Foreign direct investment in the United States in 1983.
The slower growth in 1982 and 1983 primarily reflected the U.S. recession, which lasted into the first half of 1983. Slack demand substantially reduced U.S. affiliates' earnings and, thus, funds available for reinvestment. At the same time, because prospects for future earnings were uncertain, foreign investors had little incentive to expand their existing U.S. operations or to acquire or establish new ones. Capital inflows for both equity and debt fell sharply from their peaks in 1981, when foreign takeover activity was strong. Earnings of U.S. affiliates improved in 1983, as the U.S. recovery began. However, uncertainty about the recovery's duration probably continued to dampen investment throughout much of the year.
Other factors may also have contributed to the slowdown in investment. Slack demand in most other developed countries hurt earnings of foreign multinational companies and limited the funds available for investment. In particular, weak worldwide petroleum markets restrained U.S. investments by major foreign oil companies and oil producing countries; their investments had contributed significantly to the rapid growth in earlier years. Also, the strong appreciation of the U.S. dollar against major foreign currencies during 1982-83 raised the foreign currency cost of U.S. assets and lowered the dollar cost of U.S. imports, both of which tend to encourage production abroad, rather than in the United States, to serve the U.S. market. Finally, a surge in the U.S. stock market, beginning in mid-1982, raised the cost of acquisition and, together with high interest rates here and abroad, may have diverted some foreign capital inflows from direct investment to more liquid porfolio investment in U.S. stocks and bonds.
Direct Investment Position
More than two-thirds of the year-end 1983 position of $135.3 billion was accounted for by European parents. Canadian and Japanese parents accounted for 8 percent each, and parents in "other" countries--mainly the Netherlands Antilles, Panama, and Kuwait--for 15 percent. By industry of the U.S. affiliate, 35 percent of the position was in manufacturing, 15 percent in wholesale trade, 14 percent in petroleum, and 36 percent in "other" industries, mainly real estate, banking, and insurance.
Nearly three-fourths of the position was accounted for by equity investment, including retained earnings (table 2). Net outstanding intercompany debt owed by U.S. affiliates to their foreign parents accounted for the remainder. The $35.5 billion of outstanding intercompany debt was the net of U.S. affiliates' payables due to the foreign parents, $46.1 billion, and U.S. affiliates' receivables due from their foreign parents, $10.6 billion.
The $11.7 billion increase in the position in 1983 was accounted for by capital inflows of $11.4 billion and valuation adjustments of $0.3 billion (tables 3). Capital inflows consisted of equity capital inflows of $6.8 billion, intercompany debt inflows of $4.0 billion, and reinvested earnings of $0.6 billion.
Compared with 1982, capital inflows fell $2.4 billion. Net equity capital inflows fell $2.8 billion, and net intercompany debt inflows fell $2.7 billion, mainly because of an increase in U.S. affiliates' receivables due from their foreign parents. Partially offsetting the reduced equity and debt inflows was a $3.0 billion shift to positive reinvested earnings, from a negative $2.4 billion in 1982. The shift entirely reflected an improvement in affiliate earnings in 1983; distributed earnings remained virtually unchanged (table 4).
By country of foreign parent, by far the largest increase in position--$4.1 billion--was for the United Kingdom. The increase was concentrated in manufacturing and real estate. The position of parents in the Netherlands increased $2.8 billion, mainly in petroleum and manufacturing, and the position of Japanese parents increased $1.5 billion, all in wholesale trade.
In contrast, the position of Canadian parents fell $0.3 billion, the third consecutive annual decrease. In all 3 years, negative reinvested earnings contributed to the decreases. Also, in 1981 and 1983, large negative valuation adjustments were made to the position for Canada to reflect a change in the manner in which direct investors held their U.S. investments. In 1982, the sale of a Canadian company's U.S. mining operations to a French company contributed to the decrease.
By industry, the largest increase in the position--$4.9 billion--was in "other." The increase was down substantially from that in 1982, despite smaller negative reinvestment earnings. About one-half of the increase was in real estate. The positions in banking and insurance also showed strong increases.
