Printer Friendly

Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1988 and 1989.

MAJORITY-OWNED foreign affiliates of U.S. companies plan to increase capital expenditures 4 percent in 1989, to $44.1 billion, following a planned 23-percent increase in 1988 (table 1, chart 2).1 If realized, the 1989 increase will represent the third consecutive year of growth in expenditures abroad and indicates a reversal of the declining trend that characterized most of 1982-86.

Expenditures declined substantially during 1982-84, largely because of sluggish economic growth abroad. They rose in 1985, partly because of the sharp depreciation of the U.S. dollar and associated rise in the dollar value of projects denominated in foreign currencies, but they declined again in 1986, as a sharp drop in oil prices caused petroleum companies to curtail exploration and development. Expenditures rose 5 percent in 1987, when the dollar depreciated, and will rise sharply in 1988, despite the recent appreciation of the dollar. Thus, although it is not possible to adequately gauge U.S. multinationals' expectations of exchange rate developments, changes in exchange rates do not appear to be an important factor in 1988-89 spending plans. More likely, the increases planned in both years primarily reflect expectations of expanding foreign markets and efforts to modernize facilities in order to improve competitiveness.

Actual spending for 1987 is relatively unchanged from the level reported 6 months earlier; planned spending for 1988 has been revised upward by 9 percent (table 2). The most recent estimates for 1987 and 1988 are based on a survey conducted in June 1988; the earlier estimates are based on a survey conducted in December 1987. The revisions of planned spending for 1988 are predominately in manufacturing; in that industry, the June survey shows a 23-percent increase for 1988, whereas the December survey shows a 15-percent increase. Most of the revisions are in chemicals and electrical machinery.

There are several possible reasons why planned 1988 spending in manufacturing was revised upward from an already high level. First, in general, U.S. manufacturing companies have been restructuring their operations in response to intense international competition. Their efforts typically involve modernizing production facilities in order to lower costs through higher productivity. This process, which began at home, has gained momentum and spread to U.S. multinationals' overseas operations. Second, continued economic growth, particularly in Europe and among the newly industrialized countries of Asia, provides incentives for multinationals to increase production in those areas in order to benefit from expanding markets. Third, the relaxation of controls on foreign investment in developing countries may have contributed to the upward revision in expenditures.

Although the rate of increase in planned expenditures in manufacturing in 1989 is lower than in 1988, the 1989 estimates may be revised up if economic conditions abroad continue to improve.

Projected spending by petroleum affiliates in 1988 was revised up 5 percent, based on expectations of rising oil prices. However, it is uncertain whether all of the additional spending will actually occur, primarily because the recent downward trend in oil prices may cause revenues to fall and make some projects uneconomic. The effect of oil price changes on spending may be dampened to some extent, because a portion of the total expenditures in petroleum is for projects involving natural gas, the price of which is not directly tied to oil prices. In addition, the share of natural gas in energy consumption has been rising steadily, which suggests that spending on natural gas projects will continue in order to satisfy demand.

By area, affiliates in developed countries plan a 2-percent increase, to $33.8 billion, following a 21-percent increase in 1988. In developing countries, affiliates plan an 8-percent increase, to $9.5 billion, following a 30percent increase. Affiliates in "international"-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-plan a sharp increase, to $0.9 billion, following a smaller increase.

Petroleum

Petroleum affiliates plan to increase spending 8 percent in 1989, to $14.1 billion, following a 33-percent increase in 1988. The 1988 increase, if realized, will be the largest year-toyear increase in the past decade. Nevertheless, planned 1988 spending remains significantly below the 1982 peak of $19.7 billion. During 1983-86, spending declined significantly; in 1986, it plunged 30 percent, to $9.6 billion, as firms curtailed exploration and development projects in response to the sharp drop in oil prices.

The planned 1989 increase is widespread by area. In developed countries, affiliates plan to increase spending 4 percent, to $9.2 billion, following a 31- percent increase. Much of the increase is accounted for by European affiliates, particularly those in the United Kingdom. These affiliates plan a 9-percent increase, to $3.3 billion, following a 35-percent increase; the increases in both years reflect stepped-up exploration and drilling activity in the North Sea. Significant increases are also planned in Norway and the Netherlands. In the Netherlands, part of the increase is related to a pipeline project.

Canadian affiliates plan a 2-percent increase, to $2.6 billion, following a 30-percent increase. Several affiliates plan to expand production facilities or increase exploration.

