Capital expenditures by majority-owned foreign affiliates of U.S. companies: plans for 1990 and spending patterns during 1977-89.

Mataloni, Raymond J., Jr.

Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies: * Plans for 1990 * Spending Patterns During 1977-89

1990 Plans

MAJORITY-OWNED foreign affiliates of U.S. companies plan to increase capital expenditures 13 percent in 1990, to $54.9 billion, following a 14-percent increase in 1989 (table 1, chart 1).(1) If realized, the 1990 increase will represent the third consecutive year of double-digit growth in capital expenditures abroad.

The 1988--90 increases are widespread by area and by industry, reflecting U.S. parent companies' growing emphasis on overseas operations. Petroleum firms have been slowing their domestic capital spending for exploration and development, and they have been shifting these activities overseas, partly in response to environmental concerns in the United States. Manufacturers have been attracted by favorable conditions abroad, including increasing European economic integration and rapid economic growth in East Asia. This article examines plans for capital expenditures by foreign affiliates of U.S. companies in 1990 and patterns of spending by affiliates during 1977--89.

1990 Plans

Although the planned spending increases are geographically widespread, the most rapid growth is in Europe and in "other Asia and Pacific." Nearly all of the European increase is in the European Communities (EC-12) and Norway. In Norway, oilfield development in the North Sea largely accounts for the increase.

The 1992 single-market initiative of the EC-12, which seeks to eliminate remaining trade barriers and otherwise increase the economic integration of member countries, continues to attract spending in many industries. Two provisions of the initiative are the establishment of uniform product standards and the reduction of documentation and inspection requirements for intra-Communities shipments of goods. By widening markets, expediting shipments, and lowering transportation costs, these measures may encourage affiliates to expand capacity. Finally, increased competition and the prospect of faster economic growth resulting from the 1992 initiative may provide further impetus for affiliates to expand operations, increase efficiency, and introduce product changes.

In "other Asia and Pacific," rapid economic development continues to attract increased spending by U.S.-owned affiliates. In 1988 and 1989, the increases were mainly in petroleum; the planned increases in 1990, however, are widespread by industry. Petroleum affiliates plan to increase their production of oil and natural gas to meet rising local consumption. Manufacturing affiliates are expanding capacity to serve the growing automobile and computer export markets and to meet increased demand for nondurable consumer goods.

Total planned spending for 1990 has been revised up 10 percent from the level reported 6 months ago (table 2); the large upward revision is widespread by industry. In manufacturing, projects carried over from 1989 account for most of the increase, and, in petroleum, rising oil prices may have contributed to the higher spending. Although actual spending for 1989 is only slightly lower than the level reported 6 months ago, there were substantial offsetting revisions among industries. Petroleum affiliates revised their spending up because of increased exploration and development in Canada and Australia. In contrast, manufacturing affiliates in nearly all industries revised their spending down, because, in most cases, projects were delayed. The most recent estimates for 1989 and 1990 are based on a survey conducted in December 1989; the previous estimates were based on a survey conducted in June 1989.

The planned growth in 1990 spending is widespread by industry and area. By industry, affiliates in manufacturing plan a 17-percent increase, to $27.4 billion, following a 15-percent increase in 1989; petroleum affiliates plan an 8-percent increase, to $15.6 billion, following a 9-percent increase; and affiliates in all other industries plan a 13-percent increase, to $12.0 billion, following a 20-percent increase.

By area, affiliates in developed countries plan a 13-percent increase, to $42.3 billion, following a 10-percent increase. Affiliates in developing countries plan a 15-percent increase, to $11.7 billion, following a 28-percent increase. Affiliates in "international"--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--plan to decrease spending 3 percent, following a 31-percent increase.

Tables 3--5 provide detailed country-by-industry estimates of capital expenditures for 1988--90.

Petroleum

Petroleum affiliates plan to increase spending 8 percent in 1990, to $15.6 billion, following a 9-percent increase. The widespread 1990 increase reflects a continuing shift toward exploration and development overseas, partly due to environmental concerns in the United States. Spending has also been encouraged by rising oil prices resulting from increasing worldwide demand and declining production in the United States and the Soviet Union--the world's two largest non-OPEC producers.