The position in manufacturing increased $3.7 billion, about the same as in 1982. The increase was concentrated among affiliates with parents in Europe, mainly in the United Kingdom, Netherlands, France, and Switzerland. Several acquisitions of U.S. companies resulted in sizable equity and intercompany debt inflows. Reinvested earnings were a negative $0.3 billion, substantially improved from a negative $1.6 billion in 1982. Within manufacturing, increases in the position were largest in chemicals ($1.7 billion), food ($0.8 billion), and "other" ($1.0 billion).
As in manufacturing, the increase in the position in wholesale trade--$2.3 billion--was little changed from that in 1982. Japanese-owned affiliates accounted for two-thirds of the increase and British-owned affiliates from most the remainder.
The increase in the position in petroleum was $0.8 billion, down substantially from that in 1982. Reinvested earnings fell sharply, to $0.8 billion, due to deterioration in petroleum affiliates' earnings. Also, because of a large increase in affiliates' receivables due from their foreign parents, intercompany debt transactions resulted in net outflows of $0.2 billion. Most of the increase in receivables reflected transaction of a Japanese-owned affiliate engaged in worldwide petroleum trading.
Direct investment income, the return on the position, more than doubled in 1983, to $6.4 billion (table 5). The sharp increase followed a similarly sharp decline in 1982 and largely reflected the improvement in U.S. affiliates' earnings, related to strong U.S. economic growth in 1983.
Direct investment income consists of U.S. affiliates' earnings (that is, foreign parents' shares in their U.S. affiliates' net income after U.S. income taxes), less U.S. withholding taxes on affiliates' distributed earnings, plus interest (net of withholding taxes) on intercompany debt (table 6).
Of the $3.4 billion increase in income in 1983, $3.1 billion was due to an increase, to $4.0 billion, in U.S. affiliates' earnings (table 7). Capital gains, which are included in earnings, increased from near zero in 1982 to $0.5 billion in 1983, mainly because of appreciation in the value of stock portfolios held by affiliates in insurance.
Earnings before capital gains rose $2.5 billion, to $3.5 billion. The rise reflected shifts, from losses in 1982 to positive earnings in 1983, in manufacturing, wholesale trade, and "other" industries. The shift was largest--$1.4 billion--in manufacturing. Within manufacturing, earnings improved in each subindustry; however, only in chemicals and food were earnings positive for the year. Many manufacturing affiliates continued to have losses, though smaller than those in 1982. As the impact of the U.S. recovery becomes more widespread, shifts from losses to positive earnings can be expected to provide a strong boost to both earnings and reinvested earnings after 1983. (Preliminary estimates indicate that, in the first half of 1984, earnings of manufacturing affiliates were more than three times the 1983 annual total.)
In wholesale trade, affiliates had positive earnings of $0.9 billion in 1983, after small losses in 1982. The increase in earnings was led by Japanese-owned affiliates, particularly those selling motor vehicles and consumer electronics; it mirrored the upturn in demand for consumer durables that was associated with the U.S. economic recovery.
In contrast to the increases in other industries, earnings in petroleum fell, for the second consecutive year, to $1.8 billion, from $2.2 billion. The decline reflected weak worldwide petroleum markets resulting fro recession-dampened demand in most developed countries. Despite the decline, earnings of petroleum affiliates were larger than the earnings of all other affiliates combined.
Net interest payments increased $0.3 billion, to $2.5 billion; the increase was concentrated in real estate. Net payments consisted of U.S. affiliates' gross payments of interest to the foreign parents of $3.1 billion and gross receipts of interest from their foreign parents of $0.5 billion.
Fees and Royalties
U.S. affiliates had net receipts of fees and royalties from their foreign parents of less than $0.1 billion in 1983, unchanged from the previous year (table 8). Affiliates' gross receipts of $1.7 billion were almost offset by gross payments to their foreign parents.
In the 4 years for which data on gross payments and receipts are available, gross receipts have risen much more rapidly than gross payments. Receipts, unlike payments, are concentrated among relatively few affiliates. Among them are several engaged in petroleum-related service activities. U.S. affiliates of foreing auto makers also had large receipts that reflected remittances from their foreign parents for warranty work performed by the affiliates.
