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The international investment position of the United States in 1991.

The net international investment position of the United States at yearend 1991 was a negative $361.5 billion when direct investment is valued at the current cost of replacing plant, equipment, and other tangible assets, and it was a negative $381.8 billion when direct investment is valued at the current stock-market value of owners' equity.

The negative position valued at current cost--or replacement cost--increased $66.7 billion from $294.8 billion at yearend 1990, and the negative position valued at market value--or current stock prices--increased $109.8 billion from $272.0 billion.

The increase in both measures of the negative U.S. net position was mainly due to the stronger recovery in the stock and bond markets in the United States than in those markets abroad in 1991, resulting in large price appreciation in the market basis of foreign direct investment in the United States and foreign-held U.S. securities. Net capital inflows continued to decline and had little impact on the net position; at $4.8 billion, net capital inflows were well below their i987 peak of $167.6 billion. Although there was a strong rebound in foreign demand for U.S. securities, the inflow was mostly offset by record U.S. purchases of foreign stocks. Bank and other capital flows for the year were subdued, in large part because of the retrenchment of U.S. banks from international markets and weak bank credit demand at home and abroad.

In current cost, the 1991 change in position was mainly due tO $58.6 billion in price appreciation, mostly in foreign-holdings of U.S. securities, and to $4.8 billion in net capital inflows, as foreign assets in the United States increased more rapidly than U.S. assets abroad. Exchange rate changes and other changes combined were $3.3 billion, mostly due to depreciation of U.S. assets payable in European currencies that declined against the dollar.

In market value, the change in the position reflected price appreciation of 108.0 billion, capital inflows of $4.8 billion, and exchange rate and other changes of $2.9 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-cost and market-value basis. A third section resents 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.

Changes in U.S. Assets Abroad

Bank claims

U.S. claims on foreigners reported by U.S. banks increased $4.6 billion, to $656.8 billion, in 1991, reflecting only intermittent short-term lending to the overseas interbank market (table 1, line 23). The downturn in economic growth in a number of industrial countries and further falloff in cross-border merger-related financing substantially weakened international credit needs. In addition, as an alternative to some bank financing, many international borrowers increased issuance of international bonds as interest rates dropped by substantial amounts. Moreover, bank credit expansion was constrained by intensified assessments of borrowers' credit worthiness due to the December 1990 imposition of new risk-based capital requirements on U.S. banks and poor U.S. loan performance in the weakened economic environment. [TABULAR DATA 1 OMITTED]

U.S. banks' own claims on foreign banks increased $13.8 billion, to $435.4 billion; these claims were down most of the year except late in the second and fourth quarters, when interbank demand for dollars and foreign currencies increased temporarily. Foreign-owned banks in the United States increased their claims on foreign banks in Western Europe and Caribbean banking centers. Claims on banks in Japan changed little, as large repayments of credits throughout most of the year were almost offset by a sudden surge in new credits at yearend. A sustained large drop in dollar claims on Japan for much of the year, primarily by U.S. offices of Japanese banks, represented further curtailment of international business by Japanese banks, as they adjusted to tightened capital requirements, weakened asset positions in real estate and stocks, and slowing economic growth at home. U.S.-owned banks ran down their positions with foreign banks during most of the year; however, they resumed lending to their offices in the Caribbean late in the year, which left their external positions with own foreign offices nearly unchanged.

U.S. banks' other dollar claims declined sharply; claims on foreign public borrowers decreased $4.9 billion, to $37.2 billion, and claims on other nonbank foreigners decreased $6.0 billion, to $41.8 billion. Claims on Latin American borrowers were further reduced, as repayments, loan sales, and small write-offs exceeded new lending. Several major Latin American debtor countries made significant headway in reducing their external indebtedness through further privatization sales of national enterprises, payment of interest arrears to commercial banks, and economic reforms. However, U.S. bank regulators required increased special transfer-risk reserves for Brazil and Argentina, two countries that made relatively little progress in reducing their external indebtedness. Since 1987, U.S. banks have more than halved their claims on foreign public borrowers. The decrease in claims on nonbank foreigners mostly reflected reversals of repurchase agreements by security firms in the United States with investment funds in the Caribbean.

U.S. banks' customers' claims payable in dollars decreased $1.4 billion, to $66.0 billion, largely reflecting a decline in overseas deposits by U.S. money market mutual funds. U.S. banks reduced their deposits with banks in Japan and cut back on deposits in the United Kingdom, mostly in the first quarter.

Bank-reported foreign currency claims increased 3.3 billion, to $76.4 billion, when interbank demand, particularly from Japan, surged late in the year.

