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Capital expenditures by majority-owned foreign affiliates of U.S. companies, latest plans for 1993.

MAJORITY-OWNED FOREIGN affiliates of U.S. companies (MOFA'S) plan to increase capital expenditures $4.2 billion, or 7 percent, to $67.4 billion in 1993, after virtually no change in expenditures in 1992 (table 1,chart 1).(1) The increase in spending planned by MOFA'S is in line with the 7-percent increase in domestic capital spending planned by all U.S. businesses.(2) However, the estimates of current-dollar spending by MOFA'S are probably depressed by the effects of dollar appreciation in the last half of 1992; thus, in real terms, the planned increase in their spending probably is higher than that for all U.S. businesses.

The $4.2 billion increase in planned spending by MOFA'S is concentrated in two areas--$2.1 billion in Asia and Pacific, mainly in several newly industrialized countries, and $1.2 billion in "Latin America and Other Western Hemisphere," particularly in Mexico and Brazil. The rapid growth in these countries' domestic markets suggests that the increased capital spending may in large part be prompted by the need for expanded capacity to serve local markets.(3)

In contrast to the planned 1993 growth in spending in Asia and Pacific and "Latin America and Other Western Hemisphere," a small ($0.2 billion) spending decrease is planned in Europe, where business conditions remain generally weak. Nonetheless, because of their large local markets and predominant position in the global economy, the European and other major industrial countries continue to account for the bulk of affiliates' total capital spending. MOFA'S located in (non-U.S.) member countries of the Organisation for Economic Co-operation and Development (OECD), for example, account for 71 percent of total planned capital expenditures by MOFA'S in 1993.(4)

Valuation issues.--The estimates of capital spending by MOFA'S are in current dollars; they are not adjusted for changes in prices in host countries or for changes in foreign exchange rates, both of which affect the relationship between changes in current-dollar spending and changes in the real volume of capital goods purchased by affiliates. From mid-1992 to mid-1993, wholesale prices in major host countries increased an average of about 2 percent, and the U.S. dollar appreciated about 14 percent against the currencies of those countries.(5) (Most of the appreciation occurred in the last half of 1992.) Inasmuch as dollar appreciation lowers the dollar value of a given amount of spending denominated in foreign currencies, these figures tend to suggest that growth in the real volume of spending in 1993 is significantly above the 7-percent dollar increase.

Comparison with Previous Estimates

The estimates of capital expenditures by MOFA'S for 1992 and 1993 presented in this article are based on a BEA survey conducted in June 1993. These estimates update previous estimates, published in the March 1993 SURVEY OF CURRENT BUSINESS, that were based on a survey conducted in December 1992. For 1992, the updated estimate of spending, which now represents actual spending, is 4 percent lower than the previous estimate (table 2). For 1993, the updated estimate of planned spending is also 4 percent lower.

Affiliates in all major industries except services and "other industries" have reduced their spending plans for 1993. The reductions are concentrated in manufacturing--particularly in transportation equipment and in chemicals and allied products; they may largely reflect increased deferrals and cancellations of expansion projects due to weak economic conditions abroad and unsettled conditions in European currency markets. However, to the extent that it was not anticipated at the time of the December survey, the 2-percent appreciation of the dollar that occurred during the first 6 months Of 1993 may also have reduced the dollar value of spending plans.

By area, the plans for 1993 have been reduced for all major areas except "International," Africa, and Canada; more than go percent of the reduction was accounted for by Europe.(6)

Plans for 1993

This section discusses 1993 capital spending plans for MOFA'S and changes in spending from 1992 to 1993 by area and by industry. It should be noted that changes may result from changes in spending by existing affiliates, the addition of spending by affiliates that have been newly established or acquired, or the elimination of spending by affiliates that have been sold or liquidated. In the discussion, information from outside sources, mainly press reports, has been used to supplement BEA'S survey data.

Area highlights

Affiliates in all major areas except Europe plan to increase spending in 1993. As planned, the fastest growth in spending will occur in "Latin America and Other Western Hemisphere," Asia and Pacific, and Africa. In Canada, spending is expected to increase for the first time in 3 years. In Europe, spending is expected to decrease.

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 22 percent in 1993, to $7.0 billion, after a 6-percent increase in 1992. Most of the increase is accounted for by affiliates in Mexico and Brazil--two of the largest economies in the area--but affiliates in several other countries also plan to increase spending. In both countries, but especially in Brazil, affiliates have produced mainly for local markets; in 1991, local markets were the destination of 87 percent of Brazilian affiliates' sales and 71 percent of Mexican affiliates' sales.

