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The international investment position of the United States in 1990.

The International Investment Position of the United States in 1990

The net international investment position of the United States in 1990 was a negative $412.2 billion when direct investment is valued at the current cost of replacing plant and equipment and other tangible assets, and the position was a negative $360.6 billion when direct investment is valued at the current stock market value of owner's equity.

The negative position valued at replacement cost--or current cost--decreased $27.5 billion from $439.7 billion in 1989, and the negative position valued at current stock prices--or market value--increased $92.9 billion from $267.7 billion in 1989. The primary reason the negative position decreased in current cost but increased in market value was a sharper decline in foreign than in domestic stock prices; stock prices affect market values but not current costs.

In current cost, the 1990 change in position mainly reflected exchange rate appreciation of $44.6 billion--mostly on U.S. assets abroad--and net capital flows of -$28.6 billion, as foreign assets in the United States increased more rapidly than U.S. assets abroad.

In market value, the change in the position mainly reflected price depreciation of $98.7 billion, exchange rate appreciation of $36.4 billion, and net capital flows of -$28.6 billion.

This article first discusses the major changes in U.S. assets abroad and then major changes in foreign assets in the United States on both a current-value and market-value basis. A third section presents detailed estimates on the U.S. direct investment position abroad and the foreign direct investment position in the United States for which data by country, by industry, and by account are available only on a historical-cost basis.(1)

Changes in U.S. Assets Abroad

Bank claims

Claims on foreigners reported by U.S. banks decreased $7.4 billion, to $654.3 billion in 1990 (table 1, line 23). Transactions accounted for $5.3 billion of the decrease, and writeoffs of claims on countries with large external indebtedness, mostly in Latin America, accounted for an estimated $2.1 billion. International demand for U.S. bank credit was constrained by slowing economic activity in several major industrial countries, by sharp contractions for brief periods in the overseas interbank market, and by significant weakness in the U.S. dollar's value in foreign exchange markets. In addition, U.S. banks accelerated their efforts to improve their balance sheets by reducing higher risk international loans.

U.S. banks' claims on affiliated and unaffiliated banks abroad decreased $8.0 billion. The decrease was more than accounted for by Japanese banks, which significantly reduced their borrowing from U.S. banks partly in response to the sharp decline in the value of their holdings of Japanese stocks, to weakness in the Japanese yen, and to the introduction of more stringent capital requirements for banks in Japan. U.S. banks also cut back their claims on affiliated and unaffiliated banks abroad, but they offset much of the drop in the first half of the year with a surge in lending to their offices in the United Kingdom and Caribbean toward yearend.

U.S. banks' claims on public and other private foreigners decreased $12.1 billion, reflecting a large reduction in claims on foreign public borrowers in Latin America. Banks' claims on Mexico and Venezuela were reduced as part of the U.S. Government's debt restructuring program with these countries. These countries issued bonds with U.S. Treasury securities as collateral in exchange for reductions in debt at U.S. commercial banks. Reductions in U.S. banks' claims on other countries resulted from loan sales and asset swaps to enhance the quality of balance sheets and accommodate risk-based capital requirements that went into effect at yearend. An increase in banks' claims on borrowers in the Caribbean reflected U.S. banks' short-term repurchase arrangements at yearend with securities dealers there.

U.S. banks' domestic customers' claims increased $13.8 billion, to $75.9 billion, partly offsetting the above decreases. U.S. money market mutual funds, experiencing a sharp influx of investors' funds, stepped up depositing and purchases of negotiable instruments in foreign financial centers.

Foreign securities

U.S. holdings of foreign securities increased $32.1 billion to $222.3 billion, bolstered by record purchases of foreign bonds (table 1, line 19). Net purchases of foreign securities of $28.5 billion and exchange rate appreciation of $18.8 billion were partly offset by $15.2 billion in price depreciation, mostly in foreign stocks.

Record purchases of foreign bonds of $21.6 billion, augmented by $9.2 billion in exchange rate appreciation, led to a 31-percent increase to $129.1 billion in bond holdings. Foreign new issues of bonds in the United States surged to an unprecedented $23.2 billion, as lower U.S. long-term rates favored borrowing in the U.S. market and U.S. institutional investors stepped-up purchases of higher yielding new issues when yields on short-term instruments fell rapidly. Canadian new issues in the United States more than doubled as Canadian long-term interest rates remained substantially higher than similar U.S. interest rates. New issues from Western Europe and international financial institutions also accelerated sharply, especially during the bond market rally in the fourth quarter. New issues were augmented by debt restructuring agreements with Mexico and Venezuela; both Governments issued bonds with U.S. Treasury securities as collateral in exchange for reductions in their debt at U.S. commercial banks. Net U.S. sales of outstanding foreign bonds were $1.6 billion. Heavy purchases of British gilt-edged securities were absent as British long-term rates declined sharply. In contrast, U.S. purchases of Japanese bonds increased.

U.S. holdings of foreign stocks increased $1.5 billion, or less than 2 percent, to $93.3 billion; net purchases of $6.9 billion and exchange rate appreciation of $9.6 billion were mostly offset by price depreciation of $15.0 billion. Net purchases were heavily concentrated in the second quarter when markets abroad temporarily recovered; for the year, purchases were sharply curtailed as prices declined 12-40 percent on major foreign stock exchanges. Slowing economic growth, rising foreign interest rates, and uncertainties surrounding operations in the Persian Gulf in the second half of the year sharply reduced U.S. purchases to less than one-half the prior year's record.

