Foreign Direct Investment in the United States.

Fahim-Nader, Mahnaz

New Investment in 1998

LAST YEAR, outlays by foreign direct investors to acquire or establish businesses in the United States surged to $201.0 billion, 2 1/2 times the previous record of $79.9 billion set in 1996 and almost triple the 1997 level of $69.7 billion (table 1 and chart 1).(1) The 1998 outlays were boosted by two exceptionally large acquisitions, each of which significantly exceeded the size of any previous single investment. However, even without these two investments, outlays were still about 40 percent higher than those in 1996.

[CHART 1 OMITTED]

Table 1.--Outlays and Employment of Newly Acquired or
Established U.S. Businesses, 1980-98

 Outlays (billions of dollars) Employment (thousands of
 employees)

1980 12.2 292.5
1981 23.2 442.8
1982 10.8 233.8
1983 8.1 108.1
1984 15.2 172.5
1985 23.1 275.5
1986 39.2 438.0
1987 40.3 394.1
1988 72.7 736.3
1999 71.2 722.0
1990 65.9 474.3
1991 25.5 249.0
1992 15.3 141.5
1993 26.2 289.1
1994 45.6 289.3
1995 57.2 312.9
1996 79.9 436.9
1997(p) 69.7 288.5
1998(r) 201.0 596.8

(p) Preliminary.

(r) Revised.

The surge in outlays by foreign direct investors coincides with a sharp increase in overall merger and acquisition activity in the United States to a level that substantially exceeds the 1997 record.(2) Both these increases are a part of a global increase in mergers and acquisitions. The record outlays reflected the continuing strength and stability of the U.S. economy that provided foreign investors with strong incentives to invest in the United States. In addition, a desire to gain access to the advanced and growing technological capability and large markets in the United States may have led a number of foreign companies to acquire information-related businesses in manufacturing and services.

The two large investments were acquisitions of a petroleum company and a motor vehicle manufacturing company.(3) They were accomplished by exchanging stock; the shareholders in the acquired U.S. companies received stock in the new foreign firms that were created when the U.S. companies were combined with the foreign companies that made the acquisitions. Some of the other large investments were also structured as exchanges of stock, a technique that is increasingly used for financing mergers and acquisitions both in the United States and abroad. Taken together, these exchanges resulted in large, but almost entirely offsetting, capital flows in the U.S. balance of payments: The large inflows that resulted from the foreign direct investors' acquisitions of stock in the acquired U.S. companies were offset by the outflows that resulted from the distributions to U.S. stockholders of the stock in the newly established foreign parent companies.

The large investment in the petroleum industry illustrates a trend toward greater consolidation within the industry that was also reflected by a number of other substantial petroleum-related investments, particularly in oil refining, distribution, oilfield machinery manufacturing, and oil and gas field services. In response to weak growth in the demand for fuels, excess capacity, and low oil prices, companies have been more aggressive in seeking out opportunities to reduce per unit costs in areas such as administration, refining, and marketing. A longer term factor behind the consolidations is the intensification of the worldwide competition to secure large, new oil reserves. In the United States, oil production, though declining since 1970, continues to exceed new discoveries. Generally, excluding production in the OPEC countries, production is leveling off, if not already declining. Large, new oilfields are becoming increasingly hard to find, and oil companies must explore more remote regions, often under inhospitable conditions, and deal with political, as well as geological, uncertainties. Given these circumstances, only companies with the size and financial strength to assume high costs and risks will remain profitable.

Although cost cutting and overcapacity have spurred consolidations in the motor vehicle industry worldwide, the main impetus for the large foreign investment in the United States in this industry was the complementary strengths--mainly in terms of product lines--of the two manufacturers of motor vehicles. The merger also presented opportunities to take advantage of economies of scale in engineering, purchasing, manufacturing, and distribution.

Factors that are specific to particular industries also motivated a number of other large new investments. In manufacturing (particularly machinery) and in services (particularly computer and data processing services), a desire to gain access to the advanced and growing technological capability in the United States, to integrate operations vertically, and to enter new markets led a number of foreign companies to acquire telecommunication- and information-related businesses. In "other industries" (particularly communication and electric, gas, and sanitary services), investments were spurred by global deregulation and by a need to seek strength through size.

As in the past, outlays to acquire existing U.S. companies rather than to establish new U.S. companies accounted for most of total outlays. In 1998, they accounted for 90 percent of total outlays (table 2).

