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U.S business enterprises acquired or established by foreign direct investors in 1992.

Outlays by foreign direct investors to acquire or establish U.S. business enterprises fell 47 percent in 1992, to $13.5 billion from $25.5 billion in 1991 (table I).(1) The drop was the fourth in a row, bringing outlays for new foreign direct investments in the United States to their lowest level since 1983. It contributed to the overall change in capital flows for foreign direct investment in the United States, which, according to preliminary estimates, shifted from a net inflow (or investment) of $11.5 billion in 1991 to a net outflow (disinvestment) of $3.9 billion in 1992.(2) The drop in outlays was considerably steeper than that reported by the Securities Data Company for overall mergers and acquisitions in the United States in 1992.

By industry, declines in outlays were particularly sharp in banking, insurance, retail trade, and machinery manufacturing. Outlays increased only in "other industries" and "other manufacturing." By country of ultimate beneficial owner (UBO), declines in outlays were largest for France and Japan.(3) The only countries with significant increases were Mexico and Venezuela.

The 47-percent decline in outlays in 1992 follows a 61-percent decline in 1991. The declines in both years reflect several factors. First, foreign investors' interest in making additional investments in the United States may have been tempered by the unprofitability of many of their earlier U.S. investments and by sluggish U.S. economic activity in 1991 and most of 1992, both of which may have lowered the projected profitability of new investments. Second, countries that are the largest sources of investment - mainly European countries and Japan - have been slow to emerge from recession. The recessionary conditions have constrained the ability of investors in these countries to finance additional overseas investments and may have made many of them more concerned with rebuilding their balance sheets and improving their capitalization ratios than with launching new ventures overseas. Finally, investment funds may have been attracted away from the United States by increased economic integration within the European Communities, market-oriented reforms in Eastern Europe, rapid economic growth in East Asia, and an improved investment climate in Latin America.

As in past years, acquisitions accounted for most of total outlays (76 percent) in 1992. However, large investments did not dominate to the same extent as in the past. In 1992, for the first time since 1984, there were no investments of $1 billion or more. Two investments of $500 million or more accounted for 7 percent of outlays, and 28 investments of $100 million or more accounted for 43 percent of outlays. In contrast, in 1991, 2 investments of $1 billion or more had accounted for 12 percent of outlays, and 47 investments of $100 million or more had accounted for 59 percent of outlays (tables 2.1 and 2.2).

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U.S. affiliates that were newly acquired or established in 1992, nearly all of which were nonbank affiliates, employed 120,000 persons. By comparison, all nonbank U.S. affiliates employed 4.8 million persons in 1991, the latest year for which such data are available. Total nonbank affiliate employment, in turn, accounted for 5.2 percent of total employment by all nonbank U.S. businesses.(4)

Newly acquired or established affiliates had total assets of $30.9 billion in 1992, of which $28.7 billion was held by nonbank affiliates. By comparison, total assets of an nonbank U.S. affiliates at yearend 1991 were $1,743.8 billion. Comparable all-U.S.-business data on assets are available only for manufacturing. In that industry, total assets of newly established or acquired affiliates were $7.6 billion in 1992; by comparison, total assets of all manufacturing affiliates were $516.7 billion in 1991, or 19.2 percent of the U.S. total.

The estimates for 1992 are preliminary and will be revised next year. Estimated outlays for 1991 have been revised up from $22.6 billion to $25.5 billion, and the estimated number of investments was revised up from 971 to 1,091 (tables 1 and 2.1). The largest revisions in outlays were in real estate ($0.9 billion), food and kindred products ($0.5 billion), and primary and fabricated metals ($0.4 billion).

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The remainder of this article consists of two parts. The first part discusses investment transactions by industry, by country, and by source of funding; the second part presents selected data on the operations of the U.S. businesses acquired or established. In the analysis, information from outside sources, mainly press reports, has been used to supplement BEA's survey data.

Investment Transactions

In 1992, outlays resulting from acquisitions of existing U.S. businesses ($10.2 billion) were three times as large as those resulting from the establishment of new U.S. businesses ($3.3 billion) (table 3). Most of the outlays were made by existing U.S. affiliates ($9.9 billion) rather than by the foreign direct investors themselves ($3.6 billion); however, some of the outlays made by existing U.S. affiliates were financed with funds provided by foreign parents or other members of the foreign parent groups.(5) (Transactions by source of funding are disclosed in more detail later in the article.)

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By industry

By industry of the U.S. businesses acquired or established, outlays in manufacturing, at $5.3 billion, were the largest (table 4). Within manufacturing, outlays were largest in "other manufacturing," chemicals and allied products, and primary and fabricated metals.

In "other manufacturing," outlays were $1.8 billion. Five transactions accounted for nearly one-half of the total: A Mexican glass manufacturer established a joint venture with a New York-based specialty glass company; two U.S. affiliates of a Canadian company each acquired a U.S. publishing company; an Italian UBO acquired a California-based artificial organs division of a major U.S. pharmaceutical company; and a U.S. affiliate of a British medical systems and specialized industrial component group acquired an Illinois-based supplier of disposable medical products.

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In chemicals, outlays were $1.7 billion. Three investments, each of $300 million or more, accounted for nearly two-thirds of the outlays: A German household-products company acquired a North Carolina-based fragrance and cosmetics unit of a pharmaceutical company; a U.S. affiliate of a Dutch petrochemical company acquired a West Virginia-based plastics unit of a tire manufacturer; and a U.S. affiliate of a German chemical company acquired an Illinois-based plastics unit of an energy and chemical company. In two other sizable transactions, two U.S. affiliates of a British pharmaceutical company each acquired a chemical company - one based in Texas and the other in California.

In primary and fabricated metals, outlays were $0.7 billion. Two transactions accounted for most of the outlays. The largest was the acquisition of a Florida-based manufacturer of steel bars by a Japanese steel producer; this acquisition follows several other Japanese acquisitions of companies in the U.S. steel industry in recent years. In the other transaction, a U.S. affiliate of a British cable and construction group acquired a Virginia-based electrical unit of a leading manufacturer of transmission and distribution cables.

Outside manufacturing, outlays were largest, at $2.2 billion, in "other industries." Four investments of $200 million or more dominated the transactions: A U.S. affiliate of a Belgian chemicals group acquired a Wyoming-based minerals unit of a petroleum company; a U.S. affiliate of a Venezuelan broadcasting company acquired a California-based television company; a U.S. affiliate of a German coal mining company acquired a West Virginia-based coal company; and a U.S. affiliate of a Mexican media group acquired an interest in a Connecticut-based satellite communications services company.

In real estate, outlays were $1.9 billion. Two of the largest transactions were the acquisition of an office building in New York by a U.S. affiliate of a German media group and the establishment of a research center in California by a U.S. affiliate of a German pharmaceutical and chemical group.

In services, outlays were $1.5 billion. Four transactions accounted for about one-half of the outlays: In the largest transaction reported for any industry in 1992, a U.S. affiliate of a Swiss pharmaceutical and chemical company acquired a controlling interest in a California-based biotechnology research company. In the second largest transaction in services, a U.S. affiliate of a Swiss pharmaceutical and chemical group acquired a North Carolina-based health services company. Two other large transactions were the acquisition of a Texas-based rental and leasing company by a U.S. affiliate of a British holding company and the acquisition of a Texas-based hotel by a U.S. affiliate of a Hong Kong holding company.

In finance (except banking), outlays were $1.0 billion. Four investments dominated the transactions. In the largest transaction, a U.S. affiliate of a Dutch bank acquired an Illinois-based savings institution. In addition, a U.S. affiliate of a British bank acquired the credit card unit of a New Hampshire-based bank, a Japanese investor established a U.S. affiliate in order to obtain a financial interest in a Washington-based baseball team, and a Swiss bank acquired an Illinois-based finance company.

By country

In 1992, ultimate beneficial owners (UBO's) in European countries accounted for $7.5 billion, or 56 percent, of total outlays, and those in Asian and Pacific countries, mainly Japan, accounted for $2.9 billion, or 22 percent. Within Europe, most outlays were accounted for by British, German, and Dutch UBO's. UBO's in 10 countries had at least one investment of S100 million or more. Outlays of Canadian UBO's dropped sharply. (Most of the transactions covered in this section were mentioned in the preceding section on outlays by industry.)

Outlays of Japanese UBO's were $2.3 billion in 1992, down from 5.4 billion in 1991 (tables 5.1 and 5.2). The reduction in outlays (57 percent) in 1992 follows an even sharper reduction (73 percent) in 1991. Despite these declines, outlays of Japanese UBO's remain the largest of any single country. Several factors, both in Japan and in the United States, contributed to the declines. In Japan, continuing sluggishness in the domestic economy, declining stock prices, and reduced corporate profits constrained the ability of investors to finance new investments. In the United States, disappointing results from earlier investments may have made Japanese investors more cautious. Several of the factors that may have diminished Japanese interest in new investments were specific to the U.S. real estate industry, in which Japanese UBO's have been the largest foreign investors: Reduced values of many Japanese-owned properties, depressed rental rates for commercial office space, and high office vacancy rates. Japanese UBO's accounted for less than one-third of total outlays in real estate in 1991-92, down from over one-half in 1988-90. In primary and fabricated metals, Japanese UBO's accounted for nearly 70 percent of outlays in 1992; the largest transaction was the purchase of the Florida-based manufacturer of steel bars. Other sizable Japanese acquisitions included two in wholesale trade, one in chemicals, and two in machinery.

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Outlays of British UBO's were $2.2 billion in 1992, unchanged from 1991. In 1991, British outlays had declined sharply (83 percent). The reduced level of outlays in 1991-92 may have reflected the prolonged recession in the United Kingdom. One of the largest transactions by British UBO's was the acquisition of the credit card unit of the New Hampshire-based bank by a British bank's U.S. affiliate. In addition, British investors accounted for most outlays in food and kindred products in 1992; the largest transaction was the acquisition of a Minnesota-based frozen food division of a bakery products manufacturer by a U.S. affiliate of a British food conglomerate. Other sizable British acquisitions included one in insurance, one in "other manufacturing," and one in "other industries."

Outlays of German UBO's were $1.8 billion, down from $1.9 billion. German investors accounted for more than 50 percent of outlays in chemicals; the largest transactions were the acquisitions of the North Carolina-based fragrance and cosmetics unit of a pharmaceutical company and the Illinois-based plastics business of an energy and chemical company. Other sizable German acquisitions were in "other industries," real estate, and machinery.

Outlays of Dutch UBO's were $1.2 billion, down from $1.7 billion. Most of the 1992 Outlays reflected the purchases of the Illinois-based savings institution and the West Virginia-based plastics unit of a tire manufacturer.

Outlays of Canadian UBO's were $1.0 billion, down from $3.5 billion. The largest investments were the acquisitions of the two publishing companies. In addition, the U.S. affiliate of a Canadian company acquired the commercial floor products unit of a Pennsylvania-based construction company.

By source of funding

The decline in total outlays in 1992 reflected a decline in funding both by foreign parent groups and by existing U.S. affiliates. However, funding by foreign parent groups fell somewhat faster than that by U.S. affiliates, thus decreasing the relative importance of parent groups in the financing of transactions. Of the $13.5 billion in total outlays in 1992, $7.2 billion, or 53 percent, was funded by foreign parent groups; in 1991, foreign parent groups had funded $14.1 billion, or 55 percent of total outlays (table 6). These funds financed investments made both through U.S. affiliates and directly by foreign parents. The reduction in the amount of total outlays financed with foreign-source funds contributed to the shift to net capital outflows for foreign direct investment in the United States in 1992.(6)

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The remaining $6.3 billion, or 47 percent, of 1992 outlays was funded by U.S. affiliates from sources other than the foreign parent groups. For example, the U.S. affiliates may have borrowed funds from unaffiliated foreign persons or from U.S. persons, or they may have generated the funds internally. In 1991, these other funding sources had financed 45 percent of outlays.

By industry, the percentage of financing by foreign parent groups was significantly above the all-industries average in services, manufacturing, and wholesale trade and was significantly below the average in insurance and "other industries."

By area, the percentage of financing by foreign parent groups was above the all-countries average for UBO's in the Middle East and in Asia and Pacific and below the average for UBO's in Canada and in Europe. Within Europe, the share of British investment financed by foreign parent groups was above average, whereas the share of French investment financed by foreign parent groups was considerably below average.

Selected Operating Data

The total assets of U.S. businesses acquired or established by foreign direct investors in 1992 were $30.9 billion, down from $152.1 billion in 1992 (tables 7.1 and 7.2). The assets of the businesses acquired in 1992, at 22.3 billion, were larger than those of the businesses established, at $8.6 billion.

[TABULAR DATA OMITTED]

Assets in finance (except banking), at $8.4 billion, and in manufacturing, at $7.6 billion, together accounted for more than one-half of the total assets of U.S. businesses acquired or established. In finance (except banking), assets mainly reflected the acquisition of the Illinois-based savings institution. Within manufacturing, assets in "other manufacturing," at $2.7 billion, and in chemicals, at $1.9 billion, were largest.

Acquired businesses employed 104,000 workers. Manufacturers accounted for the largest share of these employees (51 percent); retail trade also accounted for a large share (20 percent). Newly established businesses employed 16,000 workers.

Foreign investors obtained 36,000 acres of U.S. land as a result of acquisitions. Real estate affiliates accounted for a majority of the acreage obtained. Foreign investors obtained 85,000 acres by establishing new businesses, including purchases of real estate.