Foreign securities

U.S. holdings of foreign securities increased $64.1 billion, to $305.9 billion, in 1991; these holdings were bolstered by record net purchases of foreign stocks, substantial market price appreciation, and strong demand for foreign bonds (table 1, line 19). Price changes were significant for corporate stocks. Exchange rate gains were small and offsetting.

U.S. holdings of foreign stocks increased $48.2 billion, to $158.3 billion; the large increase reflected record net purchases of $30.2 billion, stock price appreciation of $16.9 billion, and modest exchange rate appreciation of $1.2 billion, mostly in Japanese stocks. U.S. demand for foreign stocks had slowed during the uncertainties over the crisis in the Persian Gulf in 1990, but demand rebounded strongly in early 1991 with the successful outcome of the war and recovering stock prices abroad. The net purchases in 1991--nearly double the 1989 record--included $13.7 billion from Western Europe, where stock prices advanced, on average, 12 percent, and $13.3 billion from Japan. Purchases were largest, at $7.8 billion, from the United Kingdom, where stock prices appreciated nearly 15 percent; the increase was partly offset by a 2-percent decline in the foreign exchange value of the British pound. Strong purchases from France and Germany--at $1.4 billion each--were bolstered by French and German stock-price gains of 18 percent and 8 percent, respectively, and little exchange rate loss. U.S. demand for Japanese stocks, which had been flat for 2 years, rebounded with large purchases in 1991 despite a 6-percent decline in prices; exchange rate gains offset some of the price decline. U.S. investors were drawn to lower stock prices following a 38-percent decline in Japanese stock prices in 1990.

U.S. holdings of foreign bonds increased $15.9 billion, to $147.6 billion; net purchases were $14.9 billion, price appreciation was $2.9 billion, and exchange rate losses were $1.9 billion. Strong foreign borrowing in the U.S. dollar bond market was partly offset by stepped-up redemptions of dollar bonds. Foreign new issues of bonds in the United States, at $21.0 billion, remained strong; they were only $2.4 billion below their record 1990 level despite the absence of large Latin American issues for debt restructuring that had been present in 1990. A 50-basis-point decline in U.S. interest rates was a significant factor in maintaining the attractiveness of the U.S. bond market. New issues by Western Europeans more than doubled to $7.1 billion, with the Netherlands accounting for one-half of the total. Canadian issues increased $1.2 billion, to $7.8 billion, as Canadian long-term rates fell less than comparable U.S. rates. Latin American issues were $0.6 billion, following nearly $9.0 billion in debt refinancing issues in 1990. U.S. holdings of outstanding bonds were boosted $13.6 billion, mostly in British gilt-edged securities; these securities became relatively attractive to U.S. investors in the second half of the year, when interest rates in the United States fell faster than those in the United Kingdom and the British pound appreciated against the dollar.

U.S. direct investment abroad and other private assets

U.S. direct investment abroad valued on a current-cost basis increased $31.7 billion, to $655.3 billion, in 1991; on a market-value basis, it increased $85.6 billion, to $802.0 billion (table 1, lines 17 and 18, respectively). Capital outflows slowed to $27.1 billion on both bases: A sharp decrease in reinvested earnings to $17.9 billion and a shift in intercompany debt flows to net inflows of $2.4 billion were only partly offset by a step-up in net equity outflows to $11.7 billion. Exchange-rate adjustments reduced the current-cost basis by $6.6 billion and had little effect on the marketvalue basis. Buoyant stock-market prices in most foreign markets added $54.7 billion to the level of direct investment on the market-value basis. Price changes added $9.9 billion to the level on the current-cost basis. (For details of 1991 direct investment developments, see the section on U.S. direct investment abroad later in this article.)

Claims on unaffiliated foreigners reported by U.S. nonbanking concerns decreased $5.4 billion, to $104.4 billion (table 1, line 22), as U.S. firms drew down Eurodollar deposits at banks in the United Kingdom, Canada, and the Caribbean. Declining interest rates on deposits and weak growth in international banks' demand for funds contributed to the decline. U.S. financial claims decreased $6.9 billion, to $87.5 billion; this decrease was offset partly by growth in commercial claims, largely trade-related, which increased $1.4 billion, to $16.9 billion.