Table 2.--Investment Outlays, Investments, and Investors, 1992-98

 Outlays (millions of dollars)
 1992 1993 1994 1995 1996

Investments, total 15,333 26,229 45,626 57,195 79,929
 U.S. businesses 10,616 21,761 38,753 47,179 68,733
 acquired
 U.S. businesses 4,718 4,468 6,873 10,016 11,196
 established
Investors, total 15,333 26,229 45,626 57,195 79,929
 Foreign direct 4,058 6,720 13,628 11,927 32,230
 investors
 U.S. affiliates 11,275 19,509 31,999 45,268 47,699

 Outlays
 (millions
 of dollars) Number
 1997(r) 1998(p) 1992 1993 1994

Investments, total 69,708 201,027 941 980 1,036
 U.S. businesses 60,733 180,697 463 554 605
 acquired
 U.S. businesses 8,974 20,330 478 426 431
 established
Investors, total 69,708 201,027 1,019 1,094 1,144
 Foreign direct 13,899 119,724 350 368 345
 investors
 U.S. affiliates 55,809 81,303 669 726 799

 Number
 1995 1996 1997(r) 1998(p)

Investments, total 1,124 1,155 1,112 1,087
 U.S. businesses 644 686 640 673
 acquired
 U.S. businesses 480 469 472 414
 established
Investors, total 1,213 1,302 1,265 1,187
 Foreign direct 345 374 366 279
 investors
 U.S. affiliates 868 928 899 908

(p) Preliminary.

(r) Revised.

Outlays in 1998 were dominated by large investments. There were 12 investments of $2 billion or more, and these investments accounted for almost two-thirds of total outlays (table 3). The number of such investments was up from three in 1997 and eight in 1996. To some extent, the increase in the number of large investments in 1998 reflects the sharp increases in U.S. stock prices in recent years; these increases have raised the size of the outlays needed to acquire individual U.S. companies. The size of an investment can also be measured by the number of employees in the acquired company: In 1998, there were seven acquisitions of U.S. companies with more than 10,000 employees, the same as in 1996.

Table 3.--Number of Investments by Size of Outlays, 1992-98

 1992 1993 1994

 Total 941 980 1,036

$2 billion or more 0 1 4
$1 billion - $1.9 billion 0 1 4
$100 million - $999 million 28 47 71
$10 million -$99 million 252 252 273
Less than $10 million 661 679 684

Addenda:
 Percent of total outlays:
 Investments of $2 billion or more 0 (D) 27
 Investments of $1 billion or more 0 19 39
 Investments of $100 million or more 42 64 78

 1995 1996

 Total 1,124 1,155

$2 billion or more 5 8
$1 billion - $1.9 billion 4 10
$100 million - $999 million 79 103
$10 million -$99 million 329 366
Less than $10 million 707 668

Addenda:
 Percent of total outlays:
 Investments of $2 billion or more 30 29
 Investments of $1 billion or more 41 48
 Investments of $100 million or more 78 83

 1997(r) 1998(p)

 Total 1,112 1,087

$2 billion or more 3 12
$1 billion - $1.9 billion 12 10
$100 million - $999 million 93 111
$10 million -$99 million 383 390
Less than $10 million 621 564

Addenda:
 Percent of total outlays:
 Investments of $2 billion or more 12 65
 Investments of $1 billion or more 37 73
 Investments of $100 million or more 79 91

(D) Suppressed to avoid disclosure of data of individual companies.

(p) Preliminary.

(r) Revised.

By industry, outlays increased sharply in the manufacturing and petroleum industries (table 4). Within manufacturing, the largest increases were in "other manufacturing" (particularly in motor vehicles and in printing and publishing) and in machinery (particularly industrial machinery and equipment). Outlays also increased in retail trade and in real estate. Outlays decreased in all other industries; the decreases were largest in the insurance industry.

Table 4.--Investment Outlays by Industry of U.S. Business Enterprise and by Country of Ultimate Beneficial Owner, 1992--98

[Millions of dollars]

 1992 1993 1994

Total 15,333 26,229 45,626

By industry:
 Petroleum 463 882 469
 Manufacturing 6,014 11,090 21,218
 Food and kindred products 404 1,294 4,567
 Chemicals and allied products 1,644 5,035 6,905
 Primary and fabricated metals 1,187 1,297 1,485
 Machinery 1,002 1,778 1,867
 Other manufacturing 1,778 1,686 6,393
 Wholesale trade 698 837 2,156
 Retail trade 256 1,495 1,542
 Depository institutions 529 958 2,026
 Finance, except 797 1,599 2,195
 depository institutions
 Insurance 291 1,105 450
 Real estate 2,161 1,883 2,647
 Services 2,023 4,162 7,163
 Other industries 2,101 2,218 5,760