In developed countries, affiliates plan to increase spending 8 percent, to $10.5 billion, following a 1-percent increase. Affiliates in the United Kingdom plan to increase spending 11 percent, to $4.3 billion, after no increase. Exploration and development have been encouraged by the resumption of production following a series of accidents on British oil and gas platforms. In addition, recent tax changes may have contributed to increases in spending. Affiliates in Norway plan to increase spending 22 percent, to $1.1 billion, following a 4-percent increase. The large 1990 increase reflects several major oil-extraction projects. Affiliates in Canada plan a 10-percent increase, to $2.7 billion, following a 16-percent decrease in 1989. A large increase is planned in 1990 by an affiliate that recently obtained Canadian Government approval to begin drilling in the Beaufort Sea.

The increases in the United Kingdom, Norway, and Canada are partially offset by a decrease in Australia. Australian affiliates plan to decrease spending 31 percent, to $0.7 billion, following a 54-percent increase. The planned decrease results from fewer new oil and gas extraction projects.

In developing countries, affiliates plan a 14-percent increase, to $4.7 billion, following a 30-percent increase. Spending continues to rise in Southeast Asia in response to growing energy needs stemming from the area's rapid economic development. Affiliates plan to increase spending 25 percent in Indonesia, 32 percent in Malaysia, and 60 percent in Thailand; these increases are mainly for projects to extract oil and natural gas.

Affiliates in the Middle East plan to increase spending 30 percent, following a 21-percent increase. The increase is largely attributable to the construction of a liquified natural gas plant.

Affiliates in "international" plan to decrease spending 31 percent in 1990, after a 20-percent increase in 1989. Much of the decrease is in petroleum shipping.

Manufacturing

Manufacturing affiliates plan to increase spending 17 percent in 1990, to $27.4 billion, following a 15-percent increase. All manufacturing industries plan increases, but the most rapid growth will occur in primary and fabricated metals, nonelectrical machinery, transportation equipment, and chemicals.

Affiliates in primary and fabricated metals plan to increase spending 38 percent, to $2.1 billion, following a 35-percent increase. The 1990 increase is mainly for the construction and expansion of aluminum smelters in Canada, where inexpensive hydroelectric power to run the plants is available. A Chilean affiliate engaged in copper processing and mining largely accounts for the remaining increase. This affiliate is expanding its operations in response to rising copper prices.

In nonelectrical machinery, affiliates plan to increase spending 24 percent, to $3.9 billion, following an 8-percent decrease in 1989. The 1989 decrease mainly resulted from delaying expenditures until 1990. The 1990 increase largely reflects the expansion of production facilities by European computer manufacturers, following strong growth in sales.

Transportation equipment affiliates plan to increase spending 20 percent, to $5.8 billion, following a 31-percent increase. In both 1989 and 1990, automotive affiliates in the EC-12 countries plan large increases. Producers are expanding capacity in anticipation of market growth related to the Communities 1992 initiative. Rising competition in the EC-12 countries has led to a growing number of transnational joint ventures. For instance, a German affiliate plans to begin construction of a factory to jointly produce compact automobiles with a Japanese firm.

Chemical affiliates plan to increase spending 17 percent, to $6.2 billion, following a 12-percent increase. Expansions of petrochemical plants in response to strong demand account for much of the increase.

Smaller increases are planned in other manufacturing industries. In food products, affiliates plan to increase spending 10 percent. Nearly one-half of the increase is accounted for by Latin American affiliates. A Mexican soft-drink producer is building two processing plants, and a Honduran tropical fruit packer is expanding its facilities. Affiliates in electrical machinery plan to increase spending 5 percent. Most of the increase is in Singapore and Taiwan, where semiconductor producers are expanding capacity. In addition, an affiliate in Taiwan is constructing a plant to produce computer memory chips in a joint venture with a local partner. Affiliates in "other manufacturing" plan an 11-percent increase, mainly in consumer product manufacturing. The fastest growth is in South Korea, where a tire producer is upgrading its equipment and a paper goods manufacturer is building new factories.

By area.--Manufacturing affiliates in developed countries plan to increase spending 16 percent, to $22.6 billion, following a 15-percent increase in 1989. In 1990, nearly three-fourths of the increase is in the EC-12 countries. The largest dollar increases are in Germany, the United Kingdom, and Belgium. German affiliates plan to increase spending 27 percent, to $3.7 billion, following no increase in 1989. The largest increase is in transportation equipment; it reflects plant construction and retooling to produce new automobile models. Affiliates in the United Kingdom plan to increase spending 14 percent, to $4.3 billion, following a 23-percent increase. The increases in both years are largely in transportation equipment and are for automobile plant modernizations. Belgian affiliates plan to increase expenditures 42 percent, to $1.1 billion, following a 6-percent increase. Plant expansions by petrochemical affiliates largely account for the increase.

