Direct investment positions on a historical-cost basis, 1993: country and industry detail.

Bargas, Sylvia E. ; Lowe, Jeffrey H.

THIS ARTICLE presents the country and industry detail underlying the U.S. direct investment position abroad and the foreign direct investment position in the United States for 1993 on a historical-cost, or book value, basis. This basis is the only one on which detailed estimates of the position are available by country and industry.(1) Aggregate estimates of the investment positions on the current-cost and market-value bases are presented in the companion article "The International Investment Position of the United States in 1993," beginning on page 63 of this issue. Table 1 shows the aggregate direct investment positions on all three valuation bases.

[TABULAR DATA OMITTED]

In the analysis that folows, information from outside sources, mainly press reports, has been used to assist in the analysis and interpretation of the direct investment position data.

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 $548.6 billion at yearend 1993 (tables 2 and 3, and chart 1).(2) The positions in the United Kingdom--$96.4 billion, or 18 percent of the total--and in Canada--$70.4 billion, or 13 percent of the total--remained by far the largest of any country (chart 2).

Table 2.--U.S. Direct Investment Position Abroad and Foreign Direct

Investment Position in the United States on a Historical-Cost Basis, 1982-93

[Millions of dollars]
 Foreign direct

 U.S. direct investment investment position in

Yearend position abroad the United States
1982 207,752 124,677
1983 207,203 137,061
1984 211,480 164,583
1985 230,250 184,615
1986 259,800 220,414
1987 314,307 263,394
1988 335,893 314,754
1989 381,781 368,924
1990 (r)430,521 394,911
1991 (r)467,844 (r)418,780
1992 (r)498,991 (r)425,636
1993 (p)548,644 (p)445,268
(r)Revised.
(p)Preliminary.

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In 1993, the overall position increased $49.7 billion, or 10 percent, compared with a 7-percent increase in 1992. The following tabulation shows the change in position by type of capital flow and valuation adjustment:(3)

Change in 1993 (Billions of dollars)

Total 49.7
 Capital outflows 58.1
 Equity capital 17.4

 Intercompany debt 10.9

 Reinvested earnings 29.8

 Valuation adjustments -8.4
 Currency translation -5.8

 Other -2.6

The increase in the 1993 position reflected several factors. First, the steadily growing economies in the Pacific Rim area and in parts of Latin America continued to attract investment by U.S. parents. Second, despite sluggish or negative economic growth in many European countries last year, expectations of a recovery, together with prospects for future growth resulting from formation of a single market in the European Union and from continued economic liberalization in Eastern Europe, may have encouraged U.S. parents to continue investing in those countries. Third, improved earnings in the United States and abroad--particularly the United Kingdom, Brazil, Switzerland, Canada, and Bermuda--strengthened U.S. parents' ability to finance investments with internally generated funds. Finally, the relaxation by some countries of restrictions on foreign investment, particularly in the financial and telecommunications services industries, increased U.S. parents' ability to invest.

Capital outflows for U.S. direct investment abroad were at a record level in 1993. About one-half of the total was accounted for by reinvested earnings, which were boosted by both strong affiliate profits and an unusually high reinvestment ratio of 0.54. (The reinvestment ratio is defined as the portion of affiliate earnings that is reinvested.) The high reinvestment ratio reflected several factors. First, U.S. parents' domestic profits grew, reducing their need for funds from abroad. Second, some parents deferred repatriation of earnings in expectation of a reduction in foreign withholding taxes on distributions, particularly in Europe. Finally, some U.S. parents reinvested a larger share of affiliate earnings in anticipation of their need to finance a planned increase in capital expenditures by foreign affiliates in 1994.(4)

Changes in the position by country

The $49.7 billion increase in the U.S. direct investment position abroad was spread among all major geographic areas. The largest increases were in Europe, Asia and Pacific, and Latin America and Other Western Hemisphere.