By country (1):
 Canada 1,351 3,797 4,128
 Europe 8,344 16,845 31,920
 France 406 1,249 1,404
 Germany 1,964 2,841 3,328
 Netherlands 1,331 2,074 1,537
 Switzerland 1,259 804 5,044
 United Kingdom 2,255 8,238 17,261
 Other Europe 1,129 1,639 3,346
 Latin America and Other 1,438 874 1,352
 Western Hemisphere
 South and Central America 1,152 527 (D)
 Other Western Hemisphere 286 347 (D)
 Africa (D) (D) (D)
 Middle East 238 1,308 (D)
 Asia and Pacific 3,716 3,004 5,263
 Australia 164 129 1,522
 Japan 2,921 2,065 2,715
 Other Asia and Pacific 631 810 1,026
 United States(2) (D) (D) 201

 1995 1996

Total 57,195 79,929

By industry:
 Petroleum 1,520 1,059
 Manufacturing 26,643 27,835
 Food and kindred products 3,802 1,145
 Chemicals and allied products 12,511 3,961
 Primary and fabricated metals 547 3,222
 Machinery 4,489 4,355
 Other manufacturing 5,293 15,151
 Wholesale trade 1,168 4,746
 Retail trade 2,838 2,988
 Depository institutions 2,301 1,944
 Finance, except 7,837 8,676
 depository institutions
 Insurance 654 4,688
 Real estate 2,996 4,175
 Services 5,881 15,292
 Other industries 5,359 8,528

By country (1):
 Canada 8,029 9,700
 Europe 38,195 49,427
 France 1,129 6,021
 Germany 13,117 12,858
 Netherlands 1,061 6,476
 Switzerland 7,533 4,910
 United Kingdom 9,094 14,757
 Other Europe 6,261 4,405
 Latin America and Other 1,550 1,790
 Western Hemisphere
 South and Central America 1,283 (D)
 Other Western Hemisphere 267 (D)
 Africa (D) (D)
 Middle East 447 (D)
 Asia and Pacific 8,688 12,751
 Australia 2,270 2,222
 Japan 3,602 8,813
 Other Asia and Pacific 2,816 1,716
 United States(2) (D) (D)

 1997(r) 1998Z(p)

Total 69,708 201,027

By industry:
 Petroleum 762 72,136
 Manufacturing 19,603 89,679
 Food and kindred products 1,949 1,556
 Chemicals and allied products 4,539 4,168
 Primary and fabricated metals 1,327 1,877
 Machinery 4,788 21,951
 Other manufacturing 7,000 60,127
 Wholesale trade 2,612 907
 Retail trade 435 1,963
 Depository institutions 3,547 1,104
 Finance, except 7,019 6,195
 depository institutions
 Insurance 8,526 4,325
 Real estate 4,119 5,272
 Services 12,187 9,951
 Other industries 10,898 9,496

By country (1):
 Canada 11,755 21,480
 Europe 44,014 160,612
 France 2,578 14,129
 Germany 6,464 39,949
 Netherlands 10,244 19,446
 Switzerland 6,745 3,637
 United Kingdom 11,834 76,881
 Other Europe 6,149 6,570
 Latin America and Other 924 10,457
 Western Hemisphere
 South and Central America 166 813
 Other Western Hemisphere 758 9,644
 Africa (D) 145
 Middle East 847 2,968
 Asia and Pacific 11,786 5,207
 Australia 7,600 1,726
 Japan 2,326 2,872
 Other Asia and Pacific 1,860 609
 United States(2) (D) 159

(D) Suppressed to avoid,disclosure of data of individual companies.

(p) Preliminary.

(r) Revised.

(1.) For investments in which more than one investor participated, each investor and each investor's outlays are classified by country of each ultimate beneficial owner.

(2.) See footnote 4 in text for explanation.

By country of ultimate beneficial owner (UBO), the United Kingdom and Germany had the largest increase in outlays in 1998 (table 4).(4) Investments from France, Canada, and the Netherlands also increased substantially. Outlays by Japanese investors, at $2.9 billion, remained flat and were only a fraction of the peak--$19.9 billion--in 1990 (chart 2).

[CHART 2 OMITTED]

The portion of outlays financed by foreign parents (including those by exchanging stock), rather than by existing U.S. affiliates, increased from 54 percent to a record 77 percent. The unusually high share mainly resulted from the two exceptionally large investments. Excluding these investments, the share would have been 59 percent.