Most of the remaining growth in developed countries is in Canada, where affiliates plan to increase spending 12 percent, to $4.8 billion, following a 25-percent increase. In both years, the increases mainly reflect the previously mentioned construction of aluminum smelters.

In developing countries, manufacturing affiliates plan to increase spending 21 percent, to $4.8 billion, following a 16-percent increase. Latin American affiliates account for most of the increases in both years. Pro-foreign-investment policies in Brazil and Mexico continue to attract capital spending. Brazilian affiliates plan to increase spending 22 percent, to $1.8 billion, following a 20-percent increase. Although the increase is widespread, one of the largest projects is the modernization of a tire plant. In Mexico, affiliates plan to increase spending 18 percent, to $0.8 billion, following a 43-percent increase. Plant expansions by a soft-drink bottler and by manufacturers of automobiles and computer floppy disks are largely responsible for the increase. Chilean affiliates plan to increase spending 52 percent, following an even larger increase in 1989. In both years, the increases are mainly for the expansion of a copper processing and mining operation.

Spending by affiliates in "other Asia and Pacific" accounts for most of the remaining growth in developing countries. Plant construction and expansion has been encouraged by rising consumer incomes and the easing of restrictions on foreign direct investment. South Korean affiliates plan to increase spending 59 percent, to $0.3 billion, following a 12-percent increase. The large increase mainly results from the paper and tire projects mentioned earlier. In Taiwan, affiliates plan to increase spending 35 percent, to $0.2 billion, following a 25-percent decline. The increase is mainly in transportation equipment and nonelectrical machinery.

Other industries

Affiliates in all other industries combined plan a 13-percent increase in spending in 1990, to $12.0 billion, following a 20-percent increase. Wholesale trade affiliates plan to increase spending 21 percent, to $4.1 billion, following a 5-percent increase. The largest increases are in Italy, France, and Australia. An Italian wholesale trade affiliate, which is also engaged in manufacturing electronic goods, is expanding and upgrading its production facilities. A French soft-drink affiliate plans to expand its network of vending machines, following its recent acquisition of a local beverage company. The increases in Australia are largely by wholesale trade affiliates of computer companies.

In finance (except banking), insurance, and real estate, affiliates plan to increase spending 16 percent, to $1.2 billion, following a 37-percent increase. In both years, brokerage affiliates in the United Kingdom account for a substantial portion of the increase.

Services affiliates plan a 7-percent increase in spending, to $2.8 billion, following a 26-percent increase in 1989. Increases planned by a German rental car affiliate and a British mobile telephone affiliate are partly offset by a decline in the Bahamas, where the construction of a hotel and casino has recently been completed.

Affiliates in "other industries"--agriculture, construction, mining, public utilities, and retail trade--plan to increase spending 9 percent, to $3.8 billion, following a 27-percent increase. Expansion projects by copper mining affiliates in Chile and Indonesia account for much of the increase. In "international," a cruise line affiliate is increasing its spending, following its acquisition of a foreign travel and tourism business. These increases are partly offset by lower spending plans by an Australian gold mining affiliate.

Spending Patterns During 1977-89

This section of the article examines patterns in affiliate spending by selected area and by industry during the past 13 years.(2) Table 6 shows the levels of, and the year-to-year percent changes in, spending during 1977-89 by major industry and area. Table 7 presents estimated average annual trend growth rates from 1977 to 1989 (see the box "Estimating Annual Growth Rates in Affiliate Spending").

Total spending by foreign affiliates showed no significant growth trend in 1977-89 because of sharp, offsetting changes during this period. In 1977-80, spending increased rapidly as tripling oil prices encouraged petroleum exploration and development and as strong demand abroad, coupled with the need to modernized and integrate production facilities, spurred spending by affiliates in manufacturing and other industries. In 1981 and 1982, total spending increased slightly. Increases in petroleum, stimulated by high crude-oil prices, were partly offset by decreases in manufacturing, resulting from the economic recession in Europe and the Western Hemisphere. Apart from a small increase in 1985, spending declined from 1983 through 1986. In 1983, it dropped sharply as spending fell in nearly all industries. It declined moderately in 1984 and 1986 as decreases in petroleum, reflecting falling oil prices, were partly offset by increases in manufacturing, resulting from economic recovery. In 1987-89, overall spending grew as continuing economic growth abroad and stability in oil prices encouraged new projects.

Changes in prices and exchange rates were significant during 1977-89, and they undoubtedly affected affiliate spending measured in dollars.(3) In particular, rapid foreign inflation and weakness in the dollar against major foreign currencies both contributed to the rapid growth in spending through 1980. Reduced foreign inflation--which resulted from widespread economic weakness, less expansionary monetary policies, and declining oil prices--and the strengthening of the dollar contributed to the declines in spending in 1981-86.

