Direct Investment Positions for 1998.

Bargas, Sylvia E. ; Troia, Rosaria

Country and Industry Detail

THE POSITIONS of U.S. direct investment abroad (USDIA) and foreign direct investment in the United States (FDIUS)--whether measured on the basis of historical cost, current cost, or market value--grew strongly in 1998 (table 1). This article presents the country and industry detail underlying the two positions. The estimates are prepared on a historical-cost basis; thus, most investments reflect price levels of earlier time periods. Because of inflation, estimates on this valuation basis understate the current values of the positions, BEA'S current-cost and market-value estimates correct for this downward bias, but they are only available at an aggregate level.(1)

Table 1.--Alternative Direct Investment Position Estimates, 1997 and 1998

[Millions of dollars]

 Position
 at Changes in 1998
Valuation method yearend (decrease (-))
 1997(r) Total

U.S. direct investment
 abroad:
 Historical cost 865,531 115,034
 Current cost 1,004,228 119,213
 Market value 1,784,494 356,034
Foreign direct investment
 in the United States:
 Historical cost 6,932,071 118,549
 Current cost 764,045 114,672
 Market value 1,642,365 551,737

 Changes in 1998
 (decrease (-))
 Position
 Valu- at
Valuation method Capital ation yearend
 flows adjust- 1998(p)
 ments

U.S. direct investment
 abroad:
 Historical cost 121,644 -6,610 980,565
 Current cost 132,829 -13,616 1,123,441
 Market value 132,829 223,205 2,140,528
Foreign direct
 investment
 in the United States:
 Historical cost 188,960 -70,411 811,756
 Current cost 193,375 -78,703 878,718
 Market value 193,375 358,362 2,194,102

(p) Preliminary

(r) Revised

On a historical-cost basis, the USDIA position grew 13 percent in 1998, and the FDIUS position grew 17 percent; for FDIUS, the rate of increase was the largest since 1989. For both positions, a substantial portion of the growth was attributable to a surge in capital flows for new investments, which coincided with a global boom in mergers and acquisitions. Equity capital flows for acquiring or establishing new affiliates set new records by large margins. The dollar value of acquisition-related flows was boosted by high valuations in the equity markets of the United States and a number of other countries.

Favorable economic conditions in the United States, Europe, and Canada also contributed to the strong growth in the direct investment positions. The strength of these economies created strong incentives to invest there. Additionally, the earnings of parent companies in these areas remained at high levels and provided a source of funds for investment abroad.

Unfavorable economic conditions in a number of countries in Asia and Latin America did not appear to significantly affect either of the positions. The USDIA position continued to grow in these areas, as U.S. investors acquired new affiliates and increased their funding of existing ones. Depressed asset prices in several countries were an inducement to U.S. investors, despite declines in the earnings of foreign affiliates in those countries. The FDIUS position of parents in Asia expanded as parent companies in Japan--by far the largest source of Asian direct investment in the United States--continued to invest in their existing U.S. affiliates, even though problems in the Japanese economy curtailed Japanese investors' ability to finance new U.S. investments. The position of Latin American parents declined slightly; the decline was related to financial restructuring among affiliates with parents in the Caribbean.

The largest component of capital flows underlying the changes in both positions was equity capital, which includes the funds used to acquire and establish new affiliates and capital contributions to existing affiliates. Equity capital accounted for almost half of the total outflows for USDIA and over four-fifths of the total inflows for FDIUS.

U.S. Direct Investment Abroad

The U.S. direct investment position abroad valued at historical cost--the book value of U.S. direct investors' equity in, and net outstanding loans to, their foreign affiliates--was $980.6 billion at the end of 1998 (table 2 and chart 1). The largest positions remained those in the United Kingdom ($178.6 billion, or 18 percent of the total), in Canada ($103.9 billion, or 11 percent of the total), and in the Netherlands ($79.4 billion, or 8 percent of the total) (table 3.2 and chart 2).