In developing countries, affiliates plan to increase spending 14 percent, to $4.3 billion, after a 38-percent increase. The increases in both years are concentrated in Asian countries, where significant discoveries of oil and natural gas have recently been made. The increases were particularly large in Malaysia and Indonesia. In addition, rising affluence in the newly industrialized countries of Asia has caused a surge in demand for oil and natural gas for both transportation and power generation. This increased demand has prompted several affiliates in Asia to upgrade their refining capacity. In Malaysia, affiliates plan to increase spending 39 percent each year for exploration and development. In Indonesia, an 8-percent increase, to $1.0 billion, follows an 83-percent increase in 1988 and reflects expenditures for exploration and drilling. In Singapore, expenditures are for improving the efficiency of refineries; affiliates plan to increase spending 25 percent, after a doubling of expenditures in 1988. In Thailand, in contrast, affiliates plan to decrease spending, following a sharp increase. Although exploration and development will increase in both years, overall spending will decrease in 1989, mainly because of the completion of a refinery expansion.

Affiliat in "international" plan to increase spending 82 percent, to $0.5 billion, following a 17-percent increase. The increases in both years reflect spending for tankers and offshore drilling rigs. Demand for such equipment is increasing in response to the surge in exploration and development expected in 1988-89; in prior years, spending in "international" was weak because of an oversupply of tankers and drilling rigs.

Manufacturing

Manufacturing affiliates plan to increase spending 2 percent in 1989, to $21.5 billion, following a 23-percent increase this year. If plans are realized, 1989 increases in most manufacturing industries will be offset by large declines in chemicals and transportation equipment. In 1988, in contrast, chemicals and transportation equipment are among those industries with the largest planned increases in expenditures.

Substantial increases in spending are planned by affiliates in nonelectrical machinery and "other manufacturing" in both 1988 and 1989. In nonelectrical machinery, a 15-percent increase, to $4.1 billion, follows a 19percent increase. In both years, the planned increases mainly reflect expenditures by computer manufacturers for facilities to produce new or improved product lines in an effort to maintain their market share in this highly competitive industry. In addition, manufacturers of agricultural equipment are increasing expenditures to modernize production facilities and lower costs in an attempt to regain market share lost to Asian competitors in recent years.

In "other manufacturing," a 5-percent increase, to $4.2 billion, follows a 32-percent increase in 1988. The high level of spending in both years is mainly in the paper and rubber industries. Affiliates in these industries are upgrading facilities and expanding capacity in the face of greater global competition and increasing demand for their products.

Affiliates in electrical machinery, primary and fabricated metals, and food products also plan sizable increases in 1989. In electrical machinery, affiliates plan to increase spending 4 percent, to $2.1 billion, following an 18-percent increase. The increases in both years, related to those in nonelectrical machinery, are mainly in response to increased demand for semiconductors and other electrical components for computers.

Affiliates in primary and fabricated metals plan to increase spending 5 percent, to $1.0 billion, following a 21percent increase. A large portion of the increase is for expanding capacity to meet increased demand for aluminum products.

In food products, affiliates plan to increase spending 3 percent, to $2.0 billion, following a 27-percent increase. The increases in both years partly reflect tobacco producers' efforts to expand their operations in the food industry as demand for tobacco products declines. They also reflect a beverage manufacturer's attempts to expand its canning operations and obtain greater control over its bottling network.

As noted earlier, planned decreases in spending in chemicals and transportation equipment in 1989 will follow sharp increases in 1988. In chemicals, affiliates plan to decrease spending 3 percent, to $4.3 billion, following an 18-percent increase. If realized, the 1989 decrease will be the first since 1983 and will reflect the completion of expansion projects.

Affiliates in transportation equipment plan to decrease spending 11 percent, to $3.8 billion, following a 27percent increase this year. The decrease in 1989 reflects reduced expenditures by automobile manufacturers for advanced manufacturing systems and product development; most of the modernizations occurred during 1986-88.

By area, manufacturing affiliates in developed countries plan to increase spending 2 percent, to $17.9 billion, compared with the 22-percent increase this year. The largest dollar increases are in Japan and the United Kingdom. These increases are partly offset by decreases in Germany and Canada.

