Capital expenditures by majority-owned foreign affiliates of U.S. companies, plans for 1994.

Fahim-Nader, Mahnaz

MAJORITY-OWNED FOREIGN affiliates of U.S. companies (MOFA's) plan to increase capital expenditures $5.3 billion, or 8 percent, to $69.6 billion in 1994 (table 1, chart 1).(1) If realized, the increase will be well above the 2-percent increase in MOFA capital spending in 1993 and the 4-percent average annual growth in 1989-92. However, it will be considerably below the average annual growth of 24 percent in 1987-89. The planned 1994 increase in MOFA spending exceeds the 5-percent increase in domestic capital spending planned by all U.S. businesses.(2)

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The $5.3 billion increase in MOFA spending is concentrated in three areas--$1.6 billion in Asia and Pacific, mainly in Indonesia, Australia, Thailand, and Japan; $1.3 billion in Canada; and $1.2 billion in "Latin America and Other Western Hemisphere," particularly in Mexico and Brazil. In these areas, the increased spending may largely be prompted by the need to expand capacity to serve local markets; in most of the countries in these areas, local markets account for a majority of MOFA sales,(3) and economic growth is robust. In a few cases, however, other factors may also have contributed to the spending increases. In Mexico and Canada, for example, the increases may have been prompted partly by the approval of the North American Free Trade Agreement (NAFTA) last November and by the recent upturn in North American sales by U.S.-owned auto companies. In Mexico and Brazil, the increases may be partly attributable to regulatory environments that have become more open to foreign direct investment. In Japan, which is currently experiencing an economic downturn, increases primarily reflect increased spending in selected industries--wholesale trade, finance, and services--that historically have accounted for only a small share of capital spending by MOFA's.

In contrast to the planned 1994 growth in spending in these areas, spending is expected to remain virtually constant in Europe, where business conditions remain generally weak. As a result, 1994 is the first year since 1986 in which European countries are expected to account for less than one-half--48 percent--of the total capital spending by MOFA's. (They accounted for 53 percent of the total in 1987-93.)

Valuation issues.--The estimates of capital spending by MOFA's are in current dollars; thus, they are affected by changes in prices in host countries and by changes in foreign exchange rates, both of which influence the relationship between changes in current-dollar spending and changes in the real volume of capital goods purchased by affiliates. In 1993, the main factor was exchange rates: The U.S. dollar appreciated about 6 percent against the currencies of major host countries, whereas wholesale prices in those countries increased by an average of only 1 percent.(4) These figures suggest that the 2-percent increase in 1993 dollar spending was probably less than the real increase in spending: Dollar appreciation lowers the dollar value of a given amount of spending denominated in foreign currencies, and the appreciation that occurred in 1993 was only partly offset by price increases.

Comparison with Previous Estimates

The estimates of capital expenditures by MOFA's for 1993 and 1994 presented in this article are based on a BEA survey conducted in December 1993. These estimates revise and update estimates, published in the September 1993 Survey of Current Business, that were based on a survey conducted in June 1993. For 1993, the revised estimate of spending is 5 percent lower than the previous estimate and 8 percent lower than the initial estimate, which was based on a survey conducted in December 1992 (table 2).

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Affiliates in all major industry categories except "other industries" reduced their spending estimates for 1993 from those reported 6 months earlier. The reductions were concentrated in manufacturing, particularly in chemicals and allied products and in nonelectrical machinery; they largely reflected increased deferrals and cancellations of expansion projects due to weak economic conditions in Europe. In addition, to the extent that it was not anticipated at the time of the June survey, the 1-percent appreciation of the dollar that occurred during the last 6 months of 1993 may also have slightly reduced the dollar value of spending plans.

By area, estimates for 1993 were reduced in all major areas except "International" and the Middle East.(5) More than 80 percent of the total reduction was accounted for by Europe.

Plans for 1994

This section discusses 1994 capital spending plans for MOFA's and changes in spending from 1993 to 1994 by area and by industry. It should be noted that changes may result from changes in spending by existing affiliates, the addition of spending by affiliates that have been newly established or acquired, or the elimination of spending by affiliates that have been sold or liquidated. In the discussion, information from outside sources, mainly press reports, has been used to assist in the analysis and interpretation of the survey results.

Area highlights

Affiliates in all major areas except Europe and the Middle East plan significant increases in spending in 1994. As planned, increases in Asia and Pacific, Canada, and "Latin America and Other Western Hemisphere" account for most of the overall increase. However, the fastest growth in spending is expected in Africa. In Europe, spending is expected to remain virtually constant; only a small increase is planned. In the Middle East, spending is expected to decrease.

In Asia and Pacific, affiliates plan to increase spending 13 percent in 1994, to $14.5 billion, after a 19-percent increase in 1993. Most of the 1994 increase is accounted for by affiliates in Indonesia, Australia, and Japan. In Indonesia, affiliates plan to increase spending 16 percent, to $2.4 billion, after a 13-percent increase; most of the 1994 increase is in petroleum and in "other industries." In Australia, affiliates plan to increase spending 13 percent, to $2.6 billion, after a 10-percent increase; most of the 1994 increase is in petroleum and manufacturing. In Japan, affiliates plan to increase spending 10 percent, to $2.4 billion, after virtually no change in 1993; the largest increases are expected in wholesale trade, in finance (except banking), insurance, and real estate, and in services. A small decline in spending is expected in manufacturing.

Elsewhere in Asia and Pacific, affiliates plan to increase spending in Thailand, the Philippines, Hong Kong, and China. The largest increases are planned by affiliates in petroleum and in "other industries," particularly mining. These affiliates have been attracted by their host countries' natural resources and by the growing energy needs resulting from the region's rapid economic growth.

In Canada, affiliates plan to increase spending 16 percent, to $8.7 billion, after a 3-percent increase. The 1994 increase partly reflects strong economic recovery and increased domestic demand. The largest increases are in manufacturing, particularly transportation equipment; in petroleum; and in "other industries," particularly mining.