[CHARTS 1-2 OMITTED]

Table 2.--U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the United States on a Historical-Cost Basis, 1982--98

 Millions of dollars
 Yearend U.S. direct Foreign direct
 investment investment
 position position in the
 abroad United States

1982 207,752 124,677
1983 212,150 137,061
1984 218,093 164,583
1985 238,369 184,615
1986 270,472 220,414
1987 326,253 263,394
1988 347,179 314,754
1989 381,781 368,924
1990 430,521 394,911
1991 467,844 419,108
1992 502,063 423,131
1993 564,283 467,412
1994 612,893 460,667
1995 699,015 535,553
1996 (r)795,195 (r)598,021
1997 (r)865,531 (r)693,207
1998 (p)980,565 (p)873,256

 Percent change from
 Yearend preceding year
 U.S. direct Foreign direct
 investment investment
 position position in the
 abroad United States

1982 ... ...
1983 2.1 9.9
1984 2.8 20.1
1985 9.3 12.2
1986 13.5 19.4
1987 20.6 19.5
1988 6.4 19.5
1989 10.0 17.2
1990 12.8 7.0
1991 8.7 6.1
1992 7.3 1.0
1993 12.4 10.5
1994 (1) (1)
1995 14.1 11.4
1996 13.8 11.7
1997 8.8 15.9
1998 13.3 17.1

(p) Preliminary.

(r) Revised.

(1.) The USDIA and FDIUS positions reflect a discontinuity between 1993 and 1994 due to the reclassification from direct investment to other investment accounts of intercompany debt between parent companies and affiliates that are nondepository financial intermediaries.

[TABULAR DATA 3.2 NOT REPRODUCIBLE IN ASCII]

In 1998, the USDIA position increased $115.0 billion, or 13 percent, following a 9-percent increase in 1997. The following table shows the change in position in 1998 by the type of capital flow and valuation adjustment:(2)

[Billions of dollars]

Total 115.0
 Capital inflows 121.6
 Equity capital 59.4
 Increases 79.9
 Decreases 20.4
 Intercompany debt 14.7
 Reinvested earnings 47.5
 Valuation adjustments -6.6
 Currency translation 0.7
 Other -7.3

Capital outflows for USDIA were a record $121.6 billion in 1998 (the previous record of $99.5 billion was set in 1997). Almost 50 percent of the outflows were accounted for by net equity capital outflows, which were up $15.5 billion from 1997; almost 40 percent was accounted for by reinvested earnings, which were down $3.7 billion; and the remainder was accounted for by intercompany debt outflows, which were up $10.3 billion.

Equity capital outflows reached a record $59.4 billion, up 35 percent from their 1997 levels. Equity capital increases, which result from equity investments by U.S. parents in both new and existing foreign affiliates, were $79.9 billion and primarily reflected acquisitions. These increases were partly offset by equity capital decreases of $20.4 billion; equity capital decreases result when U.S. parents sell off stock or other equity in their foreign affiliates and when foreign affiliates return invested capital to U.S. parents (transactions that are recorded as U.S. capital inflows).

Acquisition activity by U.S. direct investors was strong in 1998. Funds available to U.S. parent companies were plentiful as a result of rising equity markets and continued strong economic growth in the United States. In addition, relatively favorable economic conditions in the United Kingdom, Canada, and Australia, where a substantial portion of the acquisition activity was concentrated, increased the attractiveness of direct investments in these countries. Finally, several large acquisitions resulted from opportunities created by privatizations of electric utilities and telecommunications companies abroad. Acquisition activity was particularly strong in the United Kingdom, where there were substantial new investments in electric utilities, manufacturing, insurance, and services.

Although down 7 percent from a record level in 1997, reinvested earnings remained high at $47.5 billion in 1998, reflecting a pattern of strong earnings and high rates of reinvestment that began in 1995. In each year during 1995-98, total earnings exceeded $85 billion, and the share that was reinvested was at least 50 percent, well above the 35-percent average share in 1982-94. In 1998, the share was 53 percent.