In dollars, outlays financed by the foreign parents increased to $155.3 billion in 1998 from $37.4 billion in 1997. The increase contributed to the sharp overall increase in net capital inflows for foreign direct investment in the United States (FDIUS) that are recorded in the U.S. balance of payments accounts for 1998.(5) Outlays financed by existing U.S. affiliates with funds from other foreign sources or from U.S. sources increased $13.4 billion, to $45.7 billion.

The total assets of newly acquired or established affiliates were $249.4 billion in 1998, up from $170.6 billion in 1997 (table 5). The assets of the businesses that were acquired were $212.3 billion.

Table 5.--Selected Operating Data of U.S. Business Enterprises Acquired or Established, by Industry of U.S. Business Enterprise, 1997-98

 1997(r)
 Millions of dollars Number
 Total as- Net in- of em-
 sets Sales come ployees

 All industries 170,564 62,669 2,566 288,521
 3,992 5,803 458 2,448
Petroleum
Manufacturing 20,495 19,520 740 93,979
Wholesale trade 3,778 6,256 80 15,193
Retail trade 561 1,526 (*) 11,002
Depository institutions 26,316 1,769 147 7,403
Finance, except 15,699 3,061 361 10,991
 depository institutions
Insurance 66,113 8,753 397 12,217
Real estate 4,710 552 141 453
Services 12,875 6,250 167 96,556
Other industries 16,026 9,180 73 38,279

 1997(r)
 Number
 of hec- 1998(p)
 tares of Millions of dollars
 land Total as- Sales Net in-
 owned(1) sets come

 All industries 259,612 249,364 160,124 3,780
 (D) (D) (D) (D)
Petroleum
Manufacturing (D) 105,722 91,249 2,419
Wholesale trade (D) 2,069 3,891 12
Retail trade 27 2,483 6,484 124
Depository institutions 197 9,504 525 (D)
Finance, except 30 38,071 (D) 369
 depository institutions
Insurance 259 22,415 4,125 -1
Real estate 23,801 5,060 759 125
Services 1,920 11,705 7,688 -296
Other industries 70,238 (D) 6,194 -347

 1998(p)
 Number
 of hec-
 Number tares of
 of em- land
 ployees owned(1)

 All industries 596,774 150,395

Petroleum K (D)
Manufacturing 260,508 31,889
Wholesale trade 10,357 302
Retail trade 105,359 65
Depository institutions H 12
Finance, except 7,208 13
 depository institutions
Insurance 6,652 21
Real estate 2,530 (D)
Services 134,590 2,050
Other industries 28,465 26,331

(*) Less than $500,000.

(D) Suppressed to avoid disclosure of data of individual companies.

(p) Preliminary.

(r) Revised.

(1.) One hectare equals 2.471 acres. Thus, for all industries, the number of acres of land owned in 1997 and 1998 were 641,501 and 371,626, respectively.

NOTES.--For newly acquired businesses, data cover the most recently completed financial reporting year. For newly established businesses, data are projections for the first full year of operations.

Size ranges are given in employment cells that are suppressed. The size ranges are: A--1 to 499; F--500 to 999; G--1,000 to 2,499; H--2,500 to 4,999; I-5,000 to 9,999; J--10,000 to 24,999; K--25,000 to 49,999; L--50,000 to 99,999; M--100,000 or more.

U.S. businesses that were newly acquired or established employed 597,000 persons in 1998, up from 289,000 in 1997. The largest shares of employment were accounted for by manufacturing (44 percent) and services (23 percent).

Tables 5-7 follow.

[TABULAR DATA 6-7 NOT REPRODUCIBLE IN ASCII]

(1.) The estimates of outlays for 1998 are preliminary. The 1997 estimate of total outlays has been revised down 2 percent from the preliminary estimate published last year. For the preliminary 1997 estimates, see Mahnaz Fahim-Nader and William J. Zeile, "Foreign Direct Investment in the United States: New Investment in 1997 and Affiliate Operations in 1996," SURVEY OF CURRENT BUSINESS 78 (June 1998): 39--67.

(2.) The data on overall merger and acquisition activity in the United States in 1998 were reported by the Securities Data Company in a news release on January 6, 1999.

(3.) The International Investment and Trade in Services Survey Act prohibits BEA from disclosing information from its direct investment surveys in a manner that allows the data supplied by an individual respondent to be identified. The act also provides that with the prior written consent of the respondent, information supplied by the respondent may be disclosed. For these two large investments, BEA obtained consent for limited disclosure in order to present useful results from the survey.

