U.S. multinational companies: operations in 1988.

Mataloni, Raymond J., Jr.

U.S. Multinational Companies: Operations in 1988

IN 1988, operations of U.S. multi-national companies (MNC's) continued to grow, but at a slower pace than in 1987. Assets of U.S. MNC's increased 5 percent, compared with a 12-percent increase in 1987, as the assets of both U.S. parents and their foreign affiliates grew more slowly (table 1). Sales by MNC's grew 7 percent after an 8-percent increase, and employment was virtually unchanged after a 1-percent increase. The slowdown in sales and employment was much less than that in assets, because slower or negative growth for U.S. parents was largely offset by faster growth for foreign affiliates.

Parent companies' assets increased 4 percent after a 10-percent increase. Their sales increased 5 percent after a 6-percent increase, and their employment fell slightly after a 1-percent increase.

Affiliates' assets increased 8 percent, compared with a 19-percent increase in 1987. In contrast, employment and, to a lesser extent, sales of foreign affiliates accelerated. Affiliate employment increased 2 percent after a year of negligible growth; the 1988 increase, although modest, was the largest since this data series began in 1983. After increasing 13 percent in 1987, affiliate sales increased 14 percent--also the largest increase since 1983.

Affiliate assets and sales were probably affected by changes in the value of the U.S. dollar against major foreign currencies. In 1984-87, the dollar values of these measures were probably raised by rapid dollar depreciation, whereas, in 1988, the dollar's value was relatively more stable. Thus, in the absence of exchange-rate changes, the growth in affiliate assets and sales in 1988 probably would have been stronger.

The expansion of overseas operations in 1988--as measured by employment, which is not directly affected by currency fluctuations--may have been encouraged by rising profitability abroad.(1) Overseas profits of U.S. MNC's rose worldwide, but most notably in Europe and Southeast Asia. In Southeast Asia, for example, improved profitability was fueled by rapid economic development and increases in per capita spending.

Classification changes.--Data for U.S. parent companies were significantly affected by industry reclassifications. Continued merger and acquisition activity in the United States led to changes in the classification of parent companies whose principal business activity shifted because of the merger or acquisition. In addition, the adoption of Financial Accounting Standards Board Statement Number 94 (FASB-94) in October 1987 required parent companies to consolidate all of their majority-owned subsidiaries on their financial statements for fiscal years ending on or after December 15, 1988. Previously, firms were not required to consolidate domestic subsidiaries whose operations differed substantially from those of the parents. BEA had allowed these subsidiaries to file separate reports and had treated them as separate U.S. parent companies. With this accounting change, a number of large U.S. parent companies in the survey sample were consolidated. In all cases, the parents consolidated were previously classified in separate industries, whereas the new parent was classified in the single industry in which the consolidated entity's sales were largest.(2)

Organization of the article.--This article discusses selected measures--employment, assets, U.S. merchandise trade, and sales--of MNC operations in 1988. Other measures were also collected in the annual BEA survey upon which the estimates are based. Some of them are shown in the accompanying tables, and others are available in separate publications or on diskette. All of the estimates cover nonbank U.S. parent companies and their nonbank foreign affiliates.(3)

Employment

Employment by U.S. MNC's worldwide remained virtually unchanged in 1988, at 24.3 million workers, because of offsetting changes in parent and affiliate employment (table 2). While parent employment decreased slightly, to 17.9 million, affiliate employment increased 2 percent, to 6.4 million.

U.S. parents.--For U.S. parents, decreases in employment in manufacturing and petroleum were partly offset by an increase in employment in services (tables 3 and 4). In manufacturing, the largest decreases were in foods, electrical machinery, and transportation equipment. In both foods and electrical machinery, divestitures accounted for much of the decrease. In transportation equipment, the decrease reflected falling auto production, increasing reliance on outside suppliers for parts, and advances in factory automation; in addition, an auto parts manufacturer sold off several unrelated product lines. In petroleum, the decline in employment partly reflected the reclassification of a large parent firm to finance after it was consolidated with its domestic finance subsidiary in accordance with FASB-94. The increase in employment in services resulted from the expansion of a temporary-employment services franchise and the entry of a new parent company in armored car services into the survey universe.