U.S. direct investment abroad and other private assets

U.S. direct investment abroad valued on a current-cost basis increased $62.0 billion, to $598.1 billion; on a market-value basis, it decreased $93.6 billion, to $714.1 billion (table 1, lines 17 and 18, respectively). Capital outflows, included in both measures, remained at the prior year's record of $33.4 billion: Net equity transactions shifted to outflows of $6.2 billion; reinvested earnings decreased slightly to $22.3 billion; and intercompany debt outflows slowed sharply to $5.0 billion. Strong capital outflows were directed to Europe, Latin America, and the Pacific Rim countries: The integration of European markets in 1992, German unification, economic reforms, and relatively strong economic growth in some of these countries were inducements to U.S. multinational corporations' expansion. Exchange rate appreciation added $23.9 billion and $15.8 billion to the current-cost and market-value bases, respectively. Major European and Japanese currencies appreciated substantially against the U.S. dollar, resulting in large positive translation adjustments of affiliates' asset and liability positions. Price changes were significant only on the market-value basis; a negative adjustment of $142.8 billion reflected the steep drop in stock market prices in most major foreign markets. (For details of 1990 direct investment developments, see the section on U.S. Direct Investment Abroad in this article.)

Claims on unaffiliated foreigners reported by U.S. nonbanking concerns increased $1.9 billion, to $33.5 billion (table 1, line 22). Commercial claims, mostly trade receivables on industrial countries, advanced $1.6 billion, to $15.5 billion, as a result of relatively low U.S. interest rates and U.S. export growth. Financial claims increased $0.3 billion, to $18.0 billion; U.S. corporations' deposits in foreign banks picked up in the second half, but the pickup was largely offset by drops in other short-term investments abroad in the first and third quarters when U.S. interest rates temporarily increased.

U.S. official reserve assets and other U.S. Government assets

U.S. official reserve assets increased $6.0 billion, to $174.7 billion, mostly from exchange rate appreciation of foreign currency holdings (table 1, line 5). Holdings of Japanese yen and German marks increased as a result of the substantial appreciation of those currencies in exchange markets. Holdings of special drawing rights and the reserve position with the International Monetary Fund increased, as the market basket of currencies used to value them also appreciated against the dollar. A decrease in the market price of gold reduced U.S. gold reserves $2.8 billion.

U.S. Government assets other than official reserve assets decreased $3.0 billion, to $81.2 billion; principal repayments exceeded principal disbursements as they have every year since 1987 (table 1, line 10). Repayments of principal were bolstered by $5.9 billion of Egyptian military debt that was repaid by a U.S. Government grant. Prepayments of Foreign Military Sales credits from other countries slowed significantly. U.S. disbursements for debt reorganization increased, mostly to Argentina, Brazil, Mexico, and Zaire; other types of disbursements continued to decline.

Changes in Foreign Assets in the United States

Foreign official assets

Foreign official assets in the United States increased $32.3 billion, to $369.6 billion, largely from net acquisitions (table 1, line 26). Industrial countries, mainly in Western Europe, acquired $25.5 billion of dollar assets, mostly in the second half of the year, when the dollar's decline against European currencies accelerated. OPEC members acquired $2.2 billion of dollar assets, mostly early in the year; other countries acquired $4.7 billion.

Bank liabilities

Liabilities to private foreigners and international financial institutions reported by U.S. banks increased $9.9 billion, to $687.0 billion, a much smaller increase than in 1989 (table 1, line 42). Banks' own liabilities decreased $2.2 billion, to $612.0 billion, because of a substantial slowdown in growth of domestic and foreign demand for dollar credits, a widening of interest rate differentials adverse to U.S. depositing, and a significant decline in the dollar's foreign exchange value.

Much of the steep rundown in liabilities occurred in the first half of the year. In the second half, foreign-owned banks in the United States, with expanding domestic portfolios and credit needs, shifted to overseas funding, mostly from unaffiliated banks in Western Europe and Asian banking centers other than Japan. owned banks, with substantial domestic deposit growth and sluggish loan demand, drew on dollar funds from own foreign offices in Caribbean banking centers mostly to meet a surge in yearend lending overseas.

Banks' custody liabilities increased $12.2 billion, to $75.1 billion. In the first and third quarters, a substantial differential between the London interbank offering rate and the U.S. bank prime lending rate contributed to a shift of some domestic demand for U.S. bank credit to overseas banks.

U.S. Treasury securities

U.S. Treasury securities held by private foreigners and international financial institutions were nearly unchanged at $134.4 billion, as net purchases of $1.1 billion offset small price depreciation on government bonds (table 1, line 37). A sharp drop in foreign demand for U.S. Treasury bonds from the 1989 record was encouraged by widened differentials between declining U.S. Government and rising foreign government bond rates and by depreciation of the dollar in exchange markets. Foreigners more than offset their net sales of U.S. Treasury bonds with stepped-up purchases of short-term Treasury securities. By region, substantial sales (mostly of bonds) by Japanese investors were offset by net purchases of institutional investors in the Netherlands Antilles; Western European investors switched from long- to short-term U.S. Treasury securities.

Other U.S. securities

Foreign holdings of U.S. securities other than U.S. Treasury securities decreased $14.0 billion, or 3 percent, to $475.1 billion (table 1, line 38). Net sales and substantial price depreciation of U.S. stocks more than offset net purchases and price depreciation of U.S. corporate bonds.

A combination of large net sales of $14.5 billion and price depreciation of $14.9 billion reduced foreign-held U.S. stocks $29.4 billion, to $231.2 billion. The decline in U.S. economic growth and corporate earnings, the dollar's weakness in exchange markets, and uncertainties about operations in the Persian Gulf pushed U.S. stock prices down 9 percent and led to weakened foreign demand, particularly in the fourth quarter.

Foreign demand for U.S. corporate bonds was sustained through most of the year, buffeted only in the third quarter due to operations in the Persian Gulf. Net purchases were $16.3 billion; exchange rate appreciation of $4.7 billion was more than offset by price depreciation of $5.6 billion. In total, foreign holdings increased $15.4 billion, to $244.0 billion. New issues sold abroad by U.S. corporations were $16.1 billion, $2.6 billion less than in 1989, as a decline in U.S. corporations' long-term borrowing and a fourth-quarter rally in the domestic U.S. bond market limited overseas issuance. Nonetheless, foreign demand for U.S. dollar-denominated bonds remained relatively strong despite concerns over U.S. corporations' credit quality, operations in the Persian Gulf, higher foreign bond rates than U.S. rates, and a weak U.S. dollar. New issues by banks and nonbank financial corporations accounted for most of the placements. Straight fixed-rate bonds accounted for 85 percent of all new issues, and although two-thirds of borrowings were in U.S. dollars, issues denominated in Swiss francs and Japanese yen became more popular. Partly offsetting acquisitions of new issues, foreigners sold $5.4 billion of outstanding corporate bonds, mostly in the third quarter. Foreign holdings of U.S. federally sponsored agency bonds increased $5.6 billion, to $47.5 billion, mostly reflecting net purchases by Western European and Japanese residents.