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

U.S. official reserve assets decreased $15.4 billion, to $159.2 billion, in 1991; the decrease mostly resulted from a drop in the market price of gold and from sales of foreign currency assets (table 1, line 5). The drop in the market price of gold reduced the value of U.S. gold reserves $9.8 billion. Sales of foreign currencies, mostly German marks and Japanese yen, reduced currency holdings $6.3 billion. In the first quarter, sales of currencies by U.S. monetary authorities were to support the dollar in exchange markets; during the rest of the year, sales were off-market transactions with foreign monetary authorities to adjust U.S. holdings. U.S. holdings of special drawing rights and of reserves at the International Monetary Fund increased $0.3 billion, to $11.2 billion, and $0.4 billion, to $9.5 billion, respectively.

U.S. Government assets other than reserve assets decreased $3.5 billion, to $78.7 billion, as repayments substantially exceeded disbursements (table 1, line 10). Foreign repayments included a rescheduling of Polish and Egyptian debt and debt forgiveness to developing countries in sub-Saharan Africa and Latin America. The decrease in net long-term credits was partly offset by the acquisition of short-term claims on Iraq from private U.S. banks resulting from the payment of guarantees on loans to Iraq.

Changes in Foreign Assets in the United States

Foreign official assets

Foreign official assets in the United States increased $25.5 billion, to $396.6 billion, in 1991; the increase included $18.4 billion in net acquisitions of assets and $7.9 billion in price appreciation of U.S. Treasury bonds and U.S. corporate stocks (table 1, line 26). NON-OPEC developing countries, primarily Latin American and newly industrialized countries in Asia, increased their dollar assets by a substantial $32.3 billion, mostly in U.S. Treasury bonds. Some Latin American countries bolstered their official reserves by privatization sales of government-owned enterprises and capital inflows due to an improved investment climate. The increases by newly industrialized countries in Asia were encouraged by their continuing trade surpluses with the United States. OPEC members sold $5.3 billion of dollar assets, as several members made payments to the United States associated with Operation Desert Storm. Industrial countries sold $8.6 billion of dollar assets.

Bank liabilities

U.S. bank-reported liabilities to private foreigners and international financial institutions decreased $13.3 billion, to $680.1 billion, in 1991 (table 1, line 42); a large decrease in the first half of the year was offset partly in the second half as foreign-owned banks in the United States resumed borrowing from the overseas interbank market. A sharp cutback in foreign deposits in the United States, despite the dollar appreciation in exchange markets in the first half of the year, was encouraged by a substantial widening in interest-rate differentials, which favored depositing abroad rather than in the United States.

U.S. banks' liabilities to foreign banks, payable in dollars, decreased $0.9 billion, to $457.3 billion; liabilities fell sharply in the first half of the year and rebounded in the second half, when foreign-owned banks borrowed overseas interbank funds. Foreign-owned banks curtailed the use of funding from unaffiliated banks overseas in the first half, when U.S. credit demand was weak, and they expanded issuance of time deposits in the United States after U.S. bank regulators removed reserve requirements on nonpersonal time deposits in December 1990. While U.S. credit demand remained weak in the second half, foreign-owned banks borrowed funds from abroad to relend to the foreign interbank market and to finance the rebooking of loans from offices in the Caribbean to offices in the United States. A substantial reduction in liabilities to banks in Japan reflected the further scaling down of international activities by Japanese home offices with their U.S. affiliates; Japanese banks suffered declining asset values, tightened capital standards, and slowing economic growth at home.

U.S. banks' liabilities to other private foreigners and international financial institutions decreased $2.1 billion, to $82.0 billion, mostly to several Latin American countries.

U.S. banks' liabilities payable in foreign currencies increased $4.5 billion, to $74.9 billion, as Japanese offices in the United States borrowed yen from their home offices in Japan to meet a surge in overseas interbank demand in the fourth quarter.

Banks' custody liabilities decreased $14.8 billion, to $65.9 billion, following increases in the past several years, when U.S. residents borrowed from Eurodollar markets. The decrease reflected both weak U.S. demand for bank credit and loans rebooked to U.S. offices from Caribbean banking centers by foreign-owned banks in the United States.

U.S. Treasury securities

U.S. Treasury securities held by private foreigners and international financial institutions increased $23.9 billion, to $154.7 billion, in 1991; $6.6 billion of the increase was due to price appreciation (table 1, line 37). International investment funds in the Caribbean made unusually large investments at the time of the Treasury's long-term bond auction in May. Western European and Japanese purchases occurred early in the year, when the long-term interest-rate differentials favored holdings of dollar assets and when investors' concerns over the Persian Gulf war contributed to the attractiveness of U.S. Treasury bonds. Other Asian investors also added to holdings of Treasury bonds in the first half of the year. In the second half, when the interest-rate differentials turned against dollar assets and the dollar depreciated in exchange markets, Western Europeans offset their earlier net purchases with net sales. Canadians sold off relatively lower yielding U.S. Treasury bonds.