Europe accounted for just under one-half of the increase. There, the position rose $22.9 billion, or 9 percent. Capital outflows of $30.0 billion were partly offset by a --$7.1 billion valuation adjustment related to widespread foreign currency depreciation against the dollar. Within Europe, the increase (as well as the level of the position at yearend) was by far the largest in the United Kingdom; increases were also sizable in Germany and Switzerland.

In the United Kingdom, a $13.8 billion increase was mainly in finance (except banking), insurance, and real estate (FIRE); it mostly reflected U.S. parents' advances to, and earnings reinvested in, investment-bank affiliates. The capital needs of these affiliates have expanded in accordance with the growing demand for global financial services, as evidenced by the record growth in cross-border sales and purchases of securities in 1993. These affiliates also have played a role in financing the continued heavy merger and acquisition activity in Europe. Equity capital outflows to the United Kingdom were particularly large in manufacturing, where they reflected several large acquisitions in "other" manufacturing and "other" transportation equipment.

In Germany, the position increased $3.9 billion; the increase was widespread by industry and by account. In Switzerland, a $3.7 billion increase consisted mainly of reinvested earnings of affiliates in FIRE and wholesale trade.

In Norway, the increase in position, though far smaller than that in Germany or Switzerland, was the net of large, nearly offsetting changes resulting from the same transaction: The largest single equity capital outflow in 1993, reflecting the acquisition of a food products manufacturer, was largely offset by an associated negative valuation adjustment.

In Asia and Pacific, the position increased $12.3 billion, or 15 percent. Almost one-half of the increase resulted from reinvested earnings. Increases occurred in most countries and reflected continued robust economic growth in the area. Some of the largest increases--ranging from $1.6 billion to $2.1 billion--were in Australia, Hong Kong, and Singapore; they primarily resulted from reinvested earnings. However, the largest increase in position within Asia and Pacific--$4.8 billion--was in Japan; this increase mainly reflected positive valuation adjustments related to the appreciation of the Japanese yen against the U.S. dollar. Equity outflows also contributed to the increase in Japan; they were the largest to any Asian and Pacific country and were concentrated in manufacturing.

In Latin America and Other Western Hemisphere, the position increased $11.3 billion, or 12 percent. The largest increases were in Bermuda, the Netherlands Antilles, and Mexico. In Bermuda, a $2.5 billion increase mainly resulted from the reinvested earnings of finance affiliates of U.S. parents in manufacturing and petroleum. In the Netherlands Antilles, a $2.1 billion increase mainly reflected repayments by U.S. parents of loans from their finance affiliates. In Mexico, a $1.7 billion increase partly reflected the acquisition of minority interests in a beverage business and a telecommunications business. These acquisitions were part of a wider trend of acquisitions in those industries that reflected the industries' increasing globalization and the worldwide search by U.S. parents for growing markets. The acquisition of the telecommunications business, for example, was the largest of many new investments in that industry in 1993, including the purchase of minority interests in the newly privatized Hungarian telephone system and in a Hong Kong telecommunications company that will be used as a base to enter the burgeoning Chinese market.

The position in Canada increased $1.6 billion, or 2 percent. The increase largely resulted from reinvested earnings, particularly in transportation equipment manufacturing, petroleum, and FIRE; also contributing was the acquisition of a minority interest in a beverage company. However, the increase was dampened by a negative valuation adjustment that resulted from the depreciation of the Canadian dollar against the U.S. dollar.

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 $445.3 billion at the end of 1993 (tables 2 and 4, and chart 1).(5) For the second consecutive year, Japan's position--$96.2 billion, or 22 percent of the total--was the largest. The United Kingdom had the second largest position--$95.4 billion, or 21 percent of the total--and the Netherlands had the third largest--$68.5 billion, or 15 percent of the total (chart 3).