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 18 percent, to $7.9 billion, after a 15-percent increase. Most of the 1994 increase is accounted for by affiliates in Mexico and Brazil--two of the largest economies in the area.

In Mexico, affiliates plan to increase spending 25 percent, to $2.6 billion, after an 18-percent increase. The continued strong spending in Mexico reflects the favorable investment climate produced by a growing economy, by recently liberalized policies toward foreign direct investment, and by approval of NAFTA late last year. Most of the 1994 increase is accounted for by affiliates in manufacturing, particularly in transportation equipment and food and kindred products. In transportation equipment, affiliates appear to be expanding capacity to serve the U.S. and other export markets, as well as local markets. In food and kindred products, affiliates are probably expanding capacity mainly to serve local markets.

In Brazil, affiliates plan to increase spending 17 percent, to $1.9 billion, after a 15-percent increase. Both increases partly reflect a shift to more open foreign trade and investment policies in recent years. The largest 1994 increases are in transportation equipment and in chemicals and allied products.

Elsewhere in Latin America, affiliates plan to increase spending in Argentina, Colombia, and Venezuela. In Argentina, affiliates in manufacturing and petroleum plan increases. In Colombia and Venezuela, affiliates in petroleum plan increases.

In Africa, affiliates plan to increase spending 36 percent, to $2.4 billion, after a 10-percent increase. Most of the 1994 increase is accounted for by affiliates engaged in the exploration and development of petroleum and natural gas in Algeria, Angola, and Congo.

In Europe, affiliates plan to hold spending virtually constant at $33.5 billion, after an 8-percent decrease. By country, spending plans are mixed: Large increases are planned by affiliates in Belgium, Germany, and the United Kingdom; large decreases are planned by affiliates in Spain, Ireland, and the Netherlands. In Belgium, the increase is concentrated in chemicals and allied products, particularly in drugs. In Germany, the increase is concentrated in transportation equipment. In the United Kingdom, one of the few countries in western Europe where sales of cars rose in 1993, the increase is also concentrated in transportation equipment. In contrast, decreases are planned in transportation equipment in Spain and in electric and electronic equipment in Ireland. In the Netherlands, decreases by affiliates in petroleum will more than offset increases by affiliates in manufacturing.

In the Middle East, affiliates plan to decrease spending 4 percent, to $0.9 billion, after an 11-percent increase. Most of the decrease is accounted for by affiliates engaged in the exploration and development of crude petroleum and natural gas.

Industry detail

Petroleum.--Petroleum affiliates plan to increase spending 8 percent in 1994, to $20.8 billion, after a 5-percent increase in 1993. The planned 1994 increase contrasts with a planned 3-percent decrease in domestic capital spending by all U.S. petroleum companies.(6) U.S. multinational oil companies continue to emphasize overseas exploration and development because oil and gas reserves abroad tend to be more economically exploitable than those in the United States, because some host governments have offered favorable financial incentives and production licenses to U.S. companies, and because environmental regulations in some foreign countries are less restrictive than those in the United States. Nevertheless, spending growth by foreign affiliates has been held below historical trends by project completions and by several interrelated factors--weak growth in demand for fuels, excess capacity in the industry, and low oil prices--that have accompanied the prolonged economic weakness in some areas, particularly Europe. (During 1987-92, capital spending by MOFA's in petroleum increased at an average annual rate of 14 percent.) By area, petroleum affiliates in all major geographic areas except Europe and the Middle East plan to increase spending. In Africa, affiliates plan to increase spending 39 percent, to $2.1 billion, after a 13-percent increase. The 1994 increase is mainly for petroleum exploration and development in Algeria and for the development of oilfields off the coasts of Angola and Congo.

In "Latin America and Other Western Hemisphere," affiliates plan to increase spending 20 percent, to $1.3 billion, after a 19-percent increase. The 1994 increase is mostly accounted for by affiliates in Venezuela and Colombia, which plan to expand petroleum and natural gas exploration.

In Canada, affiliates plan to increase spending 19 percent, to $2.5 billion, after a 27-percent increase. The 1994 increase is partly attributable to increased participation by several affiliates in the development of crude oil reserves off the coast of Newfoundland. It also reflects plans by several affiliates to expand petroleum refining and extraction facilities.

In Asia and Pacific, affiliates plan to increase spending 16 percent, to $6.0 billion, after a similar increase in 1993. As noted earlier, this increased spending has been encouraged by the area's growing energy needs. Thailand and Indonesia have attracted an especially large share of the spending increases: In Thailand, spending is mainly for refinery expansions, and in Indonesia, it is mainly for the exploration and development of crude petroleum and natural gas reserves. In China, spending increases are planned mainly to construct natural gas extraction facilities. In Australia, planned increases are mainly for the exploration and development of crude petroleum and natural gas reserves. In the Philippines, planned increases are mainly for the expansion of retail distribution networks for petroleum products.

In Europe, affiliates plan to decrease spending 8 percent, to $7.5 billion, after a 9-percent decrease. In 1994, large decreases in spending planned by affiliates in the United Kingdom and the Netherlands are expected to more than offset increases planned by affiliates in Norway, Germany, and France. In the United Kingdom, which is expected to have the largest decrease in spending, several petroleum and natural gas extraction projects are being completed or deferred. In the Netherlands, the decrease partly reflects the completion of refinery projects.

In the Middle East, affiliates plan to decrease spending 9 percent, to $0.7 billion, after a 7-percent increase. Most of the decrease is accounted for by affiliates engaged in the exploration and development of crude petroleum and natural gas reserves.

Manufacturing.--Manufacturing affiliates plan to increase spending 8 percent in 1994, to $30.1 billion, after a 3-percent decrease in 1993. The turnaround partly reflects large spending increases in transportation equipment, in chemicals and allied products, and in nonelectrical machinery--the three industries that more than accounted for the decrease in 1993. The 1994 increase is above the 5-percent increase in domestic capital spending planned by all U.S. companies in manufacturing (excluding petroleum manufacturing). By country, the largest increases in spending are expected to occur in the United Kingdom, Canada, Mexico, Belgium, Brazil, and Germany. By industry, increases in spending are planned in all major manufacturing industries except "other manufacturing."

In transportation equipment, affiliates plan to increase spending 22 percent, to $6.8 billion, after a 10-percent decrease. The turnaround reflects two key factors: Strong auto sales in the United States, which have improved parent companies' cash flow and increased their ability to finance overseas operations, and plans for the introduction of new car models abroad, which are resulting in increased expenditures for retooling and for expansion of capacity. The increase is concentrated in Mexico, Canada, and the United Kingdom. In Mexico, affiliates plan to boost spending 54 percent, to $1.0 billion, after a 5-percent increase. Spending appears to have been stimulated by growing auto markets both in that country and in the United States, by more favorable government policies toward foreign investment, and by the approval of NAFTA. in Canada, affiliates plan to increase spending 53 percent, to $1.7 billion, after a 42-percent increase. The 1994 increase partly reflects expenditures by an affiliate to modernize and expand an assembly plant; it also reflects capacity expansion by affiliates, partly to serve growing export markets in the United States and Mexico. In the United Kingdom, affiliates plan to increase spending 39 percent, to $1.1 billion, after a 13-percent decrease. The increase partly reflects expenditures for modernization and for retooling by an affiliate that is planning to begin production of a new line of cars.

In food and kindred products, affiliates plan to increase spending 12 percent, to $3.9 billion, after an 8-percent increase. Most of the 1994 increase is accounted for by affiliates in the United Kingdom, Mexico, and Australia. In the United Kingdom, the increase is largely accounted for by candy producers. In Mexico, the increase is concentrated in soft drinks and grain mill products, and in Australia, it is concentrated in bakery products.

In chemicals and allied products, affiliates plan to increase spending 7 percent, to $6.6 billion, after a 3-percent decrease. Large increases are planned by drug manufacturers in Belgium and by industrial chemical producers in Brazil.

In nonelectrical machinery, affiliates plan to increase spending 7 percent, to $3.1 billion, after an 18-percent decrease. Large spending increases by computer manufacturers are planned in the United Kingdom and France.

In primary and fabricated metals, affiliates plan to increase spending 6 percent, to $1.2 billion, after a 2-percent increase. Spending increases are planned by manufacturers of fabricated products in the United Kingdom and Germany.

In electric and electronic equipment, affiliates plan to increase spending 5 percent, to $3.3 billion, after a 21-percent increase. Spending increases are planned by manufacturers of household audio, video, and communication equipment in the Netherlands and by semiconductor producers in Japan.

In "other manufacturing," affiliates plan to decrease spending 4 percent, to $5.2 billion, after a similar decrease in 1993. Decreases are planned by producers of paper products in Japan and the Republic of Korea and by producers of tobacco products in Turkey.

All other industries.--In all other industries combined, affiliates plan to increase spending 7 percent in 1994, to $18.6 billion, after a similar increase in 1993.

In services, affiliates plan to increase spending 10 percent, to $4.9 billion, after virtually no change in 1993. The 1994 increase is concentrated in the United Kingdom, Canada, and Switzerland. In the United Kingdom, affiliates in computer processing and data preparation services and in automotive rental and leasing services plan increases. In Canada, affiliates in automotive rental and leasing services plan increases. In Switzerland, affiliates in management and public relations services plan increases.

In "other industries," affiliates plan to increase spending 8 percent, to $7.0 billion, after a 28-percent increase.(7) Most of the 1994 increase is by affiliates in public utilities and mining. By area, the largest increases are planned in "International," Canada, Indonesia, and Hong Kong. In "International," the increase is in water transportation. In Canada and Indonesia, the increases are mainly in mining. In Hong Kong, affiliates in electric utilities plan to construct power plants and related facilities.

In wholesale trade, affiliates plan to increase spending 7 percent, to $4.4 billion, after a 7-percent decrease. The increase is concentrated in Japan and Australia. In Japan, the increase is largely accounted for by motor-vehicle wholesalers, and in Australia, by computer wholesalers.

In finance (except banking), insurance, and real estate, affiliates plan to increase spending 1 percent, to $2.4 billion, after a 1-percent decrease. Most of the increase is accounted for by insurance and finance affiliates in Japan.

Tables 3.1 and 3.2 follow. (1.) Capital expenditures estimates are for majority-owned nonbank foreign affiliates of nonbank U.S. parents. (An affirm is majority-owned when the combined ownership of all U.S. parents exceeds 50 percent.) Capital expenditures include all expenditures that are charged to capital accounts and are made to acquire, add to, or improve property, plant, and equipment For affiliates engaged in natural resource exploration and development, these expenditures also include the expenditures for exploration and development that are expensed on the books of the affiliates. Capital expenditures are measured on a gross basis; sales and other dispositions of fixed assets are not netted against them. (2.) The estimate of capital spending planned by all U.S. businesses in 1994 is based on data from a survey conducted in October-November 1993 by the Census Bureau. Although the Census Bureau estimate covers all U.S. businesses rather than only U.S. parent companies, the available estimates of domestic capital spending of parent companies for 1982-91 are significantly correlated with spending by all U.S. businesses. (3.) In 1991, the most recent year for which estimates are available, local sales (that is, sales within the country of the affiliate) accounted for a majority of sales by MOFA's in all of these countries except Indonesia. They accounted for 68 to 72 percent of sales by MOFA's in Thailand, Canada, and Mexico and for 94 to 89 percent of sales in Australia, Japan, and Brazil In Indonesia, in contrast, a majority of the sales were exports of petroleum to other foreign countries. For more information on the destination of sales by MOFA's, see U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 1991 Estimates (Washington, DC: U.S. Government Printing Office, July 1993). (4.) In these calculations, the changes in foreign-currency wholesale prices (or consumer prices when wholesale prices are unavailable) and in the value of the U.S. dollar are weighted by the value of assets in a group of major host countries; these countries accounted for over 80 percent of affiliates' assets in 1991. (5.) "International" affiliates are those that have operations in more than one country and that are engaged in petroleum shipping, other water transportation, or operating movable oil- and gas-drilling equipment. (6.) The figure for domestic capital spending in petroleum is from the Census Bureau (see footnote 2.) Both the Census Bureau data and the data for foreign affiliates are classified according to the primary activity of each company, but they differ in coverage. The Census Bureau data for "petroleum" cover only companies primarily engaged in petroleum manufacturing, whereas BEA data cover companies engaged in all phases of the industry--in manufacturing, in extraction, and in distribution. However, the Census Bureau data for petroleum manufacturing do include the large, integrated companies that account for much of the total activity in the domestic petroleum industry; thus, the figure probably would not be greatly affected if domestic spending by smaller, independent companies primarily engaged in extraction or other phases of the industry were included to make it more comparable with BEA data for foreign affiliates. (7.) "Other industries" consists of agriculture, forestry, and fishing; mining; construction; transportation, communication, and public utilities; and retail trade.

Laura A. Downey prepared the estimates of expenditures, using computer programs designed by Jane M. Fry. the increase in 1993, and those from developing countries accounted for 40 percent.

Capital goods increased $18.0 billion, or 13 percent, to $152.2 billion, following an 11-percent increase. Volume increased 21 percent, following a 19-percent increase. This is the second consecutive year of substantial gains in this category, paralleling the expansion in the U.S. economy. Strong imports of computers, peripherals, and parts and of semiconductors accounted for more than one-half of the increase in 1993, down from nearly two-thirds in 1992. Nonetheless, imports of computers again increased strongly in 1993. over two-thirds of the domestic demand is met by imports from the NIC's and Japan. Semiconductors reflected a step-up in purchases from Japan, the NIC's, and Malaysia. Partly offsetting these increases was a decrease in civilian aircraft, engines, and parts. After reaching a record level in 1992, aircraft and parts from almost all major areas declined; the largest decrease was from Western Europe, the top supplier to the United States.

Nonpetroleum industrial supplies and materials increased $11.7 billion, or 13 percent, to $100.4 billion, following an increase of 10 percent. Volume increased 15 percent, following an increase of 11 percent. Nonmonetary gold increased $5.0 billion. Building materials, chemicals, and iron and steel products increased in response to the strength in the domestic economy. Building materials increased from Canada and Latin America (mainly Mexico and Brazil), partly as a result of a rise in housing starts and in the price of lumber. Chemicals increased from Canada, Japan, and Western Europe, partly as a result of strength in manufacturing industries. Iron and steel products increased from Canada, Western Europe (mainly Germany and Italy), and Latin America.

Consumer goods (nonfood) increased $11.4 billion, or 9 percent, to $134.4 billion, following a 14-percent increase. Volume increased 9 percent, following an 11-percent increase. Last year, consumer goods had been boosted by exceptional increases from the developing countries in Asia. In 1993, durable goods increased 9 percent, nondurable goods 8 percent, and unmanufactured goods 17 percent, the latter as a result of an increase in gem diamonds. In durable and nondurable goods, the most significant increases were in apparel, footwear, household goods and appliances, toys, and recreational equipment. Developing countries in Asia accounted for more than 65 percent of the increase; however, China, Indonesia, and Malaysia continued to gain share at the expense of the NIC's. Developing countries in Latin America accounted for another 18 percent of the increase. Within umnanufactured goods, gem diamonds from Belgium, India, and Israel were sharply higher; unsold diamonds were later shipped abroad.

Automotive products increased $10.7 billion, or 12 percent, to $102.4 billion, following an increase Of 7 percent. Volume increased 10 percent, following an increase of 5 percent.

Automotive parts increased 14 percent as a result of higher domestic production. Parts imports from Canada increased 14 percent, from Mexico 19 percent, and from Japan 13 percent. Mexico's share of parts imports continued to increase; Canada's share and Japan's share remained about unchanged, and Western Europe's share declined (table I).

Passenger cars increased significantly, a rise in imports from Canada and Mexico accounted for more than four-fifths of the increase. Sales of domestic nameplates increased 7 percent, the highest increase since 1984. For Japanese cars, transplant sales exceeded import sales for the first time. The market share of domestic nameplates increased to 59 percent, while the Japanese share, including imports and transplants, declined to 33 percent.

Petroleum imports were unchanged at $51.6 billion; they have been at this level for 3 consecutive years. In 1993, a decrease in price offset an increase in volume. The average price per barrel fell for the third consecutive year to $15.69, the lowest annual average since 1988. Prices declined throughout the year. Volume increased 11 percent, as the average number of barrels imported daily increased from 8.1 million to 9.0 million, the highest level since 1977; the increase reflected rising U.S. demand and falling domestic petroleum production. In 1993, domestic production, which had been falling since 1985, reached its lowest level since 1965. The volume of imports from OPEC increased 8 percent, while the share of imports from OPEC declined from 53 percent to 51 percent, the lowest level since 1988; the share had been 54 percent in 1991. The volume of imports from Venezuela increased 11 percent to a record level. The volume of imports from Saudi Arabia declined 19 percent, the second consecutive yearly decline (chart 6).

U.S. consumption of petroleum and products increased from 17-03 million barrels per day to 17-25 million barrels per day, the highest level since 1989. The rise in consumption reflected the increased level of U.S. economic activity. Imports as a percentage of consumption increased to a record 52 percent, as domestic oil production declined to a 28-year low; the last time that imports accounted for more than half of consumption was in 1977.

Balances by area.--The U.S. merchandise trade deficit increased to $132.5 billion in 1993 from $96.1 billion in 1992.

The increase mainly reflected a shift to a deficit Of $9.7 billion with Western Europe from a surplus of $3.2 billion; this shift resulted from weaker U.S. exports of capital goods in combination with stronger imports of industrial supplies and consumer goods. An increase in the deficit with Japan to $60.4 billion from $50.5 billion was attributable to higher imports of capital goods; exports failed to grow (table J and chart 7).

[TABULAR DATA J OMITTED]

The surplus with Latin America decreased to $2.1 billion from $5.4 billion, as exports, particularly of capital goods and industrial supplies to Mexico, slowed sharply, while imports of capital goods and automotive products, largely from Mexico, increased.

The deficit with the developing countries in Asia increased to $50.6 billion from $45.1 billion, as an increase in exports of capital goods was exceeded by an increase in imports of capital goods and consumer goods.

Services.--The surplus on services was slightly lower at $55.7 billion in 1993, compared with $56.4 billion in 1992. In 1993, the surplus failed to grow for the first time since 1985 (table K). Service receipts were $186.8 billion in 1993, compared with $179.7 billion in 1992; travel and other private services accounted for the increase. Service payments were $131.1 billion, compared with $123.3 billion; travel, passenger fares, and other private services were all higher.

[TABULAR DATA K OMITTED]

Foreign visitors spent $56.5 billion for travel in the United States in 1993, uP 5 percent but down substantially from the 12-percent increase of 1992. Travel receipts from overseas were $44.1 billion, up 10 percent, following a 16-percent increase. Recessions abroad and appreciation of the dollar against most currencies slowed foreign travel to the United States. The slowdown was greatest for Western Europe, but was also sizable for Japan. Receipts from Canada decreased to $7.3 billion, or 8 percent, following a decrease of 6 percent. Depreciation of the Canadian dollar has had a particularly large impact on automotive travelers, which were down 14 percent this year and down 4 percent in 1992. Receipts from Mexico decreased 12 percent to $5.1 billion, as expenditures in the border area decreased sharply.

U.S. travel payments increased to $42.3 billion, up 6 percent, following a 13-percent increase. Travel expenditures overseas increased 7 percent to $33.4 billion, down from a 17- percent increase. The total number of overseas travelers increased about 6 percent each year; the increase in travelers to Western Europe, at 6 percent, was half that in 1992, but the number of travelers increased slightly to Japan and substantially to the Caribbean and Latin America. However, given the large share of travelers accounted for by Western Europe, the decline in travelers to that area held down the rise in total overseas payments. Payments to Canada increased 3 percent to $3.6 billion; although the amount of same-day automotive travel was virtually unchanged, the average expenditure per traveler increased. Payments to Mexico increased less than 1 percent to 5.3 billion.

Passenger fare receipts from foreign visitors traveling on U.S.-flag carriers increased 3 percent to $17.8 billion, down from a 9-percent increase. Passenger fare payments from U.S. residents traveling on foreign transocean carriers increased 3 percent to $11-3 billion, down from a 9-percent increase.

Other transportation receipts were $23.5 billion, up $0.7 billion. Increases in air port expenditure receipts and in air freight receipts led the increase; ocean port receipts and ocean freight receipts were unchanged.

Port expenditure receipts increased $0.4 billion, mostly as a result of higher air port expenditures by foreign airlines in U.S. ports. Ocean port expenditures were unchanged; higher import tonnage carried by foreign flag vessels, reflecting expansion in the U.S. economy, was offset by lower export tonnage, reflecting recession abroad.

Freight receipts increased $0.3 billion as a result of a 5-percent increase in air export tonnage. Ocean freight receipts were unchanged; recessions in Europe and Japan resulted in a 6-percent decline in revenues from Europe and in no growth in revenues from Japan. Excluding Europe and Japan, ocean freight revenues fared better, increasing nearly 3 percent from the previous year.

Other transportation payments were $24.5 billion, up $1.1 billion. Freight payments accounted for nearly all of the jump. Freight payments increased $1.0 billion, following 2 years of decline. The increase reflected growing imports as the U.S. economy completed the second consecutive year of expansion.

Port expenditure payments were virtually unchanged, as weak export volumes in ocean trade, due to recessions in Europe and Japan, offset an increase in import volumes. Declines in jet fuel prices also held down payments.

Royalties and license fees receipts increased to 20.4 billion from $20.2 billion. These receipts are heavily concentrated in Europe, Canada, and Japan and in the manufacturing and wholesale affiliates located there.

Royalties and license fees payments decreased to $4.7 billion from $5.0 billion.

Other private services receipts were $56.4 billion, up from $53.6 billion. Among these receipts, business, professional, and technical services showed the largest increase. Financial services also increased, reflecting a step-up in commissions received on securities transactions.

Other private services payments were $33.6 billion, up from $28.0 billion. Financial services showed the largest increase, reflecting a step-up in commissions paid on securities transactions. Business, professional, and technical services also increased strongly. A step-up in net insurance payments represented a return to more normal conditions, following unusually large receipts in 1992 (which held down net outflows) to cover losses caused by Hurricanes Andrew and Iniki.

Transfers under U.S. military agency sales contracts were $11.3 billion, compared with $11.0 billion in 1992. An increase in transfers to Western Europe under the Polaris/Trident program more than offset drops to Saudi Arabia, Egypt, Israel, and Kuwait, reflecting the end of the F-16 and F-18 programs. The growth in transfers has slowed sharply over the past several years.

Direct defense expenditures were $12.3 billion in 1993, down from $13-8 billion in 1992. Expenditures for contractual services, personnel, and pay to foreign nationals were all down sharply as bases were dosed in Europe, mainly in Germany, and troops returned to the United States. (This drawdown did not include troops in Japan and South Korea). The decline in expenditures in Western Europe over the past several years has significantly lagged the decline in troop strength there because of large base-closing costs, severance pay settlements, and transportation costs for the redeployment of military staff. The drawdown is expected to continue through 1995.

Investment income

Net receipts of investment income were zero in 1993, compared with a surplus of $6.2 billion in 1992 (table D). The peak surplus in recent years was $20.4 billion in 1990. In 1993, receipts decreased slightly, and payments were sharply higher.

