Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1991.

Mataloni, Raymond J., Jr.

Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1991

Majority-owned foreign affiliates of U.S. companies plan to increase capital expenditures 1 percent in 1991, to $56.6 billion, after a 17-percent increase in 1990 (table 1, chart 1).(1) The levels of spending in these years, if realized, will be significantly higher than in any year of the 1980's. During the 1980's, spending peaked at $44.8 billion in 1982, fell sharply in 1983, and then showed little change until 1988 when it began to increase rapidly. By 1991, spending will exceed the 1982 level by 26 percent.

Table : [Tabular Data Omitted]

The high level of capital expenditures projected for 1991 indicates that U.S. parent companies plan to maintain their recent emphasis on overseas operations. Petroleum firms - attracted by host government incentives and potentially larger exploitable oil and gas reserves than those in the United States - have been increasing their overseas spending, relative to their domestic spending, for exploration and development. Manufacturers have been attracted by favorable conditions abroad, such as increasing economic integration in the European Communities, movement toward market-oriented economic systems in Eastern Europe, an improved investment climate in Latin America, and rapid economic growth in East Asia. In addition, the prospect for slower economic growth in the United States may be spurring parent companies' spending overseas.

These estimates of planned expenditures are the first in a series of five estimates for 1991, and experience has shown that subsequent estimates may differ substantially.(2) Firms' changing perceptions of business conditions are a principal source of revisions. For example, subsequent estimates for 1991 may be substantially revised because the most recent survey was conducted in June of this year, before the recent Iraqi invasion of Kuwait. Developments in the Middle East following the invasion may influence worldwide economic conditions, investment opportunities, and oil prices - each of which may change firms' capital spending plans.

In addition, to the extent that they do not offset one another, changes in the value of the U.S. dollar in relation to foreign currencies and changes in foreign inflation rates can cause revisions is successive estimates of spending for a given year. Rising foreign inflation and dollar depreciation both tend to raise the level of affiliate spending in U.S. dollars, and falling foreign inflation and dollar appreciation tend to lower it.

Later estimates may also differ because, at the time of the first survey, some reporters may not have completed their detailed capital spending budgets for the following year. Lacking better information, these reporters may submit estimates that are based largely on current-year spending, or they may derive their estimates from multiyear spending plans that have been adjusted to take account of work completed or postponed.

BEA is evaluating its capital expenditures survey and the estimates derived from it, including the usefulness of the first estimates.

Revisions for 1989 and 1990

The estimates of spending for 1989 have been revised downward by 1 percent from the level reported 6 months ago (table 2). The small overall revision resulted from offsetting changes among industries. A decrease in petroleum was largely offset by increases in "other manufacturing" and nonelectrical machinery.(3)

Table : Table 2. - Revisions to Capital Expenditures Estimates, 1989-90

 Percent change
 from preceeding
 1989 1990 year
 1989 1990
 Millions of
 dollars
Date of BEA survey:(1) 44,097 n.a. 4 n.a.
 June 1988 48,079 n.a. 12 n.a.
 June 1989 48,855 49,924 15 2
 December 1989 48,443 54,895 14 13
 June 1990 47,904 55,968 13 17
 Percent

Addenda:

Revision from previous to

most recent estimate -1 2

Revision from first to most

recent estimate 9 12

n.a. Not applicable.

1. Results of the June 1988, December 1988, June 1989, and December 1989 surveys were published in the September 1988, March 1989, September 1989, and March 1990 issues, respectively, of the Survey of Current Business. Results of the June 1990 survey are presented in this article.

Planned spending for 1990 was revised upward by 2 percent. Roughly one-half of the revision is in nonelectrical machinery and mostly reflects the first reporting of substantial investments to produce an innovative type of semiconductor. The introduction of new affiliates into the survey sample also contributed to the upward revision. Some of the larger affiliates included a Canadian paper producer, a Hungarian glass manufacturer, and a Brazilian plastics producer.

The most recent estimates for 1989 and 1990 are based on a survey conducted in June 1990; the previous estimates were based on a survey conducted in December 1988.

Area Highlights

In the past 3 years, spending by affiliates has grown faster than the worldwide average in the European Communities (EC(12)), "other Asia and Pacific," and "Latin America and other Western Hemisphere." Although affiliate spending in these regions is projected to decelerate, it will remain at historically high levels.