The remaining sections will examine broad spending patterns in detail, first by selected area and then by major industry.

By area

During 1977-89, most affiliate spending occurred in developed countries; however, through 1982, the rate of growth was faster in developing countries. This pattern of growth was reversed in 1983-88, when the debt crisis in Latin America and a decline in export revenues in the oil producing countries of the Far East dampened economic activity and affiliate spending in those areas. In 1989, the rate of spending growth in developing countries overtook that in developed countries once again.

In Europe, which accounted for nearly one-half of total spending in each year, spending grew at an average annual rate of 3.2 percent during 1977-89. During 1977-80, spending by European affiliates increased rapidly, growing from $11.2 billion to $20.8 billion. In petroleum, the pace of North Sea exploration and development quickened in response to higher oil prices caused by declining production in the Middle East. In manufacturing, increased spending was fueled, in part, by the widespread automation of computer manufacturing and the restructuring of automobile manufacturing into specialized production units. During 1981-86, spending fell from $20.1 billion to $15.6 billion. In the early part of this period, the recession in Europe held down manufacturing spending; later, falling oil prices caused a sharp decline in petroleum exploration and development in the North Sea. Between 1986 and 1989, spending in Europe rose briskly from $15.6 billion to $23.3 billion. The increases were primarily in the EC-12 countries, partly reflecting the 1992 initiative. In petroleum, affiliates resumed projects that had been delayed because of falling oil prices.

In Canada, affiliates' spending exhibited no significant trend in 1977-89, as weak spending during most of the 1980's offset growth in other years. From 1978 to 1980, spending surged from $5.4 billion to $8.3 billion, encouraged by strong economic growth in North America. Spending was particularly robust in petroleum and transportation equipment manufacturing. In petroleum, spending was for projects to extract natural gas and oil from unconventional sources, such as coal and tar sands, as well as from conventional sources. In transportation equipment, spending went mainly toward plant construction to produce more fuel-efficient cars.

During 1981-87, spending by Canadian affiliates declined from $8.1 billion to $6.5 billion. Decreases were sharpest and most widespread in the early 1980's. In petroleum, several large projects were cancelled because of a drop in petroleum prices. Regulatory changes in the Canadian petroleum industry, initiated in 1981, may have further dampened spending. In manufacturing, spending was depressed because of widespread overcapacity created by the economic recession in the United States and Canada. In the mid-1980's, decreases in some industries were largely offset by increases in others.

Between 1987 and 1989, spending by Canadian affiliates rose at double-digit rates from $6.5 billion to $8.7 billion; growth was sharpest in petroleum in 1988 and in manufacturing in 1989.

In Latin America, declines in spending during 1982-87, which were largely related to the Latin American debt crisis, partly offset increases in other years. There was no significant growth trend for 1977-89.

During 1977-81, spending grew from $2.2 billion to $5.7 billion. Growth was spurred by host governments' movements away from import-substitution strategies and toward export-promotion strategies. These changes in strategy often led to strong growth in the countries' domestic consumption and exports, which broadened affiliates' markets and stimulated capital investment.

During much of the remaining 1980's, spending generally declined, falling from $5.8 billion in 1982 to $3.3 billion in 1987. In 1981, a sharp rise in world interest rates led to burdensome increases in the debt service requirements of host governments. To conserve foreign exchange that was needed to service international debt, some host governments sought to decrease imports through import restrictions or currency devaluations. As a result, affiliates found it difficult or more expensive to import intermediate goods, which restrained their production and decreased their profitability. Host governments also adopted austerity measures that lowered domestic consumption and weakened the affiliates' local markets. In addition, the region's rapid inflation tended to encourage affiliates to invest their profits in high-yield financial instruments rather than in new plant and equipment. These conditions lasted until the late 1980's, when spending was spurred by an improved business climate and a revival of pro-foreign-investment policies in some of the larger host countries. By 1989 spending had reached $4.7 billion, still somewhat below the peak reached in 1982.

In Asia and Pacific, affiliates' spending grew at an average annual rate of 8.6 percent during 1977-89--well above the rates for other areas. The region's rapid economic development and an easing of host governments' restrictions on foreign investment were largely responsible for the strong growth. From 1977 to 1982, spending rose continuously at double-digit rates, growing from $1.9 billion to $7.5 billion. Growth was very strong in Japan, where spending was encouraged, in part, by the relaxation of foreign-ownership restrictions in manufacturing. In other Asian and Pacific countries, even stronger growth largely reflected rapid economic development in these countries. In addition, petroleum affiliates were attracted by the region's potentially vast oil and gas reserves, and manufacturing affiliates by its pool of low-cost semiskilled labor.