Other U.S. securities

Foreign holdings of U.S. securities other than U.S. Treasury securities increased $87.8 billion, to $559.7 billion, in 1991 (table 1, line 38). Large price appreciation of U.S. corporate stocks and strong foreign demand led to a 19-percent increase in foreign portfolio holdings.

Foreign-held U.S. corporate and federally sponsored agency bonds increased $36.3 billion, to $277.0 billion; $25.7 billion of the increase was in net purchases, and $12.0 billion was in market price appreciation. Foreign demand was strong throughout most of the year, accommodating a high volume of new issues placed abroad by U.S. borrowers. U.S. corporations increased their overseas borrowing to $21.2 billion, largely as industrial corporations and nonbank financial corporations raised substantial amounts by straight fixed-rate bonds and Euro medium-term notes. Foreign purchases of U.S. new issues were partly offset by $4.0 billion in sales of outstanding corporate bonds. Foreign holdings of U.S. federally sponsored agency bonds increased $11.6 billion, to $59.1 billion, reflecting a strong increase in net purchases, especially by Japanese investors.

Foreign holdings of U.S. stocks increased $51.5 billion, to $282.6 billion; price appreciation was $42.3 billion, and net purchases were $9.2 billion. Foreign demand surged in the first half of the year with the quick conclusion of the Persian Gulf war, signs of U.S. economic recovery, and the advance of the dollar in foreign exchange markets; U.S. stock prices rebounded 12 percent over the prior yearend level. Canadian purchases increased especially strongly--to four times the previous year's level--because of steady buying throughout the year as U.S. stock prices outpaced those in Canada. Japanese holdings were augmented by buying early in the year as Japanese stock prices fell. Western European investors shifted from net purchases in the first half of the year to net sales in the second half.

Foreign direct investment in the United States and other liabilities

Foreign direct investment in the United States valued on a current-cost basis increased $20.5 billion, to $487.0 billion, in 1991; on a market-value basis, it increased $117.5 billion, to $654.1 billion (table 1, lines 35 and 36, respectively). Capital inflows slowed markedly on both bases to $11.5 billion; sharply reduced equity inflows of $27.9 billion and intercompany debt inflows of $3.6 billion were partly offset by continued large negative reinvested earnings associated with losses on U.S. operations. Foreign capital inflows were slowed by continued weakness in the U.S. economy, sharply reduced foreign demand for new capital investments in the United States, and a decline in the U.S. cost of funds. The level of direct investment on the current-cost basis was increased by a $9.5 billion valuation adjustment for price changes of plant, equipment, and other tangible assets; the level on the market-value basis was augmented by a $103.8 billion gain due to the rise in U.S. stock prices. (For details of 1991 direct investment developments, see the section on foreign direct investment in the United States later in this article.)

Liabilities reported by U.S. nonbanking concerns decreased $1.6 billion, to $43.8 billion, primarily because of sharply reduced trade financing and a negative valuation adjustment (table 1, line 41). Trade payables decreased $1.5 billion, to $9.0 billion, in the first half of the year; the decrease was partly offset by an increase of $0.8 billion, to $16.1 billion, in advance receipts. Financial liabilities were nearly unchanged at $18.7 billion; relatively low and declining U.S. interest rates generally discouraged borrowing abroad.

Direct Investment

The direct investment positions are valued on three alternative bases: the two current-price bases discussed earlier--current cost and market value--and a historical-cost basis (tables 4 and 5). In 1991, the U.S. direct investment position abroad valued on a current-cost basis rose $31.7 billion, to $655.3 billion; on a market-value basis, it increased $85.6 billion, to $802.0 billion. The foreign direct investment position in the United States valued on a current-cost basis rose $20.5 billion, to $487.0 billion; on a market-value basis, it increased $117.5 billion, to $654.1 billion. [TABULAR DATA 4 OMITTED]
 Table 5.--U.S. Direct Investment Position Abroad and
 Foreign Direct Investment Position in the United
 States on a Historical-Cost Basis, 1982-91
 [Millions of dollars]
 Foreign direct investment
 Yearend U.S. direct investment position in the
 position abroad United States
1982 207,752 124,677
1983 207,203 137,061
1984 211,480 164,583
1985 230,250 184,615
1986 259,800 220,414
1987 314,307 263,394
1988 335,893 314,754
1989 372,419 368,924
1990 424,086 396,702
1991 450,196 407,577


This section of the article presents estimates of the direct investment positions on a historical-cost basis because detailed estimates of the positions by country, by industry, and by account, which are discussed here, are only available on this basis. (For consistency, estimates of earnings and reinvested earnings used in analyzing changes in the historical-cost positions also are on this basis; detailed estimates of these items, as well as of the positions, are not available on the current-cost or market-value bases.)