Affiliates in the EC(12) plan to hold their spending constant, at $27.5 billion, after an average annual increase of 20 percent in 1988-90. Major factors attracting capital spending to this region are the EC(12)'s increasing economic integration, its new industrial policies, and U.S. parent companies' desire to serve Eastern Europe's recently opened markets through their EC(12) affiliates.

The EC(12)'s 1992 single-market initiative seeks to eliminate remaining trade barriers and to otherwise increase the economic integration of member countries. Two provisions of the initiative are the establishment of uniform product standards and the reduction of documentation and inspection requirements for shipments between member countries. By widening markets, expediting shipments, and lowering transportation costs, such measures may be encouraging EC(12) affiliates to expand capacity.

Industrial policies issued by the European Commission, which are separate from the 1992 initiative, also appear to be affecting affiliate spending. For example, a newly adopted rules-of-origin policy, which imposes customs duties on "non-European" computer chips, may be accelerating the investments of semiconductor manufacturing affiliates in the EC(12).(4) Additional concerns about rules-of-origin policies may be spurring Japanese direct investment in European automobile manufacturing; as a result of this rising competition, U.S.-owned automotive affiliates in the EC(12) have spent large sums to reduce production costs and introduce product improvements.

In addition, Eastern Europe's market-oriented economic reforms are encouraging some parent companies to serve those markets by increasing the production and distribution capabilities of their EC(12) affiliates, rather than by investing directly in Eastern Europe. The apparent reluctance to invest in Eastern Europe at this time may reflect that region's less-developed infrastructure, financial markets, and commercial legal systems.

In "other Asia and Pacific," affiliates plan to increase spending 3 percent, to $5.0 billion, after an average annual increase of 30 percent in 1988-90. Rapid economic development in host countries has generated favorable markets for affiliates in all industries. Petroleum, mining, and geothermal energy affiliates have been attracted to this region by its reserves of natural resources and by the growing demand for energy and raw materials. Spending by affiliates in other industries has been encouraged by rising consumer incomes and the availability of low-cost, semiskilled labor.

In "Latin American and other Western Hemisphere," affiliates plan to hold spending constant, at $5.2 billion, after an average annual increase of 17 percent in 1988-90. Capital spending has been encouraged by liberazation of regulations governing foreign direct investment and by a generally more favorable economic climate.

Industry Detail

The small change in total planned spending in 1991 reflects offsetting year-to-year changes among industries; for example, affiliates plan to increase spending 12 percent in nonelectrical machinery manufacturing but to decrease spending 21 percent in primary and fabricated metals manufacturing. Tables 3-5 provide detailed country-by-industry estimates of capital expenditures for 1989-91.

Petroleum

Petroleum affiliates plan to increase spending 2 percent in 1991, to $15.9 billion, after an 18-percent increase in 1990. Although most U.S. multinational oil companies are maintaining their emphasis on overseas exploration and development, several factors tended to dampen the growth in planned spending abroad. First, affiliates may have been conservative in projecting spending for oil and gas fields whose potential yields were highly uncertain at the time of this survey. Second, a decline in crude oil prices during the first half of this year, when the survey was taken, may have lowered firms' expected return on investment. Finally, planned spending for 1991 was dampened by the projected completion of several large projects during 1990.

Significant increases in spending are planned in Canada, Norway, Nigeria, "other Asia and Pacific," Ecuador, Peru, and "international."(5) Two Canadian affiliates plan large increases; one affiliate plans to develop oil reserves off the coast of Newfoundland, and the other plans to extract natural gas in response to rising North American demand. In Norway, the increase reflects the planned construction of oil-drilling platforms. The sizable increase planned by Nigerian affiliates is partly in response to an affiliate's recent joint venture with the State-owned petroleum company to develop offshore oil reserves. In "other Asia and Pacific," petroleum activity continues to be encouraged by the region's rapid economic development and its growing demand for oil. The construction of oil refineries in Singapore, the exploration and development of inland oil reserves in Papua New Guinea, and the extraction of natural gas in Malaysia have all contributed to the region's spending growth. In Ecuador, affiliate spending is projected to double following the host Government's recent renewal of affiliates' oil development contracts. The increases in Peru follow the resolution of a financial dispute between an affiliate and the State-owned oil company. Affiliates in "international" plan to increase spending 28 percent; the increase reflects the construction of oil tankers in response to rising worldwide oil imports.