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[TABULAR DATA OMITTED]

In 1993, the overall position increased $19.6 billion, or 5 percent, compared with a 2-percent increase in 1992 and a 6-percent increase in 1991. The following tabulation shows the change in position by type of capital flow and valuation adjustment:

Change in 1993 (Billions of dollars)

Total 19.6
Capital inflows 22.6
Equity capital 21.7
Intercompany debt 9.1
Reinvested earnings -8.1
Valuation adjustments -3.0
Currency translation -.4
Other -2.6

The increase in the position resulted from improvements in foreigners' incentive and ability to invest in the United States. Foreigners' incentive to invest was enhanced by the continued growth of the U.S. economy. Their ability to invest was strengthened by improved business conditions in certain major investor countries, such as the United Kingdom, which raised the earnings of foreign parents in those countries. The impact of these factors can also be seen in the total outlays by foreign investors to acquire or establish U.S. businesses: In 1993, such outlays, including those financed by equity capital inflows, rose 71 percent after having decreased 40 percent in 1992.(6)

The 5-percent increase in the position in 1993 is in line with the average rate of growth over the previous 2 years, but it remains well below the rates of growth during 1982--90, when annual increases averaged 16 percent. Among the factors limiting growth in the position in 1993 were continued economic weakness in Japan, the largest investor country, and competition for investable funds from a number of other areas, such as Europe, Latin America, and the Pacific Rim, that also offered attractive investment opportunities.

For the fifth consecutive year, growth in the position was reduced by negative reinvested earnings, which occur when affiliates incur losses or pay dividends to their foreign parents in excess of their current earnings.(7) During the 5-year period, U.S. affiliates maintained relatively stable earnings distributions despite sharp declines in earnings, which turned to losses in 1990 (chart 4). Earnings began to recover in 1992, and by 1993 they were once again positive, though barely. Reinvested earnings also increased, but were still negative in 1993. By country, Japan accounted for over one-half of total negative reinvested earnings in 1993, as Japanese parent companies, faced with poor business conditions at home, turned to their U.S. affiliates for funds. By industry, affiliates' negative reinvested earnings were fairly widespread, but were highest in real estate and machinery manufacturing.

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Changes in the position by country

The $19.6 billion increase in the 1993 position was fully accounted for by European investors, whose position rose 8 percent. Within Europe, parents in the United Kingdom had the largest increase, followed by parents in Germany, the Netherlands, and France. Outside Europe, the position of Canada increased, while the position of Japan decreased. In Other Western Hemisphere, a relatively small increase in the position was the net result of a number of considerably larger, offsetting changes among countries in the area; most of the largest changes were in finance (except banking) (hereinafter referred to as "finance").

The position of British parents increased $6.3 billion, or 7 percent. The largest increases were in finance, chemicals, and "other" industries. In finance, the increase was in the form of debt, as affiliates borrowed funds from their British parents. In chemicals, nearly one-half of the increase was accounted for by (positive) reinvested earnings of companies engaged primarily in the manufacture of pharmaceuticals. In "other" industries, equity capital inflows accounted for most of the increase; included in equity capital inflows was a $0.4 billion inflow resulting from a British company's acquisition of a minority interest in an air transportation company.

The position of German parents increased $5.1 billion, or 17 percent. The largest increases were in finance and in chemicals. In finance, the increase resulted from debt repayments by foreign parents; in chemicals, it was due to affiliates' borrowing from foreign parents.

The position of Netherlands parents increased $3.2 billion, or 5 percent. "Other" industries and banking had the largest increases. In "other" industries, the increase was due to borrowing from foreign parents. Nearly one-half of the increase in banking resulted from the elimination of negative positions in affiliates that were liquidated.

The position of French parents increased $3.0 billion, or 12 percent. Three-fourths of the increase was in finance and resulted from repayments by French parents of funds borrowed from their affiliates.

The position of Canadian parents increased $1.6 billion, or 4 percent. Increases in insurance and finance were partly offset by a decrease in "other" industries. In both insurance and finance, the increases were about evenly distributed between equity inflows, debt inflows, and (positive) reinvested earnings. The decrease in "other" industries was mostly attributable to the repayment of loans from foreign parents.