As noted elsewhere in this issue, capital gains and losses have been removed from direct investment income.(1) This methodological change does not affect the direct investment positions but it does affect the two major components of the change in the position. Previously, capital gains and losses had been included in reinvested earnings and thus entered the position as capital flows; now, they enter the positions as valuation adjustments.(2)

U.S. direct investment abroad

The U.S. direct investment position abroad valued at historical cost was $450.2 billion at the end of 1991 (table 6).(3) The positions in Canada and in the United Kingdom, at over $68 billion each, were by far the largest. The position in Germany, at $32.9 billion, was the third largest. [TABULAR DATA 6 OMITTED]

In 1991, the position increased $26.1 billion, or 6 percent. This modest increase contrasts sharply with the double-digit rates of growth in the 2 preceding years. Both components of the change in the position--valuation adjustments and capital flows--contributed to the slowdown. However, a shift in valuation adjustments, from $17.6 billion in 1991 to --$2.1 billion in 1991, was most important.(4) Most of this shift was, in turn, accounted for by a shift in currency translation adjustments from $13.7 billion to --$2.3 billion.(5) The shift in translation adjustments largely reflected divergent movements in exchange rates: In 1990, the dollar fell sharply in relation to major European currencies, which boosted the dollar value of affiliates' net assets denominated in those currencies; in 1991, the dollar recovered somewhat, which lowered these dollar values.

Capital outflows decreased $5.9 billion, to $28.2 billion, in 1991. The decrease reflected sluggish worldwide economic conditions, which dampened the earnings of both U.S. parents an foreign affiliates and limited the supply of capital that parents could invest in affiliates. Most of the decrease in capital outflows was accounted for a shift to net intercompany debt inflows, but a decline in reinvested earnings also contributed; an increase in equity outflows was a partial offset.

Net intercompany debt flows shifted to net inflows of $2.4 billion in 1991 from net outflows of $5.8 billion in 1991. This shift to net intercompany debt inflows, which followed several years of net outflows, was more than accounted for by a shift to net inflows on U.S. parent receivables. (Net inflows on U.S. parent receivables occur when affiliate repayments of existing loans from their U.S. parents exceed the parents' new loans to affiliates.) In 1991, as well as in 1990, a sharp drop in the operating earnings of U.S. parents limited parents' ability to provide new loans to their affiliates.

Reinvested earnings of foreign affiliates declined to $18.9 billion in 1991 from $20.9 billion in 1990. Affiliates reinvested about the same share of their total earnings in 1991 as they did in 1990, but their total earnings decreased. The lower earnings reflected sluggish economic conditions abroad, particularly in U.S. multinationals' most important foreign market--Europe and Canada.

Net equity capital outflows increased to $11.7 billion in 1991 from $7.5 billion in 1990; in 1989, in contrast, there were net inflows of $1.8 billion. The 2-year growth in equity capital outflows primarily reflected diminishing sales of equity, rather than rising equity investments, in foreign affiliates. Equity decreases (primarily sales) fell sharply, from $21.7 billion in 1989 to $10.0 billion in 1991, while equity increases (investments) rose only slightly, from $20.0 billion to $21.7 billion.

Change in the position by account.--The $26.1 billion increase in the U.S. direct investment position abroad consisted of capital outflows of $28.2 billion and valuation adjustments of --$2.1 billion. Within capital outflows, reinvested earnings of $18.9 billion and equity outflows of $11.7 billion were partly offset by intercompany debt inflows of $2.4 billion.(6) Within valuation adjustments, translation adjustments of --$2.3 billion and "other" valuation adjustments of --$2.2 billion were partly offset by capital gains of --$2.4 billion.

Change in position accounts by industry.--Reinvested earnings were largest in manufacturing, at $7.5 billion. Within manufacturing, the chemical industry accounted for most of the total. The reinvested earnings of affiliates in "finance (except banking), insurance, and real estate," were second largest, at $7.4 billion.

Equity capital outflows were largest, at $4.2 billion, in finance (except banking), insurance, and real estate. These outflows were mainly capital contributions to British affiliates and to Bermudan affiliates serving as financial conduits for the global operations of their U.S. parent companies.

Equity capital outflows in manufacturing, "other industries," and petroleum were each between $1 billion and $2 billion. In manufacturing, most of the outflows were accounted for by three large transactions: A U.S. parent swapped equity capital for a large loan that it had extended to its Canadian affiliate (thus, this transaction had no net effect on the position), and two other U.S. parents acquired controlling stakes in Existing European manufacturing companies.