The 7-percent decline in reinvested earnings mirrored an even sharper decline in earnings. Both declines were centered in Asia and Latin America--particularly in some countries where economic conditions deteriorated significantly, such as Japan, Malaysia, Indonesia and Brazil. Earnings and reinvested earnings also declined in Australia and Mexico, partly because the depreciation of their currencies lowered the value of these items in terms of U.S. dollars.

The intercompany debt outflows primarily resulted from increased lending by parents to their foreign affiliates. These outflows were more than accounted for by outflows to Europe, particularly to the United Kingdom, the Netherlands, and Ireland.

The capital outflows were partly offset by a $6.6 billion downward adjustment to the value of the position. Several foreign affiliates were acquired by U.S. direct investors for more than book value, so a downward adjustment was necessary to reconcile the purchase price, which is reflected in capital outflows (and would otherwise determine the measured change in position), with the book values used in computing the historical-cost position. (See valuation adjustments in the box "Key Terms.")

Changes by country

More than half of the $115.0 billion increase in the USDIA position in 1998 was accounted for by increases in Europe. Major changes in the position by area and by country are shown in the following table:

[Billions of dollars]

All countries 115.0

 Europe 69.4
 Of which:
 United Kingdom 25.5
 Netherlands 15.0
 Switzerland 6.2

 Latin America and Other Western Hemisphere 18.1
 Of which:
 Panama 5.9
 Bermuda 3.4
 Brazil 2.7
 Mexico 1.7

 Asia and Pacific 15.2
 Of which:
 Japan 4.4
 Australia 3.8

Canada 7.9

The position in Europe increased 17 percent. Within Europe, the United Kingdom had by far the largest increase, followed by the Netherlands and Switzerland. In the United Kingdom, equity investments to acquire companies were substantial, especially in "other industries" (primarily electric utilities); manufacturing (primarily transportation equipment); finance (except depository institutions), insurance and real estate (FIRE) (primarily insurance); and services. U.S. parent companies are attracted to the United Kingdom because of its large, prosperous market and because of the similarity of its business culture, legal framework, and language to that of the United States; in addition, the United Kingdom is often used as a springboard for investing elsewhere in Europe. In both the Netherlands and Switzerland, a large portion of the increase in the position was accounted for by reinvested earnings--particularly those of holding companies classified in FIRE, which, in turn, reflected strong earnings of operating affiliates held by these companies.

The position in Latin America and Other Western Hemisphere increased 10 percent; the increase was almost entirely in capital outflows, mostly equity capital. Within the area, the largest increases were in Panama, Bermuda, Brazil, and Mexico. In Panama, the increase consisted largely of valuation adjustments, mainly reflecting capital gains in FIRE. In Bermuda, the increase consisted largely of reinvested earnings of holding companies in FIRE and reflected earnings of operating affiliates located in other countries. In Brazil, the increases were largely in new investments in electric utility and telecommunications companies (classified in "other industries") that were made in response to opportunities created by privatizations. In Mexico, the largest increases were in FIRE and in "other industries" (primarily retail trade and telecommunications) and were split between reinvested earnings and equity capital outflows.

The position in Asia and Pacific increased 10 percent; the largest increases were in Japan and Australia. In Japan, by far the largest increase was in FIRE. In Australia, most of the increase was in equity capital outflows for acquisitions of new affiliates in FIRE.

The position in Canada increased 8 percent. More than 80 percent of the increase was accounted for by equity capital. By industry, the largest increases were in "other industries" (primarily retail trade), "other manufacturing" (primarily paper and allied products), FIRE, and petroleum.

Foreign Direct Investment in the United States

The foreign direct investment position in the United States valued at historical cost--the book value of foreign direct investors' equity in, and net outstanding loans to, their U.S. affiliates--was $811.8 billion at the end of 1998 (table 2 and chart 1). The largest position remained that of the United Kingdom, ($151.3 billion, or 19 percent of the total), which widened its margin over Japan, the country with the second-largest position ($132.6 billion, or 16 percent). The Netherlands had the third largest position ($96.9 billion, or 12 percent), slightly ahead of Germany ($95.0 billion, or 12 percent) (table 4.2 and chart 3).