Japanese affiliates plan large spending increases in both 1988 and 1989-64 percent and 51 percent, respectively-to $1.8 billion. The increases are concentrated in nonelectrical machinery; in that industry, a manufacturer of computer equipment is expanding its operations in an attempt to capture a larger share of the Japanese market.

British affiliates plan to increase spending 7 percent, to $3.4 billion, following a 25-percent increase. The largest increases are in transportation equipment and nonelectrical machinery. In transportation equipment, an automobile manufacturer plans to continue to expand production capacity and to install advanced manufacturing systems. The increases in nonelectrical machinery reflect expenditures by affiliates for facilities to manufacture computer equipment.

German affiliates plan to decrease spending 6 percent, to $3.1 billion, after a 38-percent increase. The decrease is attributable to a shift in spending in transportation equipment; spending in that industry is expected to fall 13 percent, after increasing 89 percent in 1988. The large increase in 1988 is due to an automobile manufacturer's retooling for two new car models.

Canadian affiliates plan to decrease spending 5 percent, after a 17-percent increase. The decrease reflects the completion of expansion projects in 1988 in various industries, particularly in transportation equipment.

In developing countries, affiliates plan a slight decrease in spending in 1989, after a 28-percent increase. Increases in spending in metals, food products, and nonelectrical machinery are more than offset by decreases in all other industries. The increase in spending in metals is concentrated in Chile. It reflects greater demand for copper and aluminum products, which has encouraged affiliates to proceed with projects that were previously postponed because of an oversupply of these commodities. The offsetting decreases in other industries reflect the completion or slowdown of various projects.

Affiliates in Latin America plan to increase spending in both years, but the increase in 1988 will be much larger than in 1989. The 1988 increase is concentrated in Mexico and Brazil. Brazilian affiliates in all manufacturing industries plan increases this year, the largest occurring in chemicals. In 1989, expenditures will decline because of the completion of projects. In Mexico, increases will occur in all industries in 1988; the largest increases will be in transportation equipment. The increases in 1989 will be much smaller. Expenditures in both years reflect the construction of new assembly plants and capacity expansion. In recent years, expansion of U.S. production facilities in Mexico has been stimulated by the devalued peso and by the maquiladora program, which provides favorable trade concessions for assembly operations in Mexico.

The "debt-equity swap" programs in Mexico and other Latin American countries may also have contributed indirectly to the growth in expenditures in those countries, because they provide low-cost funds for foreign investors in an attempt 'to reduce foreign debt and attract direct investment. 2

Other industries

Affiliates in all other industries combined plan a 4-percent increase in 1989, to $8.5 billion, following a 9-percent increase in 1988. Increases are planned in all industries but finance (except banking), insurance, and real estate. In that industry, affiliates plan a 13-percent decrease, to $0.8 billion, following a 15- percent decrease. The decreases in both years mostly reflect lower expenditures by finance and insurance affiliates for purchasing office buildings, primarily in Europe.

Affiliates in wholesale trade plan to increase spending 9 percent, to $3.4 billion, following a 16-percent increase. Increases in Canada and Finland reflect expenditures by affiliates of computer manufacturers for new distribution facilities. Increases in Switzerland and Singapore reflect expenditures by affiliates of a chemical manufacturer to double storage capacity.

Affiliates in services plan to increase spending 2 percent, to $2.0 billion, following a 13-percent increase. The increase in 1989 is more than accounted for by one affiliate's construction of a hotel and casino in the Caribbean.

Affiliates in "other industries" plan a 6-percent increase, to $2.5 billion, following a 9-percent increase. The increases in both years are more than accounted for by affiliates in international shipping that plan to purchase new vessels and by a mining affiliate in Chile. These increases are partly offset by decreases in Europe and Japan.
COPYRIGHT 1988 U.S. Government Printing Office
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1988 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Quijano, Alicia M.
Publication:Survey of Current Business
Date:Sep 1, 1988
Words:2305
Previous Article:Receipts and expenditures of state governments and of local governments: revised and updated estimates, 1984-87.
Next Article:U.S. international transactions, second quarter 1988.
Topics:


Related Articles
Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1986.
Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1987.
U.S. multinational companies: operations in 1986.
Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1988.
Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1989.
U.S. multinational companies: operations in 1987.
Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1991.
Capital expenditures by majority-owned foreign affiliates of U.S. companies, latest plans for 1991.
Gross product of U.S. multinational companies, 1977-91.
Capital expenditures by majority-owned foreign affiliates of U.S. companies.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters