U.S. direct investment abroad in 1983.
the increase in 1983 followed a 3-percent delcine in 1982 and a 6-percent increase in 1981. The slow growth in 1983 and 1981 and the decline in 1982 contrasted sharply with the average annual rate of growth of about 11 percent during the prior decade.
Growth in 1981-83 was dampened by several factors. In all 3 years, borrowing by U.S. parents from their Netherlands Antillean finance affiliates was large; such borrowing gives rise to capital inflows that reduce the position. In addition, economic conditions abroad were generally sluggish, even though they improved in several foreign countries in 1983. Thus, U.S. companies had little incentive to establish, acquire, or expand foreign affiliates. The sluggish conditions also depressed affiliate earnings, which, in turn, reduced funds available for reinvestment. Finally, availability of U.S.-source funds to finance foreign affiliates was limited. In 1981-82, funds were limited by the U.S. recession, corporate illiquidity, and high U.S. interest rates. In 1983, although interest rates declined and the U.S. economy improved, borrowing in the United States remained relatively expensive, and U.S. companies' internally generated funds were probably needed to finance expansion of domestic operations.
Direct investment income declined 7 percent in 1983, to $20.8 billion, the fourth consecutive annual decline. The 1983 decline occurred because a substantial increase in interest payments by U.S. direct investors to foreign affiliates, particularly Netherlands antillean finance affiliates, more than offset a slight increase in affiliate earnings. The increase in earnings was small because affiliates had sharply higher capital losses, mainly due to foreign exchange translation. Earnings before capital gains and losses increased significantly, particularly in automobile manufacturing in a number of developed countries.
Direct Investment Position
The $4.6 billion increase in the U.S. direct investment position consisted of capital outflows of $4.9 billion and negative valuation adjustments of $0.3 billion (tables 1 and 2). Capital outflows, in turn, consisted of equity capital outflows of $4.8 billion and reinvested earnings of $9.1 billion, partly offset by intercompany debt inflows of $9.0 billion.
The position increased 3 percent in the developed countries and decreased 3 percent in the developing countries. Among industries, the position increased 6 percent in petroleum and 3 percent in "other" industries, and declined 1 percent in manufacturing. Developed countries
In developed countries, the position increased $5.4 billion, to $169.6 billion. Increases were small in both Canada and Europe, which together accounted for almost nine-tenths of the total position in developed countries. In Japan, in contrast, the position increased sharply.
The position in Canada increased 3 percent, to $47.5 billion. It increased 5 percent in petroleum and 4 percent in "other" industries, and was virtually unchanged in manufacturing. In "other" industries, growth was concentrated in finance and insurance and in trade. In manufacturing, increases in food and in nonelectrical and electrical machinery were offset by decreases in chemicals, metals, transportation equipment, and "other" manufacturing.
The position in transportation equipment declined even though conditions in the United States and Canadian auto industries improved substantially during the year. The decline was the result of two large, and partly offsetting, factors. On the one hand, reinvested enarnings of affiliates were substantial--$1.0 billion--as total earnings were boosted by improved automobile sales and by cost-cutting measures. (In 1982, in contrast, reinvested earnings were a negative $0.3 billion.) On the other hand, intercompany debt inflows were large--$1.1 billion. These inflows probably reflected the financing of increased shipments of automotive products by Canadian affiliates to their U.S. parents.
In Europe, the position increased 3 percent, to $102.5 billion. Changes were small or negative in most of the larger European countries. For example, the position increased only 3 percent in the United Kingdom and 1 percent in Germany; in France, it declined 12 percent. Among industries, the position increased 6 percent in "other" industries and 5 percent in petroleum, and declined slightly in manufacturing. Within manufacturing, the position declined or remained unchanged in every industry except transportation equipment, where it increased 8 percent.
The decline in the position in manufacturing resulted from negative valuation adjustments of $0.7 billion, partly offset by capital outflows of $0.6 billion. The negative valuation adjustments mainly reflected one-time adjustments to U.S. parents' accounts with their affiliates, following the parents' adoption of a new U.S. standard for foreign currency translation (Financial Accounting Standards Board (FASB) Statement No. 52).
Capital outflows were small, partly because weak earnings and an extremely low--0.04--reinvestment ratio held reinvested earnings of European manufacturing affiliates to only $0.1 billion, compared with $0.9 billion in 1982 (table 3). (The reinvestment ratio is the portion of earnings reinvested.) Earnings were weak due to sluggish economic conditions and unusually large $3.0 billion) capital losses by affiliates during the year. The losses mainly resulted from translation of the affiliates' financial statements from foreign currencies into U.S. dollars at a time when the U.S. dollar was appreciating against most foreign currencies. (See the next section for the definition of earnings and for a fuller discussion of these translation losses.)
The unusually low reinvestment ratio for European manufacturing affiliates partly reflected weak economic conditions in Europe, which dampened affiliates' need for the funds. As a result, the funds were remitted to U.S. parents whose operations were expanding as the U.S. economy improved.