[CHART 3 OMITTED]

[TABULAR DATA 4.2 NOT REPRODUCIBLE IN ASCII]

In 1998, the FDIUS position increased $118.5 billion, or 17 percent, following an increase of 16 percent in 1997. Two exceptionally large transactions contributed to the overall increase. The two transactions--each of which significantly exceeded the size of any previous single investment--involved the acquisition of a petroleum company and the acquisition of a motor vehicle manufacturer by foreign firms in the same industries as the acquired firms.(3) Both transactions were accomplished by exchanging stock; the shareholders of the premerger firms exchanged their stock for stock in the new foreign firms that were created through the mergers. Taken together, these exchanges resulted in large, but almost entirely offsetting, capital flows in the U.S. balance of payments: The large capital inflows on direct investment that resulted from the foreign investors' acquisition of stock of the U.S. companies were offset by the capital outflows on foreign securities that resulted from the U.S. stockholders receiving the stock of the newly established foreign firms.(4)

The two transactions significantly affected the positions in petroleum and manufacturing. In petroleum, the position expanded 27 percent, following several years of almost no growth. (The annual growth rate in 1987--97 was I percent.) The acquisition also changed the parent-country composition of the position in petroleum; roughly half was accounted for by the United Kingdom at yearend 1998, compared with slightly more than a fourth at yearend 1997. The acquisition of the automobile manufacturer contributed to a 21-percent increase in the position in manufacturing, nearly twice the annual growth rate in 1987-97.

Although these two transactions accounted for nearly a fourth of the overall increase, growth in the position would have been 13 percent even without them. Investment in the United States was indirectly boosted by the recessionary conditions in some other parts of the world and by a perceived widening of the risk differential between investing in the United States and investing in many developing countries. In particular, economic difficulties in Asia and Latin America caused some foreign direct investors to place a high value on the "safe harbor" provided by the economic stability of the United States. Growth in the position also reflected favorable economic conditions in Europe and Canada, which helped parents from those areas to acquire affiliates in the United States and to contribute additional capital to their existing U.S. affiliates.

Although the economic situation deteriorated sharply in Japan, capital flows from Japanese parents to their existing U.S. affiliates continued, resulting in a 6-percent increase in Japan's direct investment position in the United States. However, because of the weakness of the Japanese economy, Japanese investments in new U.S. affiliates remained at historically low levels.

The following table shows the change in the FDIUS position in 1998 by type of capital flow and valuation adjustment:

[Billions of dollars]

Total 118.5
 Capital inflows 189.0
 Equity capital 154.2
 Increases 176.0
 Decreases 21.8
 Intercompany debt 26.4
 Reinvested earnings 8.4
 Valuation adjustments -70.4
 Currency translation (*)
 Other -70.4

(*) Less than $500,000.

Capital inflows for FDIUS were a record $189.0 billion in 1998 (the previous record of $105.5 billion was set in 1997). Most--82 percent--of the capital inflows were net inflows of equity capital ($154.2 billion). The rest were accounted for by intercompany debt flows ($26.4 billion) and reinvested earnings ($8.4 billion). The capital inflows were partly offset by a substantial downward adjustment--$70.4 billion--to the value of the position, which was primarily related to the two large transactions. Both the petroleum company and the motor vehicle manufacturer were acquired by foreign direct investors for considerably more than book value; the downward adjustment was made to reconcile the transactions values of the acquisitions, which are reflected in capital inflows (and would otherwise determine the measured change in position), with the much smaller book values that are recorded in the historical-cost position.

Total acquisition activity by foreign direct investors was at record levels and coincided with a sharp increase in overall merger and acquisition activity in the United States.(5) A general factor behind the surge in acquisitions was the desire to reduce costs through economies of scale in response to heightened global competition. In addition, the desire of foreign investors to gain access to the advanced and growing technological capability of the United States led to a number of acquisitions of telecommunication and information-related businesses. (Funds provided by foreign parents for such acquisitions exceeded $25 billion.) High valuations in the U.S. equity markets boosted the dollar value of acquisition-related inflows.