Direct investment income.--Income receipts on U.S. direct investment abroad increased to $55.8 billion in 1993 from $49.9 billion in 1992 (table L).

Earnings in Western Europe were significantly higher as a result of a step-up in earnings of finance and banking affiliates in the United Kingdom. However, one-half of the step-up was offset by a decline in earnings in other European countries. Earnings in Latin America were boosted by the liberalization of Brazilian trade and tax policies; regulations were eased to permit the import of digital technology for both computer and telecommunications applications, and sales taxes on automobiles were reduced. Earnings were also higher in Canada.

[TABULAR DATA L OMITTED]

Although earnings were up 11 percent in 1993, they have remained in the $50-$55 billion range for 3 years. In 1991-93, European earnings were well below their 1990 peak, as growth in industrial economies slowed markedly. During this period, worldwide earnings were buoyed by earnings growth in Latin America (primarily in Brazil and Mexico) and in Asia and the Pacific (primarily in Hong Kong and Singapore). The most rapid growth in earnings in recent years occurred in 1986-88, caused by the synchronous expansion in economies worldwide and depreciation of the dollar (chart 8).

Income payments on foreign direct investment in the United States were $9.8 billion, compared with $1.6 billion. A shift from negative (losses) to positive (profits) operating earnings reflected the expansion of the U.S. economy.

Portfolio investment income.--Receipts of income on other private investment decreased to $49.5 billion from $53.7 billion (table M). The decline was attributable to lower receipts on bank and nonbank claims, reflecting reduced U.S. bank and nonbank lending activity and declining interest rates. Interest receipts on bonds and stocks increased sharply as a result of the large step-up in U.S. acquisitions of foreign securities.

 Table M. Other Private Income
 [Billions of dollars]
 1991 1992 1993(p)
Receipts 69.5 53.7 49.5
 Dividends 4.6 5.3 6.0
 Interest on bonds 13.6 14.9 16.9
 Interest on bank claims 37.2 24.1 19.1
 Interest on other claims(1) 14.1 9.4 7.5
Payments 75.6 61.6 58.5
 Dividends 8.5 8.4 8.7
 Interest on bonds 21.4 23.0 24.4
 Interest on bank liabilities 38.4 25.7 21.4
 Interest on other liabilities(1) 7.3 4.5 4.0
(p) Preliminary.
(1.) Primarily income of business concerns other than banks.
NOTE.--Excludes direct investment income receipts and payments.

Receipts of income on U.S. Government assets decreased to $5.0 billion from $7.0 billion; receipts from debt reschedulings were substantially lower, as were earnings on holdings of foreign currencies (table N).

[TABULAR DATA N OMITTED]

Payments of income on other private investment decreased to $58.5 billion from $61.6 billion. The decline was attributable to lower payments of interest on bank and nonbank liabilities, reflecting reduced deposit flows to the United States and declining interest rates. Payments of interest on bonds and stocks were higher, reflecting large foreign acquisitions of U.S. securities.

Payments of income on U.S. Government liabilities were slightly higher at $41.9 billion, as declining interest rates about offset higher balances.

Unilateral transfers

Net unilateral transfers were $32.5 billion in 1993, compared with $32.9 billion in 1992.

U.S. Government grants were somewhat lower at $14.4 billion, reflecting both a drop in grants financing military purchases and the end of cash inflows from coalition partners in Operation Desert Storm. Grants for debt forgiveness were low, as they had been in 1992, and were directed to Latin American countries (table N).

Private remittances and other transfers were $14.1 billion, down from $14.5 billion, as institutional remittances were slightly lower.

Capital Account

Net recorded capital inflows--that is, net changes in U.S. assets abroad less net changes in foreign assets in the United States--increased to $82.5 billion in 1993 from $78.6 billion in 1992. Increases in both U.S. assets abroad and foreign assets in the United States were sharply higher in 1993, boosted by unprecedented flows in securities.

U.S. assets abroad

U.S. assets abroad increased $143.9 billion in 1993, compared with an increase of $51.0 billion in 1992. The step-up was due to large increases in net U.S. purchases of foreign securities and in direct investment outflows. These step-ups were partly offset by continued, substantial reductions in U.S. bank claims.

U.S. official reserve assets.--U.S. official reserve assets increased $1.4 billion in 1993, following a decrease of $3.9 billion in 1992 (table C). In 1993, foreign currency holdings increased by only a small amount.

U.S. Government assets other than official reserve assets.--U.S. Government credits and other long-term assets increased $5.6 billion in 1993, down from a $7.1 billion increase in 1992, as fewer credits were rescheduled. Disbursements under country loan programs also were lower, but were augmented by $1.0 billion in new credits to the Government of the Russian Federation, that represented the consolidation and rescheduling of certain debts of the former Soviet Union owed to the U.S. Government (table N).

U.S. Government short-term assets reflected the acquisition of outstanding claims on the former Soviet Union held by U.S. banks.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks decreased $34.6 billion in 1993, compared with a decrease of s24.9 billion in 1992 (tables O and P).

[TABULAR DATA O OMITTED]

[TABULAR DATA P OMITTED]

The primary reason for the diminished demand for U.S. bank credit was the further scaling back of Japanese banks' international operations in 1993 in response to the economic recession in Japan, as well as to the residual effects of declining securities markets and asset quality problems stemming from poor real estate loans. Recession in most other industrial countries also lowered demand for U.S. bank credit in 1993, Particularly in the interbank market. Finally, the shift away from traditional bank intermediation into securities accelerated significantly in 1993, prompted by an exceptionally sharp drop in U.S. medium-and long-term interest rates to their lowest levels in 20 years. These low interest rates encouraged a large volume of refinancing in the medium-and long-term securities markets, which attracted funds away from the banking sector to the Euro medium-term note facilities and other Eurobond sectors.

Interbank claims decreased $26.2 billion, compared with a $25.7 billion decrease. The decrease in 1993 was more than accounted for by the withdrawal of Japanese banks; however, claims on other industrial countries also decreased. Borrowing to meet yearend requirements, which sometimes can be large, was only moderate in 1993. The primary offset to these declines was an increase in U.S. securities firms' lending to mutual funds in the Caribbean and Western Europe through resale agreements.

Banks' domestic customers' claims decreased $17.9 billion, compared with an increase of $4.0 billion. Dollar deposits decreased s8.2 billion; negotiable and transferable instruments decreased $6.8 billion reflecting large sales of Eurodorar certificates of deposit; and foreign commercial paper outstanding in the United States decreased $1.1 billion, partly the result of a shift in programs to U.S. subsidiaries (where they would be classified as direct investment) or their replacement by new Euro medium-term note programs.

Foreign securities.--Net U.S. purchases of foreign securities reached an unprecedented $125.4 billion in 1993, more than double the heavy 1992 purchases Of $48.0 billion. Net purchases of foreign stocks reached $64.9 billion, following purchases Of $30.6 billion, and net purchases of foreign bonds were $60.5 billion, compared with $17.3 billion (table O and chart 9).

U.S. institutional investors, primarily pensions and mutual funds, accelerated their acquisitions of foreign securities--their total purchases as well as the percentage of total portfolios allocated to foreign securities. Pension funds invested approximately $54 billion, or 8 percent, of their assets abroad in 1993, up from $33 billion, or 5 percent, in 1992.(2) Sales of shares by U.S. mutual funds investing abroad increased to $28 billion in 1993 from $9 billion in 1992.(3) These investors aggressively sought higher yielding fixed-income securities abroad, and foreign stock markets far outperformed the U.S. market. Falling bond rates induced record foreign borrowing in the U.S. market, as U.S. bond rates remained lower than most comparable foreign rates.

Net U.S. purchases of foreign stocks more than doubled to a record $64.9 billion in 1993. Stock prices abroad, particularly in Europe and the emerging markets of Latin America and the Pacific Rim, rose on average 27 percent during the year, compared with only a 7-percent gain in the United States. U.S. investment was heaviest in Europe ($30.0 billion in net purchases), followed by the Asian emerging markets ($10.5 billion) and Latin American markets ($9.5 billion).

Investment in European stocks was dominated by $15.6 billion in net purchases from the United Kingdom, as U.S. investors responded strongly to London stock prices, which rose 23 percent, to a more stable sterling-dollar relationship, and to expansion in the British economy.

Investment in Asian emerging markets was $10.5 billion. These markets experienced explosive price appreciation. In U.S. dollar terms, stock prices in Hong Kong soared 110 percent, and in Singapore 65 percent. Gains in other markets were nearly as spectacular. U.S. investors, primarily through country-specific mutual funds, invested $6.1 billion in Hong Kong, $1.3 billion in South Korea, $1.2 billion in Singapore, $1.1 billion in Malaysia, and smaller amounts--less than so.8 billion total--in China, Taiwan, India, Indonesia, the Philippines, and Thailand. (Some of the price gains in 1993 have already eroded in the early months of 1994.)

Net purchases from Latin America increased strongly to $9.5 billion and included $4.4 billion in new stock issues. Much of the increase was attributable to Mexico (where the stock market rose 48 percent), which had net purchases of $5.1 billion, of which $2.0 billion was in new issues or stocks issued in privatizations.

Net U.S. purchases of foreign bonds soared to 6o.5 billion in 1993 from $17.3 billion in 1992.

New foreign bond issues in the United States increased to a record $46.1 billion, up from $25.5 billion in 1992. Issuance was heavy throughout the year, as U.S. long-term interest rates declined sharply and more rapidly than most foreign rates. Issuance by foreign governments accelerated, but the pickup by foreign corporations was even larger, as both sought to raise funds at the lowest U.S. rates in 20 years. The Canadian Government stepped up its borrowing, as U.S. rates were 150 basis points below Canadian rates. Canadian, Dutch, and British corporations accounted for well over half of the step-up in corporate borrowing, as U.S. rates averaged about 100 basis points below comparable corporate rates in those countries. From all sources, there were 243 new bond issues placed in the United States, nearly double the 123 issues placed in 1992.

Net U.S. purchases of outstanding foreign bonds were $21.5 billion, compared with net sales of $1.6 billion; the shift was more than accounted for by net purchases of British gilt-edged bonds, which, at $41.3 billion, were more than double the 1992 level of $17.0 billion. British bond rates, although falling, remained 100 to 190 basis points higher than comparable U.S. rates until the fourth quarter. Purchases were strong for much of the year, but were especially heavy in the third quarter, when British bond rates fell sharply and created opportunities for large capital gains. Large sales of bonds occurred in the Caribbean and Asia.

Direct investment.--Net capital outflows for U.S. direct investment abroad were $50.2 billion in 1993, compared with $34.8 billion in 1992 (table L).

Most of the step-up was attributable to reinvested earnings, which increased to $28.6 billion from $15.3 billion. Higher reinvested earnings in Western Europe, almost all of which was in finance and banking, accounted for over one-half of the increase. Equity capital outflows increased to $12.3 billion from $8.0 billion as a result of smaller inflows in (decreases in) equity capital.

Intercompany debt outflows decreased to $9.3 billion from $11.5 billion.

Foreign assets in the United States

Foreign assets in the United States increased 226.4 billion in 1993, compared with an increase of $129.6 billion in 1992. The step-up was mostly due to a large increase in foreign net purchases of U.S. securities by both private and official foreigners.

Foreign official assets.--Foreign official assets in the United States increased $71.2 billion in 1993, compared with an increase of $40.7 billion in 1992. Dollar assets of industrial countries increased $38.4 billion (table C). Much of the increase was from Asia in the second and third quarters and from Western Europe in the fourth quarter. Dollar assets of non-OPEC developing countries increased $38.6 billion. Many Asian countries stepped up their placement of dollar assets in the United States. In addition, a few Latin American countries may have deposited unspent proceeds of new international debt issues in the United States.