Data Availability

Only summary data are published in this article. A set of supplementary tables containing detail on the number of investments and investors for 1987-91 and on investment outlays and selected operating data for the newly acquired or established businesses for 1987-92 will be available in July for $10.00 from the Public Information Office, Order Desk, BE-53, Bureau of Economic Analysis, U.S. Department of Commerce, Washington, DC 20230. Visa or MasterCard orders may be placed by telephone at (202) 523-0640. When ordering, refer to the "BE-13 Supplementary Tables for the May 1993 Survey Article," Accession No. 50-93-20-105, and make checks payable to the Bureau of Economic Analysis. Comparable tables for 1980-86, Accession No. 50-89-20-106, are also available for $18.00.

In addition to the data on new foreign direct investments presented here, BEA also publishes estimates of quarterly balance of payments flows and the annual direct investment position for new and existing investments combined. Summary estimates of quarterly balance of payments flows appear in the "U.S. International Transactions" article in the March, June, September, and December issues of the Survey. Summary position estimates appear in the June Survey. More detailed annual estimates of both the flows and the position follow in the August issue. Estimates covering the operations of U.S. affiliates of foreign companies are also available from BEA; the most recent estimates appear in this issue of the Survey in "U.S. Affiliates of Foreign Companies: Operations in 1991."

(1.) These data are from BEA's annual survey of new foreign direct investments in the United States, which covers (1) existing U.S. business enterprises in which foreign investors acquired, directly or through U.S. affiliates, at least 10-percent voting interest, and (2) new U.S. business enterprises established by foreign investors or their U.S. affiliates. Acquisitions of additional equity or voting interests in existing U.S. affiliates are not covered.

The data are limited to U.S. business enterprise that had total assets of over $1 million or that owned at least 200 acres of U.S. land in the year they were acquired or established. U.S. enterprise that did not meet these criteria were required to file reports are not included in the accompanying tables. For 1992, total assets of the U.S. enterprises that filed partial reports were only $152.2 million, or about 0.5 percent of the total assets of $30.9 billion of the U.S. enterprises that met the criteria for filing a complete report. (2) For further information on the relationship between the data on investment outlays presented in this article and the estimates of capital flows for foreign direct investment in the United States recorded in the U.S. balance of payments accounts, see footnote 6. (3.) The transactions discussed in this article are classified by country of UBO. The UBO is the first person in the ownership chain of the acquired or established U.S. business beginning with the foreign parent, that is not owned more than 50 percent by another person. The foreign parent is the first foreign person in the ownership chain. The country of UBO is often the same as that of the foreign parent, but it may be a different foreign country or the United States. "Person" is broadly defined to include any individual, corporation, branch, partnership, associated group, association, estate, trust, or other organization and any government (including any corporation, institution, or other entity or instrumentality of a government). (4.) The data for all U.S. businesses and for all nonbank U.S. affiliates cited here and in the following paragraph are from "U.S. Affiliates of Foreign Companies: Operations in 1991" elsewhere in this issue. (5.) Foreign parent groups consist of the foreign parents and their foreign (non-U.S.) affiliates. (6.) Foreign-source funds used to acquire or establish U.S. affiliates are also included in U.S. capital flows for foreign direct investment in the United States (FDUIS) that are recorded in the U.S. balance of payments accounts. However, because the total FDIUS capital flows also include funds that are used for other purposes, the two measures are not directly comparable.

Preliminary estimates of capital flows for FDIUS in 1992 were published in table 5 of "U.S. International Transactions, Fourth Quarter and Year 1991," Survey of Current Business 73 (March 1993): 96. The estimated capital outflow of $3.9 billion recorded for 1992 contrasts with the estimated $7.2 billion in foreign-source funding (an inflow). However, the $3.9 billion is a net figure that includes several components - namely, decreases in equity, reinvested earnings, and changes in U.S. affiliates' receivables from their foreign parent groups - that are unrelated to foreign funding of new affiliates and for which net outflows of $28.1 billion were recorded in 1992. In contrast, net capital inflows of $24.2 billion were recorded for the components of capital flows that could represent foreign-parent funding of acquisitions and establishments - namely, increases in equity and changes in U.S. affiliate payables to their foreign parent groups. Some of these inflows also financed the operations of existing U.S. affiliates.

It should be noted that the estimates both of acquisitions and establishments of U.S. affiliates and of capital flows for FDIUS are preliminary. Revised capital flow estimates will be published in the June 1993 Survey, and revised estimates of new investments will be published in the May 1994 issue. Until both series have been revised, comparisons between the data on investment outlays funded by foreign parent groups and the data on total capital flows for FDIUS should be made with caution.Furthermore, it should be noted that, when disregarded by country, the outlays data in this article are shown by country of UBO, whereas the capital flow data are shown by country of foreign parent.
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Author:Fahim-Nader, Mahnaz; Bargas, Sylvia E.
Publication:Survey of Current Business
Date:May 1, 1993
Words:3606
Previous Article:U.S. affiliates of foreign companies: operations in 1991.
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