Equity capital inflows--the net of equity capital increases and equity capital decreases reached a record $154.2 billion, more than double the previous record of $64.7 billion in 1997. Equity capital increases--at $176.0 billion--reflected the acquisitions of U.S. businesses by foreigners and additional equity contributions to existing U.S. affiliates. These increases were partly offset by equity capital decreases--at $21.8 billion which reflected selloffs of affiliates by, and returns of capital to, foreign direct investors (transactions that are recorded as U.S. capital outflows).

Intercompany debt inflows were $26.4 billion, up from $24.3 billion. More than half of the inflows were from parents in Luxembourg and were partly related to several acquisitions in manufacturing and services.

Reinvested earnings were $8.4 billion in 1998--about half their level in 1997. The decrease primarily reflected a drop in earnings, but a lower rate of reinvestment also contributed. Earnings fell $5.5 billion; the drop was more than accounted for by petroleum and finance (except depository institutions). The decrease in petroleum reflected the drop in oil prices. In finance, earnings shifted to losses; more than half of this shift was accounted for by Swiss-owned investment firms that were restructuring. The share of earnings that were reinvested was 30 percent, down from an unusually high 49 percent in 1997 but in line with an average rate of 32 percent in 1994-96. Reinvested earnings were negative in food manufacturing, finance, petroleum, real estate, and "other industries" (Negative reinvested earnings are recorded when affiliates incur losses or distribute earnings to their foreign parents in excess of their current earnings.)

Changes by country

Almost all--90 percent--of the $118.5 billion increase in the FDIUS position in 1998 was accounted for by parents in Europe. Within Europe, the largest dollar increase was in the position of parents in Germany, followed by the positions of parents in the United Kingdom, Switzerland, Luxembourg, and France. Outside Europe, the largest increases were by parents in Japan and Canada. Major changes in the positions by area and by country are shown in the following table:

[Billions of dollars]

All countries 118.5

 Europe 107.3
 Of which:
 Germany 23.8
 United Kingdom 20.0
 Switzerland 15.7
 Luxembourg 14.9
 France 12.7

 Asia and Pacific 7.0
 Of which:
 Japan 7.4

Canada 5.0

The position of Germany increased 33 percent. Most of this increase was accounted for by the acquisition of the motor vehicle manufacturer. This acquisition substantially changed the industry composition of Germany's position; more than half was accounted for by manufacturing at yearend 1998. Germany's overall position was also increased by additional equity investments in existing affiliates that are depository institutions.

The acquisition of a major petroleum company accounted for most of the increase in the United Kingdom's overall position and was the primary factor behind a more than twofold increase in its position in petroleum. The overall position was also increased by additional equity investments in existing affiliates in manufacturing, petroleum, wholesale trade, finance, and services (some of which financed acquisitions by these affiliates) and by reinvested earnings of affiliates in manufacturing (particularly chemicals), services, and wholesale trade. These increases were partly offset by equity capital outflows and downward adjustments to the position that were related to sell-offs of telecommunications and insurance affiliates.

The position of Swiss parents increased 41 percent. Nearly two-thirds of the increase was in insurance. Swiss investors acquired a number of U.S. insurance companies, some from foreign parents in other countries.(6) In addition, Swiss parents contributed substantial capital to their existing insurance affiliates. These changes--which more than doubled Switzerland's position in insurance--reflected Swiss insurers' desires to consolidate into larger, more efficient units and to become better able to spread risks.

The position of Luxembourg parents nearly quadrupled; the increase reflected intercompany borrowing by affiliates in manufacturing and to a lesser extent--services. In both industries, the borrowing was related to the acquisitions of new U.S. affiliates.

The increase in the position of French parents was concentrated in machinery, "other manufacturing" and chemicals. The increase in machinery resulted from acquisitions of telecommunications equipment businesses; the increase in "other manufacturing" resulted from capital contributions to existing affiliates; and the increase in chemicals resulted from affiliate borrowing from foreign parents.