In Japan, unlike in Canada and Europe, the increase in the position was substantial--16 percent. Nearly three-fourths of the $1.1 billion increase was in the form of reinvested earnings. Reinvested earnings were large because affiliates' earnings improved significantly during the year, particularly in petroleum and trade. Developing countries
In developing countries, the position declined 3 percent, to $51.0 billion. A decline in Latin america was partly offset by an increase in "other" developing countries.
In Latin america, U.S. parents' position in Netherlands antillean finance affiliates fell $3.9 billion, as a result of substantial borrowing by the parents from the affiliates (table 4). although intercompany debt inflows, at $6.1 billion, were down sharply from the record $13.9 billion in 1982, they were still at a historically high level.
The borrowed funds, which were raised mostly by affiliates' sales of bonds in Euromarkets, were reloaned to the U.S. parents, who used them mainly to finance U.S. operations. The funds were borrowed abroad, largely because interest rates were lower in Euromarkets than in U.S. markets. A narrowing of this differential during the year, because of declines in U.S. interest rates, was probably partly responsible for the decline in borrowing in 1983.
Netherlands Antillean finance affiliates have generally been established so that parents can raise funds abroad without having the associated interest payments subjected to U.S. withholding taxes, as provided by a treaty between the United States and the Netherlands Antialles. Borrowing is often channeled through the Netherlands antilles, even though the United States has similar treaties with several other countries, because the Netherlands Antilles does not have a withholding tax on interest payments to third countries and because it structures most taxes on affiliates to generate offsetting tax credits for the U.S. parents.
In the future, U.S. parents' borrowing from their Netherlands Antillean finance affiliates will probably be sharply reduced because the Tax Reform Act of 1984, adopted in July, repealed the 30-percent U.S. withholding tax on interest paid to foreigners. With the repeal of this tax, interest payments to foreigners in any country, not just those in treaty countries like the Netherlands antilles, will be free from U.S. withholding taxes.
among other Latin American countries, the position declined significantly--$0.5 billion and $0.6 billion, respectively--in Mexico and Venezuela. The decline in Mexico reflected many of the same unfavorable conditions--high interest rates on external debt, devaluations of the peso, domestic austerity measures, and exchange controls--that contributed to the much larger ($1.4 billion) decline in 1982. The decline in Venezuela also reflected adverse conditions, including economic recession, poor export markets for petroleum, problems meeting obligtaions on external debt, imposition of exchange controls to stem capital outflows, and a sharp depreciation of the Venezuelean bolivar after exchange rates applicable to nonessential goods were freed from government control.
In "other" developing countries, increases were strongest in the Middle East and in "other Asia and Pacific." The increase in the Middle East was 26 percent and was centered in petroleum and services. The increase in "other Asia and Pacific" was 7 percent and was mainly in trade and petroleum.
Direct investment income, the return on the position, declined 7 percent, to $20.8 billion (table 5). Direct invest ment income consists of foreign affiliate earning (that is, U.S. parents' shares in their affiliates' net income after foreign income taxes), less foreign withholding taxes on distributed earnings, plus interest (net of withholding taxes) on intercompany debt (table 6).
The decline in income partly reflected a $1.4 billion increase, to $3.2 billion, in net interest payments by U.S. parents to their foreign affiliates (table 7). Payments to Netherlands Antillean Finance affiliates, which accounted for most of the increase, stemmed from the parents' heavy borrowing from these affiliates in 1983 and earlier years.
The decline in income was moderated by a slight improvement in earnings. The improvement was small because affiliates' net capital losses increased $4.4 billion to $6.5 billion. Earning before capital gains and losses increased 17 percent, to $32.4 billion.
The capital losses, which were centered in Europe, mainly resulted from the translation of U.S. affiliates' financial statements from foreign currencies into U.S. dollars. The translation losses, in turn, reflected the appreciation of the U.S. dollar against many foreign currencies in 1983. Developed countries
Income from affiliates in developed countries increased 12 percent, to $14.8 billion. The increase was largely the result of a sharp increase in income from Canadian and Japanese affiliates and a partly offsetting decline in income from European affiliates.
In Canada, income increased $2.3 billion, to $5.2 billion. Although the increase was centered in transportation equipment manufacturing, income also improved in each of the other manufacturing industries. In transportation equipment, earnings shifted $1.2 billion, to a positive $1.1 billion. This improvement reflected the recovery in the North American automobile industry.
In Japan, income increased $0.5 billion, to $1.2 billion. The largest increases were in petroleum, trade, and nonelectrical machinery manufacturing. The increase in petroleum partly reflected improved refining profits, due to a sharp drop in crude oil prices during the year, and a shift from small capital losses to over $0.1 billion in capital gains. The capital gains were probably mainly translation gains that reflected the depreciation of the U.S. dollar against the Japanese yen.
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|Author:||Howenstine, Ned G.|
|Publication:||Survey of Current Business|
|Date:||Aug 1, 1984|
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