During 1983-87, spending decreased moderately from $6.3 billion to $5.2 billion. The decreases were mainly in oil- and gas-producing countries, where falling oil prices dampened exploration and development activity. In addition, declining petroleum export revenues led to slower economic growth, which created stagnant markets for affiliates in all industries. These declines were offset by rapid growth in spending by Japanese affiliates, which continued through 1989. The rise in spending in Japan may have been encouraged by new Government programs to attract foreign investment by offering tax incentives, facilitating financing, and reducing bureaucratic delays in approving new investments.

In 1988 and 1989, spending in Asian and Pacific countries resumed its double-digit growth, ending the period at a level of $9.1 billion. In the area's newly industrialized countries, affiliates in a wide range of industries stepped up their investments in response to oil price stability and renewed vigor in local economies.

By industry

Petroleum.--During 1977-89, petroleum affiliates' spending underwent two periods of sustained growth that were separated by a period of decline. Because these increases and decreases were largely offsetting, there was no significant trend for the entire period. From 1977 to 1982, spending increased rapidly, from $8.9 billion to $20.8 billion; it increased over 30 percent in two of these years. Spending fell from 1983 to 1986, ending at a low of $9.6 billion. From 1987 to 1989, spending increased again, to $14.4 billion in 1989--still considerably below the level of 1982.

For two related reasons, the movements in capital spending during 1977-89 were strongly correlated with changes in the world price of crude oil (chart 2). First, movements in oil prices tend to cause corresponding changes in the expected return on capital investment. Second, they affect industry profits and, hence, the availability of funds for exploration and development.

The pronounced movements in oil prices during 1977-89 were the result of continuing disequilibrium in the petroleum market. Before 1981, restrictions on output by the OPEC cartel, combined with strong demand, led to shortages of crude oil and to rising petroleum prices. The shortages were made more acute by the Iranian revolution of 1979 and the shutdown of that country's oil production for most of the year. As prices rose, changes began to occur in the petroleum market that contributed to a subsequent collapse in prices. Producers began to accelerate the development of alternative sources of supply, particularly in the North Sea area, and petroleum users, especially in the business sector, began to conserve petroleum and to use alternative fuels. During 1982-86, these factors led to substantial overcapacity and rapidly falling crude oil prices. Overproduction in some OPEC countries contributed to an especially sharp drop in prices in 1986.

During 1977-89, spending occurred at all levels of industry operations--from the producing or "upstream" end, which consists of exploration, development, and extraction, to the "downstream" end, which consists of transportation, refining, and distribution.

The producing areas that attracted the most affiliate spending during this period were the North Sea, Canada, Southeast Asia, and Sub-Saharan Africa. Mainly because of their North Sea operations, British and Norwegian affiliates accounted for 31 percent of total petroleum spending during 1977-89--the largest share of all producing regions. This large share reflects several factors. First, the artificial shortage of Middle Eastern crude oil early in the period created excess demand for petroleum, which resulted in high prices; the high prices made tapping the higher cost North Sea deposits economically feasible. Production costs have been very high in this region because most of the deposits are relatively small and because they are located offshore and often require fixed drilling platforms and undersea pipelines to bring the oil ashore. Second, the political stability of the United Kingdom and Norway has made the North Sea a secure long-term supply source. Finally, the British Government has taken a relatively less active role in the industry than most governments of oil-producing countries; this lesser role has allowed for greater participation by private companies.

British and Norwegian affiliates' spending increased rapidly during 1978-81, when oil prices nearly tripled. Established oilfields were expanded, not only because production was yielding a higher return, but also because oilfield expansion lowered the per-barrel cost of pipelines and other fixed capital goods. In 1982-83, spending dropped, partly in response to the overcapacity created by oil-conservation measures and by sluggish economic activity in several major oil-consuming countries and partly because of higher British petroleum taxes. Spending fell again in 1985 and 1986, largely in response to a sharp decline in oil prices that made many North Sea projects uneconomic. Spending increased during 1987-89, as affiliates resumed projects that had been delayed because of falling oil prices.

Canada accounted for 19 percent of total petroleum spending during 1977-89--the second largest share of all petroleum producing regions. Spending by Canadian affiliates has been encouraged by the large size of the local and nearby U.S. markets and by Canada's potentially vast oil and gas reserves.