Since August 1983, when the last annual article on foreign direct investment in the United States was published, three major changes have been made to the data series. First, the series for 1980 forward have been revised to incorporate the results of BEA's 1980 benchmark survey of foreign direct investment in the United States; previous estimates for these years were based on the 1974 benchmark survey. Second, capital inflows for 1981 forward have been revised to include certain data from BEA's survey of new foreign direct investments in the United States. Third, unincorporated affiliates are now required to report as much detail as incorporated affiliates. As a result, the definitions of some of the components of the direct investment position, capital inflows, and income have been changed.
Preliminary estimates for 1980 forward, incorporating the bulk of these changes, were published in two articles--one on U.S. international transactions and the other on the U.S. international investment position--in the June 1984 issue of the SURVEY. The estimates published in this article supersede the June estimates. In June, the process of incorporating the 1980 benchmark survey results into the estimates was well underway, but was not completed. To avoid delaying publication of the international transactions accounts and the international investment position, preliminary direct investment estimates, at a highly aggregated level, were made. Since June, the benchmarking process has been completed, and revised estimates for 1980 forward prepared. Although the revised estimates are presented here, they will not be incorporated into the international transactions accounts or the international investment position until June 1985, when both will undergo customary annual revisions.
Coverage of the estimates.--All series now incorporate information from the 1980 benchmark survey of foreign direct investment in the United States. The benchmark survey covered the universe of U.S. affiliates. The larger affiliates in the universe were required to file complete reports, which included the balance of payments and direct investment position data used to derive the estimates in this article. The remaining affiliates filed only partial reports, which did not include the balance of payments and position data.
Complete reports were required from affiliates that had total assets, sales, or net income of $1 million or more or that owned 200 or more acres of U.S. land. Out of a total of 12,510 U.S. affiliates, 7,676 filed complete reports. Although these affiliates accounted for only 61.o percent of the universe in terms of number, they accounted for virtually all of it in terms of value--99.7 percent of total assets, 99.9 percent of sales, 100.6 percent of net income, and 99.3 percent of acres of U.S. land owned. (The percentage for net income exceeds 100 because affiliates that filed only partial reports had, in the aggregate, a net loss for the year.)
In this article, the universe consists of affiliates that filed complete reports--and thus provided balance of payments and direct investment position data--in the 1980 benchmark survey. For the nonbenchmark years after 1980, balance of payments and position data were reported, but by only a sample of these affiliates, in BEA's quarterly survey of foreign direct investment in the United States. To obtain universe estimates of most items in nonbenchmark years, an estimates had to be derived for affiliates that were in the universe but not in the sample. The estimation was done by estrapolating forward the data of each of these affiliates based on the movement of the reported sample data. For 1981-83, the quarterly sample consisted of U.S. affiliates that had annual assets, sales, or net income of $5 million or more; for 1984 forward, the exemption level was raised to $10 million.
Comparison of the quarterly and benchmark survey data.--For affiliates that reported in both the 1980 quarterly sample survey and the 1980 benchmark survey, the first step in the benchmarking process was a comparison and reconciliation of the data from the two surveys. It should be noted that, to ease the reporting burden on respondents, the benchmark survey data were collected on a fiscal-year, rather than a calendar-year, basis (see the next section for further discussion). Thus, the sum of the data for the four quarters corresponding to an affiliate's 1980 fiscal year, as reported in the quarterly survey, was compared with the fiscal-year total reported in the benchmark survey. Any significant discrepancies were investigated and resolved--usually in favor of the fiscal-year total from the benchmark survey, which was reported later and was subject to more edit checks during processing than the quarterly survey data. To obtain quarterly estimates, the fiscal-year total (including revisions, if any) was, in most cases, allocated among the quarters in the same proportions as in the quarterly sample data.
For affiliates that did not report in the quarterly survey, such a comparison between benchmark and quarterly survey sdata could not be made. The fiscal-year data reported in the benchmark survey were accepted without revision. Quarterly estimates were obtained by dividing the annual total by 4.
Adjustment of 1980 data from a fiscal- to a calendar-year basis.--Before universe estimates for 1981 onward could be derived, the fiscal-year data from the benchmark survey (including any revisions) had to be adjusted to a calendar-year basis--the basis required for recording U.S. international transactions. An affiliate's 1980 fiscal year was defined as its financial reporting year that had an ending data in calendar year 1980. About two-thirds of the affiliates had a fiscal year that coincided with the calendar year; these affiliates' data required no adjustment. For the remaining one-third, the specific adjustment procedure depended upon whether or not the affiliate reported in the 1980 quarterly sample survey.
