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U.S. multinational companies: operations in 1991.

GROWTH IN the operations of U.S. multinational companies (MNC's) in 1991 was constrained by weak economic conditions here and abroad. According to preliminary results of BEA's latest annual survey of U.S. direct investment broad, worldwide employment of U.S. MNC's decreased 1 percent for the second year in a row, sales increased only 2 percent after a 7-percent increase in 1990, and assets increased 6 percent, about the same rate as in 1990 (table 1).


For U.S. parent companies, growth in operations in 1991 was constrained by the economic recession in the United States and by corporate downsizing related to longer term, industry-specific factors. Employment decreased 2 percent for the second consecutive year, and sales increased 1 percent after a 3-percent increase. Assets increased 5 percent after a 2-percent increase.

For foreign affiliates, growth in operations in 1991 was constrained by sluggish economic conditions both in the United States--which reduced U.S. parent cash flow, thus limiting the availability of capital for new foreign ventures--and abroad--which limited the demand for affiliates' output. Employment was essentially unchanged after a 3-percent increase, sales increased 3 percent after a 16-percent increase, and assets increased 8 percent after a 17-percent increase. Growth in affiliate assets and sales was also affected by changes in exchange rates. In 1990, the U.S. dollar had fallen sharply against major European currencies and the Japanese yen, thus boosting the dollar value of assets and sales denominated in those currencies; in 1991, by contrast, the dollar was more stable against those currencies.

The following are other highlights from the 1991 survey:

* Europe remained the favored location for

newly acquired or established affiliates.

* Manufacturing operations of U.S. MNC's

tended to be located in high-wage countries,

where they primarily served the host country

and other foreign markets.

* Foreign affiliates were more profitable than

their U.S. parents, partly because of differences

between business cycle conditions here

and abroad.

* Foreign affiliates remained far less technology-intensive

than U.S. parents.

* U.S. MNC's accounted for a large share of

all U.S. merchandise trade, but they continued

to deliver goods to foreign markets

primarily through sales by affiliates rather

than through exports.

* Services accounted for a notably smaller

share of sales by affiliates than of sales by

U.S. parents, an indication that the overseas

presence of MNC's in services is smaller than

that of MNC's in other industries.

* The allocation of worldwide MNC employment

between the United States and abroad

was little changed from 1982.

This article has three parts. The first part analyzes changes in the employment of U.S. parents and their foreign affiliates in 1991. The second part briefly examines selected aspects of U.S. MNC's in light of the 1991 survey results. The third part analyzes changes in MNC operations in low-wage countries during the 1980's. In the discussion, information from outside sources, including press reports on specific companies, is used to supplement BEA's survey data.

The tables that follow the article present selected data for MNC's. Table 9 presents selected data for U.S. parents by industry of the parent; table 10, for foreign affiliates by country and major industry; and table 11, for majority-owned foreign affiliates by country and major industry. Tables 12 and 13 present foreign affiliates' assets and employment, respectively, by country cross-classified by major industry of affiliate.


This section examines employment by U.S. parents and by foreign affiliates in 1991. Because employment is not directly affected by valuation changes (such as those caused by inflation or by exchange-rate fluctuations), it usually provides a more accurate indication of changes in the level of real economic activity than other available measures.

U.S. parents, highlights by industry

The 2-percent decrease in U.S. parent employment in 1991 mirrored the decline in total private employment in the United States and was widespread among industries. Excluding changes resulting from industry reclassifications of U.S. parents, the largest decreases were in transportation equipment manufacturing, nonelectrical machinery manufacturing, and "other" industries.(1)

In transportation equipment manufacturing, parent employment decreased 4 percent; the decrease was spread between the two major segments of the industry-automotive ("motor vehicles and equipment") and aerospace (included in "other transportation equipment"). In the automotive industry, the decrease mainly reflected reduced production in response to falling demand in the U.S. auto market. In aerospace, the decrease reflected parents' efforts to bring employment in line with reduced orders for military equipment by the U.S. Government. In nonelectrical machinery manufacturing, parent employment decreased 6 percent, partly reflecting the elimination of redundant jobs following a merger of U.S. parent companies. In "other" industries, parent employment decreased 2 percent; the largest decreases were in retail trade and transportation. In retail trade, the decrease mainly reflected sluggish sales; in transportation, the decrease mainly reflected consolidation within the airline industry.

U.S. parent employment increased in services and wholesale trade. In services, it increased 1 percent, mainly as a result of growth in existing operations. In wholesale trade, it increased 4 percent, mainly as a result of the entry into the parent universe of U.S. companies that established or acquired foreign affiliates for the first time in 1991.

Foreign affiliates

Year-to-year changes in affiliate employment are the net result of changes in existing operations, acquisitions and establishments of affiliates, sales of affiliates to foreigners, liquidations of affiliates, and improvements in survey coverage (table 2).(2) In 1991, decreases in employment attributable to existing operations and to affiliates that were sold or liquidated partly offset increases attributable to affiliates identified through improvements in coverage and to affiliates that were acquired and established.


Acquisitions and establishments.--In 1991, 259 affiliates with a combined employment of 98,300 were established or acquired by U.S. MNC's (table 3). As in the prior year, Europe was the primary location for the new affiliates.(3) New European affiliates accounted for 62 percent of the number of all new affiliates, and for 60 percent of their employment. Employment by new affiliates in Latin America and Other Western Hemisphere was also sizable, but it was the result of one very large transaction rather than a general pattern.


Manufacturing was the primary industry for new investments in 1991, but to a much lesser extent than in 1990. In 1991, 31 percent of all new affiliates were in manufacturing, compared with 47 percent in 1990, and 36 percent of new-affiliate employment was in manufacturing, compared with 87 percent. All of the major industries except manufacturing had more acquisitions and establishments in 1991 than in 1990. Highlights by area and by industry.--By area, affiliate employment in 1991 increased modestly in Europe, Asia and Pacific, Latin America and Other Western Hemisphere, Africa, and the Middle East, and it declined in Canada. By industry, employment increased in services, "other" industries, and wholesale trade, but it decreased in manufacturing, in finance (except banking), insurance, and real estate (FIRE), and in petroleum.

In Europe, affiliate employment increased 2 percent to 3.0 million, following an 8-percent increase. The slowdown reflected a reduction in the growth of ongoing operations as well as a general reduction in the size of newly acquired or established affiliates. of the employment growth that did occur, roughly one-half was attributable to minority-owned foreign affiliates. In Eastern Europe, affiliate employment grew rapidly, largely as a result of acquisitions and establishments in Hungary and Poland; however, affiliate employment in this region remained low, at 21,000.

In Asia and Pacific, employment increased 1 percent to 1.5 million, following a 3-percent increase. The slowdown mainly reflected decreases in Australia and the Philippines. In Australia, the decrease was widespread by industry and partly reflected the economic recession. In the Philippines, the decrease was concentrated in food manufacturing and was probably related to the extensive agricultural damage caused by the eruption of Mount Pinatubo. These decreases were offset by sizable increases in affiliate employment elsewhere in the region, mainly in Japan and Thailand, where continuing economic growth contributed to widespread increases, and in New Zealand, where the privatization of the telephone system led to the acquisition of one large affiliate.

In Latin America and Other Western Hemisphere, employment increased marginally to 1.3 million, following a 2-percent increase. The slowdown was more than accounted for by a decrease in affiliate employment in Brazil, mainly in manufacturing. Partly offsetting increases occurred in Mexico and Venezuela. In Mexico, the growing local economy, liberalized investment climate, and proximity to the United States continued to attract new affiliates and to encourage existing affiliates to expand. In Venezuela, the increase reflected one very large investment in the newly privatized telecommunications industry.

In Africa, employment increased 2 percent to 123,000, as manufacturing affiliates were established in Nigeria. In the Middle East, employment increased i percent to 50,000.

In Canada, affiliate employment decreased 2 percent to 911,0000 after a similar decrease in 1990. The decrease reflected divestiture of affiliates, as well as economic recession in the United States and Canada.

Majority-owned foreign affiliates.--Majority-owned foreign affiliates (MOFA's) are those in which the combined ownership of all U.S. parents exceeds 50 percent. For some analytical purposes, data for MOFA's--rather than all affiliates--should be used. For example, data for MOFA's are appropriate for analyzing foreign affiliate operations in which the U.S. parent has unambiguous control. Additionally, some aspects of affiliate operations can be analyzed only from the perspective of MOFA's, because the necessary data items are not collected for other affiliates.

The MOFA share of all affiliate employment was 78 percent in 1991 (table 4). of the countries presented in table 4, Canada had the highest MOFA share (95 percent), followed by the United Kingdom (92 percent) and the Netherlands (90 percent). The shares were lowest in India (26 percent), Japan (36 percent), and the Republic of Korea (37 percent). Lower-than-average shares in some countries may reflect current or, perhaps more commonly, past restrictions on majority ownership by foreigners. In India, for example, foreign ownership of businesses engaged predominantly in trading activities was restricted to 40 percent prior to July 1991.(4) Low MOFA shares may also reflect strategic business decisions by U.S. parents; for example, some U.S. parents may acquire minority interests in affiliates to share knowledge or to facilitate trade rather than to influence operations or management.


Table 5 presents selected data items for U.S. parents and for MOFA's and shows the MOFA share of the worldwide MNC totals for these items.(5) In 1991, 42 percent of worldwide MNC net income, but only 12 percent of MNC research and development expenditures, were accounted for by MOFA's. MOFA shares of total MNC employment and capital expenditures were each 23 percent.


Selected Aspects of MNC Operations

This section briefly examines selected aspects of U.S. parents and their foreign affiliates in light of the results of the 1991 survey.

Host country wages and manufacturing MOFA's. --In 1991, manufacturing MOFA's were concentrated in relatively high-wage countries, where they primarily served the host country and other foreign markets.(6) Sixty-six percent of the employees of manufacturing MOFA's were located in high-wage countries. Ninety percent of sales by manufacturing MOFA's in these countries were to foreign customers (60 percent to customers in the host country and 30 percent to other foreign customers), and only 10 percent were to U.S. customers.

Profitability.--In 1991, the profitability of MOFA's as measured by net income as a percentage of owners' equity-exceeded that of their U.S. parents. This measure of profitability was 13 percent for MOFA's and 7 percent for parents.(7) The higher profitability of MOFA's partly resulted from differences between business cycle conditions in the United States and abroad: In 1991, the U.S. economy was in recession, while some major host economies in Europe, Latin America, and Asia continued to expand. In addition, U.S. MNC's may require higher rates of return on foreign than domestic operations in order to offset the added risks of operating abroad, such as the risk of unfavorable changes in exchange rates or in the host country's political climate.

Research and development (R&D) intensity.--In 1991, R&D intensity was much higher for U.S. parents than for MOFA's: U.S. parents spent $21 on R&D per $1,000 of sales, compared with about $6 for MOFA's. The higher R&D intensity of U.S. parents partly reflects the following factors: (1) R&D tends to be a "headquarters function," and (2) the United States has a well-developed technological infrastructure, including a large pool of scientists and engineers. The tendency for parents' R&D intensity to be higher has, however, decreased in recent years. In 1982-91, for example, the R&D intensity of MOFA's grew at an average annual rate of 5 percent, compared with 3 percent for U.S. parents. The faster growth of MOFA R&D intensity over the last decade partly reflects the formation of joint research ventures between MOFA's and unaffiliated foreigners to help defray the cost of developing new technologies.

The R&D intensity of majority-owned U.S. affiliates of foreign companies (MOUSA's) was higher than that of MOFA's; MOUSA's spent $9 on R&D per $1,000 of sales, compared with $6 for MOFA's.

Merchandise trade.--In 1991, trade associated with U.S. MNC's accounted for a large share of all U.S. merchandise trade. U.S. merchandise exports associated with U.S. MNC's--the sum of goods shipped by all U.S. persons to affiliates and goods shipped by U.S. parents to unaffiliated foreigners--were $262.0 billion, or 62 percent of total U.S. merchandise exports (table 6). U.S. merchandise imports associated with U.S. MMC's--the sum of goods shipped by affiliates to all U.S. persons and goods shipped by unaffiliated foreigners to U.S. parents--were $216.0 billion, or 44 percent of total U.S. merchandise imports.(8)


Delivery of goods to foreign markets.--Despite their large share of total U.S. merchandise exports, U.S. MNC's continued to deliver goods to foreign markets primarily through sales by affiliates rather than through U.S. merchandise exports in 1991. of all U.S. MNC sales of goods to unaffiliated foreigners, roughly 84 percent were sales by MOFA's, and the remainder were merchandise exports shipped by U.S. parents.(9) The dominance of sales by MOFA's reflects many factors, among them the following: (1) Many sales to foreigners would not be feasible through exporting from the United States because of market barriers and transportation costs, and (2) MOFA's are better positioned than their parents to design, manufacture, distribute, and service products for the special requirements of the host country markets.(10)

Sales by parents and MOFA's, by type.--Sales of goods accounted for most of the sales by parents and MOFA's in 1991 (table 7). of the $3,274 million in sales by U.S. parents, 69 percent was goods, 27 percent was services, and the remainder was investment income.(11) of the $1,241 million in sales by MOFA's, 86 percent was goods, 12 percent was services, and the remainder was investment income. Services accounted for a notably smaller share of sales for MOFA's than for U.S. parents, an indication that the overseas presence of MNC's in services is smaller than that of MNC's in other industries.


MNC Manufacturing Operations in Low-wage Countries

The closing of some manufacturing facilities in the United States and the expansion of U.S.-owned facilities in relatively low-wage countries has generated considerable public debate over the impact of U.S. direct investment in such countries on employment and production in the United States. This debate cannot be fully resolved using statistics, because only the actual changes that have occurred in domestic employment and production can be directly measured; changes that would have occurred had the investment not taken place are equally relevant but are not readily quantifiable.(12) Nevertheless, the following analysis suggests that, although some U.S. MNC's in manufacturing have been increasing their presence in relatively low-wage countries during the last decade, their investments have not led to pronounced declines in the U.S. parent shares of MNC's worldwide production and employment. In other words, the allocation of worldwide MNC employment and production between the United States and abroad has changed little over the last decade. This section will examine changes between 1982 and 1991 in the country distribution of employment by manufacturing MOFA's located in low-wage countries and the implications of these changes for employment and production by U.S. parents.

In the analysis, the distinction between "high-wage" and "low-wage" countries is based on estimates of average hourly wages of production workers of manufacturing MOFA's; the estimates are derived from data collected in BEA's 1989 benchmark survey of U.S. direct investment abroad. To ensure the statistical significance of the data underlying this distinction, the analysis is restricted to countries having the largest presence of manufacturing MOFA's.(13) High-wage countries are defined as those with average hourly wages higher than $9.30 (the unweighted average hourly wage in 1989 of all countries included in the sample), and low-wage countries are defined as those with average hourly wages lower than that level.

Overall, the low-wage-country share of manufacturing MOFA employment increased somewhat during 1982-91, rising three percentage points to 34 percent in 1991. However, when data for individual countries are examined, there does not appear to be a strong correlation between the level of wages and the rate of change in manufacturing MOFA employment (chart 1). Furthermore, there were pronounced offsetting shifts in employment among the low-wage countries (chart 1, lower panels). Employment by manufacturing MOFA's tended to shift away from countries with sluggish economies and high corporate tax rate--countries in which MOFA's tended to produce almost exclusively for local markets--towards rapidly growing, low-tax countries in which MOFA's had a greater tendency to produce goods for export to the United States (table 8). In the countries where employment by manufacturing MOFA's grew, real gross domestic product increased at an average annual rate of 5.3 percent over the period, compared with a 2.6-percent rate in the other low-wage countries. MOFA income taxes averaged 24 percent of MOFA net income in these countries, compared with 43 percent in the other low-wage countries. For MOFA's located in these countries, an average of 35 percent of sales were to U.S. customers in 1991 (the remainder to foreign customers), compared with 8 percent for MOFA's in the other low-wage countries.


This shift in the location of manufacturing MOFA's (particularly towards the Pacific Rim) occurred mainly in the electronics industry. Because of the small size of most electronic components, the average per-unit cost of shipping goods to the United States probably is relatively low in this industry. For MNC's in most other manufacturing industries, per-unit shipping costs may outweigh any potential savings in labor costs. In addition, production of some electronic components may have been shifted abroad because these products were in a maturing stage of the product cycle. In the early stages of a product cycle, the location of production may be largely determined by the need for access to technology and for proximity to the primary market, both of which are often best satisfied by U.S. parent production. Later, as the technology for producing the good matures and as competitors enter the market, cost becomes a relatively more important factor, and production of the good may be shifted to foreign affiliates in low-wage countries.

Despite the growth of MOFA's producing in low-wage countries for the U.S. market, U.S. parent companies have apparently substituted imports for domestic production to only a small degree. In 1982-89, the domestic content of U.S. parents' output in manufacturing decreased from 96 percent to 93 percent.(14) This decrease in domestic content was probably shared by other U.S. companies; the share of U.S. gross domestic purchases of goods accounted for by U.S. merchandise imports shipped to companies other than U.S. parents rose from 10 percent in 1982 to 13 percent in 1989.

Overall, the growth of MOFA's producing in low-wage countries for the U.S. market does not appear to be associated with significant substitution of foreign for domestic employment by U.S. MNC's. Although the domestic share of worldwide employment of U.S. MNC's in manufacturing decreased two percentage points in 1982-91, from 74 percent to 72 percent, this decrease appears to be largely unrelated to production by MOFA's for the U.S. market. Instead, much of it reflects downsizing by U.S. parents, partly in response to a loss of market share to newer U.S. companies that have no foreign affiliates.


The International Investment Division's Direct Investment Abroad Branch, under the direction of Patricia C. Walker, conducted the survey from which the estimates were derived. Margo R. Collier supervised the editing and processing of the reports. Marie Colosimo and Arnold Gilbert designed the computer programs to derive estimates for unreported data, generate the tables, and prevent disclosure of company-specific data.

Key Terms

The following key terms are used to describe the members of U.S. multinational companies. U.S. multinational Company (MNC) : The U.S. parent and all of its foreign affiliates. U.S. parent: A person, resident in the United States, that owns or controls 10 percent or more of th

securities, or the equivalent, of a foreign business enterprise. "Person" is broadly defined to in

branch, partnership, associated group, association, estate, trust, corporation or other organizati

not organized under the laws of any State), or any government entity. If incorporated, the U.S. pa

consolidated U.S. enterprise consisting of (i) the U.S. corporation whose voting securities are no

than 50 percent by another U.S. corporation, and (2) proceeding down each ownership chain from tha

corporation, any U.S. corporation (including Foreign Sales Corporations located within the United

voting securities are more than 50 percent owned by the U.S. corporation above it. A U.S. parent c

domestic (U.S.) operations of a U.S. MNC. Foreign affiliate : A foreign business enterprise in which there is U.S. direct investment, that is,

person owns or controls 10 percent or more of the voting securities or the equivalent. Affiliates

foreign operations of a U.S. MNC. Majority-owned foreign affiliate (MOFA) : A foreign affiliate in which the combined ownership of all

exceeds 50 percent. Nonbank : An entity (MNC, parent, or affiliate) whose primary activity is not banking. Only nonbanks

by this article.

