U.S. affiliates of foreign companies: operations in 1986.

Howenstine, Ned G.

U.S. Affiliates of Foreign Companies: Operations in 1986

This article presents estimates of the operations of nonbank U.S. affiliates of foreign companies in 1986. The first part of the article presents highlights for 1986. The second discusses detailed changes in affiliate operations based on employment. The third, which is included for the first time this year, discusses the share of the U.S. economy accounted for by U.S. affiliates.

Highlights for 1986 are:

* Total assets of U.S. affiliates were $830 billion, up $89 billion from 1985. By industry of affiliate, finance, except banking; insurance; and manufacturing all had increases of over $20 billion. By country of ultimate beneficial owner (UBO), the increase in total assets of affiliates with UBO's in Japan ($33 billion) was more than twice as large as that for any other country.

* Sales by U.S. affiliates were $667 billion, up $34 billion. By industry of affiliate, increases were largest in wholesale trade ($18 billion) and in retail trade and insurance ($8 billion each). The increase in wholesale trade was largely attributable to affiliates importing and selling automobiles and electronic equipment. By country of UBO, the largest increase was for affiliates with UBO's in Japan ($13 billion).

* Net income of U.S. affiliates was $3 billion, down $3 billion from 1985. By industry of affiliate, petroleum, wholesale trade, and manufacturing had substantial declines. By country of UBO, affiliates with UBO's in the Netherlands Antilles and Japan had the largest declines (over $1 billion each).

* Employment of U.S. affiliates was 2,964,000, up 100,000. Employee compensation was $87 billion, up $7 billion.

* U.S. affiliates owned 15 million acres of U.S. land--1 million more than in 1985. The gross book value of U.S. affiliates' property, plant, and equipment was up $22 billion, to $318 billion.

* U.S. merchandise exports by affiliates were $51 billion, down $6 billion, and U.S. merchandise imports to affiliates were $124 billion, up $11 billion. One-half of the drop in exports was attributable to affiliates in farm product raw materials wholesale trade and probably reflects a decline in grain exports by these affiliates. Also, a major affiliate sharply reduced the size of its international trading operations. The increase in imports was largely attributable to affiliates in motor vehicles wholesale trade.

Employment in 1986

Although the accompanying tables present a number of key items on U.S. affiliate operations, this section discusses changes in affiliate operations based on only one item--employment. Employment was chosen because changes in it are not directly affected by inflation and, thus, tend to correspond more closely than the other available items to changes in real economic activity.

Employment of U.S. affiliates increased 4 percent to 2,964,000 in 1986, after increasing 5 percent in 1985 (table 1). Growth slowed even though the number of employees added as a result of new investments increased substantially. The slowdown occurred because of a sharp jump in the number of employees lost as a result of sales or liquidations of U.S. affiliates.

By source of change

The number of employees added by affiliates making new investments (but not also selling or liquidating a business) increased from 239,000 to 260,000 (table 2, line 2). In addition, the number of employees added by affiliates that both made new investments and sold or liquidated a business increased sharply--from 1,000 to 104,000 (table 2, line 6). Taken together, these changes indicate that the total increase in the number of employees added because of new investments was at least 124,000.

Factors contributing to the increase were strong growth in the U.S. economy, depreciation of the U.S. dollar, fears of U.S. protectionist measures, corporate restructuring, and U.S. tax reform legislation enacted in 1986. For a more detailed discussion of new direct investment in the United States in 1986, see "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1986," SURVEY 67 (May 1987):27-35.

Declines in employment because a U.S. affiliate was sold or liquidated or because parts of an affiliate's operations were sold more than doubled from 111,000 to 280,000 (table 2, line 4). Corporate restructuring contributed to the step-up in sales and liquidations. In some cases, foreign parents immediately sold parts of new acquisitions because the operations were unprofitable or consisted of unwanted lines of business. In other cases, operations were sold to obtain funds to repay loans used to finance the acquisition.

Much of the decrease in employment due to sales or liquidations in 1986 was attributable to transactions involving a few large affiliates. The largest affiliate, which had more than 100,000 employees, ceased to be foreign owned when it bought the minority interest held by its German parent. Also, substantial portions of three other affiliates--involving more than 15,000 employees in each case--ceased to be foreign owned in 1986. Foreign parents that had previously held minority stakes in two of these affiliates gained, through reorganizations, majority ownership of some of the affiliates' assets and, at the same time, sold the remaining assets to U.S. persons. The third affiliate sold part of its large department store operations to a U.S. company. (Later in 1986, that U.S. company was itself acquired by a foreign investor; as a result, the U.S. company's employees, including those associated with the operations acquired earlier from the other affiliate, are included in line 2 of table 2).