For affiliates that did report in the quarterly survey, the data dervived from the benchmark survey for those quarters of the fiscal year that also fell in calendar year u980 were first isolated. These data were then added to data from the quarterly survey for any remaining quarters of the calendar year to obtain estimates for the calendar year as a whole.
For affiliates that did not report in the quarterly survey, the procedure differed depending on the item being estimated. For income and its components, except capital gains/losses, and for fees and royalties, the data from the benchmark survey for fiscal year 1980 were used as the estimates for calendar year 1980. For equity capital and intercompany debt--two components of total capital inflows--and for capital gains/losses, the calendar-year estimates consisted only of the amounts for those quarters of the affiliate's 1980 fiscal year that were also in the 1980 calendar year. For any remaining quarters of the calendar year, the amounts were assumed to be zero.
The treatment of the latter items is consistent with that in nonbenchmark periods, in which data for them are not expanded to universe-levels, but are included in the estimates only as actually reported in the quarterly sample survey. These items tend to be volatile, with frequent sign reversals; thus, the reported sample data do not provide a reliable basis for estimating unreported data.
The revisions to reported benchmark survey data and the adjustment from a fiscal- to a calendar-year basis raised the direct investment position 3.9 percent--from $80.0 billion to $83.0 billion (table 9). Income was raised 19.4 percent--from $7.2 billion to $8.6 billion--mainly because of an exceptionally large capital gain that fell in the calendar year but not in the affiliate's 1980 fiscal year. Capital inflows were raised 11.5 percent--from $15.2 billion to $16.9 billion. This upward adjustment partly reflected the impact on reinvested earnings of the exceptionally large capital gain, and partly a fairly sizable upward adjustment in intercompany debt.
Comparison of revised and previously published 1980 estimates.--In table 10, the calendar-year estimates for 1980 based oin the 1980 benchmark survey are compared with previously published estimates for 1980 based on the 1974 benchmark survey. The previously published estimates were obtained by extrapolating forward universe data from the 1974 benchmark survey (which were for the calendar year), using sample data for interim years.
Differences between the estimates on the 1974 and 1980 bases are quite large. On the 1980 basis, the direct investment position, at $83.0 billion, is $14.7 billion higher than on the 1974 basis. Capital inflows, at $16.9 billion, are $3.3 billion higher. In contrast, income on the 1980 basis is $0.8 billion lower, and fees and royalties $0.1 billion lower, than on the 1974 basis.
All of the $3.3 billion upward revisioin in capital inflows was accounted for by affiliates that reported in the 1980 benchmark survey but not in the 1980 quarterly sample survey; revisions or corrections of errors in the reported sample data were negligible. As noted earlier, in the absence of a benchmark survey, no estimate of unreported equity capital or intercompany debt inflows is made. Thus, the previously published estimates, which were prepared before the results of the 1980 benchmark survey became available, included only equity capital and intercompany debt inflows actually reported in the 1980 quarterly survey. Of the unreported inflows, about three-fourths were accounted for by affiliates that should have reported but did not, and about one-fourth were accounted for by exempt affiliates. (Most of the former affiliates, identifed during the benchmarking process, have now begun to report quarterly.)
Similarly, a large share--about two-thirds--of the upward revision in the direct investment position, which consists of cumulative capital inflows and valuation adjustments, was due to unreported equity capital and intercompany debt transactions from 1974 to 1980. Most of the remaining one-third was due to revisions or corrections of errors in the reported sample data.
For income and for fees and royalies, the downward revisions were due both to revisions in reported sample data and to overesstimation of the unreported part of the universe on the 1974 basis.
Estimates for 1981 forward.--As noted earlier, for equity capital, intercompany debt inflows, and capital gains/losses, the estimates for 1981 forward consist only of the sample data reported in the quarterly survey; no estimates are made for affiliates that did not report in that survey. In contrast, for income and its components, except capital gains/losses, and for fees and royalties, the estimates cover all affiliates.