Data Availability

Only summary data are published in this article. Estimates of U.S. MNC operations in greater detail are available for 1977 and for 1982-91 in publications and for 1982-91 on computer-readable media (tape or diskette). For information on ordering publications, call (202) 606-9867, for information on computer media, call (202) 606-9820. Publications presenting the revised estimates for 1990 and the preliminary estimates for 1991 will be available in August; their availability will be announced on the inside back cover of the Survey of Current Business. (1.) Each U.S. parent is classified in the industry that accounts for the largest portion of its sates or, for holding companies, its total income. Many U.S. parents are involved in a variety of business activities, and changes in the mix of these activities can cause a parent's industry classification to change. In 1991, industry reclassifications, which have no net effect on the all-industries total, resulted in decreases in employment in electric and electronic equipment manufacturing and in finance (except banking), insurance, and real estate (FIRE), largely offset by an increase in "other" manufacturing. (2.) Through BEA's efforts to improve survey coverage, some affiliates that existed in prior years were added to the survey universe in 1991. Some of these affiliates should have been reported in earlier years but were not. Data for these affiliates are included in line 7 of table 2. (3.) Acquisitions and establishments of foreign affiliates in 1990 are discussed in "U.S. Multinational Companies: Operations in 1990," Survey of Current Business 72 (August 1992): 62-63. (4.) Firms meeting certain technology-transfer and export-performance criteria were exempt from this restriction. (5.) The items shown in table 5 were selected because the parent data and the affiliate data for all of these measures except net income are nonduplicative and thus yield meaningful comparisons between parent and MOFA shares. The ratio of MOFA net income to total MNC net income must be interpreted cautiously because parents' net income includes the parents' share of their affiliates' net income; thus, this amount is double-counted in the denominator of the ratio. For this reason, the ratio, and any increase or decrease in it, will be somewhat understated (assuming that both the numerator and the denominator are positive). (6.) The distinction between "high-wage" and "low-wage" countries is based on estimates of average hourly compensation paid to production workers by manufacturing MOFA's; the estimates were derived from data collected 1989 benchmark survey of U.S. direct investment abroad. For details, (7.) It should be noted that the rate of return for parents reflects the results of foreign as well as domestic operations of the MNC because U.S. parents' net income includes the parents' share of their foreign affiliates' net income and because parents' owners' equity includes their equity investment in their foreign affiliates. If the rate of return for parents were computed using measures of domestic operations alone (such measures are not available, however), affiliates would still have the higher rate of return, and the difference between the two rates would be somewhat greater than that cited. Note also that the denominator of this measure of profitability is based on historical cost, so rates of return for parents and affiliates may differ because of differences in the relative ages of the firms covered. (8.) The data on total U.S. merchandise exports and imports used for this comparison are on a Census basis; exports include reexports and military grant shipments. The data are from table lines 1 and 9, in "U.S. International Transactions, First Quarter 19993," Survey of Current Business 73 (June 1993): 76-77. (9.) For this calculation, "U.S. merchandise exports shipped" were use as a proxy for "sales of goods" by U.S. parents to unaffiliated foreign persons. The two measures are closely related but differ because of cases in which U.S. parents ship goods to one party and charge them to a third party. (10.) For a discussion of factors that can lead firms to engage in direct investment rather than trade, see C. Fred Bergsten, Thomas Horst, and Theodore H. Moran, American Multinationals and American Interests Brookings Institution, 1978): 46-47. (11.) In finance and insurance, parents and MOFA'S general include investment income in sales because it is generated by a primary activity of the company. In most other industries, parents and MOFA'S generally consider investment income an incidental revenue source; in such cases, investment income is not included in their sales or in this table. (12.) To illustrate the issues involved in determining changes in domestic employment that may result from U.S. direct investment abroad, suppose a U.S. manufacturer finds it is losing market share to lower-priced goods produced in a foreign country where labor costs are lower. If, in response, the manufacturer decides to transfer a portion of its production to that country, the immediate and most readily measurable effect is the loss of jobs shifted abroad. However, it is possible that the U.S. firm would not have survived without the transfer of production; in this case, even more jobs would have been lost. Thus, the ultimate effect of the transfer of production may have been to mitigate the loss of U.S. jobs. How many jobs might have been saved as a result of the transfer of production, however, cannot be directly measured. (13.) To be included in the sample, a country must have hosted manufacturing together had at least 10,000 employees in 1989. Such countries accounted for roughly 95 percent of all employment by manufacturing in 1989. (14.) Domestic content of output is calculated as the ratio of (1) U.S. parent gross product (or value added) plus purchases from other U.S. residents to (2) total U.S. parent output (sales plus inventory change). It can also be calculated as one minus the ratio of (1) U.S. merchandise imports shipped to U.S. parents to (2) total U.S. parent output.
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Author:Mataloni, Raymond J., Jr.
Publication:Survey of Current Business
Date:Jul 1, 1993
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