By industry

Affiliate employment increased substantially in retail trade (97,000) and services (26,000). Employment also increased in a number of subindustries within manufacturing. The largest increases were in electrical machinery (27,000) and, within chemicals, in industrial chemicals (21,000), in soap, cleaners, and toilet goods (18,000), and in drugs (15,000).

In retail trade, the increase largely reflects the acquisition of companies that operate department, book, sporting goods, and clothing store chains. In services, acquisitions of motion picture theaters, an advertising agency, and a company that provides building cleaning and maintenance services boosted employment.

In manufacturing, the increase in electrical machinery largely resulted from acquisitions of two companies--one that makes communication equipment and another that makes consumer appliances. In industrial chemicals, acquisitions of companies that manufacture paints accounted for most of the increase. In soaps, cleaners, and toilet goods, the increase largely reflects the acquisition of a company that makes personal care products. In drugs, the increase occurred because the industry classification of a large affiliate shifted from industrial chemicals to drugs.

Several manufacturing subindustries had substantial decreases in employment. The largest decreases were in agricultural chemicals (over 100,000), primary metals (23,000), nonelectrical machinery (12,000), and stone, clay, and glass (9,000). Taken together, the decreases in manufacturing exceeded the increases, and employment for manufacturing as a whole declined 56,000.

The decline in employment in agricultural chemicals was more than accounted for by the large affiliate, discussed earlier, that bought the minority interest held by its German parent. The declines in primary metals, nonelectrical machinery, and stone, clay, and glass all largely reflect sales of all or part of the operations of one or two large affiliates.

By country

Increases in employment were largest for affiliates with UBO's in Canada (75,000), the Netherlands (46,000), and France (28,000). In each case, the increases mainly resulted from acquisitions. For Canada, the acquisitions were in retail trade and services; for the Netherlands, in retail trade and chemicals; and for France, in machinery manufacturing and construction.

Employment of affiliates with UBO's in Germany declined 103,000. This decline occurred mainly because, as previously discussed, a large chemicals manufacturing affiliate bought the minority interest that had been held by its German parent.

Employment of Japanese-owned affiliates increased only moderately (4,000); however, other measures of these affiliates' operations often showed much stronger increases relative to those for other affiliates. For example, as noted at the beginning of this article, affiliates with Japanese UBO's had the largest increase in total assets of all affiliates. Compared with other affiliates, the increase in these affiliates' employment was small relative to that for total assets, because much of the new investment by Japanese parents in 1986 was in finance and real estate--industries with low employment relative to assets.

By U.S. region and State

By U.S. region, the largest increases in affiliate employment were in the Mideast (52,000) and the Southeast (30,000) (table 3). Employment in the Far West and the Southwest declined.

By State, the largest increases in affiliate employment were in New York (43,000), Florida (13,000), and Minnesota (12,000). In all three States, the increases were largely attributable to acquisitions. In New York, the acquisitions were mainly in retail trade and services; in Florida and Minnesota, they were mainly in retail trade.

The largest declines in employment were in California (14,000), Ohio (11,000), Wisconsin (6,000), and West Virginia (5,000). In each State, the decline resulted because all or part of a few large U.S. affiliates were sold or liquidated. In addition, in Ohio, layoffs by a large manufacturing affiliate contributed to the decline.

Share of the U.S. Economy

While measures of U.S. affiliate operations themselves may seem sizable, a question frequently asked is, How large are the affiliates compared with the total U.S. economy? Several of the measures of U.S. affiliates' operations discussed earlier could be used for such a comparison. This section discusses the shares for two measures--employment and total assets. The size of U.S. affiliates relative to the overall U.S. economy and to U.S. manufacturing as a whole is discussed in terms of employment, and the relative size of affiliates by subindustry within manufacturing is discussed in terms of total assets. (Comparisons based on sales for subindustries within manufacturing are shown in the accompanying table and chart but are not discussed.) Employment is not used for comparisons within manufacturing because differences in industry classification between U.S. affiliates and all U.S. businesses distort employment comparisons at that level of disaggregation.

The main findings of this section are:

* Despite strong growth in direct investment recently, the affiliate share of the overall U.S. economy remains small--3.5 percent in terms of employment.

* In industries where direct investment is concerntrated, the U.S. affiliate share is significantly larger than the affiliate share of the economy as a whole. For example, the U.S. affiliate share of total assets in chemicals manufacturing is 32 percent.

* Although the share of the U.S. economy accounted for by U.S. affiliates increased from 1977 to 1986, most of the increase occurred from 1977 to 1981; since 1981, the share has increased only slightly.