In Mexico, affiliates plan to boost spending 34 percent, to $2.4 billion, after a 42-percent increase. The continued strong spending in Mexico reflects the favorable investment climate produced by a growing economy, by liberalized policies toward foreign direct investment in recent years, and by the prospective free-trade agreement with the United States and Canada. Most of the increase is accounted for by affiliates in manufacturing, particularly in transportation equipment, chemicals and allied products, and food and kindred products. In transportation equipment, affiliates appear to be expanding capacity to serve export, as well as domestic, markets, both of which have grown rapidly in recent years. In chemicals, affiliates are probably expanding capacity mainly to serve local markets, which were the destination of more than 95 percent of chemical affiliates' sales in 1991.

In Brazil, increases are planned in all manufacturing industries after decreases in 1992; the turnaround partly reflects a shift to more open foreign trade and investment policies in recent years. The largest increases are in transportation equipment and in rubber products (part of "other manufacturing"). In both industries, more than 8o percent of affiliates' sales in 1991 were local.

Among other Latin American countries, affiliates plan to increase spending in Chile, Ecuador, and Venezuela. In Chile, affiliates in "other industries," particularly mining, plan to double spending. In Ecuador, affiliates in petroleum plan to more than triple spending. In Venezuela, affiliates in petroleum and manufacturing plan increases.

In Asia and Pacific, affiliates plan to increase spending 20 percent, to $13.0 billion, after a 3-percent increase. The increases are largely in response to rapid economic growth in several newly industrialized countries, which has generated favorable markets for affiliates throughout the region. The largest increases are planned by affiliates in "other industries," particularly mining, and in petroleum. These affiliates have been attracted by the natural resources in their host countries and by the growing energy needs resulting from the region's rapid economic growth. In manufacturing, most of the increase is accounted for by affiliates in Australia, Japan, Thailand, the Republic of Korea, Singapore, and Hong Kong. If the pattern of sales by destination remains similar to that in 1991, the capacity added by affiliates in Australia and Japan probably will be used mainly to serve domestic markets, whereas that added by affiliates in the remaining countries probably will be used mainly to serve export markets. (For Japan, 83 percent of sales were local, and for Australia, 78 percent of sales were local; for the Republic of Korea, Singapore, and Hong Kong combined, 28 percent of sales were to local markets, 43 percent were to the United States, and 29 percent were to other foreign countries.)

In Africa, affiliates plan to increase spending 15 percent, to $1.8 billion, after a 2-percent increase. Most of the increase is accounted for by affiliates engaged in the exploration and development of petroleum and natural gas in Congo and in Angola.

In Canada, affiliates plan to increase spending 5 percent, to $7.6 billion, after a 13-percent decrease. The largest increases are in petroleum and in "other industries," particularly telecommunications.

In Europe, affiliates plan to decrease spending 1 percent, to $35.9 billion, after a 1-percent increase. As planned, sizable decreases by affiliates in Germany, France, the United Kingdom, and Austria will more than offset generally smaller increases by affiliates in the Netherlands, Spain, Switzerland, Turkey, Poland, and the former Czechoslovakia.(7) In Germany, sizable decreases are planned in transportation equipment and in paper products (part of "other manufacturing"). In France, large decreases are planned in paper products and machinery. In the United Kingdom, large decreases are planned in petroleum. Most of the increase in the Netherlands is accounted for by affiliates in petroleum and in chemicals. In Spain, the largest increases are in services and in "other manufacturing," particularly glass products. In Switzerland, most of the increase is in food and kindred products and in other industries," particularly food retailing. In Turkey, the largest increases are in "other manufacturing," particularly tobacco products, and in food and kindred products. In Poland, the increase is largely accounted for by producers of tobacco products. In the former Czechoslovakia, producers of paper products account for most of the increase. The increases in Poland and the former Czechoslovakia are part of an overall pattern of rapid spending growth by affiliates in Eastern Europe, which has been prompted largely by market-oriented reforms in the area. Total spending by affiliates in Eastern Europe is expected to reach $0.8 billion in 1993, almost double the 1992 level.

Industry detail

Petroleum.--Petroleum affiliates plan to increase spending 7 percent in 1993, to $19.6 billion, after a 1-percent decrease in 1992. The planned 1993 increase contrasts with the planned 3-percent decrease in domestic capital spending by all U.S. businesses in petroleum.(8) U.S. multinational oil companies continue to emphasize overseas exploration and development because exploitable oil and gas reserves abroad are larger than those in the United States, because some host governments have offered favorable financial incentives and production licenses to U.S. companies, and because environmental regulations in some foreign countries are less restrictive than those in the United States. Nevertheless, spending growth by foreign affiliates has been held below historical trends by the continued weakness in oil prices--partly a consequence of the prolonged weakness in industrial activity, particularly in Europe. (During 1987--91, capital spending by MOFA'S in petroleum increased at an average annual rate of 18 percent.)

By area, petroleum affiliates in all major geographic areas except Europe plan to increase spending. In Canada, affiliates plan to increase spending 22 percent, to $2.0 billion, after a 22-percent decrease. The increase is partly attributable to increased participation by several affiliates in the development of crude oil reserves off the coast of Newfoundland.

In Africa, affiliates plan to increase spending 17 percent, to $1.6 billion, after a 3-Percent decrease. The increase is mainly for development of oilfields off the coasts of Congo and Angola.

In Asia and Pacific, affiliates plan to increase spending 15 percent, to $5.1 billion, after a 19-percent increase. As noted earlier, this increased spending has been encouraged by the area's growing energy needs. Indonesia and Thailand have attracted an especially large share of the spending increases: In Indonesia, spending is mainly for exploration and development of crude petroleum and natural gas, and in Thailand, it is mainly for refinery expansions. In China, a sizable spending increase is planned to construct natural gas extraction facilities. In Australia, a planned increase is mainly for exploration and development.

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 10-percent, to $1.0 billion, after a similar increase in 1992. The 1993 increase is more than accounted for by affiliates in Ecuador, which plan to expand petroleum refining and extraction facilities.

In the Middle East, affiliates plan to increase spending 6 percent, to so.8 billion, after a 28-percent increase. The 1993 increase is mainly for petroleum refining and extraction.

In Europe, affiliates plan to decrease spending 2 percent, to $8.8 billion, after a 6-percent decrease. The 1993 decrease is the net result of increases planned by affiliates in the Netherlands and Norway and of large decreases planned by affiliates in the United Kingdom, France, and Italy. In the Netherlands, the increase is for refinery expansion, and in Norway, it is for crude petroleum and natural gas extraction projects. In the United Kingdom, which has the largest decrease in spending, decreases partly reflect project completions and deferrals.

Manufacturing.--Manufacturing affiliates plan to increase spending 4 percent in 1993, to $29.8 billion, after a 1-percent increase in 1992. The 1993 increase is about in line with the 5-percent increase in domestic capital spending planned by all U.S. companies in manufacturing (excluding petroleum manufacturing).

By area, the largest increases in spending are expected to occur in several countries in Asia and Pacific; increases are also expected in Mexico and Brazil. Spending is expected to decrease in Canada and in Europe, particularly in Germany, France, and Austria.

Increases in spending are planned in all major manufacturing industries except transportation equipment. In chemicals, affiliates plan to increase spending 15 percent, to $7.3 billion, after a 3-percent decrease. Sizable increases are planned by manufacturers of drugs in Belgium and Ireland and by industrial chemical producers in the Netherlands and Mexico.

In "other manufacturing," affiliates plan to increase spending 6 percent, to $6.o billion, after an 11-percent increase. In Japan and Poland, producers of paper products are planning sizable increases; in the former Czechoslovakia, producers of tobacco products are planning increases. These increases are partly offset by sizable decreases in France and Germany that reflect project completions by producers of paper products.

In primary and fabricated metals, affiliates plan to increase spending 6 percent, to $1.2 billion, after a 7-percent increase. Large spending increases are planned by manufacturers of fabricated products in Germany and of primary aluminum in Hungary.

In food and kindred products, affiliates plan to increase spending 5 percent, to $3.4 billion, after a 7-percent increase. Most of the increase is accounted for by affiliates in Mexico and Switzerland. In Mexico, the increase is largely accounted for by producers of grain mill products, and in Switzerland, by producers of candy.

In nonelectrical machinery, affiliates plan to increase spending 4 percent, to $3.7 billion, after a 21-percent decrease. Large spending increases by computer manufacturers are planned in the United Kingdom and Japan.

In electric and electronic equipment, affiliates plan to increase spending 3 percent, to $2.7 billion, after a 6-percent decrease. Increases in spending by semiconductor producers in Germany and by manufacturers of household audio, video, and communication equipment in the Netherlands are partly offset by decreases in spending by semiconductor producers in Japan and Taiwan.

