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Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1986 and 1987.

Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1986 and 1987

MAJORITY-OWNED foreign affiliates of U.S. companies plan to reduce capital expenditures 2 percent in 1987, to $35.0 billion, following a planned 2-percent increase in 1986 (table 1, chart 5).1 Spending has been weak since 1980, largely reflecting slow economic growth in most developed countries abroad, the oil supply glut, and, until 1985, the appreciation of the U.S. dollar, which lowered the dollar value of expenditures denominated in foreign currencies. Small increases in 1981 and 1982 were followed by decreases in 1983 and 1984 and another small increase in 1985. The 1983 decrease was sharper than in any year since 1957, when this series began.

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. They 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.

The small increase planned for 1986 is the net result of strong increases planned by manufacturing affiliates, particularly in nonelectrical machinery and transportation equipment, and of decreases planned by petroleum affiliates. The decreases in petroleum are largely in response to the dramatic decline in oil prices earlier this year.

Planned spending in 1987 by affiliates in most countries and industries is little changed. There are a number of offsetting factors affecting survey respondents' spending estimates. Factors that would tend to boost expenditures in 1987 are decreased interest rates worldwide, efforts by France and many developing countries to encourage investment by foreigners, and the recent depreciation of the dollar vis-a-vis many foreign currencies (depreciation has the opposite effect of appreciation--that is, it raises the dollar value of expenditures denominated in foreign currencies). A partly offsetting effect of depreciation may be improved U.S. competitiveness, which would tend to shift expenditures from abroad to the United States. Other factors that would tend to reduce affiliates' expenditures are continued sluggish growth abroad and weak oil prices.

The recently enacted revisions in the U.S. tax code probably had only a small effect on the 1987 estimates because they are based on plans companies reported to BEA in June--before the provisions of the new legislation could be accurately foreseen. The new law will affect future spending estimates but its impact cannot be predicted with certainty. The effect will depend upon respondents' estimates of after-tax profits on investments here versus abroad and the response, if any, by foreign taxing authorities to the U.S. tax law changes.

Actual spending for 1985 and planned spending for 1986 are both below previously planned levels (table 2). The latest estimates for both years are based on a survey conducted in June and are linked to data from BEA's most recent benchmark survey, or census, of U.S. direct investment abroad, which covered 1982. The previous plans were based on a survey conducted 6 months earlier and were linked to BEA's 1977 benchmark survey (see technical note). For 1985, actual spending increased 1 percent, compared with a 5-percent increase based on the earlier survey. For 1986, the latest estimate shows a 2-percent increase, compared with a 9-percent increase based on the earlier survey. The revisions for both years were predominately in petroleum.

By area, affiliates in developed countries plan to maintain spending at $26.7 billion in 1987, following a 5-percent increase. Affiliates in developing countries plan to reduce spending 5 percent, to $8.0 billion, following a 6-percent decrease. Affiliates in "international'--those that have operations in more than one country and that are engaged in petroleum shipping, other water transportation, or operating oil and gas drilling equipment that is moved from country to country during the year--plan a 16-percent decrease in spending, to $0.3 billion, following an even sharper decrease.

Petroleum

Petroleum affiliates plan a 3-percent spending decrease in 1987, to $11.4 billion, following a 14-percent decrease in 1986. The decreases continue a downturn that began in 1983 and that followed 5 years of increases. The peak level of expenditures, in 1982, was 50 percent higher than levels currently planned for 1986 and 1987. The 1986 and 1987 estimates may be revised downward in later surveys; several sizable U.S. petroleum companies have announced further reductions in their exploration budgets since completing the June survey.

In developed countries, affiliates plan a 4-percent decrease in spending, to $7.4 billion, following a 12-percent decrease. Most of the 1987 decrease is expected to occur in the North Sea area.

British affiliates plan sharp decreases in spending in both years. A 13-percent decrease in 1987, to $2.3 billion, follows a similar decrease in 1986. The decreases partly reflect an affiliate's abandonment of a large project to develop a North Sea oil and natural gas field. Netherlands affiliates also plan decreases in each year. A 3-percent decrease in 1987, to $0.4 billion, follows a 34-percent decrease. The sizable 1986 decrease reflects the completion of a refinery expansion project in 1985.

In contrast to British and Netherlands affiliates, Norwegian affiliates plan to increase spending in both years--7 percent in 1987, to $1.0 billion, following a 9-percent increase. The increases are partly due to investment in secondary recovery projects for existing oilfields and to the first stage of the development of a large North Sea gasfield; the latter follows Norway's agreement in 1986 to provide greatly increased quantities of natural gas to Western Europe.

Canadian affiliates plan a 2-percent increase in spending, to $2.1 billion, after a 21-percent decrease. The decrease in 1986 is partly due to the sale of a major affiliate's assets to a Canadian purchaser.

In developing countries, affiliates plan a 1-percent decrease, to $3.8 billion, following a 16-percent decrease. An 18-percent decrease, to $0.9 billion, is planned by Indonesian affiliates, following little change in 1986. The decrease reflects the 1986 completion of a major offshore development project. In Colombia, large decreases in spending are planned in both 1987 and 1986--34 percent and 27 percent, respectively. The 1986 decrease reflects the 1985 sale of an affiliate's oil-producing assets, and the 1987 decrease reflects the 1986 completion of a pipeline. In contrast, Malaysian affiliates plan a sharp increase in spending, to $0.5 billion, following a 6-percent decrease. The increase in 1987 reflects investment for oil production platforms.

Affiliates in "international' plan to decrease spending 14 percent, to $0.2 billion, following a 38-percent decrease. Spending has fallen sharply in recent years largely because of an oversupply of tankers and mobile offshore drilling rigs.

Manufacturing

Manufacturing affiliates plan to maintain spending at $17.1 billion in 1987, following a 15-percent increase in 1986. Sizable decreases in transportation equipment and in primary and fabricated metals are expected to be offset by a sharp increase in nonelectrical machinery. Affiliates in other manufacturing industries plan only small changes in spending. In 1986, in contrast, affiliates in every industry except primary and fabricated metals and electrical machinery plan to increase spending. The largest increase is planned by affiliates in transportation equipment; it largely reflects investment in more cost-efficient production facilities and new product lines resulting from increased competition worldwide among automobile manufacturers. The increase is centered in Canada and Mexico.

In developed countries, affiliates plan to maintain spending at $14.3 billion in 1987, following a 15-percent increase. Increases in electrical and nonelectrical machinery are expected to be offset by decreases in transportation equipment and in primary and fabricated metals. German affiliates plan to increase spending 4 percent, to $2.8 billion, after a 14-percent increase. In both years, the increases are centered in nonelectrical machinery and are mainly for advanced computers. Affiliates in France plan to increase spending 15 percent, to $1.3 billion, following a 16-percent increase. Although both increases are widespread among manufacturing industries, they are particularly strong in nonelectrical machinery. The increases may partly reflect efforts by France to encourage investment by foreigners, as mentioned earlier. A large decrease in spending--13 percent, to $3.1 billion--is planned by Canadian affiliates, following a 22-percent increase. Both the 1986 increase and the 1987 decrease are mainly in transportation equipment and reflect the completion of plant expansion and modernization projects in 1986.

In developing countries, affiliates plan a 10-percent decrease in spending, to $2.8 billion, following a 15-percent increase. In each year, the largest change is in Mexico. Mexican affiliates plan to reduce spending 34 percent, to $0.6 billion, in 1987, after increasing spending 47 percent. These changes largely reflect sizable expenditures planned for 1986, but not for 1987, by transportation equipment manufacturing affiliates. The 1986 increase mostly reflects the completion of a plant expansion project and expenditures, deferred from 1985, for development of a new automobile model. In Brazil, affiliates plan a 9-percent increase, to $1.2 billion, following a 12-percent increase. In each year, spending increases in transportation equipment and nonelectrical machinery are partly offset by decreases in primary and fabricated metals. The increases in transportation equipment planned by Mexican affiliates in 1986 and by Brazilian affiliates in both years may partly reflect increased capability to produce goods destined for sale in the U.S. market.