Canadian affiliates' spending accelerated during 1977-80, partly because of new searches for unconventional energy sources, such as the extraction of oil from tar sands and the production of synthetic fuels. Spending generally fell during 1981-84; the declines may have been partly in response to the newly created National Energy Program (NEP). The NEP sought to increase Canadian ownership and control of the petroleum industry by purchasing foreign-owned assets, providing special incentives to Canadian-owned companies, and increasing Government regulation of industry operations. Except for a sharp drop in 1986, affiliate spending generally rose for the remainder of the period.

Affiliates in Southeast Asia and Sub-Saharan Africa had the most rapid growth in petroleum spending in 1977-89, The growth was continual except during the mid-1980's, when falling oil prices depressed oil-export revenues and general economic activity. During 1977-89, host governments, through a variety of incentives and liberalizations of their direct investment policies, sought to attract foreign investors in order to obtain foreign exchange, increase employment, and gain technical expertise to aid their economic development programs.

Southeast Asian affiliates accounted for 12 percent of total petroleum spending during 1977-89. Spending was concentrated in Indonesia, Malaysia, and Thailand, where prospecting has yielded high success ratios and relatively large deposits. Except during the mid-1980's, spending was also encouraged by growing local petroleum demand fueled by the region's continuing economic development. In Singapore, which has no oil or gas reserves, large expenditures were made in the refining sector to keep pace with growing local demand for refined fuels.

Sub-Saharan African affiliates accounted for 5 percent of total petroleum spending during 1977-89. Although Nigeria has been the largest producer of crude oil, spending has, at times, been equal or greater in Angola, Cameroon, Sudan, and the Ivory Coast. Most of the interest in this area was sparked during the late 1970's by rising crude oil prices and the search for petroleum sources outside the Middle East. The 1977-82 surge in activity was also spurred by the establishment of oil industries in several West African countries, including Cameroon and the Ivory Coast. In addition, oil producers have been attracted to this relatively unexplored region by highly successful prospect drilling, by low offshore-production costs, and by the region's proximity to European markets and refineries.

Western Europe, the world's largest refining center, attracted the most spending by refinery affiliates during 1977-89. Spending in Germany, France, and Italy--the countries where petroleum affiliates are mainly engaged in refining--grew between 1977 and 1982 and remained fairly stable through 1989. Affiliates in these three countries together accounted for 5 percent of total petroleum spending during 1977-89. Most of the spending was to modify existing refineries to produce cleaner burning fuels, in response to declining demand for industrial fuel oil and to new antipollution legislation. Because of substantial overcapacity and low profitability, few European refineries were built during this period. Refining capacity had increased rapidly during the post-World War II economic boom, and it continued to grow until the OPEC price hikes and output restrictions in 1973. The price hikes, combined with fiscal disincentives aimed at reducing consumption of industrial fuel oils, led to a fall in demand for refined products as many Europeans began to conserve petroleum and switch to alternative fuels. Demand was further constrained by the economic recession during the early 1980's. The resulting excess capacity led to a sharp drop in downstream profits, as increased competition and lower, less efficient levels of production reduced margins on sales of refined products.

Affiliates in "international" accounted for 4 percent of total petroleum spending during 1977-89. Spending by these affiliates was robust during 1977-82, when new tankers were constructed and existing tankers were modernized to meet increased demand for petroleum by importing countries. Spending fell by one-half in 1983 and remained low throughout most of the rest of the 1980's. This weak spending reflected excess capacity in the tanker industry that resulted from low oil production in the Middle East and the creation of new oilfields closer to consuming areas.

Manufacturing.--Spending by manufacturing affiliates grew at an average annual rate of 3.7 percent during 1977-89. The increases in most years exceeded this rate, but they were offset by 3 years of decline in the early 1980's. From 1977 to 1980, spending increased at double-digit rates, growing from $10.5 billion to $19.5 billion. These increases reflected not only large spending projects in some industries but also rapid inflation overseas, which boosted the nominal value of spending. From 1980 to 1983, spending fell from $19.5 billion to $13.6 billion, partly because of project completions and partly because of poor conditions for new investment, including widespread economic recession, high interest rates, and corporate illiquidity. From 1983 to 1989, spending resumed its upward trend, ending the period at $23.4 billion; the increases resulted partly from falling interest rates and renewed economic growth in overseas markets.

The following paragraphs examine the three manufacturing industries that attracted the largest amounts of spending: Chemicals, transportation equipment, and nonelectrical machinery.