Foreign affiliates.--Foreign affiliates, unlike their U.S. parent firms, increased their employment in 1988 (tables 5-7). Nearly two-thirds of the increase was in Canada, where major acquisitions were made, and in Australia, where labor intensive industries stepped up operations. In Canada, the increases were spread among several industries; significant increases resulted from the purchase of a Canadian natural gas producer by a U.S. petroleum company, the establishment of a major soft drink manufacturer, and expansions of retail trade affiliates. In Australia, retail trade affiliates were largely responsible for the increase.

Significant employment growth also occurred in some Latin American countries, such as Mexico and Chile, and in virtually all of the newly industrialized countries of Southeast Asia. In Mexico, affiliates producing automotive parts, household appliances, and electrical machinery accounted for most of the increase. Nearly all these affiliates, which were mainly engaged in labor-intensive assembly operations, were located near the U.S. border and were taking part in the Mexican Government's maquiladora program. Under this program, U.S. producers have been able to export components free of customs duties to Mexican affiliates for assembly, if at least 80 percent of the finished goods are exported back to the United States. U.S. duties on the goods are levied only on the value added in Mexico. In Chile, nearly one-half of the increase in employment resulted from the establishment of new affiliates; the new investments may have been encouraged by the country's relatively favorable business climate and pro-foreign-investment policies.

In the newly industrialized countries of Southeast Asia, roughly one-half of the increase occurred in industries serving the local market, namely snack foods, soft drinks, and fast food franchises. The remaining one-half largely resulted from expansion by producers of computer memory chips in the electrical components and accessories industry.

In contrast, affiliate employment declined in South Africa. The decline was widespread by industry but was most pronounced in metal mining and manufacturing, which partly reflected the sale of foreign affiliates.

By industry, employment growth was widespread; the largest increase occurred in "other industries";(4) in services; in finance (except banking), insurance, and real estate (FIRE (except banking)); and in manufacturing. "Other industries" accounted for nearly one-half of the overall increase. The rapid overseas expansion of a discount department store chain and a fast food chain and the establishment of a large construction firm in the United Kingdom were primarily responsible for the increase in "other industries." In services, the increases were mainly in Canada and the European Communities (EC(12)). The establishment of new affiliates--a Canadian armored transport services affiliate and advertising and telecommunications affiliates in various EC(12) countries--accounted for most of these increases. Also contributing to the increases in services was the establishment of an architectural affiliate in Central America.

In FIRE (except banking), the largest increase occurred in Japan, where brokerage affiliates expanded their operations following their 1987 admission to the Tokyo Stock Exchange. Employment also grew substantially in Canada, reflecting, in part, the acquisition of a large real estate firm by a U.S. parent company. In manufacturing, affiliates in chemicals and transportation equipment more than accounted for the increase. In chemicals, nearly all of the increase occurred in the EC(12). Over one-half of that increase involved new ventures, either acquired or established. In transportation equipment, one-third of the increase in employment occurred in Mexico and mainly reflected U.S. auto manufacturers' increased production of components in their maquiladora plants. Automakers also increased employment at their other Mexican plants, in part to increase production of automobiles for export to the U.S. market. Mexican automobile exports to the United States--mostly from affiliates of U.S. companies--grew 30 percent in 1988.

MOFA's.--In 1988, MOFA's employed 4.8 million workers, or 74 percent of total foreign affiliate employment (tables 8-10). For some purposes, analysis of MOFA's is preferable to that of all nonbank affiliates, because MOFA's represent operations in which U.S. MNC's have a controlling interest.(5) In addition, more detailed data are collected for MOFA's than for other affiliates.

Of countries having total affiliate employment of more than 50,000 persons, the MOFA shares were much higher than average in Malaysia (92 percent), Canada (91 percent), and Singapore (90 percent). The MOFA shares were lower than average in India (20 percent), Japan (34 percent), and South Korea (39 percent).

Employment by MOFA's generally followed the same industry pattern as that of employment by all affiliates. MOFA employment grew in all major industries; the largest growth occurred in manufacturing and "other industries," and the smallest growth occurred in petroleum and wholesale trade.