In "other industries," most of the equity outflows were in the communications industry. In communications, outflows were largely related to the acquisition or establishment of new affiliates; in this industry, unlike in other industries, acquisitions and establishments of new affiliates increased in 1991. U.S. parents in the communications industry were encouraged to invest abroad by rising domestic profits, which provided a low-cost source of funds, whereas parents in other industries generally scaled back their investments because of capital constraints. In addition, the domestic business activities of U.S. communications companies--specifically, U.S. regional telephone companies--have been legally constrained since their creation in 1984, while overseas investment opportunities have been created by the privatization of some foreign Government-owned telephone companies.

In petroleum, equity capital outflows of $1.7 billion consisted mainly of capital contributions. These investments, which occurred in both the upstream and downstream operations of the industry, reflected two factors: U.S. oil companies' recent tendency to concentrate their exploration and development efforts overseas, where accessible oil and gas deposits are generally larger and more profitable, and a robust demand for gasoline and other petroleum products in the rapidly growing Pacific Rim economies.

Intercompany debt inflows occurred in both U.S. parent receivables from and payables to their foreign affiliates. In receivables, repayments of loans to U.S. parents by affiliates in finance (except banking), insurance, and real estate more than accounted for the $1.1 billion in inflows. in payables, loans from British affiliates in the petroleum industry to their U.S. parents more than accounted for the $1.3 billion in inflows.

Change in the position by country.--The $26.1 billion increase in the U.S. direct investment position in 1991 was spread among all major geographic areas. The largest increases were in Europe, in "Latin America and Other Western Hemisphere," and in the Asia and Pacific countries (including Australia, Japan, and New Zealand).

In Europe, the position increased $13.4 billion, or 6 percent, to $224.6 billion. Growth occurred in nearly all of the European Communities (12) countries, but it was largest in Germany, the Netherlands, and France. In Germany, the position increased $5.7 billion, mainly through intercompany debt outflows and reinvested earnings. Earnings, and reinvested earnings, of German affiliates probably were boosted by the upturn in German consumer spending that followed the reunification. In France and the Netherlands, the increases in the position were each less than one-third as large as that in Germany. In France, the increase reflected intercompany debt outflows; in the Netherlands, it reflected reinvested earnings.

In "Latin America and Other Western Hemisphere," the position increased $5.7 billion, or 8 percent, to $77.3 billion. The increase was more than accounted for by a $6.4 billion increase in reinvested earnings of affiliates and by a $3.2 billion increase in equity capital outflows. Nearly all of the reinvested earnings occurred in Panama and the Caribbean and in Mexico. In Panama and the Caribbean, the reinvested earnings probably consisted largely of investment income, because a common activity of affiliates in those countries is to invest funds. In Mexico, the large reinvested earnings reflected continued growth in the total earnings of Mexican affiliates since the mid-1980's: After zero net earnings during 1982-86, their earnings rose each year, reaching $2.3 billion in 1991. The turnaround in Mexican affiliates' earnings has corresponded with, and probably is related to, the wide-ranging economic liberalizations instituted in that country. The increase in equity capital outflows to "Latin America and Other Western Hemisphere" reflected a large capital contribution to a Bermudan finance affiliate and the acquisition of minority interests in previously Government-owned telephone companies.

In the Asia and Pacific countries, the position increased $4.7 billion, or 8 percent, to $66.5 billion. The increase was primarily in Japan and "Other Asia and Pacific." In Japan, the position was bolstered by positive valuation adjustments related to dollar depreciation against the yen. In "Other Asia and Pacific," the position increased at double-digit rates in both manufacturing and petroleum, as U.S. parents expanded their presence in the region. Within manufacturing, producers of computer components accounted for most of the increase in the position. Within petroleum, U.S. oil companies increased their investments in both upstream and downstream operations.

Foreign direct investment in the United States

The foreign direct investment position in the United States valued at historical cost was $407.6 billion at the end of 1991 (table 7).(7) The United Kingdom had the largest position, at $106.1 billion; Japan had the second largest position, at $86.7 billion; and the Netherlands had the third largest, at $63.8 billion. [TABULAR DATA 7 OMITTED]

In 1991, the position increased $10.9 billion, or 3 percent, down from an 8-percent increase in 1990. The slowdown was more than accounted for by a substantial decline in capital inflows--from $46.1 billion to $12.6 billion. Valuation adjustments (see footnote 4) were --$1.7 billion, compared with -$18.3 billion in 1990.