For the latter items, the estimation procedure used is designed to ensure coverage as complete as that in the 1980 benchmark survey. Thus, estimates had to be made for affiliates that filed complete reports in the 1980 benchmark survey but did not report in the quarterly sampel survey, either because they were exempt from the quarterly survey or should have reported in that survey but, for some reason, did not. The esstimates for affiliates that did not report in the quarterly survey are then added to the reported data of affiliates that did report to obtain the universe estimates.
For most nonreporting affiliiates, the estimate for the current period is the product of two factors: (1) the prior-period estimate for the affiliate and (2) the ratio of current- to prior-period data for a matched sample of affiliates--i.e., affiliates that reported in both the prior and current periods--that are in the same industry as the affiliate whose data are being estimated. The multiplication of the first factor by the ratio essentially assumes that, in the given industry, data for each nonreporting affiliate change at the same rates as data for affiliates in the matched sample.
In four instances, the calculated ratio for the matched sample was not used in estimating data for nonreporting affiliates. First, the largest nonreporting affiliates were scrutinized individually and, where available information suggested that applying the ratio would give an erroneous result, an alternative, estimate was made. Second, if the ratio was biased by the data for one or two large reporters, or was unrepresentative because of low coverage, it was adjusted before being applied. Third, if the calculated ratio for earnings was undefined because it was derived from numbers of opposite sign, a substitute ratio was developed. Fourth, if a ratio for earnings was derived from numbers of the same sign, but was to be applied to numbers of the opposite sign, the results would not have been meaningful; in these cases, the calculated ratio was inverted before being applied, as discussed below.
This procedure for expanding sample data to universe levels differs, in several respects, from that used in the past:
1. For all items except distributed earnings, the "prior period" is now defined as the immediately preceding quarter; for distributed earnings, it is the same quarter of the preceding year. In the past, the "prior period" was the same quarter of the preceding year for all items.
The past procedure took into account the impact of seasonal variations on the estimates. Review of the estimates over time, however, now indicates that, despite seasonal variations, current-period data for all items except distributed earnings tend to be estimated more accurately using data for the immediately preceding quarter that for the same quarter of the preceding year. For distributed earnings, in contrast, data for the current quarter bear a much stronger relationship to those for the same quarter of the preceding year, because affiliates often make earnings distributions only once a year and usually in the same quarter each year.
2. The ratios of current- to prior-period data for affiliates in the matched sample are now calculated for 14 industries, instead of for a matrix of 11 industries of affiliate by 19 areas or countries of foreign parent. The more aggregated level now used reduces the likelihood that a ratio will be unrepresentative because it is based on data for only a few affiliates. Also, ratios are no longer computed by country, because an affiliate's industry and the economic conditions in the United States have been found to be more important than the country of the affiliate's foreign parent in explaining changes in income and in fees and royalties.
3. In a given industry, a separate current-period estimate for each nonreporting affiliate is now obtained by applying the ratio of current- to prior-period data for affiliates in the matched sample to the prior-period estimate of each nonreporting affiliate. Previously, an aggregate current-period estimate for all nonreporting affiliates in a country-industry cell combined was obtained by applying the ratio for the given country-industry cell to the aggregate prior-period estimate for all nonreporting affiliates in the cell. Thus, only an estimate for the cell as a whole was obtained; no detail below that level was available. The new procedure has the advantage that universe estimates in full country and industry detail, and for any combination of countries or industries, can be obtained.
4. As noted earlier, data for capital gains/losses are now included in the estimates of earnings and income only to the extent they are actually reported in the quartely sample survey. Previously, capital gains/losses were expanded to universe levels as part of the expansion of total earnings.
5. Separate estimates are derived for payments and receipts of interest on intercompany debt and for payments and receipts of fees and royalties. In the past, universe estimates were derived only for net payments (that is, payments less receipts).
6. A new procedure has been established to deal with cases in which the ratio of current to prior-period earnings of affiliates in the matched sample is derived from numbers that are of the same sign, but the ratio is to be applied to an individual affiliate's earnings that are of the opposite sign. In such cases, the results are not meaningful. The new procedure requires that the ratio be inverted before it is applied. The inverted ratio yields an estimate that moves in the correct direction and that usually shows an appropriate degree of change. In the past, a less formal procedure was used. Sign reversals, however, were not as much of a problem in the past, when the ratios were applied to aggregate data in a country-industry cell rather than to data for individual affiliates; earnings of individual affiliates tend to be more volatile than those for an aggregate.