Foreign direct investment in the United States and other liabilities

Foreign direct investment in the United States valued on a current-cost basis increased $32.2 billion, to $465.9 billion; on a market-value basis, it decreased $3.1 billion, to $530.4 billion (table 1, lines 35 and 36, respectively). (Both bases were revised to incorporate results from the Bureau of Economic Analysis' 1987 Benchmark Survey on Foreign Direct Investment in the United States.) Capital inflows, which are included in both measures, were nearly halved to $37.2 billion: Equity inflows dropped from their 1989 peak to $47.0 billion; reinvested earnings became more negative, at $14.0 billion, mostly reflecting larger operating losses; and intercompany debt inflows slowed sharply to $4.2 billion. This sharp slowdown in capital inflows reflected the weak U.S. economy, relatively high costs of funds abroad, sizable debt repayments to foreign parents by U.S. affiliates, new loans by U.S. finance affiliates to foreign parents, and a moderate drop in investments in new acquisitions and establishments by foreign parent companies. Price increases for property, plant, equipment, and inventories increased the current-cost measure by $2.2 billion. A steep fall in U.S. stock market prices decreased the market-value measure by $40.3 billion. (For details of 1990 direct investment developments, see the section on Foreign Direct Investment in the United States in this article.)

Liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns increased $3.7 billion, to $44.1 billion, reflecting a reduction in U.S. corporate borrowing from banks overseas that was more than offset by increased financing of U.S. trade (table 1, line 41). Financial liabilities decreased $0.4 billion, to $17.9 billion; large net repayments to banks in the United Kingdom were partly offset by increased borrowing from Caribbean banking centers. Commercial liabilities increased $4.2 billion, to $26.2 billion; much of the increase was from a sharp rise in trade payables, primarily to OPEC members, in the third quarter, reflecting the initial uncertainties over operations in the Persian Gulf and expectations of higher oil prices. An increase in advance receipts from industrial countries was probably associated with a step-up in prepayments on U.S. exports.

Direct Investment

As discussed earlier, the direct investment position is valued in prices of the current period on two alternative bases--current cost and market value. In 1990, the U.S. direct investment position abroad valued on a current-cost basis rose $62.0 billion, to $598.1 billion (table 4). On a market-value basis, it declined $93.6 billion, to $714.1 billion. The foreign direct investment position in the United States valued on a current-cost basis rose $32.2 billion, to $465.9 billion. On a market-value basis, it declined $3.1 billion, to $530.4 billion.

Before last month, only historical-cost estimates were available. (See table 5 for historical-cost estimates for 1982-90.) Historical cost is the basis used for valuation in company accounting records in the United States, and is the basis on which companies report data in BEA's direct investment surveys. Also, the historical-cost basis is the only basis on which detailed estimates of the U.S. direct investment position abroad and the foreign direct investment position in the United States are available by country, by industry, and by account. Finally, because most other countries do not yet have current-price measures, the historical-cost estimates can provide a rough, but useful, indicator of the relative size of the direct investment positions of different countries.

The following sections present detailed estimates of positions on a historical-cost basis for U.S. direct investment abroad and foreign direct investment in the United States. A technical note describes revisions to the foreign direct investment in the United States data for 1987 forward made as a result of information obtained from BEA's 1987 benchmark survey of foreign direct investment in the United States. In the analysis, information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

U.S. direct investment abroad

The U.S. direct investment position abroad measured at historical cost increased $51.4 billion (14 percent) in 1990, to $421.5 billion, compared with $34.2 billion (10 percent) in 1989 (table 6).(2) The increase in the position consisted of capital outflows of $33.4 billion and valuation adjustments of $18.0 billion. Although capital outflows accounted for most of the increase in the position, the accelerated growth rate was primarily due to sharply higher valuation adjustments, mainly currency translation adjustments.

Capital outflows for U.S. direct investment abroad were unchanged from the record level set in 1989, as a shift to equity capital outflows was offset by a sharp decline in intercompany debt outflows and a slight decrease in reinvested earnings. The continued strong pace of capital outflows reflected ongoing interest by U.S. multinational corporations in expanding their global operations. Among the factors that helped to sustain outflows are the 1992 single-market initiative in the European Communities, economic reforms in Latin America and Eastern Europe, and vigorous growth in the Pacific Rim countries. Although economic growth slowed in many countries last year, prospects for overseas growth may have induced U.S. corporations, despite limited resources, to continue to invest abroad.

Valuation adjustments--which are made to reflect differences between changes in the position, measured at book value, and capital flows, which are recorded at transaction values--increased $17.2 billion, to $18.0 billion. Most of the increase was accounted for by a $14.4 billion shift in currency translation adjustments from a negative $1.0 billion in 1989 to a positive $13.4 billion in 1990; the shift was largely attributable to the sharp depreciation of the U.S. dollar vis-a-vis major European currencies and, to a lesser extent, vis-a-vis the Japanese yen.(3) In contrast with the large positive translation adjustment in 1990, there was a relatively small net negative translation adjustment in 1989, as negative adjustments from dollar appreciation against the British pound and the Japanese yen were largely offset by positive adjustments from dollar depreciation against the major continental European currencies and the Canadian dollar.

Valuation adjustments other than from currency translation increased $2.8 billion, to $4.6 billion. Most of these adjustments were the net result of the sale and purchase of affiliates in excess of their book values.(4)

The $10.7 billion shift from equity capital inflows to outflows of $6.2 billion was almost entirely attributable to a reduction in U.S. parents' sales of equity interests, both partial and total, in their affiliates. During 1989, some U.S. parent companies were restructuring their worldwide operations, partly to reduce debt, and a number of petroleum, food-manufacturing, and metals-manufacturing affiliates were sold. Such sales of affiliates gave rise to sizable equity capital inflows in 1989. In contrast, sales of affiliates were fewer in number and smaller in value in 1990.