In 1986, U.S. affiliate employment accounted for 3.5 percent of the 84,012,000 employees of all nonbank U.S. businesses. The affiliate share is small; even though direct investment by foreigners has been large in recent years compared with that in earlier periods, the amounts invested--and the base to which they are being added--are small compared with the large stock of U.S. business assets. Also, there has been only limited direct investment in some industries, such as services, that account for a substantial part of the U.S. economy.

Although small, the affiliate share of all U.S. employment has nearly doubled since 1977, when the share was 1.8 percent. Most of the increase had occurred by 1981, when the U.S. affiliate share reached 3.2 percent. During the 1977-81 period, the rate of growth in affiliate employment was particularly rapid--19 percent per year, on average; after 1981, growth slowed to an average of 4 percent per year. The fast growth during 1977-81 was due in part to the rapid pace of acquisitions of U.S. companies by foreign direct investors. The slower growth during 1982-86 occurred partly because fewer employees were added as a result of new direct investments and partly because offsetting sales and liquidations of U.S. affiliates increased in importance.

In manufacturing, the U.S. affiliate share of all U.S. employment was 7.8 percent in 1986, up from 3.8 percent in 1977. Here too, most of the increase in the 1977-86 period had occurred by 1981, when the affiliate share reached 6.9 percent. For both 1977 and 1986, the shares for manufacturing are higher than those for the all-industries total because direct investment is relatively heavily concentrated in manufacturing.

At the detailed industry level, comparisons of affiliate shares based on employment are not appropriate because of differences in industry classification between the U.S. affiliate and all-U.S. business employment data. The affiliate data are classified by industry at the enterprise (company) level, while all-U.S. business employment is classified by industry at the establishment level. These differences in classification probably do not significantly affect comparisons of employment for broad industry groups, such as manufacturing, but they can seriously distort comparisons of employment at a more detailed level.

Comparisons for more detailed industries can be made, however, using all-U.S. business data classified at the enterprise level. For example, table 4 and chart 4 compares total assets and sales of U.S. affiliates and all U.S. businesses using all-U.S. business enterprise data from the Quarterly Financial Report for Manufacturing, Mining, and Trade Corporations (QFR). In the following, shares based on total assets are discussed.

For manufacturing as a whole, U.S. affiliates' share of total assets of all U.S. businesses was 12.1 percent in 1986. This share is higher than the affiliates' 7.8-percent share of all-U.S. manufacturing employment, mainly for two reasons. First, affiliates are more concentrated than all U.S. businesses in industries, such as chemicals and petroleum and coal products, that have relatively low employment-to-assets ratios. Second, differences in valuation may cause affiliate shares based on total assets to be overstated. Differences in valuation of total assets occur because, when a company is acquired--whether by foreign or U.S. buyers--its assets are often revalued to reflect the newM generally higher, value implicit in the acquisition price. Because much of the growth in foreign direct investment in recent years has involved acquisitions, the portion of affiliates' assets that has been recently revalued is probably much higher than that for all U.S. businesses.

Within manufacturing, affiliate shares were highest in chemicals (32.5 percent), in stone, clay, and glass (22.8 percent), and in primary metals (20.5 percent). They were lowest in transportation equipment (2.9 percent), in rubber and plastics (4.0 percent), and in textile products (4.4 percent).

U.S. affiliates' large shares in chemicals, in stone, clay, and glass, and in primary metals probably reflect a combination of factors. Many foreign companies in these industries are large and have the resources to support investment in the United States. Also, some probably have technological, managerial, or marketing advantages over U.S. firms. Such advantages allow the U.S. affiliates of these foreign companies to compete successfully with other U.S. companies. Furthermore, foreign companies in these industries may find it advantageous to serve U.S. markets through production here rather than through exports to the United States. In industrial chemicals, for example, the proximity of petroleum feedstocks may make petrochemical production cheaper here than abroad. In drugs, U.S. Government regulations may favor production in, rather than exports to, the United States. In primary metals, U.S. quotas on steel exports to the United States may have resulted in investment here. Finally, some direct investment in these industries, particularly in chemicals, originates in foreign firms that are not themselves in these industries. This investment, probably reflects foreign investors' favorable assessment of the long-term prospects of these industries.

From 1977 to 1986, the U.S. affiliate share of total assets increased in every subindustry within manufacturing. The sharpest increases were in transportation equipment (a nearly fivefold increase) and in stone, clay, and glass and in primary metals (more than threefold increases in each). The smallest increases were in petroleum and coal products (25 percent) and textile products (39 percent).