More than three-fourths of the increase in the position of Japanese parents was accounted for by equity capital contributions to existing affiliates. These capital contributions were concentrated in the three industries that account for the largest shares of Japan's position--wholesale trade, finance (except depository institutions), and "other manufacturing." Reinvested earnings in "other manufacturing" also boosted the position.

The increase in the position of Canadian parents was more than accounted for by equity capital inflows, which were the third largest of any country. By industry, the largest increases in the position were in "other industries," finance, real estate, and machinery.

Tables 3 and 4 follow.

[TABULAR DATA 3.1, 4.1 NOT REPRODUCIBLE IN ASCII]

Key Terms

Below are definitions and descriptions of some of the key terms used in this article. For a more detailed discussion of these terms and the methodologies used to prepare the estimates, see Foreign Direct Investment in the United States: 1992 Benchmark Survey, Final Results (Washington, DC: U.S. Government Printing Office, 1995) and U.S. Direct Investment Abroad: 1994 Benchmark Survey, Final Results (Washington, DC: U.S. Government Printing Office, 1998).

Direct investment. Investment in which a resident of one country obtains a lasting interest in, and a degree of influence over the management of, a business enterprise in another country. In the United States, the criterion used to distinguish direct investment from other types of investment is ownership of at least 10 percent of the voting securities of an incorporated business enterprise or the equivalent interest in an unincorporated business enterprise.

U.S. direct investment abroad (USDIA). The ownership or control, directly or indirectly, by one U.S. resident of 10 percent or more of the voting securities of an incorporated foreign business enterprise or the equivalent interest in an unincorporated foreign business enterprise.

Foreign direct investment in the United States (FDIUS). The ownership or control, directly or indirectly, by one foreign resident of 10 percent or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise.

Foreign affiliate. A foreign business enterprise in which a single U.S. investor (that is, a U.S. parent) owns at least 10 percent of the voting securities, or the equivalent.

U.S. affiliate. A U.S. business enterprise in which a single foreign investor (that is, a foreign parent) owns at least 10 percent of the voting securities, or the equivalent.

Direct investment capital flows. Funds that parent companies provide to their affiliates net of funds that affiliates provide to their parents. For USDIA, capital flows also include the funds that U.S. direct investors pay to unaffiliated foreign parties when affiliates are acquired and the funds that U.S. investors receive from them when affiliates are sold. Similarly, FDIUS capital flows include the funds that foreign direct investors pay to unaffiliated U.S. residents when affiliates are acquired and the funds that foreign investors receive from them when affiliates are sold.

Direct investment capital flows consist of equity capital, intercompany debt, and reinvested earnings. Equity capital flows are the net of equity capital increases and decreases. Equity capital increases consist of payments made by parents to third parties for the purchase of capital stock when they acquire an existing business, as well as funds that parents provide to their affiliates that increase their ownership interest in the affiliates. Equity capital decreases are funds parents receive when they reduce their equity interest in existing affiliates. Intercompany debt flows result from changes in net outstanding loans and trade accounts between parents and their affiliates; they include loans by parents to affiliates and loans by affiliates to parents. Reinvested earnings are the parents' claim on the undistributed after-tax earnings of the affiliates.

Direct investment position. The value of direct investors' equity in, and net outstanding loans to, their affiliates. The position may be viewed as the parents' contributions to the total assets of their affiliates or as the financing provided in the form of equity (including reinvested earnings) or debt by parents to their affiliates. Financing obtained from other sources, such as local or foreign third-party borrowing, is excluded.

BEA provides estimates of the positions for USDIA and for FDIUS that are valued on three bases--historical cost, current cost, and market value. At historical cost, the positions are valued according to the values carried on the books of affiliates; thus, most investments reflect price levels of earlier time periods. At current cost, the portion of the position representing parents' shares of their affiliates' tangible assets (property, plant, and equipment and inventories) is revalued from historical cost to replacement cost. At market value, the owners' equity portion of the position is revalued to current market value using indexes of stock prices.

