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Gross product of U.S. affiliates of foreign direct investors, 1987-90.

This report presents estimates of the gross product of nonbank U.S. affiliates of foreign direct investors. It updates and extends the estimates that were previously published in the June 1990 Survey of Current Business.(1) Estimates for 1988-90 are being presented for the first time, and estimates for 1987 are revised; the estimates for 1977-86 are unchanged. Table 1 provides historical perspective by showing estimates for 1977-90 by major industry and by major area of ultimate beneficial owner (UBO).(2) Tables 2.1-2.4 present detailed industry-by-country estimates for 1987-90, and tables 3.1 and 3.2 present detailed industry-by-component estimates for 1987-90.


Gross product is an economic accounting measure of production. For an individual business, it can be calculated as sales plus inventory change less purchases from other businesses; thus, it measures value added by the business. For affiliates, it can also be calculated as the sum of (1) certain factor incomes-that is, employee compensation, profit-type return, and net interest; (2) certain, nonfactor income-that is, indirect business taxes; and (3) consumption of fixed capital-that is, depreciation.

Estimates of affiliate gross product are useful in measuring the economic impact of affiliates on the U.S. economy and on individual industries. Although sales by affiliates can also be used to measure this impact, gross product is a preferable measure for most purposes. Gross product indicates the extent to which affiliates' sales result from their own production rather than from production that originates elsewhere, whereas sales data do not distinguish between these two sources of production. In addition, gross product estimates measure value added by affiliates in a specific time period. In contrast, sales in a given period may Partly reflect production that occurred in earlier periods (if inventories are drawn down), and they may not reflect all of the production that occurred in the given period (if inventories increase).

In general, the estimates of affiliate gross product are conceptually consistent with the estimates of gross domestic product (GDP) in the U.S. national income and product accounts (NIPA'S). However, GDP includes estimates of several items that could not be made for affiliates, namely business transfer payments; subsidies; depreciation of expenditures for mining exploration, shafts, and wells; and a bad debt adjustment.(3) These items collectively accounted for about 2 percent of GDP in 1989.

The estimates for affiliates are somewhat narrower in coverage than those for GDP. The major difference is that GDP includes, but the estimates for affiliates exclude, gross product originating in banks, which is not covered by BEA'S annual survey of foreign direct investment in the United States. GDP also includes estimates that do not pertain to foreign direct investment in the United States: GDP originating in government, government enterprises, and private households; imputed GDP of owner-occupied farm and nonfarm housing; and rental income of persons.

It should be noted that the profit-type-return component of affiliate gross product differs conceptually from direct investment income defined for balance of payments purposes and from net income defined for BEA'S annual series of financial and operating data of U.S. affiliates. The major difference between profit-type return and direct investment income for balance of payments purposes is that the balance of payments measure consists only of the foreign parent's share of an affiliate's net income, whereas the gross product measure includes all of the affiliate's net income. For example, if an affiliate is 50-percent owned by its foreign parent and has net income of $100, the entire $100 enters affiliate gross product, but only $50 enters direct investment income.(4) Another difference is that profit-type return includes, but direct investment income excludes, an inventory valuation adjustment, which places the value of inventory withdrawals on a current-cost (replacement-cost) basis. In contrast, profit-type return excludes, but direct investment income includes, an adjustment to place reported depreciation and expensed exploration and development costs on a current-cost basis.(5)

The difference between profit-type return and net income in the financial and operating series is that profit-type return is, in general, conceptually consistent with the NIPA definition of profit, whereas net income is conceptually consistent with generally accepted accounting principles (GAAP). The following adjustments are made to net income to convert it to profit-type return: Income taxes, depletion, and an inventory valuation adjustment are added, and capital gains and income from equity Investments are deducted.

Each of the three profit measures - profit-type return, direct investment income, and net income - serves a different purpose. Profit-type return measures an affiliate's profits from an economic accounting perspective, that is, from current production. Direct investment income measures the foreign parent's share of an affiliate's net income. An affiliate's net income provides a picture of the affiliate's total earnings, not just the parent's share of those earnings, from a financial reporting perspective.

NOTE. - The annual survey from which the estimates were derived was conducted by the Foreign Direct Investment in the United States Branch, under the supervision of James L. Bomkamp. Arnold Gilbert designed the computer programs for data retrieval and tabular presentation. Jeffrey H. Lowe, with assistance from Lee I. Goldberg, prepared the estimates.

Tables 2.1 through 3.2 follow.


(1.) "Gross Product of U.S. Affiliates of Foreign Companies, 1977-87," Survey of Current Business 70 (June 1990): 45-53. (2.) The ultimate beneficial owner is that person, proceeding up a U.S. affiliate's ownership chain, beginning with and including the foreign parent, that is not owned more than 50 percent by another person. (The foreign parent is the first person outside the United States in a U.S. affiliate's ownership chain that has a direct investment interest in the affiliate.) The country of ultimate beneficial owner is often the same as that of the foreign parent, but it may be a different foreign country or the United States. (3.) For additional information about the conceptual differences between affiliate and NIPA gross product components, see "Gross Product of U.S. Affiliates," p. 53. (4.) This example assumes that adjustments normally made to net income to derive profit-type return and adjustments made to net income before it is entered in the international transactions accounts (balance of payments) are both zero. (5.) For details on the measurement of direct investment income, see "U.S. International Transaction," Survey 72 (June 1992): 72-73.
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Publication:Survey of Current Business
Date:Nov 1, 1992
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