Significant decreases in spending are planned in the United Kingdom, the Caribbean, Indonesia, Australia, and the United Arab Emirates. A British affiliate plans to cut its spending substantially following reconstruction of the North Sea facilities that were destroyed in an explosion in 1988. Other British affiliates plan lower spending upon completion of oilfield development projects. In the Caribbean, a large decline is projected following the refurbishing of oil-refining facilities. In Indonesia, where several large oilfield development projects are nearing completion, affiliates plan to decrease spending after 3 years of rapid growth. Australian affiliates plan lower spending following the completion of exploration and development projects. In the United Arab Emirates, spending is projected to decline following a U.S. parent company's acquisition of oil extraction facilities in 1990.

Manufacturing

Manufacturing affiliates plan to increase spending 1 percent in 1991, to $28.2 billion, after an 18-percent increase. By area, significant increases are planned in the EC(12), South America, Japan, and Australia. These increases are offset by declines planned in Canada, Mexico, "other Asia and Pacific," and "other Europe."(6) By industry, planned increases in nonelectrical machinery, transportation equipment, and chemicals are largely offset by planned decreases in primary and fabricated metals, "other manufacturing" (mainly rubber and paper products), electrical machinery, and food products.

In nonelectrical machinery, spending is projected to increase 12 percent, to $5.1 billion, after an 18-percent increase. Spending by affiliates in the EC(12) accounts for approximately two-thirds of the planned increase. In Ireland, a producer of personal computers is expanding capacity to meet rapidly growing product demand. Else-where in the EC(12) and in Japan, the increases are largely attributable to the construction of facilities to produce a new generation of computer chips made of advanced ceramic materials.

Transportation equipment affiliates plan to increase spending 5 percent, to $5.9 billion, after a 25-percent increase. Parent companies are focusing their efforts on overseas markets, where competition is rising and where demand is projected to increase faster than in the United States. In West Germany, the large spending increases reflect a number of investments to introduce new passenger car models and to expand capacity; Belgian affiliates plan a related increase to produce components for these new models. Significant increases are also slated for Australia and Brazil. The increases in these countries are partly offset by reduced spending in the United Kingdom, Canada, Spain, and Mexico. British and Mexican affiliates plan to reduce spending at certain plants at which there have been recent labor disputes. In Canada and Spain, major projects were completed.

Chemical affiliates plan to increase spending 3 percent, to $6.6 billion, after a 21-percent increase. Over one-half of the overall increase will occur in Japan, where a manufacturer of personal-care products is building a product development center. In Europe, increases in Ireland and the United Kingdom are widespread among affiliates. Affiliates in Taiwan, Jamaica, and Chile also plan to raise spending. These increases are partly offset by decreases related to the completion of projects in Canada, Belgium, and Malaysia.

Decreases in capital spending are planned in the remaining manufacturing industries. In primary and fabricated metals, affiliates plan a 21-percent decrease, to $1.3 billion, after a 27-percent increase. This sharp downturn largely reflects the expected completion of a Canadian aluminum smelter. In addition, an affiliate engaged in copper processing and mining in Thailand plans to reduce mine expansions.

In "other manufacturing," affiliates plan to decrease spending 6 percent, to $4.9 billion, after a 4-percent increase. The decline mainly reflects the expected completion of projects, which include tire plants in Canada and Brazil, a reinforced plastics factory in the United Kingdom, and a household paper goods plant in France.

Affiliates in electrical machinery plan to decrease spending 6 percent, to $2.3 billion, after a 17-percent increase. Nearly one-half of the decline is accounted for by affiliates in the United Kingdom, whose expenditures were unusually large in 1990; these expenditures included the purchase of new production machinery by manufacturers of household appliances and electric generators. Significant declines are also planned in Canada, Spain, Thailand, and Norway.