(4.) The UBO is that person, proceeding up a U.S. affiliate's ownership chain, beginning with and including the foreign parent, that is not owned more than 50 percent by another person. The foreign parent is the first foreign person in the affiliate's ownership chain. Unlike the foreign parent, the UBO of an affiliate may be located in the United States. The UBO of each U.S. affiliate is identified to ascertain the person that ultimately owns or controls the U.S. affiliate and that therefore ultimately derives the benefits from ownership or control.

(5.) In addition to outlays from foreign parents to acquire or establish U.S. affiliates, net capital inflows for FDIUS include foreign parents' financing of their existing U.S. affiliates. In 1998, net inflows increased $102.8 billion, to $196.2 billion. Of the components of total capital inflows--equity capital, reinvested earnings, and intercompany debt-changes in equity capital inflows tend to most closely reflect the changes in new foreign investment, and in 1998, these inflows, net, increased $110.3 billion, to $156.8 billion. Because some of the largest investments in 1998 were structured as exchanges of stock, the net inflows for FDIUS were--as discussed earlier--largely offset in the U.S. balance of payments by capital outflows that reflected the increase in U.S. ownership of foreign securities. These preliminary estimates of inflows were published in Christopher L. Bach, "U.S. International Transactions, Fourth Quarter and Year 1998" SURVEY 79 (April 1999): 47 and 54- Revised estimates will be published in the July issue of the Survey.

RELATED ARTICLE: BEA Data on New Foreign Direct Investments

The estimates of new foreign direct investments cover U.S. business enterprises that were acquired or established by foreign direct investors during the year and that had total assets of more than $1 million or that owned at least 200 acres of U.S. land in the year they were acquired or established. For 1997, U.S. enterprises that met these criteria were required to file full reports on the survey that the Bureau of Economic Analysis used to collect the data.

U.S. enterprises that were acquired or established by foreign direct investors and that had total assets of $1 million or less were required to file partial reports, mainly for identification purposes; the data from the partial reports for 1997 are not included in the estimates. The total assets of the U.S. enterprises that filed partial reports for 1997 were $166.0 million, only about 0.1 percent of the total assets of $170.6 billion of the U.S. enterprises that filed complete reports.

For 1998, the criterion for filing full reports was raised to total assets of more than $3 million, in order to reduce the reporting burden on small enterprises. To maintain comparability between the estimates for 1997 and 1998, the 1998 estimates incorporate the data from the partial reports filed by enterprises with assets between $1 million and $3 million. In 1998, the total assets of U.S. enterprises with assets of $1 million or less that filed partial reports were $257.4 million, only about 0.1 percent of the total assets of $249.4 billion of the U.S. enterprises with assets of more than $1 million.

A U.S. business enterprise is categorized as "established" if the foreign parent or its existing U.S. affiliate (a) creates a new legal entity that is organized and begins operating as a new U.S. business enterprise or (b) directly purchases U.S. real estate. A U.S. business enterprise is categorized as "acquired" if the foreign parent or its existing U.S. affiliate (a) obtains a voting equity interest in an existing U.S. business enterprise and continues to operate it as a separate legal entity, (b) purchases a business segment or an operating unit of an existing U.S. business enterprise that it organizes as a new separate legal entity, or (c) purchases through the existing U.S. affiliate a U.S. business enterprise or a business segment or an operating unit of a U.S. business enterprise and merges it into the affiliate's operations.

The data on new investments do not cover a foreign parent's acquisition of additional equity in its U.S. affiliate or its acquisition of an existing U.S. affiliate from another foreign investor. They also do not cover expansions in the operations of existing U.S. affiliates, and selloffs or other disinvestment are not netted against the new investments.

RELATED ARTICLE: Data Availability

This article presents summary estimates of outlays by foreign direct investors to acquire or establish businesses in the United States.

A set of supplementary tables that present detail on the number of investments and investors for 1992-97 and on investment outlays and selected operating data for the newly acquired or established businesses for 1992-98 is available in compressed text files on BEA'S Web site at <www. bea.doc.gov>. To access the files, click on the Catalog of Products, look under "International Accounts Products"" Foreign Direct Investment in the United States" and scroll down the page to "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors." A set of tables for 1980-91 is also available.

The supplementary tables are also available on diskettes. To order, call the BEA Order Desk at 1-800-704-0415 (outside the United States, call 202-606-9666), and specify product number IDN-0235 for the 1992-98 estimates and product number IDN-0078 for the 1980-91 estimates.

The survey, from which the data presented in this article were drawn, was conducted under the supervision of Joseph F. Cherry III and Dorrett E. Williams, with contributions by Nicole L. Donegan, Erik A. Kasari, Edward J. Kozerka, and Ronald McNeil. Karen Poffel programmed the tables.3