The position of Japanese parents declined $1.3 billion, or 1 percent. The decline was spread among several industries; the largest declines were in finance, real estate, and "other" industries. In finance, the decrease was more than accounted for by debt outflows, as affiliates made loans to their parents. The declines in real estate and "other" industries were more than accounted for by negative reinvested earnings, as affiliates paid dividends to their parents even though they had negative earnings. Only in wholesale trade and banking were there significant increases, which reflected sizable capital contributions by Japanese parents to their affiliates.

Mark W. New--assisted by Spicer V. Conant, Laura A. Downey, Marie K. Laddomada, Sherry Lee, Gary M. Solamon, and Dwayne Torney--conducted the survey from which the U.S. direct investment position abroad data were drawn. Smith W. Allnutt III programmed the tables. Gregory G. Fouch--assisted by Peter J. Fox, Nancy F. Halvorson, Tracy K. Leigh, Beverly E. Palmer, and Linden L. Webber--conducted the survey from which the foreign direct investment position in the United States data were drawn. D. Richard Mauery programmed the tables.

(1.)Estimates on a historical-cost basis largely reflect prices at the time of investment rather than prices of the current or any other period. Historical cost is the basis used for valuation in company accounting records in the United States and is the only basis on which companies can report data in the direct investment surveys conducted by the Bureau of Economic Analysis (BEA). (For consistency, the estimates of earnings and reinvested earnings used in analyzing changes in the historical-cost positions are also on this basis and are not adjusted to current cost; detailed estimates of these items, like the positions, are 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.)Valuation adjustments to the historical-cost position are made to reflect differences between changes in the position, measured at book value, and capital flows, measured at transaction value. (For the position on a historical-cost basis, there are no valuation adjustments due to price changes, because prices are held at historical levels.)

Currency translation adjustments to the position are made to reflect changes in the exchange rates that are sued to translate affiliates' foreign-currency-denominated assets and liabilities into U.S. dollars. The precise effects of currency fluctuations on translation adjustments depend on the value and currency composition of affiliates' assets and liabilities. Depreciation of foreign currencies in relation to the dollar usually results in negative translation adjustments, because it tends to lower the dollar value of net foreign-currency-denominated asstes. Similarly, appreciation of foreign currencies in relation to the dollar usually results in positive adjustments, because it tends to raise the dollar value of net foreign-currency-denominated assets.

(4.)According to a BEA survey taken in December 1993, majority-owned foreign affiliates plan to increase capital expenditures 8 percent in 1994, compared with a 2-percent increase in 1993. See "Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, Plans for 1994," SURVEY OF CURRENT BUSINESS 74 (March 1994): 36-43.

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

(6.)For a discussion of these and other factors affecting new foreign direct investment in the United States, see "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1993," SURVEY 74 (May 1994): 50-61. Preliminary data from BEA's survey of new foreign direct investments, summarized in that article, indicate that total outlays to establish or acquire U.S. businesses were $26.2 billion in 1993, up from $15.3 billion in 1992. These figures differ from those on changes in the foreign direct investment position presented here largely because they cover only transactions involving the acquisition or establishment of new U.S. affiliates and because they include financing other than that from the foreign parent, such as local borrowing by existing U.S. affiliates. In contrast, changes in the position reflect transactions of existing, as well as new, U.S. affiliates (but only if the transactions are with the foreign parent or other members of the foreign parent group) and valuation adjustments.

Notwithstanding their differences, the two types of data are related. Any outlays to acquire or establish U.S. businesses that are funded by foreign parents (or other members of the foreign parent group) are part of capital inflows, a component of the change in the position. Data on the sources of funding of outlays to acquire or establish new U.S. affiliates indicate that foreign parent groups funded $11.8 billion of such outlays in 1993, compared with $7.8 billion in 1992.

(7.)For direct investment in the United States, negative reinvested earnings represent an outflow of investment capital, which reduces the position.