Assets

Worldwide assets of U.S. MNC's grew 5 percent in 1988, to $5,557 billion, after increasing 10 percent in 1986 and 12 percent in 1987. Assets of foreign affiliates grew faster than those of their parents for the third consecutive year.

As mentioned earlier, increases in affiliate assets during 1984-87 probably were affected by the rapid decline in the value of the U.S. dollar in that period. Affiliate assets increased 10 percent in 1985, 12 percent in 1986, and 19 percent in 1987; rates of decline in the value of the dollar during this period were of about the same or greater magnitude.(6) Thus, absent the translation effects, the increases in affiliate assets, if any, would probably have been much smaller. In contrast, the dollar was relatively more stable in 1988; thus, the growth in affiliate assets in 1988 probably would have been stronger if the effects of these exchange-rate changes were excluded.

U.S. parents.--Assets of U.S. parents increased 4 percent, to $4,353 billion. Merger and acquisition activity contributed to this increase by bringing new companies into the survey sample and by causing parent company assets to be revalued to reflect what the purchaser paid for them, including any premium for "goodwill."(7)

Roughly 60 percent of the increase in parent company assets was in FIRE (except banking). This increase was related to the wave of mergers and acquisitions in the brokerage industry that followed the collapse of stock prices in October 1987. Factors prompting the mergers and acquisitions included the acquired firms' need for cash and the substantial declines in their stock prices, which made them more attractive candidates for acquisition. Several large transactions resulted in new companies entering the survey universe.

U.S. parents in manufacturing accounted for most of the remaining increase in assets. The largest increases were in chemicals, foods, and "other manufacturing." In chemicals, most of the increase resulted from the acquisition of an MNC cosmetics manufacturer by a non-MNC holding company. In food, the substantial increase resulted from the goodwill generated when one large U.S. parent acquired another. In "other manufacturing," the increases were mainly in the paper, tobacco, and lumber industries. The increase in paper manufacturing was due to the expansion of production facilities and the entry of a new parent firm into the survey universe. In tobacco manufacturing, the merger of a U.S. parent in cigarette manufacturing and a U.S. insurance company not previously in the survey universe caused the increase in assets. In lumber manufacturing, the increase in parent assets reflected the construction of new production facilities and a rise in mortgage loans issued by a diversified parent.

The increases in manufacturing and FIRE (except banking) were partly offset by a decrease in petroleum. The decrease mainly reflected the sale of assets by two petroleum parents in 1988. One sold its department store chain, and the other sold various assets as part of its post-bankruptcy restructuring. The previously mentioned reclassification of a petroleum wholesaling parent to finance also contributed to the decline.

Foreign affiliates.--Assets of foreign affiliates rose 8 percent, to $1,204 billion. Affiliates in FIRE (except banking) accounted for 58 percent of the increase, more than one-half of which was in the EC(12). Assets of Japanese affiliates increased 64 percent, largely in response to a brokerage firm's expansion following its 1987 admission to the Tokyo Stock Exchange. In Canada, assets of affiliates in FIRE (except banking) were boosted by the acquisition of a major Canadian real estate developer by a U.S. parent.

Assets of manufacturing affiliates also increased substantially; the largest increases were in Japan, "other Asia and Pacific," Latin America, and Canada. In Japan and "other Asia and Pacific," minority-owned firms were responsible for virtually all of the increase. In Latin America, assets of manufacturing affiliates increased 10 percent--the most rapid increase since this survey began in 1983. The construction of new facilities and the expansion of existing ones in Chile and Brazil accounted for a significant part of the increase. In Chile, one of the largest new ventures was financed through the Chilean Government's debt-for-equity-swap plan.(8) In Canada, the stock of plant and equipment grew rapidly as many new affiliates were established and as existing affiliates expanded capacity.