The decline in capital inflows was almost entirely due to a sharp drop in equity inflows, which had increased sharply in recent years. Equity inflows dropped $29.1 billion in 1991, to $27.9 billion, lowest level since 1986. The drop in equity inflows reflected several factors, including continued economic weakness in the United States, which made new investments and expansions less attractive, and economic weakness and bank restructuring in several industrialized countries, which reduced the availability of funds for investment. Total outlays by foreign investors to acquire or establish U.S. businesses--including outlays financed by equity capital inflows--were down considerably in 1991.(8)

By industry, the decreases in equity capital inflows were widespread. The largest decreases were in manufacturing (down $10.7 billion, to $11.8 billion), services (down $5.6 billion, to $2.0 billion), and wholesale trade (down $4.7 billion, to $2.2 billion).

Decreases in the other two major components of capital inflows were much smaller than the decrease in equity capital inflows. Intercompany debt inflows decreased $0.8 billion, to $3.6 billion, as increases in affiliates' payables (inflows) decreased by a larger amount than did increases in affiliates' receivables (outflows). Reinvested earnings decreased $3.6 billion, to --$18.9 billion. The decrease was more than accounted for by an increase in losses from --$6.0 billion in 1990 to --$11.3 billion in 1991; distributed earnings fell from $9.3 billion to $7.6 billion.

Change in the position by account.--The $10.9 billion increase in the foreign direct investment position in 1991 was more than accounted for by capital inflows of $12.6 billion. Within capital inflows, equity inflows of $27.9 billion and intercompany debt inflows of $3.6 billion were partly offset by reinvested earnings of --$18.9 billion. Valuation adjustments were --$1.7 billion.

Change in position accounts by industry.--Equity capital inflows were particularly large in manufacturing, real estate, and banking. In manufacturing, most of the inflows were in "other manufacturing," in chemicals and allied products, and in machinery. In "other manufacturing," two very large inflows resulted from the acquisition of a U.S. company by a French firm and from a capital contribution to a rubber products affiliate by its Japanese parent. In chemicals, there were several sizable inflows from European parents; the largest inflow involved the acquisition of a chemical company by a German firm. In machinery, several European and Japanese parents made sizable capital contributions to their U.S. computer affiliates, and a Japanese company acquired an electrical machinery manufacturer.

In real estate, most of the equity capital inflows were to affiliates of Japanese parents. Some of the larger of these flows involved conversions of debt to equity, which had no effect on the position because such inflows are offset by outflows on intercompany debt. In banking, there were numerous small capital contributions to affiliates with parents located in various countries; a few of the larger of these contributions were to affiliates of British parents.

Intercompany debt inflows were largest in insurance, where several large inflows from the Netherlands and France were related to recent acquisitions. Partly offsetting the large inflows in insurance were large outflows in petroleum, most of which were to the United Kingdom and represented the repayment of debt.

Reinvested earnings were negative in most industries, largely reflecting losses associated with the U.S. economic downturn. Negative reinvested earnings were largest in manufacturing and real estate. In manufacturing, they were accounted for by "other manufacturing" and machinery. In both manufacturing and real estate, they were fairly widespread by country.

Change in the position by country.--In 1991, parents in Japan, France, and the United Kingdom had the largest increases in position. Parents in the Netherlands Antilles had the largest decrease in position.

The position of Japanese parents increased $4.9 billion, to $86.7 billion. By industry, manufacturing and wholesale trade accounted for much of the increase. In manufacturing, a large increase in "other manufacturing" was more than accounted for by a very large capital contribution to a rubber products affiliate. In wholesale trade, Japanese parents made several sizable capital contributions to their affiliates.

The position of French parents increased $4.1 billion, to $22.7 billion. By industry, the increase was concentrated in finance (except banking), in insurance, and in manufacturing. In finance (except banking), the increase was more than accounted for by the repayment of loans that were previously extended by U.S. affiliates to their foreign parent groups. In insurance, the increase was due to a large loan from a French parent to a new affiliate. in manufacturing, much of the increase was in "other manufacturing," which had an equity inflow associated with the acquisition of a large U.S. company.

The position of British parents increased $3.3 billion, to $106.1 billion. The largest increases were in manufacturing and services. In manufacturing, much of the increase was in chemicals and reflected new loans to U.S. affiliates; in services, the increase also reflected new loans to affiliates. These increases were partly offset by decreases in petroleum and finance (except banking). In petroleum, a few U.S. affiliates repaid intercompany loans. In finance (except banking), a few U.S affiliates made sizable loans, and another affiliate had a large negative valuation adjustment.