Liabilities reported by banks.--U.S. liabilities to foreigners reported by U.S. banks, excluding U.S. Treasury securities, increased $12.2 billion in 1993, compared with an increase of $18.6 billion in 1992. The withdrawal of Japanese banking operations from the U.S. market was a major reason for the limited inflow in 1993. In addition, inflows were limited by weak demand for bank funds, both in the United States and abroad, and by low bank interest rates, which reduced the incentive to place funds on deposit in the United States (tables O and P).

Net interbank flows decreased $2.6 billion in 1993, following a $15.9 billion increase in 1992; the shift was more than accounted for by the continued withdrawal of Japanese operations from the U.S. market. Excluding the Japanese transactions, there was some interbank demand for foreign funds in the second and fourth quarters, when non-Japanese foreign-owned banks borrowed from foreign sources, largely to repay earlier interbank borrowing. This pattern is in contrast to that in 1992, when most borrowing by non-Japanese banks was used to expand their share of the U.S. loan market. U.S.-owned banks had little demand for funds in 1993, as bank reserves were sufficient to finance the loan growth associated with the U.S. economic expansion. Liabilities to other private foreigners increased, mainly as a result of U.S. securities dealers' repurchase arrangements with mutual funds.

Banks' liabilities payable in foreign currencies increased $6.6 billion. Banks' custody liabilities increased $5.9 billion, mostly in the form of negotiable CD's acquired in the fourth quarter.

U.S. Treasury securities.--Net foreign purchases of U.S. Treasury securities were $24.3 billion in 1993, down from a record $36.9 billion in 1992. Demand was strongest in the first half of the year, when bond prices were rising sharply, but demand fell late in the third quarter and in the fourth, when bond prices fell. Purchases by Western Europe and Japan were one-half those in 1992; purchases by Canada were higher.

Other U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities more than doubled to a record $79.6 billion in 1993 from $30.3 billion in 1992, Surpassing the previous record of $71.0 billion in i986 (table O and chart 9).

International capital market activity, both in new issues and outstanding securities, accelerated worldwide. Foreign demand for dollar-denominated assets reached record highs, as U.S. financial markets advanced on an acceleration in the decline in U.S. bond rates, low inflation, significant dollar appreciation, and, toward yearend, strong economic growth. Net purchases were strong throughout the year, but nearly one-half of the net purchases, or $37.9 billion, occurred in the record fourth quarter. U.S. corporate and other bonds accounted for most of the net foreign purchases, totaling a record $61.4 billion in 1993. Net foreign purchases of U.S. stocks totaled a record $18.2 billion in 1993.

Net foreign purchases of U.S. stocks occurred throughout the year, but mostly in the fourth quarter, when a record $11.9 billion was purchased on reports of a strengthening U.S. economy. Heavy volumes of initial public offerings, along with an increase in the U.S. issuance of Euro-equities abroad, contributed to the increase in net purchases. Most of the increase in net purchases was attributable to Western European investors, who shifted to net purchases of $9.7 billion from net sales of $5.3 billion. Gross purchases and sales of U.S. stocks were 38 percent higher in 1993 than in 1992. (The U.S. stock market advanced consistently during 1993, but underperformed most foreign markets. The U.S. market advanced about 7 percent, while the German, Swiss, and Dutch markets advanced 40 percent each; the Canadian, British, and French markets about 25 percent each; and the Japanese market, 10 percent.)

Net foreign purchases of U.S. corporate and other bonds increased strongly to $61.4 billion from $34.6 billion.

New bond issues sold abroad by U.S. corporations increased to $34.0 billion from $23.4 billion, reaching the highest annual volume since 1986 (table Q). The lowest U.S. interest rates in 20 years prompted a large volume of refinancing. (The Eurobond market as a whole saw record primary market activity, with new issue volume up 44 percent from the 1992 level.) Issues placed by U.S. nonbank financial corporations increased to $24.6 billion from $14.9 billion; issues by retail, telecommunications, and trading companies were also strong.

[TABULAR DATA Q OMITTED]

Straight fixed-rate bonds accounted for $15.3 billion of the new issues, unchanged from last year; however, as a percentage of total new issues, these bonds dropped to 45 percent from 65 percent. Issues placed through medium-term note (MTN) programs increased sharply to $9.8 billion from $3.1 billion; popularity of MTN programs has increased as a result of the lower costs and greater flexibility offered borrowers. Floating-rate notes also increased, as issuers were attracted to comparatively cheaper funding than was available in the swap market and as investors were attracted to floating-rate yields that were higher than fixed-rate yields.

The U.S. dollar remained the most popular currency for new issues; new issues denominated in dollars totaled $20.3 billion, up from $11.9 billion.

Net foreign purchases of U.S. federally sponsored agency bonds more than doubled to a record $32.1 billion in 1993, as investors moved into mortgage-backed securities of U.S. agencies, partly on expectations that interest rates would begin to rise. Gross purchases and sales of agency bonds were 29 percent higher than in 1993.

Direct investment--Net capital inflows for foreign direct investment in the United States were 31.5 billion in 1993, compared with $2.4 billion in 1992 (table L).

Net intercompany debt shifted to inflows of 15.9 billion from outflows of $7.5 billion. The shift, which occurred mostly from large inflows in the first half of the year, was primarily responsible for the rebound in total capital inflows to a very substantial amount in 1993 from a very small amount in 1992.

Reinvested earnings increased to --$5.6 billion from --$12.6 billion, as operating losses of many affiliates shifted to gains. Equity capital inflows decreased to $21.2 billion from $22.5 billion.

Tables 1 through 10 follow. (1.) Quarterly estimates of U.S. current- and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present. The accompanying tables present both adjusted and unadjusted estimates. (2.) Pensions and Investments 22, no.2 (January 24, 1994). (3.) Trends in Mutual Fund Activity (Washington DC: Investment Company Institute, Research Department).