Data on capital inflows to acquire or
establish new U.S. affiliates
BEA's survey of new foreign direct investments in the United States (the BE-13), which was instituted in 1979, collects data on total outlays to acquire or establish new U.S. affiliates. These data are used to supplement the data on capital inflows reported in the quarterly sample survey. As noted earlier, no estimate of equity capital inflows is normally made for affiliates that are exempt from the quarterly survey. Because newly established or acquired affiliates tend to be relatively small, many of them are exempt. The BE-13 data indicate that equity capital inflows to acquire or establish such exempt affiliates, although small for any given affiliate, were large in total during 1981-83. Therefore, quarterly estimates of these unreported inflows were made utilizing the BE-13 data.
Total outlays to acquire or establish new U.S. affiliates would constitute direct investment capital inflows if they were made directly by foreign parents. (They would also constitute capital inflows if they were made indirectly by the foreign parents through their existing U.S. affiliates, but the inflows probably would have been reported in the existing U.S. affiliate's quarterly report.) The BE-13 survey indicates that direct outlays by foreign parents to acquire or establish U.S. affiliates that were exempt from the quarterly sample survey were $977 million in 1981, $663 million in 1982, and $314 million in 1983. These data were added to direct investment capital inflows reported in the quarterly surveys for the 3 years; for any given affiliate, the data were included in inflows in the quarter in which the acquisition or establishment occurred. Similar adjustments, based on the BE-13 data, will be made to capital inflows in future years as well.
Change in treatment of unincorporated affiliates
For 1980 forward, the treatment of unincorporated U.S. affiliates has been changed to parallel of incorporated U.S. affiliates, because BEA now obtains similar detail for both types of affiliates. This change is possible because, over time, the accounting procedures of the two types of affiliates have become more similar. The change in treatment affects only individual components, not the totals, for the direct investment position, income, and capital flows.
Previously, the direct investment position in unincorporated affiliates was reported as a single summary account, including both foreign parents' equity in, and intercompany debt with, these affiliates. Now, the components are reported separately. The equity portion is combined with equity in incorporated affiliates and shown as the foreign parent's equity in all affiliates; the intercompany debt portion is combined with intercompany debt of incorporated affiliates and shown as the foreign parents' intercompany debt position with all affiliates.
In addition, reinvested and distributed earnings of unincorporated affiliates previously were not reported separately. Instead, in the income account, total earnings of these affiliates were treated as if they were distributed; in the capital account, earnings actually reinvested were treated as transfers of cash or other assets from parents to affiliates adn were included, along with other capital flows, in a single summary account in the "equity and intercompany accounts" component of direct investment capital flows. The term "reinvested earnings" referred only to incorporated affiliates. Now, in contrast, reinvested and distributed earnings of unincorporated affiliates are reported separately. The distributed portion is included, together with dividends of incorporated affiliates, in distributed earnings of all affiliates, and, in both the income and capital accounts, the reinvested portion is included, together with reinvested earnings of incorporated affiliates, in reinvested earnings of all affiliates.
Finally, capital flows to unincorporated affiliates, which--as noted earlier--were previously shown together as a single summary account in equity and intercompany account flows, have now been split into the equity, intercompany debt, and reinvested earnings portions, and each portion is combined with that for incorporated affiliates to obtain a total for all affiliates. In the few cases where equity capital of an unincorporated affiliate could not be separated from intercompany debt, the entire amount was considered equity capital.
Because the totals for the direct investment position, income, and capital inflows are not affected by the change in treatment of unincorporated affiliates, the estimates of these items for 1980 forward are comparable with those for earlier years. However, the components of these items are not comparable. Estimates of the components on the new basis for earlier years cannot be made because the necessary detail for unincorporated affiliates is not available. For 1980 forward, however, estimates on the new basis are separately available for both incorporated and unincorporated affiliates (table 11).
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|Author:||Belli, R. David|
|Publication:||Survey of Current Business|
|Date:||Oct 1, 1984|
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