In transportation equipment, affiliates plan to decrease spending 9 percent, to $5.6 billion, after a 10-percent increase. Large decreases in spending by affiliates in Europe are expected to more than offset increases in spending by affiliates in Mexico and Brazil. In Europe, spending is expected to decrease 23

percent, to $3.4 billion, after a 9-percent increase. Decreases are planned in Germany and, to a lesser extent, in Austria and the United Kingdom. The decreases are mainly attributable to the continued economic slowdown, weak sales, and overcapacity. In contrast, spending in Mexico appears to have been stimulated by a growing auto market, more favorable government policies toward foreign investment, and the prospective free-trade agreement. In Brazil, affiliates are expanding capacity partly to serve growing auto markets in other Latin American countries.

All other industries.--In all other industries combined, affiliates plan to increase spending 11 percent in 1993, to $18.o billion, after a 2-percent increase in 1992. In "other industries"--mainly in public utilities, telecommunications, and mining--affiliates plan to increase spending 26 percent, to $6.3 billion, after an 8-percent decrease.(9) The largest increases are planned by affiliates in Hong Kong, "International," Chile, Australia, and Canada. In Hong Kong and Australia, affiliates in electric utilities plan increases to construct power plants and related facilities. In "International," the increase is in water transportation. In Chile, the increase is concentrated in mining. In Canada, it is mainly in telecommunications.

In services, affiliates plan to increase spending 7 percent, to $4.8 billion, after a 41-percent increase. Most of the 1993 increase is accounted for by affiliates in the United Kingdom and Spain. In the United Kingdom, affiliates in computer processing and data preparation services and in automotive rental and leasing services plan to expand capacity. In Spain, affiliates in management and public relations services plan increases.

In finance (except banking), insurance, and real estate, affiliates plan to increase spending 5 percent, to $2.5 billion, after a 9-percent decrease. Most of the increase is accounted for by insurance affiliates in Japan.

In wholesale trade, affiliates plan to increase spending 1 percent, to $4.4 billion, after a 6-percent decrease. Increases in spending by affiliates in Singapore and Japan are partly offset by decreases in spending by affiliates in Hungary and Spain. (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 are made to acquire, add to, or improve property, plant, and equipment. For affiliates engaged in natural resource exploration and development, these expenditures also include the expenditures for exploration and development 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. (2.) The estimate of capital spending planned by all U.S. businesses in 1993 is based on data from a survey conducted in July-August 1993 by the Census Bureau. Although the Census Bureau estimate covers all U.S. businesses rather than only U.S. parent companies, the available estimates of domestic capital spending of parent companies for 1982--91 are significantly correlated with spending by all U.S. businesses. (3.) Sales to local markets (that is, sales within the country of the affiliate) account for a majority of the sales by MOFA'S in these areas and in other major geographic areas. In 1991, the most recent year for which data are available, local sales accounted for 72 percent of sales by MOFA'S in Asia and Pacific and for 64 percent of sales by MOFA'S in "Latin America and Other Western Hemisphere." For more information on the destination of sales by MOFA'S, see U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 1991 Estimates (Washington, DC: U.S. Government Printing Office, July 1993). (4.) The OECD members are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. (5.) In these calculations, the changes in foreign-currency wholesale prices (or consumer prices when wholesale prices are unavailable) and in the value of the U.S. dollar are weighted by the value of the MOFA'S assets in a group of major host countries; these countries accounted for over 80 percent of affiliates' assets in 1991. (6.) "International" affiliates are those that have operations in more than one country and that are engaged in petroleum shipping, other water transportation, or operating movable oil-and gas-drilling equipment. (7.) On January 1, 1993, the former Czechoslovakia ceased to exist; it was succeeded by two independent States--the Czech Republic and Slovakia. However, in June 1993, when the BEA survey of capital spending was conducted, most companies had not yet begun to report data separately for the two countries. (8.) The figure for domestic capital spending is from the Census Bureau (see footnote 2). Both the Census Bureau data and the BEA data for foreign affiliates are classified according to the primary activity of each company, but they differ in coverage. The Census Bureau data for "petroleum" cover only companies primarily engaged in petroleum manufacturing, whereas BEA data cover companies engaged in all phases of the industry--in manufacturing, in extraction, and in distribution. However, the Census Bureau data for petroleum manufacturing to include the large, integrated companies that account for much of the total activity in the domestic petroleum industry; thus, the figure probably would not be greatly affected if domestic spending by smaller, independent companies primarily engaged in extraction or other phases of the industry were included to make it more comparable with BEA data for foreign affiliates. (9.) "Other industries" consists of agriculture, forestry, and fishing; mining; construction; transportation, communication, and public utilities; and retail trade.
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Author:Downey, Laura A.; Fahim-Nader, Mahnaz
Publication:Survey of Current Business
Date:Sep 1, 1993
Words:3504
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