Direct investment positions for 1997; country and industry detail.

Bargas, Sylvia E.

The country and industry detail underlying the positions of U.S. direct investment abroad (USDIA) and foreign direct investment in the United States (FDIUS) are prepared on a historical-cost basis; thus, the estimates reflect prices at the time of investment rather than prices of the current period.(1) Because of inflation, the estimates prepared on this basis tend to understate the current value of the positions. Table 1 shows the revised estimates of the positions for 1996 and preliminary estimates for 1997 on the historical-cost basis and in terms of two measures of current prices--current cost and market value--that correct for this downward bias. In 1997, the USDIA and FDIUS positions on a historical-cost basis were $860.7 billion and $681.7 billion, respectively, compared with $1,023.9 billion and $751.8 billion on a current-cost basis and $1,793.7 billion and $1,620.5 billion on a market-value basis. The current-cost and market-value estimates--which are available only at an aggregate level--are discussed in "The International Investment Position of the United States in 1997" in this issue.

Table 1.--Alternative Direct Investment Position Estimates, 1996 and 1997 [Millions of dollars]

 Changes in 1997 (decrease (-))
 Position
 at Valuation
Valuation method yearend Capital adjust-
 1996(r) Total flows ment's

U.S. direct Investment
abroad:
 Historical cost 777,203 83,521 114,537 -31,016
 Current cost 936,954 86,918 121,843 -34,925
 Market value 1,517,084 276,596 121,843 154,753

Foreign direct
investment in the
United Sates:
 Historical cost 594,088 87,563 90,748 -3,185
 Current cost 666,962 84,883 93,449 -8,566
 Market value 1,223,672 396,868 93,449 303,419

 Position
 at
Valuation method yearend
 1997 (p)

U.S. direct Investment
abroad:
 Historical cost 860,723
 Current cost 1,023,872
 Market value 1,793,680

Foreign direct
investment in the
United Sates:
 Historical cost 681,651
 Current cost 751,845
 Market value 1,620,540

(p) Preliminary.

(r) Revised.

On a historical-cost basis, the USDIA position grew 11 percent in 1997, and the FDIUS position grew 15 percent; for FDIUS, the rate of increase was the largest since 1989. The growth in both measures was largely attributable to favorable economic conditions in the United States, in several European countries, and in Canada. The favorable conditions enhanced the profit potential of direct investments in those countries and boosted the earnings of affiliates and their parents. Strong earnings by affiliates, coupled with unusually high rates of reinvestment, generated readily available financing in the form of reinvested earnings. Strong earnings by parents provided a source of funds for new investments and reduced the parents' need to draw funds from affiliates.

In contrast, economic conditions were unfavorable in much of Asia; currency values, stock prices, and financial asset values declined, particularly during the last half of the year. For USDIA, the increase in the position was dampened somewhat by large negative currency-translation adjustments, and a reduction in the dollar value of reinvested earnings, among affiliates in Asia. For FDIUS, new investment from Japan dropped considerably; however, inflows of capital from Japanese parents to their existing U.S. affiliates remained strong. Additionally, the financial problems in Asia may have resulted in some investments in the United States that otherwise Would have been made in that area.

In addition, the growth in the positions was affected by factors that are specific to particular industries. For USDIA, U.S. utility companies--energy providers and telephone companies--acquired several foreign companies, largely in response to the new investment opportunities created by privatizations of Government-owned utilities abroad. For FDIUS, foreign insurance companies' desire to diversify risk and to consolidate into larger, more efficient units led to acquisitions of U.S. insurance companies. Both direct investment positions were boosted by acquisitions of investment companies, reflecting the trend towards integration of the global securities markets and the recent growth in the equity markets in the United States and Europe.

The capital flows underlying the changes in the two positions differed in composition. As in previous years, the largest component of capital outflows for USDIA was reinvested earnings, which tend to be used mainly to finance the ongoing operations of foreign affiliates.(2) The largest component of capital inflows for FDIUS continued to be equity capital, which includes capital contributions to existing U.S. affiliates and funds used to acquire and establish new U.S. affiliates.(3)

Revisions of USDIA and FDIUS estimates.--The position estimates for 1994-96 reflect revisions from two sources. First, for USDIA, the estimates for 1994 incorporate the data collected in BEA's 1994 benchmark survey of U.S. direct investment abroad, which covered the universe of USDIA. For years after 1994, the estimates have been benchmarked to (that is, extrapolated from) that survey and include new or corrected data from BEA'S quarterly sample survey. Previously, the estimates for 1994-96 were benchmarked to the 1989 benchmark survey of USDIA.

Second, for both USDIA and FDIUS, the estimates for 1994-96 exclude intercompany debt between parent companies and their affiliates that are nondepository financial intermediaries. This debt, which was previously classified as direct investment, is now grouped with transactions with unaffiliated foreigners reported by U.S. nonbank concerns.(4)

Change in industry designation.--For USDIA, the industry that was previously designated "banking" is now designated "depository institutions," and the industry that was previously designated "finance, except banking" is now designated "finance, except depository institutions."

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 $860.7 billion at the end of 1997 (table 2 and chart 1). The largest positions remained those in the United Kingdom ($138.8 billion, or 16 percent of the total), in Canada ($99.9 billion, or 12 percent of the total), and in the Netherlands ($64.6 billion, or 8 percent of the total) (table 3.2 and chart 2).

Table 2.--U.S. Direct Investment Position Abroad and Foreign Direct Investment Position in the United States on a Historical-Cost Basis, 1982-97

 Millions of dollars

 Yearend U.S. direct Foreign direct
 investment
 investment position in the
 position 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 (r)612,893 (r)480,667
1995 (r)699,015 (r)535,553
1996 (r)777,203 (r)594,088
1997 (p)860,723 (p)681,651

 Percent change from
 preceding year

 Yearend
 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 11.2 10.9
1997 10.7 14.7

(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.

[CHART OMITTED]

In 1997, the USDIA position increased $83.5 billion, or 11 percent--the same rate as in 1996. The following table shows the change in position in 1997 by the type of capital flow and valuation adjustment:(5)

 [Billions of dollars]

Total 83.5
 Capital outflows 114.5
 Equity capital 45.7
 Intercompany debt 11.8
 Reinvested earnings 57.0
 Valuation adjustments -31.0
 Currency translation -23.1
 Other -7.9
 Of which:
 Capital gains and losses 9.6

Capital outflows were at record levels in 1997 (the previous record was set in 1995). Half of the outflows were accounted for by reinvested earnings, which were up $8.7 billion; the other half was accounted for by net equity capital outflows, which were up $20.7 billion, and by intercompany debt outflows, which were up $10.4 billion.

Reinvested earnings reflected strong affiliate earnings and high rates of reinvestment. As a result of the expanded earnings base that reflected large increases in the position in recent years, the earnings of affiliates reached a record level in 1997, despite the U.S. dollar's appreciation against several major currencies, which reduced earnings in dollar terms. Additionally, the share of affiliate earnings that was reinvested (rather than distributed to owners) was unusually high--58 percent; the share was 54 percent in 1996 and averaged 38 percent in 1982-95.

Equity capital outflows--the net of equity capital increases and equity capital decreases--also reached a new record (the previous record was set in 1995). Equity capital increases rose sharply, reflecting acquisitions and, to a lesser extent, capital contributions to existing affiliates. In contrast, equity capital decreases rose only slightly, reflecting increased sales of affiliates by, and returns of capital to, U.S. direct investors (these transactions are recorded as U.S. capital inflows).

Acquisition activity by U.S. direct investors was strong. Rising equity prices in the United States increased the wealth of U.S. investors, enhancing their ability to fund acquisitions. Additionally, foreign acquisitions were less expensive for U.S. investors because of the appreciation of the U.S. dollar against several foreign currencies. Some of the largest transactions involved acquisitions of investment firms; as noted, these acquisitions may have been spurred by growth in, and increased integration of, the U.S. and European equity markets. As in 1995-96, there were also several acquisitions of energy providers and telephone companies as a result of opportunities created by the recent privatizations of Government-owned utilities abroad.

The increase in intercompany debt outflows was more than accounted for by increased lending by parents to their foreign affiliates.

The capital outflows were partly offset by negative valuation adjustments of $31.o billion, three-fourths of which was accounted for by negative currency-translation adjustments resulting from the U.S. dollar's appreciation against several foreign currencies. The appreciation of the dollar against the Japanese yen and several other Asian currencies was particularly large.

Changes by country

The $83.5 billion increase in the USDIA position in 1997 was concentrated in Europe and Latin America, which together accounted for over three-fourths of the total increase. Major changes in the position by area and by country are shown in the following table:

 [Billions of dollars]

 All countries 83.5

Europe 38.6
 Of which:
 United Kingdom 16.1
 Netherlands 10.2
 Switzerland 5.0
 Ireland 4.3

Latin America and Other Western Hemisphere 24.9
 Of which:
 Brazil 7.0
 Mexico 5.5
 Panama 4.9

Canada 8.6

Asia and Pacific 6.2
 Of which:
 Hong Kong 4.4
 Singapore 3.5

The position in Europe increased 10 percent and accounted for nearly half of the increase worldwide. Capital outflows of $60.6 billion were partly offset by negative valuation adjustments of $22.0 billion. Within Europe, the largest increase was in the United Kingdom, followed by the Netherlands, Switzerland, and Ireland. In each of the four countries, a substantial portion of the increase was accounted for by holding companies--classified within finance (except depository institutions), insurance, and real estate ("FIRE"); these increases reflected strong earnings of the operating affiliates held by the holding companies. For the United Kingdom and the Netherlands, the increases in the position in holding companies also reflected substantial new investments by U.S. parent companies. In the case of the Netherlands holding companies, the new investments were primarily in operating affiliates in Asia. In the case of the British holding companies, the new investments were in investment companies in several geographic areas.

In addition to the new investments channeled through holding companies, the equity capital outflows for other acquisitions in the United Kingdom, Switzerland, and Ireland were substantial. In the United Kingdom, large outflows were related to the acquisitions of water transportation and telephone companies (both in "other industries") and beverage makers (in food manufacturing). In Switzerland, substantial outflows resulted from the acquisitions of banks (in depository institutions). In Ireland, large outflows resulted from the acquisitions of investment companies (in FIRE).

The position in Latin America and Other Western Hemisphere increased 17 percent as a result of capital outflows of $23.8 billion and positive valuation adjustments of $1.2 billion. Within the area, the largest increases were in Brazil, Mexico, and Panama.

In Brazil, the largest increases were in "other industries" and FIRE. In "other industries," the increase reflected acquisitions of telephone companies. In FIRE, the increase was related to the acquisitions of insurance companies; these acquisitions appear to have been motivated both by U.S. insurers' desire to access Brazil's rapidly growing insurance market and by Government policy that has become more open to such investments by foreigners.

The largest increases in Mexico were in FIRE, "other industries" (primarily retail trade), and food manufacturing. The increase in FIRE primarily reflected reinvested earnings of holding companies; the increases in retail trade and food manufacturing reflected equity capital outflows for acquisitions.

In Panama, the increase reflected the capital gains and the reinvested earnings of affiliates in FIRE.

The position in Canada increased 9 percent. In dollar terms, the increase was the third-largest of any country. Two-thirds of the increase was accounted for by reinvested earnings. By industry, the largest increases were in transportation equipment manufacturing, rare, and petroleum.

The position in Asia and Pacific increased 5 percent, the smallest percentage increase of any major area. Capital outflows of $13.8 billion were substantially offset by negative valuation adjustments of $7.6 billion. The valuation adjustments were more than accounted for by currency-translation adjustments resulting from the sharp depreciation of several Asian currencies against the U.S. dollar.

Within Asia and Pacific, the largest increases in positions were in Hong Kong and Singapore. In Hong Kong, the increase resulted from acquisition-related U.S. outflows of equity capital, reflecting the global expansion by U.S. utility companies. In Singapore, most of the increase resulted from reinvested earnings--particularly in industrial machinery and electronic equipment. The increases in Hong Kong and Singapore were partly offset by decreases elsewhere in Asia and Pacific, particularly Australia and Thailand.

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 $681.7 billion at the end of 1997 (table 2 and chart 1). The largest positions remained those of the United Kingdom ($129.6 billion, or 19 percent of the total), Japan ($123.5 billion, or 18 percent), and the Netherlands ($84.9 billion, or 12 percent) (table 4.2 and chart 3).

[CHART OMITTED]

In 1997, the FDIUS position increased $87.6 billion, or 15 percent, following an increase of 11 percent in 1996. The strong increase in the position reflected favorable economic conditions in the United States, Europe, and Canada. Growth in the U.S. economy attracted new investments from abroad and expanded the earnings of existing U.S. affiliates. As a result of economic growth in Europe and Canada, parents from those areas were able to make new investments in the United States and to contribute additional capital to their existing U.S. affiliates.