Valuation adjustments to the historical-cost position. Adjustments to account for the differences between changes in the position, which are measured at book value, and direct investment capital flows, which are measured at transactions value. (Unlike the positions on a current-cost and market-value basis, the historical-cost position is not adjusted to account for changes in the replacement cost of the tangible assets of affiliates or in the market value of parent companies' equity in affiliates.)

Valuation adjustments to the historical-cost position consist of currency translation and "other" adjustments. Currency-translation adjustments are made to account for changes in the exchange rates that are used to translate affiliates' foreign-currency-denominated assets and liabilities into U.S. dollars. The precise effects of currency fluctuations on these adjustments depend on the value and currency composition of affiliates' assets and liabilities. Depreciation of foreign currencies against the dollar usually results in negative translation adjustments because it tends to lower the dollar value of foreign-currency-denominated net assets. Similarly, appreciation of foreign currencies usually results in positive adjustments because it tends to raise the dollar value of foreign-currency-denominated net assets.

"Other" adjustments are made to account for differences between the proceeds from the sale or liquidation of affiliates and their book values, for differences between the purchase prices of affiliates and their book values, for writeoffs resulting from uncompensated expropriations of affiliates, for changes in industry of affiliate or country of foreign parent, and for capital gains and losses (other than currency translation adjustments). These capital gains and losses represent the revaluation of the assets of ongoing affiliates for reasons other than exchange-rate changes, such as the partial sale of the assets for an amount different from their historical cost.

Acknowledgments

The data for the U.S. direct investment position abroad were drawn from a survey that was conducted under the supervision of Mark W. New, assisted by Jennifer C. Chilzer, Laura A. Downey, Javier J. Hodge, Marie K. Laddomada, Sherry Lee, Leila C. Morrison, Gary M. Solamon, and Dwayne Torney. Computer programming for data estimation and tabulation was provided by Marie Colosimo and Arnold Gilbert.

The data for the foreign direct investment position in the United States were drawn from a survey that was conducted under the supervision of Gregory G. Fouch, assisted by Howard S. Chenkin, Peter J. Fox, Tracy K. Leigh, Beverly E. Palmer, and Linden L. Webber. Computer programming for data estimation and tabulation was provided by Karen E. Poffel, assisted by Fritz H. Mayhew.

(1.) The current-cost and market-value estimates are discussed in "The International Investment Position of the United States in 1998" in this issue.

(2.) Valuation adjustments to the historical-cost position are made to account for differences between changes in the position, measured at book value, and capital flows, measured at transactions value (see the box "Key Terms").

(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 USDIA position was not affected by these two transactions, because the exchanges of stock did not result in any single U.S. investor owning as much as 10 percent of the shares of the new foreign firms.

(5.) See Mahnaz Fahim-Nader, "Foreign Direct Investment in the United States: New Investment in 1998" SURVEY or CURRENT BUSINESS 79 (June 1999): 16-23. Preliminary data from BEA's survey of new foreign direct investments, summarized in that article, indicate that total outlays to acquire or establish U.S. businesses, including those financed by capital inflows from foreign parents, were up 188 percent to $201.0 billion in 1998, following a 13-percent decrease in 1997. These data cover only transactions involving U.S. businesses newly acquired or established by foreign direct investors and include financing other than that from the foreign parent, such as local borrowing by existing U.S. affiliates. In contrast, the changes in the FDIUS position described in this article reflect transactions of both new and existing U.S. affiliates with their foreign parents or other members of the foreign parent group and valuation adjustments, and exclude financing not provided by the foreign parent.

Notwithstanding these differences, the two types of data are related. Any outlays to acquire or establish U.S. businesses that are funded by foreign parent groups are part of capital inflows for FDIUS, a component of the change in the position. Data from the new investments survey indicate that foreign parent groups funded $155.3 billion, or 77 percent, of outlays to acquire or establish new U.S. affiliates in 1998, compared with $37-4 billion, or 54 percent, in 1997.

(6.) The acquisition of a U.S. affiliate by a foreign parent in one country from a foreign parent in another country is recorded as an upward adjustment (positive valuation adjustment) to the position of the acquiring country that is offset by a downward adjustment (negative valuation adjustment) to the position of the selling country.3