is in the United Kingdom and "Other Asia and Pacific."

Tables 4.1, 4.2, and 4.3 follow.

[TABULAR DATA OMITTED]

(1) Capital expenditures estimated 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 are made to acquire, add to, or improve property, plant, and equipment. For affiliates engaged in natural resource exploration and development, they 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. They are reported to BEA in current dollars and 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 December 1991 by the Bureau of the Census. Although the Census Bureau projection covers all U.S. businesses rather than only U.S. parent companies, the available estimates of domestic capital spending of parent companies (covering 1977 and 1982-89) are significantly correlated with spending by all U.S. businesses.

(3) This figure is from the Census Bureau survey identified in footnote 2. The data from this survey, like the BEA data for foreign affiliates, are classified according to the primary activity of each company. Although the Census Bureau figure is only for companies classified in petroleum manufacturing, these companies include the large, integrated companies that account for much of the total activity in the domestic petroleum industry. Therefore, the inclusion of smaller, independent companies primarily engaged in extraction (included in mining) or other phases of the industry probably would not eliminate the difference between the changes in domestic and foreign expenditures.

(4) "Other industries" consists of agriculture, forestry, and fishing; mining; construction; transporation, communication, and public utilities; and retail trade.
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Article Details
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Author:Fahim-Nader, Mahnaz
Publication:Survey of Current Business
Date:Mar 1, 1992
Words:2230
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