Intercompany debt outflows dropped $10.5 billion, to $5.0 billion, in 1990. The sharp drop was more than accounted for by affiliates in finance (except banking). In particular, British investment banks repaid a substantial portion of unusually large loans that were made by their U.S. parents in 1989 to help finance the affiliates' activities throughout Europe. The drop in intercompany debt outflows probably also reflected the high (but declining) level of affiliate earnings, which presumably lessened affiliates' needs for loans from their U.S. parents.

Reinvested earnings declined slightly in 1990, to $22.3 billion, as a $1.6 billion decrease in earnings was almost entirely offset by a $1.5 billion decrease in distributed earnings. By industry, a decline in reinvested earnings in manufacturing was nearly offset by a sharp increase in petroleum and a smaller increase in all other industries combined. The decline in manufacturing mainly reflected lower earnings by affiliates in most subindustries, particularly in transportation equipment. In addition, manufacturing affiliates, especially those in nonelectrical machinery and transportation equipment, distributed a larger portion of earnings to their U.S. parents than they did in 1989. These parents probably found distributed earnings from their affiliates to be a cost-effective method of financing domestic operations. The increase in petroleum affiliates' reinvested earnings mostly reflected higher earnings available for reinvestment due to the runup in crude oil prices following the Iraqi invasion of Kuwait. Although the higher prices proved to be temporary, they probably prompted some U.S. parents to reinvest additional earnings in their petroleum affiliates to expand or accelerate overseas exploration and development.

By account.--The $51.4 billion increase in the position consisted of capital outflows of $33.4 billion and valuation adjustments of $18.0 billion. Capital outflows consisted of reinvested earnings of $22.3 billion, equity capital outflows of $6.2 billion, and intercompany debt outflows of $5.0 billion. (For more detailed estimates of capital outflows by account, see table 5 in "U.S. International Transactions, First Quarter 1991" in this issue.) Valuation adjustments consisted of translation adjustments of $13.4 billion and other valuation adjustments of $4.6 billion.

Over two-thirds of the equity capital outflows were in finance (except banking); most of the remaining outflows were in "other industries" and banking. In finance (except banking), nearly all of the outflows were accounted for by the purchase of a Swiss holding company that owns a majority of the shares of a Swiss coffee and chocolate manufacturer. The purchase will enable the U.S. parent to expand its already prominent presence throughout Europe.

In "other industries," most of the equity capital outflows reflected the purchase of a minority stake in the Mexican national telephone company by a U.S. regional telephone company. This purchase was part of the second major privatization of a foreign government-owned telecommunications company in 1990. (The first was of the New Zealand Government-owned telephone company, which was purchased by two U.S. regional telephone companies; that acquisition, however, was financed through intercompany debt rather than through equity capital.) The privatizations may have been prompted by a desire by the foreign governments to help finance their budget deficits and, at the same time, obtain funding and technology from foreigners to modernize their telecommunications systems. Foreign investment is particularly attractive to regional U.S. telephone companies, which have been restricted domestically to certain operations.

In banking, the outflows mainly reflected capital contributions to European affiliates, particularly in the United Kingdom. Bank affiliates may be boosting their capital to meet the new minimum capital guidelines, established under the auspices of the Bank for International Settlements, that are to be phased in by 1993. The outflows were partly offset by inflows from the sale of a Swiss bank.

Intercompany debt outflows, although widespread by industry, were particularly large in "other industries." They were also sizable in manufacturing, finance (except banking), and services. In "other industries," most of the outflows were related to the purchase of the New Zealand Government-owned telephone company. In manufacturing, outflows to affiliates in "other manufacturing" and in food products financed acquisitions by existing affiliates in the United Kingdom and Mexico.(5) These outflows were partly offset by a large inflow in transportation equipment that mainly reflected the repayment of a 1989 loan made to a British affiliate for acquiring another affiliate. In finance (except banking), outflows reflected U.S. parents' repayments of loans to their Netherlands Antillean finance affiliates and an unusually large short-term loan to a Netherlands Antillean affiliate;(6) the outflows were partly offset by inflows from the previously mentioned repayments of loans by British investment banks to their U.S. parents. In services, the outflows were mainly to Europe.

Reinvested earnings, at $22.3 billion, continued to be a major source of funds for financing U.S. direct investment abroad. This near-record level reflected U.S. affiliates' robust profits--partly due to depreciation of the dollar against many major foreign currencies--despite slowing economic growth abroad.(7) Reinvested earnings were positive in all industries except banking, where distributions by affiliates far exceeded current-period earnings and thus were paid out of earnings from earlier years.

Reinvested earnings were particularly large in manufacturing, especially in chemicals, and in finance (except banking). In petroleum, reinvested earnings were at the highest level since 1984, partly as a result of unusually strong profits in 1990.

As noted earlier, the largest share--$13.4 billion--of the $18.0 billion of total valuation adjustments was due to translation adjustments. Other valuation adjustments, which totaled $4.6 billion, were particularly large in manufacturing and banking. In manufacturing, the other valuation adjustments reflected the sales of several affiliates for more than book value. In banking, the adjustments primarily reflected the previously mentioned sale of the Swiss bank for more than book value. In finance (except banking), positive adjustments were made to reflect changes in the ownership structure of several affiliates, the partial sale of a minority interest in a holding company for more than book value, and the inclusion in the 1990 data of several existing affiliates that had previously been unreported.(8) These positive adjustments were nearly offset by a very large negative adjustment that resulted from the previously mentioned purchase of the Swiss holding company for more than book value.

By country.--The position in developed countries rose $37.6 billion (14 percent), to $312.2 billion. Within the developed countries, the United Kingdom had the largest dollar increase, at $5.2 billion, but one of the smallest percentage increases (9 percent). Most of the increase resulted from positive translation adjustments that reflected the sharp depreciation of the U.S. dollar vis-a-vis the British pound. The position was also boosted by equity capital outflows to finance the acquisition of oil and gas field assets in the North Sea and by capital contributions to several British bank affiliates. Inflows reflecting loan repayments to parents from affiliates in finance and transportation equipment, and the sale of a minority interest in a food manufacturer, dampened the increase in position.

Within Europe, the positions in the Netherlands and Switzerland increased significantly. In the Netherlands, the $4.6 billion increase was largely attributable to positive translation adjustments and sizable reinvested earnings. In Switzerland, most of the $4.5 billion increase reflected the purchase of the holding company. In Germany and France, smaller increases in position were mainly due to positive translation adjustments and to reinvested earnings of manufacturing affiliates.

In Canada, Japan, and New Zealand, the increases in position mostly reflected loans by U.S. parents to affiliates. In Canada, where interest rates were higher than in the United States, the $2.9 billion increase in the position mostly resulted from loans to manufacturing affiliates. In Japan, the position increased $2.5 billion, as a rise in interest rates in reaction to a sharp decline in stock prices prompted Japanese affiliates to meet more of their capital needs through borrowing from their U.S. parents. Positive translation adjustments also boosted the position in Japan. In New Zealand, the loans were related to the previously mentioned purchase of the Government-owned telephone company.

In developing countries, the position increased $13.6 billion (15 percent), to $105.7 billion. Nearly three-fourths of the increase--$9.7 billion--was in Latin America, particularly in the Netherlands Antilles, Mexico, and Bermuda. Most of the remainder was in "other Asia and Pacific." In the Netherlands Antilles, the $4.6 billion increase mainly reflected the previously mentioned repayments by U.S. parents of loans from their finance affiliates and, to a lesser extent, the unusually large short-term loan to an affiliate. In Mexico, the $2.1 billion increase resulted from the reinvestment of earnings of manufacturing affiliates and from the previously mentioned purchase of a minority stake in the Mexican national telephone company; it may also have partly reflected a liberalization of Mexican policies towards foreign investment. In "other Asia and Pacific," the increase was mostly due to reinvested earnings and may have reflected continued strong economic growth throughout the region.

Foreign direct investment in the United

States

The foreign direct investment position in the United States measured at historical cost increased $30.0 billion (8 percent) in 1990, to $403.7 billion, after a $59.0 billion (19 percent) increase in 1989 (table 7).(9) As of the end of 1990, the United Kingdom had the largest position, at $108.1 billion, followed by Japan, at $83.5 billion, and the Netherlands, at $64.3 billion.

Several factors contributed to the less rapid growth in the position in 1990. A weaker U.S. economy contributed to operating and capital losses, which in turn affected the position through negative reinvested earnings. Sluggish economic conditions in some other industrialized countries, tighter monetary policies of several major central banks, and worldwide bank restructuring appear to have reduced the availability of funds for investment. In some countries, however, particularly in Europe, the demand for capital was strong; the increasing economic integration within the European Communities and the reunification of Germany, along with the U.S. economic slowdown, may have shifted foreign investors' attention away from investment in the United States. Although outlays by foreign investors to acquire or establish U.S. businesses were still considerable, capital inflows for such investments declined because of greater reliance on sources of financing other than foreign parent groups.(10) Some foreign companies, probably encouraged by shifts in differentials between interest rates in the United States and those overseas, borrowed more in the United States through their U.S. affiliates to finance operations abroad. Finally, several U.S. affiliates that had made large U.S. investments in recent years repaid sizable amounts of debt to their foreign parent groups.

Capital inflows decreased $33.3 billion, to $37.2 billion, in 1990. Most of the decrease was accounted for by a steep decline in intercompany debt inflows and by significantly larger negative reinvested earnings; equity capital inflows also declined, but to a much lesser extent. Valuation adjustments were a negative $7.2 billion, compared with a negative $11.5 billion in 1989.

Intercompany debt inflows decreased $18.3 billion, to $4.2 billion, primarily as a result of increased outflows. The outflows reflected both U.S. affiliates' repayment to foreign parent groups of loans associated with earlier investments and new loans from U.S. finance affiliates to their foreign parent groups.

Reinvested earnings decreased $10.2 billion, to a negative $14.0 billion. The decline was more than accounted for by a $10.4 billion shift in earnings, to losses of $6.2 billion; distributed earnings declined slightly. Operating earnings shifted $6.9 billion, to losses of $4.1 billion, and capital gains shifted $3.5 billion, to losses of $1.9 billion.

Equity capital inflows decreased $4.8 billion, to $47.0 billion. By industry, the largest decrease was in manufacturing (particularly in chemicals, where inflows had been considerable in 1989). In 1990, as in past years, a significant portion of the inflows were associated with recent acquisitions of U.S. companies.

By account.--Capital inflows more than accounted for the increase in the position in 1990; valuation adjustments were a negative $7.2 billion. Equity capital inflows of $47.0 billion and intercompany debt inflows of $4.2 billion were partly offset by negative reinvested earnings (outflows) of $14.0 billion.

Many sizable equity capital inflows were associated with recent acquisitions by foreign parents either directly or through existing U.S. affiliates. In manufacturing, the largest transactions were in "other manufacturing," in chemicals, and in food products. In "other manufacturing," a large transaction was associated with the acquisition of a large U.S. firm by a new affiliate of a French company; several other sizable transactions in "other manufacturing" involved U.S. affiliates of British and other French parents. There were particularly large transactions in food products and in chemicals. In food products, an inflow reduced the debt of a British firm's U.S. affiliate. In chemicals, a French company acquired a U.S. business.

There were also some large equity capital inflows in wholesale trade, in services, and in insurance. In wholesale trade, the largest transactions were capital infusions to a Japanese firm's U.S. affiliate, which acquired several large U.S. companies in recent years. In services, there were a few major hotel acquisitions that involved U.S. affiliates of parents in Europe and Japan. In insurance, there were several significant transactions associated with acquisitions by European parents or their existing U.S. affiliates.

Although intercompany debt inflows in 1990 were small compared with those in other recent years, many sizable individual inflows and outflows occurred. Two of the largest loans to U.S. affiliates were in services and were associated with recent acquisitions. There were several large loans to U.S. finance affiliates and many loans, some of them sizable, to real estate affiliates (particularly to those of Japanese or Netherlands parents).

Intercompany debt inflows were partly offset by large repayments of debt, primarily by U.S. manufacturing and petroleum affiliates of European parents; much of the debt was associated with earlier acquisitions. In addition, several U.S. finance affiliates, most of which have ultimate beneficial owners that are European banks, made large loans to parents in various countries.

Reinvested earnings were negative in most industries, largely because of operating losses or capital losses or both; an exception was petroleum, in which positive reinvested earnings reflected significant operating earnings. In manufacturing, the negative reinvested earnings were more than accounted for by affiliates in "other manufacturing" and in machinery. In "other manufacturing," affiliates of British and French parents had particularly large negative reinvested earnings. In machinery, the negative reinvested earnings were largely accounted for by affiliates of parents in the Netherlands and other European countries. Large negative reinvested earnings also occurred in real estate and in banking. In real estate, they reflected widespread operating losses; in banking, they reflected a combination of operating losses and distributed earnings.

Negative valuation adjustments of $7.2 billion resulted largely from offsets to purchases of U.S. affiliates for more than book value. By industry, negative adjustments were fairly widespread.

By country.--In 1990, parents in Japan and the Netherlands realized the largest increases in position. Much smaller, but still considerable, increases were realized by parents in France and the United Kingdom. In contrast, parents in the United Kingdom Islands (Caribbean), Germany, and Switzerland had the largest decreases in position.

The position of Japanese parents increased $16.2 billion, to $83.5 billion. By industry, equity inflows were largest in wholesale trade and in real estate. In wholesale trade, there were large capital contributions to existing U.S. affiliates that had recently been involved in acquisition and expansion activity; in real estate, there were many new investments. Intercompany debt inflows were largest in services and wholesale trade; most of the larger loans were to affiliates recently involved in entertainment or hotel acquisitions. Reinvested earnings were negative in many industries, most noticeably in manufacturing and in banking.

The position of Netherlands parents increased $8.0 billion, to $64.3 billion. By industry, equity inflows were largest in services and in manufacturing (particularly machinery), with many of the larger transactions associated with recent acquisitions. Intercompany debt inflows were sizable in several industries. Reinvested earnings were negative in many industries, particularly in manufacturing and in banking.

The position of French parents increased $2.7 billion, to $19.6 billion. The increase was more than accounted for by large equity capital inflows, which were partly offset by negative valuation adjustments and negative reinvested earnings; intercompany debt outflows were relatively small, as large individual outflows were nearly offset by many inflows. By industry, equity inflows were largest in manufacturing (particularly "other manufacturing" and chemicals) and in services, the largest transactions involving acquisitions. Intercompany debt inflows in manufacturing were more than offset by outflows from U.S. finance affiliates.

The position of British parents increased $2.5 billion, to $108.1 billion, as equity capital inflows more than accounted for the increase. These inflows were partly offset by intercompany debt outflows, negative reinvested earnings, and negative valuation adjustments. By industry, equity inflows were largest in manufacturing (particularly food products and "other manufacturing") and in insurance. Most of the larger inflows in these industries were associated with recent acquisitions. Intercompany debt outflows were largest in manufacturing (particularly food products) and in petroleum. Negative reinvested earnings were fairly widespread by industry.

Parents in the United Kingdom Islands (Caribbean), Switzerland, and Germany had the largest decreases in position. The position of United Kingdom Islands (Caribbean) parents declined $3.1 billion, to --$3.2 billion, largely because of outflows from U.S. finance affiliates whose ultimate beneficial owners are in Europe and Australia. The position of Swiss parents decreased $1.3 billion, to $17.5 billion, and the position of German parents decreased $1.2 billion, to $27.8 billion; for both countries, equity capital inflows were more than offset by negative reinvested earnings, intercompany debt outflows, and negative valuation adjustments.

Technical Note

Direct investment accounts

For foreign direct investment in the United States, estimates of capital inflows, income, royalties and license fees, and charges for other services for 1987-90 and estimates of the direct investment position for 1987-89 have been revised to incorporate information from BEA's 1987 benchmark survey of foreign direct investment in the United States; previously, these estimates were based on the last (1980) benchmark survey. Revisions to the estimates for 1988 forward also reflect the inclusion of new or adjusted data from various BEA surveys of foreign direct investment.

The benchmark survey covered the universe of U.S. affiliates of foreign direct investors. Reports were required from affiliates that had total assets, sales or net income of $1 million or more in fiscal year 1987.(11)

In nonbenchmark years, estimates of the direct investment position and of balance of payments flows are derived from data reported quarterly by a sample of the affiliates that reported in the benchmark survey and by affiliates that entered the direct investment universe since the benchmark survey and that met the reporting criteria for the quarterly sample survey. To obtain universe estimates in nonbenchmark years, estimates were made for affiliates that did not report in the quarterly sample survey. These estimates are derived by extrapolating the data reported previously by these affiliates--usually in the benchmark survey; the extrapolation is based on the movement of the data reported in nonbenchmark years for a matched sample of affiliates.

Comparison of the quarterly and benchmark survey data.--The benchmarking procedure was comprised of a series of steps involving the comparison of quarterly and benchmark survey data. First, the data for affiliates that had either left the universe or been consolidated into other affiliates were removed from the estimates. Next, the data from the 1987 quarterly sample surveys and the 1987 benchmark survey for affiliates that reported in both surveys were compared and reconciled. Significant discrepancies were investigated and resolved--usually in favor of the totals from the benchmark survey; because the benchmark data were reported later than the quarterly survey data and because the benchmark survey was more comprehensive and integrated than the quarterly survey, the benchmark survey data could generally be more thoroughly edited and cross-checked than the quarterly survey data. As part of this reconciliation process, the benchmark survey data were adjusted to a calendar year basis because the benchmark survey data were collected on a fiscal year basis, whereas the quarterly survey data were collected on a calendar year basis. The sum of the quarterly survey data for the four quarters corresponding to an affiliate's 1987 fiscal year was compared with the fiscal year total reported in the benchmark survey (the fiscal year of approximately two-thirds of the affiliates coincided with the calendar year).(12) To obtain estimates for the calendar year, the data derived from the benchmark survey for those fiscal year quarters that also fell in calendar year 1987 were isolated and were added to the data from the quarterly survey for any calendar year quarters not covered by the benchmark survey.

Finally, data for affiliates that did not report in the quarterly survey but that did report in the benchmark survey were added to the estimates. The procedure for adding the data depended on the item that was estimated. For income and its components, for royalties and license fees, and for charges for other services, the data from the benchmark survey for fiscal year 1987 were used as the estimates for calendar year 1987 and were distributed among the four calendar quarters of the year. For two components of total capital inflows--equity capital and intercompany debt--the data from the benchmark survey for fiscal year 1987 were distributed among the four quarters of the fiscal year, although the calendar year estimates consisted only of estimates for those quarters of the affiliate's 1987 fiscal year that were also in the 1987 calendar year; for any remaining quarters of the calendar year, the amounts were assumed to be zero.

The treatment of equity capital and intercompany debt inflows was consistent with that in nonbenchmark periods, in which data for them are included only as actually reported in the quarterly sample survey. These items tend to be volatile, with frequent sign reversals; thus, the reported sample data may not provide a reliable basis for estimating unreported data. (As part of a broader initiative to improve the data on international capital flows, BEA plans to investigate alternative methods for estimating unreported direct investment capital flows.)

Comparison of the revised 1987 estimates with the previously published 1987 estimates.--In table 8, the revised calendar year estimates for 1987, which incorporate information from the 1987 benchmark survey, are compared with the previously published estimates for 1987, which were based on the 1980 benchmark survey. The previously published estimates were obtained by extrapolating forward universe data from the 1980 benchmark survey, using sample data for interim years.

On the 1987 basis, the direct investment position (at book value) of $263.4 billion was $8.4 billion lower than on the 1980 basis. Capital inflows were $58.1 billion, $11.2 billion higher than on the 1980 basis. Income was $7.2 billion, $2.3 billion lower than on the 1980 basis. Net payments for royalties and license fees were $0.1 billion higher, and net receipts for other services were $0.1 billion lower.

The $8.4 billion, or 3-percent, downward revision in the position reflects the net effect of previously unrecorded changes over the entire period between the 1980 and 1987 benchmark surveys. The revision largely reflects the removal of affiliates that the 1987 benchmark survey indicated had left the universe but that had continued to be included in the estimates. The downward revision also reflected prior overestimation of reinvested earnings and underestimation of negative valuation adjustments. Much of the $11.2 billion upward revision in capital inflows was accounted for by affiliates that did not report in the 1987 quarterly surveys, by affiliates that did report but, according to information from the benchmark survey, did not report accurate flow data, and by affiliates that reported late and whose capital inflows were previously included as valuation adjustments. Much of the downward revision in income reflected the prior overestimation of reported earnings and, to a lesser extent, the removal of affiliates that the benchmark survey indicated had left the universe.

By country, much of the downward revision in the position was accounted for by the two countries with the largest 1987 positions--the United Kingdom and the Netherlands. Upward revisions in capital inflows were widespread; the largest upward revisions were for the United Kingdom and Canada. Downward revisions in income were also widespread; the largest revision was for Canada.(13)

By industry, revisions in the position varied considerably. The largest downward revision was in real estate and largely reflected the removal of affiliates that the benchmark survey indicated no longer existed. The upward revision in capital inflows was largely accounted for by affiliates in finance (except banking), where debt flows tend to be particularly volatile. The downward revision in income was largely accounted for by wholesale trade affiliates. Changes to industry classifications of affiliates also accounted for part of the revisions.

Estimates for 1988 forward.--For equity capital inflows, intercompany debt inflows, and capital gains/losses, the estimates for 1988 forward are based on the data included in the quarterly surveys and, in some cases, on the data from BEA's survey of new U.S. affiliates and its annual survey of foreign direct investment in the United States. As noted earlier, the volatility of these items makes reliable estimation of them difficult. In contrast, for income and its components (except capital gains/losses), for royalties and license fees, and for charges for other services, the estimates cover all affiliates. For the latter items, the estimation procedure used is designed to ensure coverage as complete as that in the 1987 benchmark survey. Thus, estimates had to be made for affiliates that reported in the 1987 benchmark survey but that did not report in the quarterly sample surveys, either because they were exempt from reporting or because they should have reported but did not. To obtain the universe estimates, the estimates for affiliates that did not report in the quarterly survey were then added to the data of affiliates that did report.

The revisions in the estimates for 1988 and 1989 reflect information obtained in BEA's annual survey of foreign direct investment, its survey of new foreign investments, late and revised quarterly reports, and the 1987 benchmark survey. The position for 1988 was revised downward substantially, largely because of the downward revision to the 1987 position and, to a lesser extent, because of additional negative valuation adjustments. The position for 1989 was also revised downward substantially, largely because of the downward revision to the 1988 position and because of additional negative valuation adjustments. Many of the additional negative valuation adjustments arose from offsets to inflows associated with acquisitions whose book values were not adjusted to their (higher) transaction values. Income for both years was also revised downward, largely reflecting the prior overestimation of earnings and, to a lesser extent, the removal of affiliates that the benchmark survey indicated had left the universe. [Tabular Data 1 to 8 Omitted]