U.S. merchandise trade

U.S. merchandise exports and imports associated with U.S. MNC's increased in 1988 for the second consecutive year (table 11). Unlike in 1987, however, MNC-associated U.S. exports grew faster than MNC-associated U.S. imports. Exports--the sum of goods shipped to affiliates by all U.S. persons and goods shipped to unaffiliated foreigners by U.S. parents--increased 20 percent, to $215 billion. Imports--the sum of goods shipped by affiliates to all U.S. persons and goods shipped by unaffiliated foreigners to U.S. parents--increased 8 percent, to $180 billion.

The increase in MNC-associated exports was fairly evenly split between exports shipped to affiliates and those shipped to unaffiliated foreigners. Parents in manufacturing and wholesale trade were responsible for nearly all of the increase. U.S. exports associated with MNC's accounted for 67 percent of total U.S. merchandise exports in 1988.(9)

Imports shipped by affiliates to their U.S. parents accounted for more than four-fifths of the total increase in MNC-associated imports. Imports shipped to U.S. parents in manufacturing more than accounted for the increase, which was partly offset by a decline in imports shipped to parents in petroleum. U.S. imports associated with MNC's accounted for 41 percent of total U.S. merchandise imports in 1988.(10)

Sales

Sales by U.S. MNC's increased 7 percent, to $4,022 billion, after an 8-percent increase in 1987. Affiliates' sales grew faster than those of their parents--14 percent, compared with 5 percent--and accounted for most of the overall increase. As was the case with assets, the increase in affiliates' sales in 1988 might have been significantly larger were it not for currency translation effects.(11)

Sales by U.S. parents increased 5 percent, to $2,827 billion. Increases were widespread by industry; the only significant decline occurred in petroleum. Manufacturing parents accounted for two-thirds of the increase; the largest increases occurred in transportation equipment, chemicals, non-electrical machinery, and "other manufacturing." In transportation equipment, the increase was largely due to the consolidation of U.S. automakers and their domestic finance subsidiaries in accordance with FASB-94. In chemicals, sales growth was widespread as a result of rising demand. In nonelectrical machinery, computer manufacturers had the largest increase; however, the rate of growth was faster in farm equipment manufacturing--because of rising agricultural exports--and in construction equipment manufacturing--because of rising U.S. home sales. In "other manufacturing," U.S. parents in instruments and related products, paper, and lumber had the largest sales increases. In instruments, a domestic finance subsidiary was consolidated with its parent firm. In paper and lumber, the increases reflected favorable markets. In petroleum, the decline resulted from the previously mentioned divestments of assets.

Sales by foreign affiliates grew 14 percent, to $1,194 billion. Manufacturing affiliates had the largest and most rapid sales growth. Sales by affiliates in wholesale trade and services also increased substantially. In these three industries, sales increased worldwide, but growth was particularly rapid in Southeast Asia, Latin America, and Canada.

In manufacturing, well over one-half of the increase by Japanese affiliates was generated by minority-owned auto manufacturing affiliates; in addition, a computer manufacturing affiliate substantially increased its local sales. In "other Asia and Pacific," most of the rise in sales resulted from affiliates' worldwide exports of computer equipment and semiconductors. In Latin America, local sales of automobiles, computers, and food products largely accounted for the increase. In Canada, rising transportation equipment sales in both the domestic and U.S. markets accounted for nearly one-half of the increase.

In wholesale trade, the increase in sales by Japanese affiliates was mostly generated by wholesalers of automobiles, computers, and nondurable goods--chiefly, cigarettes. Increases in "other Asia and Pacific" were concentrated in Hong Kong; they reflected increased non local sales by affiliates engaged in marketing products produced in Southeast Asia, such as toys, tropical fruits, and tires. In Latin America, non local sales by commodity brokers in the Caribbean and by agricultural brokers and computer manufacturers in Central and South America accounted for much of the sales increase.

In services, sales by affiliates grew most rapidly in Japan and Canada. The increased sales reflected new investments in the motion picture industry in both countries. Rising sales by a Japanese film processing affiliate and the establishment of a Canadian architectural affiliate also contributed to the increases.

Petroleum was the only major industry in which affiliates' sales fell. Most of the decline was in Europe; it resulted from the divestiture of a large West German petroleum affiliate and from widespread overcapacity in the European oil refining industry. In most other areas, declines reflected falling oil prices resulting from overproduction in some OPEC countries.