Affiliates in food products plan to decrease spending 1 percent, to $2.1 billion, after a 21-percent increase. There are sizable offsetting changes among countries. In Canada and Japan, the purchase of new production equipment in 1990, but not in 1991, accounts for the decline. Spending is also projected to decline in the Netherlands and in "other Central America."(7) These declines are partly offset by new projects planned mainly in Europe, chiefly by West German and British breakfast cereal producers and by various British snack food producers who plan to distribute their products throughout the EC(12). Some of these projects may have been encouraged by the prospect of declining intra-EC(12) trade barriers.

Other industries

In all other industries combined, affiliates plan to increase spending 1 percent, to $12.5 billion, after a 14-percent increase. Wholesale trade affiliates plan to hold spending constant, at $4.1 billion, after a 12-percent increase. The stability in their worldwide spending reflects offsetting changes among geographic areas. The largest increase is planned in West Germany, where a soft-drink affiliate is expanding its stock of bottling machinery, trucks, and vending machines to serve the newly opened East German market. In Japan, two marketing affiliates of computer manufacturing companies plan large increases: A commercial computer distributer with ancillary production facilities is constructing a new manufacturing plant and upgrading an existing warehouse, and a personal computer distributer is expanding capacity to meet rising demand for its products. These increases are offset by declines in Italy and Brazil. An Italian wholesale trade affiliate that is also engaged in manufacturing electronic goods has nearly completed a major expansion of its production facilities. A Brazilian wholesale trade affiliate with ancillary production facilities plans to finish the construction of an automotive parts factory in 1991.

In finance (except banking), insurance, and real estate, affiliates plan to decrease spending 4 percent, to $1.4 billion, after a 25-percent increase. The decline is more than accounted for by affiliates in the United Kingdom, where reduced planned spending reflects the completion of new office buildings. The decline is partly offset by a rise in planned expenditures in Canada and West Germany. In Canada, a U.S. insurance company is expanding its operations. In West Germany, a lessor of manufacturing equipment will increase its stock to allow a client to expand its production of farm machinery.

Services affiliates plan to decrease spending 2 percent, to $2.9 billion, after a 10-percent increase. The decline is largely centered in the United Kingdom, Australia, and Brazil. The decline in the United Kingdom results mainly from the completion of new office buildings. In Australia, the decline is widespread among affiliates. In Brazil, the services affiliate of an office machine manufacturer plans to reduce spending. Partly offsetting these decreases are increases reflecting plans by a French affiliate to renovate a hotel and by a German computer services affiliate to expand operations.

Affiliates in "other industries" plan to increase spending 7 percent, to $4.2 billion, after a 14-percent increase.(8) Spending by mining affiliates accounts for one-third of the overall increase; significant mine development projects are planned in Chile, Indonesia, and "other Sub-Saharan Africa."(9) In the remaining industries, a cruise line affiliate is increasing its spending after acquiring a foreign travel and tourism business. In Indonesia, an affiliate is expanding its development of the country's rich geothermal resources. Offsetting these increases is a substantial decline in Italy, where a public sanitation affiliate plans to lower its spending after acquiring the assets of several small competitors in 1990.

(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 sets 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.) These revisions are not the result of low survey response rates; BEA's first estimates of total affiliate spending are derived from reported data that usually account for 80 percent or more of the universe estimate. (3.) "Other manufacturing" consists of tobacco products; textile products and apparel; lumber, wood, and furniture and fixtures; paper and allied products; printing and publishing; rubber products; miscellaneous plastics products; glass products; stone, clay, and other nonmetallic mineral products; instruments and related products; and manufactures not elsewhere classified. (4.) Under this policy, for a computer chip to be considered "European," its circuit must be etched within Europe. (5.) "International" affiliates are those that have operations in more than one country and that are engaged in petroleum shipping, other water transportation, or operating movable oil-and gas-drilling equipment. (6.) "Other Europe" consists of all European countries that are not members of the EC(12). (7.) "Other Central America" consists of Belize, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. (8.) "Other industries" consists of agriculture, forestry, and fishing; mining; construction; transportation, communication, and public utilities; and retail trade. (9.) "Other Sub-Saharan Africa" consists of all African countries except Algeria, Egypt, Liberia, Libya, Morocco, Nigeria, South Africa, and Tunisia.