Chemical affiliates' spending grew at an average annual rate of 6.2 percent during 1977-89--substantially higher than the 3.7-percent rate for total manufacturing. During this period, facilities were built as large chemical companies responded to increased competition and sought to concentrate on high-technology specialty products. Spending was also boosted by increased use of plastics in the automotive, construction, and food-packaging industries. Especially after the mid-1980's, spending in petrochemicals grew rapidly in response to strong product demand and declining petroleum feedstock prices.

From 1977 to 1982, spending increased from $2.0 billion to $3.3 billion. In most areas, the spending went toward improvements to increase energy efficiency and to lower pollution emissions of existing plants. New construction was stalled because of overcapacity, following large additions to capacity in the 4 preceding years. A major exception was in Latin America, where new construction increased substantially in response to rising local demand.

In 1983, spending by chemical affiliates decreased 31 percent, to $2.3 billion. A delay in a large expansion by an Australian producer of alumina contributed significantly to the decrease. Latin American affiliates also decreased their spending, partly because of foreign exchange restrictions and other conditions related to the debt crisis. In addition, several European affiliates discontinued their production of basic chemicals.

During 1984-89, spending by chemical affiliates grew at double-digit rates, from $2.4 billion to $5.3 billion. Growth was especially rapid in Europe, where affiliates shifted production out of basic chemicals and into advanced specialty products to exploit their technological advantage over competitors in Eastern Europe. Spending by petrochemical affiliates of petroleum companies also contributed to the increase. During these years, parent companies were emphasizing their downstream activities in response to falling petroleum prices and strong product demand. Spending by Japanese affiliates, which increased rapidly throughout the 1977-89 period, grew especially fast during 1984-89, fueled by strong local demand.

Transportation equipment affiliates' spending grew at an average annual rate of 4.9 percent during 1977-89, largely because of their efforts to expand and integrate their global operations. During the late 1970's and early 1980's, parent companies began "world car" programs to develop standardized automobiles that could be built and sold in a variety of markets with only slight modifications. Such standardization permitted multinationals to exploit economies of scale by restructuring their operations so that certain units would specialize in producing components, such as engines or transmissions, for export to other units for final assembly; this restructuring continued during the 1980's. U.S. auto companies also sought to introduce product improvements in response to profound market changes. First, higher gasoline prices, augmented by stiff gasoline consumption taxes in many overseas countries and new fuel economy standards in the United States, led to a shift in consumer demand toward more fuel efficient vehicles. Second, increased competition from Japanese manufacturers inspired design improvements and heightened efforts to lower production costs.

During 1977-81, spending increased rapidly, from $1.6 billion to $5.2 billion. European affiliates boosted their spending from $0.8 billion to $2.7 billion. The increase largely reflected the establishment of "world car" programs. In Mexico and Brazil, spending increased from $0.1 billion to $0.7 billion. The increase partly reflected the construction of plants to meet Latin America's growing demand for cars and trucks; it also reflected construction of facilities to produce vehicle components to meet host government requirements on the local content of finished vehicles.

During 1981-84, spending dropped sharply, ending the period at $2.3 billion. The declines primarily reflected overcapacity caused by the 1980-82 economic recession in most developed countries and the debt-related economic difficulties in developing countries.

During 1984-89, spending increased rapidly in most years, reaching $4.8 billion by the end of the period. Plant construction in Canada, stimulated by strong U.S. car and truck sales, contributed to increases in 1984-86. Spending fell briefly in 1987, when projects were completed, but then rose sharply as affiliates in the European Communities sought to modernize their product lines in preparation for the 1992 initiative.

Nonelectrical machinery affiliates' spending during 1977-89 exhibited two periods of sustained growth that were separated by a period of sharp decline. Because the increases and decreases were largely offsetting, there was no significant trend for the entire period. Affiliates in office and computing machines accounted for most of the spending during this period. The most rapid growth occurred during 1977-80, when spending rose between 18 and 30 percent each year--from $3.0 billion to $5.6 billion. The increases were widespread by area and mainly reflected the computer industry's switch from small-batch manufacturing to mass production to meet the growing demand for mainframe computers. Demand was spurred by rapidly declining computer prices, which, in turn, reflected declining costs of semiconductors. In addition, to remain competitive with low-cost Japanese producers, affiliates invested in equipment to automate production.

During 1980-86, spending by nonelectrical machinery affiliates fell steadily and ended the period at $2.9 billion; this decline more than erased the prior period's increase. The decline mainly reflected project completions and a lack of new construction because of market saturation and lingering overcapacity.