Sales of services.--The remainder of this section deals with sales of services by U.S. MNC's.(12) The collection of information on such sales is part of a larger BEA effort to improve and expand the information it provides on international sales of services.

Of the $2,827 billion in sales by non-bank U.S. parent companies in 1988, goods accounted for 71 percent, and services for 29 percent (table 12).(13) Of the $928 billion in sales by MOFA's, goods accounted for 88 percent, and services for 12 percent.

Of total U.S. parent sales of services to foreigners, 77 percent were to unaffiliated foreigners. These sales increased 54 percent in 1988, to $16 billion. Most of the increase occurred in services industries, chiefly business information services, brokerage, insurance, air travel, and telecommunications. However, some of the fastest growth occurred in manufacturing industries, where exports of services are less common. The growth largely reflected a new U.S. venture by a chemical manufacturing parent to supply services to the petroleum processing industry at home and abroad and the acquisition of a U.S. international engineering services firm by a construction equipment manufacturer.

Sales of services by parent companies to U.S. persons increased much less rapidly--only 5 percent--in 1988. Parent companies in FIRE (except banking) accounted for a large share--37 percent--of the total increase, mainly because of the previously mentioned mergers and acquisitions. A related increase occurred in manufacturing; it reflected the consolidation of an electronic equipment manufacturer and its domestic finance subsidiary in accordance with FASB-94. Much of the remaining increase occurred in various services industries; one of the largest increases resulted from the entry of a new U.S. parent company into the survey universe when a regional telephone company acquired its first foreign affiliate.

For MOFA's, sales of services increased 14 percent. However, the services share of total MOFA sales remained virtually unchanged at 12 percent. In the 4 previous years, in contrast, sales of services grew faster than sales of goods, and services' share of total MOFA sales increased.

Sales to unaffiliated foreign (non-U.S.) persons accounted for nearly all of the increase in sales of services by MOFA's. MOFA's in FIRE (except banking), services, wholesale trade, and manufacturing had the largest increases. In FIRE (except banking), the increase reflected the previously mentioned acquisition of a Canadian real estate firm and rising foreign sales by MOFA's in life insurance. In services, it reflected the establishment of new advertising affiliates in the EC(12). In both wholesale trade and manufacturing, affiliates of computer companies increased their sales of user-support services. [Tabular Data 1 to 12 Omitted]

(1)For majority-owned foreign affiliates (MOFA's)--affiliates in which the combined ownership of all U.S. parents exceeds 50 percent--net income rose from 14 percent of owners' equity in 1986 and 15 percent in 1987 to 18 percent in 1988. Although this measure of profitability is subject to several limitations--including its use of book values rather than current values in calculating owners' equity and its applicability to existing investments rather than to the new investments being considered--the increases probably raised MNC's expectations about the profitability of additional investments. (2)For example, the domestic finance subsidiaries of two U.S. auto manufacturers, which had previously been treated as separate U.S. parent companies in finance, were consolidated with the U.S. auto manufacturers and were reclassified to transportation equipment manufacturing. In nearly all cases, these changes affect only the classification of U.S. parent companies for 1988 forward; although early application of FASB-94 was encouraged, few companies voluntarily submitted revised data to BEA for 1987. (3)A U.S. parent is a U.S. person that owns or controls, directly or indirectly, 10 percent or more of the voting securities of an incorporated foreign business enterprise or an equivalent interest in an unincorporated foreign business enterprise. A foreign affiliate is a foreign business enterprise so owned or controlled. A U.S. MNC consists of a U.S. parent company and its foreign affiliates.

In the estimates, sales and total assets of MNC's are shown on an aggregated basis--that is, parent and affiliate data have been summed. The sums contain duplication because of intercompany positions and transactions between parents and affiliates and among affiliates of the same parent. The data needed to derive consolidated sales and assets of MNC's are not available.