(1)See J. Steven Landefeld and Ann M. Lawson, "The Valuation of the U.S. Net International Investment Position," Survey of Current Business 71 (May 1991) for a discussion of concepts and estimation procedures. (2)The position is the book value of U.S. direct investors' equity in, and net outstanding loans to, their foreign affiliates. A foreign affiliate is a foreign business enterprise in which a single U.S. investor owns at least 10 percent of the voting securities, or the equivalent. (3)Currency translation adjustments to the position are made to reflect changes in the exchange rates that are used to translate affiliates' foreign-currency-denominated assets and liabilities into U.S. dollars. Although the precise effects of currency fluctuations on translation adjustments depend on the value and currency composition of affiliates' assets and liabilities, dollar depreciation usually results in positive translation adjustments (capital gains), because it tends to raise the dollar value of net foreign-currency-denominated assets. Similarly, negative adjustments (capital losses) tend to be associated with dollar appreciation, which lowers the dollar value of net foreign-currency-denominated assets. (4)When a foreign affiliate is sold for more than its book value, a positive valuation adjustment is made to reflect the difference between the capital inflow to the U.S. parent as a result of the sale and the book value removed from the direct investment position. Similarly, when an affiliate is purchased for more than its book value, and if the affiliate's books (which are used as the basis for recording the position) are not revalued at the time of the purchase to reflect the transaction value, a negative valuation adjustment is made to reflect the difference between the capital outflow as a result of the purchase and the book value added to the direct investment position. (In many purchases, however, the affiliates's assets are revalued at the time of the purchase and no valuation adjustment is necessary, because the (revalued) book value added to the direct investment position is equal to the capital outflow.) (5)In recent years, U.S. parents have increasingly relied on indirect acquisitions in which they loan funds to existing affiliates, for use in acquiring other foreign companies. To the extent that indirect acquisitions replace direct acquisitions by the U.S. parents themselves, they tend to increase intercompany debt outflows rather than equity capital outflows. (6)Most Netherlands Antillean finance affiliates were established in the late 1970's and early 1980's to borrow funds in European capital markets and relend them to their U.S. parents. The parents were prompted to borrow indirectly through these affiliates, rather than directly from Euromarkets, because the associated interest payments were exempt from U.S. withholding taxes under a United States-Netherlands Antilles tax treaty. To realize this tax advantage, the affiliates were required to be incorporated in the Netherlands Antilles. However, the principal advantage to borrowing through Netherlands Antillean affiliates was eliminated in the third quarter of 1984, when the U.S. withholding tax on interest paid to foreigners was repealed. Consequently, relatively little new borrowing from these affiliates has occurred, and repayments of previous loans have increased substantially. Concurrently, U.S. parents have been reducing their equity in these affiliates. (7)Currency translation has a twofold effect on the U.S. direct investment position abroad. As discussed earlier, translation adjustments that arise from translation of affiliates' foreign-currency-denominated assets and liabilities into U.S. dollars enter the position as valuation adjustments. In addition, currency translation affects affiliates' operating earnings (and, thus, reinvested earnings) through its effect on the dollar value of affiliates' foreign-currency-denominated revenues and expenses. The dollar value of earnings generally is raised by depreciation, and is lowered by appreciation, of the dollar against foreign currencies. (8)Because capital flow data for these affiliates were not available for inclusion in the direct investment positions for previous years, valuation adjustments to the 1990 position were made to account for the prior investments. (9)The position is the book value of foreign direct investors' equity in, and net outstanding loans to, their U.S. affiliates. A U.S. affiliate is a U.S. business enterprise in which a single foreign direct investor owns at least 10 percent of the voting securities, or the equivalent. The position and related capital and income flows for 1987 forward have been revised as a result of information obtained from BEA's 1987 benchmark survey of foreign direct investment in the United States, the further editing of previously received reports, and the inclusion of late reports (see technical note).

In table 7, there is more country detail than in the past. This change, along with modified industry detail, will be reflected in the tables on foreign direct investment in the United States that will appear in the August 1991 issue of the Survey, where additional detail for 1987-90 will be presented. (10)For a discussion of these and other factors affecting foreign direct investment, see "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1990," Survey of Current Business 71 (May 1991): 30-39. Preliminary data from BEA's survey of new foreign direct investments in the United States, summarized in that article, indicate that total outlays to establish or acquire U.S. businesses were $64.4 billion in 1990, down from $71.2 billion in 1989. These figures differ from those on changes in the foreign direct investment position presented here, primarily because they cover only transactions involving the acquisition or establishment of new U.S. affiliates and because they include financing other than from the foreign parent, such as local borrowing by existing U.S. affiliates. Changes in the position, in contrast, reflect transaction of existing as well as new U.S. affiliates, but only if the transactions are with the foreign parent (or other members of the foreign parent group). The two types of data, however, are related. Any outlays to acquire or establish U.S. businesses that are funded by foreign parents (or other members of the foreign parent group) are part of capital inflows, a component of the change in the position. Data on the sources of funding of outlays to acquire or establish new U.S. affiliates indicate that foreign parent groups provided $32.0 billion of total 1990 outlays, down from $48.2 billion in 1989. (11)Affiliates that did not meet these criteria were exempt from reporting but had to file an exemption claim on which they reported the value of their total assets, sales, and net income and the number of acres of U.S. land they owned. Of the universe of 12,913 U.S. affiliates, 8,577 were required to report, and 4,336 were exempt from reporting. (Because the report of an affiliate is for the fully consolidated U.S. enterprise, it may cover many companies. Thus, the number of companies covered is substantially higher than the number of affiliates--23,404 compared with 8,577. The number of establishments, or plants, of U.S. affiliates is not available from the benchmark survey, but it would be even higher than the number of companies covered.) Although the number of affiliates that were required to file a report accounted for only about two-thirds of the universe, they accounted for virtually all of the value.

For a detailed description of the methodology for foreign direct investment in the United States, including basic concepts and definitions, see Foreign Direct Investment in the United States: 1987 Benchmark Survey, Final Results. See the inside back cover for information on ordering this publication. (12)The reported fiscal year data from the benchmark survey for the direct investment position, capital inflows, income, royalties and license fees, and charges for other services were published in Foreign Direct Investment in the United States: 1987 Benchmark Survey, Final Results. (13)Detailed tables that include the 1987-90 country and industry estimates for these items will be presented in the August 1991 issue of the Survey.
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Author:Scholl, Russell B.
Publication:Survey of Current Business
Date:Jun 1, 1991
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