The position of Netherlands Antilles parents declined $4.6 billion, to $7.9 billion. By industry, services and manufacturing accounted for most of the decrease. [TABULAR DATA 2 AND 3 OMITTED]

Methodological Improvements in the Position Estimates

Improvements have been made in definitions, estimating methodologies, and source data to parallel those made in the international transactions accounts. For the international investment position, there were three changes:

(1) Claims on foreigners reported by U.S. nonbanking

concerns were revised to substitute foreign-source data for

claims reported to the U.S. Treasury. Data from

Canada and the United Kingdom on bank liabilities to U.S.

nonbanks were substituted for U.S. Treasury-reported

data on U.S. nonbank claims on foreign banks. In addition,

data from the Federal Reserve Board on liabilities of

foreign branches of U.S. banks in the Bahamas and British

West Indies (Cayman Islands) were substituted for

Treasury-reported data. The substitutions were made from

1979 for the Canadian data, from 1983 for the British

data, and from 1984 for the Federal Reserve data. The

substitutions were made because of the broader coverage

of the new source data than the Treasury-reported data.

(2) Revisions to the position estimates of U.S. holdings

of foreign securities reflect an improved methodology to

revalue foreign securities through the application of more

country- and area-specific market-price and exchange-rate

indexes. Revisions also reflect improved estimates of

bond redemptions. Revisions begin in 1980.

(3) Direct investment capital flows are now measured on a

current-cost (replacement-cost) basis after adjustment to

reported depreciation, depletion, and expensed exploration

and development costs; the current-cost adjustment,

which is the sum of these three items, is classified as a

valuation adjustment. Also, capital gains and losses are

removed from the capital flow data and classified as a valuation

adjustment. Revisions begin in 1982.

For a further discussion of these changes, see "U.S. International Transactions" elsewhere in this issue. (1.) See page 73 of "U.S. International Transactions." (2.) For income on U.S. direct investment abroad, the capital gains and losses referred to here do not include gains and losses resulting from currency translation, which had previously been removed from such income. For foreign direct investment in the United States, these gains and losses, known as "currency translation adjustments," were not previously removed from income because they could not be segregated from other capital gains and losses; however, they are believed to have accounted for only a small portion of total capital gains and losses of U.S. affiliates. In any event, both types of capital gains and losses have now been removed from income. For details, see "U.S. International Transactions, First Quarter 1989," SURVEY OF CURRENT BUSINESS 70 (June 1990): 72. (3.) 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. (4.) Valuation adjustments to the historical-cost position are made to reconcile changes in the position, which is measured at book value, with capital flows, which are recorded at transactions value. (5.) Currency translation adjustments are made to reflect the effect of changes in exchange rates on the dollar value of affiliates' foreign-currency-denominated net assets. The precise effects of currency fluctuations on translation adjustments depend on the value and currency composition of affiliates' assets and liabilities. In general, positive translation adjustments are usually associated with depreciation of the dollar because affiliates' assets denominated in foreign currencies tend to exceed their liabilities. Likewise, negative translation adjustments tend to be associated with dollar appreciation. (6.) For data on capital flows by account, see table 5 in "U.S. International Transactions" on page 100 of this issue. (7.) 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. (8.) For a discussion of these and other factors affecting new foreign direct investment in the United States, see "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1991," SURVEY OF CURRENT BUSINESS 72 (May 1992): 69-79. Preliminary data from BEA's survey of new foreign direct investments, summarized in that article, indicate that total outlays to establish or acquire U.S. business were $22.6 billion in 1991, down from $65.9 billion in 1990. These figures differ from those on changes in the foreign direct investment position presented here, largely because they cover only transactions involving the acquisition or establishment of new U.S. affiliates and because they include financing other than that from the foreign parent, such as local borrowing by existing U.S. affiliates. In contrast, changes in the position reflect transactions 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) and valuation adjustments.

However, the two types of data 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 $13.1 billion in outlays in 1991, down from $32.5 billion in 1990. Scholl wrote the first part of the article; Mataloni and Bezirganian wrote the second part. Harlan W. King contributed to the preparation of estimates other than those of direct investment with assistance from Christopher A. Gohrband, Dena A. Holland, and Lori A. Trawinski.
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Title Annotation:includes related article on methodological improvements
Author:Scholl, Russel B.; Mataloni, Raymond J., Jr.; Bezirganian, Steve D.
Publication:Survey of Current Business
Date:Jun 1, 1992
Words:7128
Previous Article:The composite index of coincident indicators and alternative coincident indexes.
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Appendix Suggested Reading.

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