The estimates are on a fiscal year basis. An individual parent's or affiliate's 1988 fiscal year is its financial reporting year that ended in calendar year 1988. The estimates were obtained by expanding the sample data collected in BEA's annual survey of U.S. direct investment abroad to universe totals. (4)"Other industries" consists of agriculture, forestry and fishing; mining; construction; transportation, communication, and public utilities; and retail trade. (5)Although U.S. MNC's often prefer to hold a controlling interest in their affiliates, many considerations could lead them to have a minority share in a foreign enterprises. In some cases, host governments may restrict foreign ownership of domestic firms. In other cases, U.S. MNC's may acquire minority interests to share designs, technology, marketing networks, or production facilities with foreign firms. (6)On a trade-weighted basis against the currencies of 10 industrial countries, from December to December, the U.S. dollar depreciated 16 percent in 1985, 15 percent in 1986, and 17 percent in 1987; it appreciated 4 percent in 1988. For assets, December-to-December exchange-rate changes provide an approximate measure of currency translation effects because, in accordance with the Financial Accounting Standards Board Statement Number 52 (FASB-52), assets denominated in foreign currencies are translated using end-of-fiscal-year rates. (7)For accounting purposes, any premium paid for an acquired company's assets beyond their book value is treated as an increase in the assets of the consolidated firm. Part of this premium represents a restatement of the acquired company's assets from book value to fair market value. Any premium remaining is recorded as "goodwill," which is considered an amortizable, intangible asset. In mergers and acquisitions between large parent companies, billions of dollars in goodwill may be generated. If the premium is not sufficient to raise the assets to their fair market value, negative goodwill is recorded. (8)Under this plan, private foreign investors have been able to purchase Chilean Government debt from the original lenders at a discount and then redeem the debt at the Chilean central bank at a rate closer to its face value. In most cases, the currency earned must then be invested in local businesses. (9)The data on total U.S. exports, including reexports and military grant shipments, used in this comparison are on a Census basis. (10)The data on total U.S. imports used in this comparison are on a Census Bureau basis. (11)On a trade-weighted basis against the currencies of 10 industrial countries, the average monthly value of the U.S. dollar declined 14 percent in 1987 and 4 percent in 1988. For affiliate sales, unlike for their assets, average monthly exchange rates provide an appropriate measure of currency translation effects, because, in accordance with FASB-52, sales denominated in foreign currencies are translated using weighted average exchange rates for the year.

The divergent effects of currency translation on affiliate assets and sales in 1988 reflected differences between the movements in December-to-December and average monthly exchange rates. During 1987-88, the dollar reached its lowest value in December 1987; thus, the December-to-December comparison used for assets showed the dollar appreciating. However, the dollar's average value for the year, used for sales, was higher in 1988.

Although these changes in exchange rates probably boosted affiliates' sales in both 1987 and 1988, the effect was proportionately larger in 1987. (12)For purposes of distributing sales between goods and services, "services" are defined as activities characteristic of a particular group of industries: The "services" division of the Standard Industrial Classification, petroleum services, FIRE (except banking), agricultural services, metal mining services, and transportation, communication, and public utilities. A parent or affiliate need not be classified in one of these industries to have sales of services; in fact, a significant portion of sales of services is accounted for by entities in manufacturing and other goods-producing industries that sell services as a secondary activity. Additional details on the methodology underlying BEA's data on sales of services by MNC's are in "U.S. Sales of Services to Foreigners," SURVEY OF CURRENT BUSINESS 67 (January 1987): 22--41. (13)In examining U.S. parent sales of goods in table 12, it should be noted that parent sales of goods to foreign persons (which are not separately available) and U.S. parent merchandise exports (shown in table 11) are similar, but not conceptually identical. The major difference between them is that sales are recorded on the basis of the location of the person to whom the sales are charged and merchandise exports are recorded on the basis of the location of the person to whom the goods are shipped. Although the two locations usually are the same, goods are sometimes charged to a person in one country but shipped to a person in another. The time of recording a transaction may also differ between the two measures, because goods may not be charged in the same period that they are shipped. Further differences may arise because of differences in the sources companies use to compile the data: Sales usually are compiled on the basis of accounting records, whereas merchandise exports usually are compiled on the basis of export declarations or other shipping documents.