Other industries

Affiliates in all other industries combined plan a 2-percent spending decrease in 1987, to $6.5 billion, following a 4-percent increase in 1986.

Affiliates in wholesale trade plan to increase spending 3 percent, to $2.8 billion, following a 13-percent increase. The 1986 increase is centered in Switzerland, the United Kingdom, and Japan and reflects increased expenditures by computer wholesalers.

Spending by affiliates in finance (except banking), insurance, and real estate is expected to decrease 7 percent, to $0.3 billion, following an 8-percent increase. The decrease in 1987 is concentrated in Canada, where an affiliate completed construction of a new office building in 1986. The increase in 1986 is mostly in Germany and the United Kingdom; in both cases, the increases reflect plans to modernize office buildings.

Affiliates in services plan to decrease spending 3 percent, to $1.4 billion, following a 12-percent increase. Both the 1987 decrease and the 1986 increase are primarily in the United Kingdom.

Affiliates in "other industries'--agriculture, construction, public utilities, mining, and retail trade--plan spending decreases in both years. A 6-percent decrease in 1987, to $1.9 billion, follows a 10-percent decrease in 1986. The decreases in both years are largely in Hong Kong, where an affiliate has completed construction of power generator facilities, and in Colombia, where a mine-to-port railway system is nearing completion. Another large decrease in 1986 is in Australia, where an affiliate in bauxite mining has completed a refinery.

Technical Note

The 1982-87 estimates presented in this article have been benchmarked to data from the 1982 Benchmark Survey of U.S. Direct Investment Abroad. Previous estimates, which covered actual and projected expenditures through 1986, were benchmarked to data from the 1977 benchmark survey. Estimates for 1977-81 continue to be based on the 1977 survey.

The estimates of 1982 expenditures presented here are the same as those previously published in the 1982 benchmark survey data publication, which covered fiscal year 1982.2 Estimates for 1983-87 cover calendar years. BEA does not have the necessary information to adjust the 1982 benchmark survey data to a calendar-year basis; however, differences between estimates on a fiscal-year and calendar-year basis are probably small.3

2. See U.S. Direct Investment Abroad 1982. This publication can be ordered from Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402; stock number 003-010-00161-5, price $18.00.

3. Affiliates with fiscal years ending December 31 accounted for more than 80 percent of affiliate expenditures. Affiliates with fiscal years ending between October 1 and December 31, inclusive, accounted for more than 90 percent of affiliate expenditures. Also, the fiscal-year 1982 data reported in the benchmark survey were, for most affiliates, only slightly different from the calendar-year data reported on the capital expenditures survey for 1982.

The estimates for 1983-87 are calculated as the sum of data for affiliates that reported in the given year plus estimates of data for affiliates that existed but did not report. The latter group consisted of affiliates that did not report because they were below the threshold for reporting and those that should have reported but did not. The estimates for nonreporting affiliates were usually obtained by extrapolating forward estimated or reported data for these same affiliates from the preceding year. Where the extrapolated estimates appeared to be incorrect or unreasonable, adjustments were made.

BEA has estimated actual expenditures for 1982-84 based upon both benchmark surveys; for each year, the global estimate based on the 1982 survey was within 2 percent of that based on the 1977 survey (table 9). The revisions generally resulted from sizable, partly offsetting corrections to the data reported for a few affiliates. The definitions and concepts were the same for both surveys.

Table: 1.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1982-87

Table: 2.--Revisions to Capital Expenditures Estimates, 1986-87

Table: 3.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1982

Table: 4.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1983

Table: 5.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1984

Table: 6.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1985

Table: 7.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1986

Table: 8.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1987

Table: 9.--Comparison of Estimates of Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies Based Upon the 1977 and 1982 Benchmark Surveys

Photo: CHART 5 Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies
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Author:Herr, Ellen M.
Publication:Survey of Current Business
Date:Oct 1, 1986
Words:2388
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