In contrast, economic growth slowed substantially (or, in some countries, turned negative) in Asia. In Japan, financial problems made it difficult for Japanese investors--who in recent years have accounted for a large share of foreign investment in the United States--to finance new overseas investments. Japanese investors' outlays to acquire or establish U.S. businesses fell 79 percent in 1997; this drop was the most significant factor underlying the decrease in foreign investors' total outlays to acquire or establish U.S. businesses.(6) However, this factor's effect on the FDIUS position was overshadowed by an increase in capital flows from Japanese parents to their existing affiliates, which resulted in an 8-percent increase in Japan's direct investment position in the United States. Additionally, financial difficulties in Asia may have indirectly boosted investment in the United States by reducing the attractiveness of potential investments in Asia.

The following table shows the change in the FDIUS position in 1997 by type of capital flow and valuation adjustment:(7)

 [Billions of dollars]

 Total 87.6
 Capital inflows 90.7
 Equity-capital 46.5
 Intercompany debt 24.4
 Reinvested earnings 19.8
 Valuation adjustments -3.2
 Currency translation -1.3
 Other -1.9
 Of which:
 Capital gains and losses 3.5

Capital inflows for foreign direct investment in the United States were a record $90.7 billion in 1997, up from $76.5 billion in 1996. Net inflows of equity capital were down $8.9 billion from 1996, but they still accounted for about half of total capital inflows in 1997. The other half was accounted for by intercompany debt flows, which were up $13.4 billion, and by reinvested earnings, which were up $9.8 billion.

Equity capital inflows--the net of equity capital increases and equity capital decreases--were $46.5 billion, down from $55.4 billion in 1996. Equity capital increases fell, reflecting reduced capital contributions to existing U.S. affiliates and a reduction in acquisitions of U.S. businesses by foreigners. However, equity capital decreases also fell, reflecting reduced sales of affiliates by, and returns of capital to, foreign direct investors.(8)

Total acquisition activity by foreign direct investors was lower in 1997 than in 1996, but it was still strong. By industry, capital inflows for acquisitions were largest in chemicals--particularly pharmaceuticals--reflecting the trend towards global consolidation of the pharmaceutical industry. Inflows for acquisitions were also large in services and in insurance.

Intercompany debt inflows were $24.4 billion, up from $11.0 billion. The increase primarily reflected increased borrowing by affiliates from their foreign parents, but reduced lending by affiliates to their foreign parents also contributed.

Reinvested earnings were a record $19.8 billion in 1997--almost double the record set in 1996. All industries except real estate and services had positive reinvested earnings. The increase reflected record earnings that were $9.8 billion higher than in 1996 and an unusually high rate of reinvestment.(9) To some extent, the high level of earnings reflected an increase in affiliates' rate of return on equity that resulted from the strength of the U.S. economy and, possibly, from a tendency for profitability to improve as affiliates--many of which were acquired or established in the last several years--become older and gain more experience. It also reflected an expanded earnings base, resulting from the large increases in the FDIUS position in recent years. Earnings increased in almost all industries; the largest increases were in insurance and machinery manufacturing.

Changes by country

The $87.6 billion increase in the FDIUS position in 1997 was concentrated among parents in Europe; outside Europe, the largest increases were by parents in Canada and Japan. Major changes in the positions by area and by country are shown in the following table:

 [Billions of dollars]

 All countries 87.6

 Europe 56.9
 Of which:
 Netherlands 10.5
 Germany 9.8
 United Kingdom 8.3
 Switzerland 8.2
 France 6.0

 Asia and Pacific 13.1
 Of which:
 Japan 9.0
 Australia 2.4

 Canada 9.2

The position of European investors increased 15 percent and accounted for nearly two-thirds of the overall increase in 1997, reflecting the large number of mature companies in Europe that have the ability and resources to take advantage of investment opportunities beyond their national and regional borders. Within Europe, the largest dollar increase was in the position of parents in the Netherlands, followed by parents in Germany, the United Kingdom, Switzerland, and France.

Nearly two-thirds of the increase in the position of parents in the Netherlands was accounted for by equity capital inflows, which were the largest of any country; the rest of the increase was largely accounted for by reinvested earnings. By industry, insurance accounted for nearly half of the overall increase. The increase in insurance resulted from acquisitions and capital contributions to existing affiliates.

The largest increases in the position of Germany were in "other manufacturing" (particularly medical instruments and supplies), wholesale trade, and depository institutions. The increases in medical instruments and in wholesale trade reflected borrowing by affiliates. In depository institutions, the increase reflected capital contributions to existing affiliates.

The largest increases in the position of British parents were in insurance, wholesale trade, and metals. The increases in insurance and in metals primarily reflected valuation adjustments that were due to capital gains on insurers' investment portfolios and industry reclassifications. In wholesale trade, the increase reflected equity capital contributions to existing affiliates, affiliate borrowing, and repayment of loans by parents.

More than two-thirds of the increase in the position of Swiss parents was accounted for by intercompany debt inflows that reflected borrowing by affiliates in chemical manufacturing and, to a lesser extent, in insurance. Valuation adjustments--in wholesale trade and insurance--also contributed to the increase.

The largest increases in the position of French parents were in chemical manufacturing (particularly pharmaceuticals), food manufacturing, and finance. The increase in pharmaceuticals resulted from equity capital inflows for acquisitions, reflecting the trend toward global consolidation of the pharmaceutical industry. In food manufacturing and finance, the increase resulted from affiliate borrowing.

More than half of the increase in the position of Japanese parents was accounted for by equity capital inflows--primarily capital contributions to existing affiliates rather than acquisitions (as noted earlier, acquisitions by Japanese investors declined substantially). By industry, the increase was concentrated in wholesale trade and in services. In wholesale trade, the increase reflected equity capital contributions to existing affiliates, reinvested earnings, and valuation adjustments. The increase in services reflected valuation adjustments.

The increase in the position of Australian parents was more than accounted for by services, reflecting valuation adjustments, acquisition-related equity capital inflows, and affiliate borrowing.

More than half of the increase in the position of Canadian parents was accounted for by equity capital inflows, which were the third largest of any country. By industry, the largest increases were in "other industries" "other manufacturing" and chemicals.

Tables 3.1 through 4.2 follow.

Acknowledgements

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 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 the generation of data tables 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, Nancy F. Steffen, and Linden L. Webber, Karen E. Poffel generated the tables.

(1.) Historical-cost basis is used for valuation in company accounting records in the United States and is the basis on which companies report data in the direct investment surveys conducted by BEA. For consistency, the estimates of earnings and reinvested earnings that are used in analyzing changes in the historical-cost positions are also on this basis and are not adjusted to current cost; country and industry detail for these items, like the positions, is not available with such an adjustment.

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

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

(4.) This reclassification results in a discontinuity between the 1993 and 1994 estimates of the USDIA and FDIUS positions. For additional information on both the 1994 benchmark revision and the reclassification of intercompany debt (as well as related interest transactions) with financial intermediaries, see "U.S. International Transactions, Revised Estimates for 1986-97" in this issue. A further discussion of the changes will accompany the publication of detailed tables on USDIA and FDIUS in the SURVEY OF CURRENT BUSINESS later this year.

(5.) 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. Unlike the positions on a current-cost and market-value basis, adjustments are not made 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.

Currency-translation adjustments to the position 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" valuation adjustments include adjustments for differences between the proceeds from the sale or liquidation and the book values of affiliates, for differences between the purchase prices and the book values of affiliates, for writeoffs resulting from uncompensated expropriations of affiliates, and for capital gains and losses. 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 those assets for an amount different from their historical cost.

(6.) See "Foreign Direct Investment in the United States: New Investment in 1997 and Affiliate Operations in 1996" Survey 78 (June 1998): 39-67. Preliminary data from SEA'S survey of new foreign direct investments, summarized in that article, indicate that total outlays to acquire or establish U.S. businesses were $70.8 billion in 1997, down 11 percent from 1996. 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.

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, a component of the change in the position. Data from the new investments survey indicate that foreign parent groups funded $39.1 billion, or 55 percent, of outlays to acquire or establish new U.S. affiliates in 1997, compared with $54.7 billion, or 68 percent, in 1996.

(7.) For a discussion of the different types of valuation adjustments, see footnote 6.

(8.) Because equity capital decreases are recorded as U.S. capital outflows, the reduction in decreases had the effect of mitigating the overall drop in equity capital inflows.

(9.) The reinvestment rate was 60 percent in 1997 and 43 percent in 1996; in contrast, reinvested earnings were negative in 1989-93 (negative reinvested earnings are recorded when affiliates incur losses or distribute earnings to their foreign parents in excess of their current earnings).