After 1986, spending rose, reaching $3.4 billion in 1988; it then fell mildly in 1989 to $3.1 billion. A large share of the 1986-88 increase occurred in Japan, where an affiliate was developing products to be marketed through several newly formed joint ventures with local firms. Spending also was strong in Europe, where microcomputer producers were increasing capacity to exploit the rapidly growing market.

Other industries.--Spending by affiliates in all other industries combined grew at an average annual rate of 4.1 percent during 1977-89; as in petroleum and manufacturing, this rate was dampened by spending declines during the early 1980's. Major industries included in this category are wholesale and retail trade, services, mining, finance, and banking.(4)

Spending in these industries remained unchanged at $4.6 billion in 1977 and 1978 and then increased rapidly, reaching $8.8 billion in 1981. Growth was widespread by industry but was most rapid in mining because of rising mineral prices. Some of the most significant projects were the expansion of a coal mine and the construction of a bauxite smelter by Australian mining affiliates and the development of a copper mine in Chile.

In 1982, spending fell sharply, to $7.4 billion, and continued to decline moderately, to $6.3 billion, in 1985. Spending fell in all of the major subindustries, but the decrease was most pronounced in mining, where mineral prices dropped. The weak market for minerals led to the sale of a Canadian mine and the absence of new mining projects. In 1983, a finance affiliate in the United Kingdom accounted for much of the decline.

After a moderate rise in 1986, spending grew at double-digit rates, reaching $10.6 billion in 1989. These increases were largely accounted for by affiliates in services and finance. The increases in services reflected initial investments by rental car affiliates in the United Kingdom and Australia.

Spending by finance affiliates during 1986-89 was largely in the United Kingdom, where spending was prompted by the October 1986 deregulation of the country's financial industry. The deregulation was aimed at increasing competition within the industry and lowering the country's cost of capital. These changes, which opened new markets to foreign companies, attracted several large U.S. affiliates and prompted them to spend on office buildings and equipment.

Country-by-Industry Tables

This article presents detailed country-by-industry estimates of capital expenditures for 1988-90 in tables 3-5. Country-by-industry estimates for 1977-87 can be found in the following issues of the SURVEY OF CURRENT BUSINESS:

 Year Issue Page
 numbers
 1977-80 October 1981 60-63
 1981 September 1982 44
 1982-85 October 1986 24-27
 1986 September 1987 29
 1987 September 1988 30

[Tabular Data 1 to 7 Omitted] [Chart 1 to 2 Omitted]

(1)Capital expenditures estimates are for majority-owned nonbank foreign affiliates of nonbank U.S. parents. (An affiliate is majority-owned when the combined ownership of all U.S. parents exceeds 50 percent.) For affiliates other than those engaged in natural resource exploration and development, capital expenditures include all expenditures that are charged to capital accounts and that are made to acquire, add to, or improve property, plant, and equipment. For affiliates engaged in natural resource exploration and development, capital expenditures also include the full amount of exploration and development expenditures, whether capitalized or expensed. Capital expenditures are on a gross basis; sales and other dispositions of fixed assets are not netted against them. Capital expenditures are reported to BEA in current dollars; they are not adjusted for price changes in host countries or for changes in the value of foreign currencies, because the necessary data are unavailable. (2)Patterns in 1966-76 are examined in an article in the March 1976 SURVEY OF CURRENT BUSINESS, pages 20-29. (3)Changes in affiliate spending reflect changes not only in the volume of capital goods purchased but also in the prices of those goods in terms of U.S. dollars. The price changes are, in turn, affected by both U.S. and foreign inflation rates and by changes in the value of the dollar in relation to foreign currencies. The changes in dollar prices cannot be quantified because of a lack of information about the prices of capital goods purchased by affiliates, the currencies in which the purchases are made, and the effects of price and exchange-rate movements on investment decisions. However, because dollar depreciation increases the dollar cost of capital goods whose prices are denominated in foreign currencies, it tends to boost nominal spending; dollar appreciation, in contrast, tends to lower nominal spending. Foreign inflation tends to raise nominal spending, but, if the foreign inflation is above (below) that in the United States, its effects may be partly or wholly offset by a rise (fall) in the value of the dollar. (4)In tables published in other issues of the SURVEY (see box "Country-by-Industry Tables"), the treatment of several industries in this category was changed beginning with 1982. The 1982 changes include the following: (1) "Mining," which was previously shown separately, is combined with "other industries"; (2) "services," which was previously combined with "other industries," is shown separately; and (3) the "trade" category has been dropped, "wholesale trade" is shown separately, and "retail trade" is combined with "other industries." These changes affect the detail that can be shown for "other industries" in table 6 of this article.