U.S. affiliates of foreign companies: operations in 1985.

Howenstine, Ned G.

U.S. Affiliates of Foreign Companies: Operations in 1985

THIS article presents estimates of the operations of nonbank U.S. affiliates of foreign companies in 1985. The estimates were obtained by expanding to universe totals sample data collected in BEA's annual survey of foreign direct investment in the United States.1

1. A U.S. affiliate is a U.S. business enterprise in which a single foreign person owns or controls, directly or indirectly, 10 percent or more of the voting securities if an incorporated business enterprise or an equivalent interest if an unincorporated business enterprise. Estimates presented in this article cover nonbank U.S. affiliates; data for bank affiliates are published by the Federal Reserve Board in the Federal Reserve Bulletin.

The estimates in this article are on a fiscal year basis. An individual affiliate's 1985 fiscal year is its financial reporting year that ended in calendar year 1985.

In terms of employment, data reported by the sample accounted for 89 percent of the universe estimate for 1985. A table presenting sample coverage for earlier years by industry of affiliate and country of ultimate beneficial owner appeared in "U.S. Affiliates of Foreign Companies: Operations in 1984,' SURVEY 66 (October 1986):32. In that table, the values for 1983 are typical of the sample coverage of the revised estimates for a given year. The values for 1984, which are typical of the sample coverage of the preliminary estimates for a given year, are, in most instances, slightly lower.

Highlights for 1985 include:

Total assets of U.S. affiliates were $736 billion, up $134 billion from 1984. By industry of affiliate, almost $80 billion of the increase was in "finance, except banking.' By country of ultimate beneficial owner (UBO), the largest increase ($52 billion) was attributable to affiliates with UBO's in Europe.2

2. The UBO is that person, proceeding up a U.S. affiliate's ownership chain, beginning with an including the foreign parent, that is not owned more than 50 percent by another person. The foreign parent is the first foreign person in the affiliate's ownership chain. Unlike the foreign parent, the UBO of an affiliate may be located in the United States.

NOTE.--The annual survey from which the estimates in this article were derived was conducted under the supervision of James L. Bomkamp, Chief, Direct Investment in the United States Branch, International Investment Division. Beverly A. Feeser was project leader for editing and processing the forms. Richard Mauery and Arnold Gilbert designed the computer programs for data retrieval and analysis.

Sales by U.S. affiliates were $630 billion, up $37 billion from 1984. By industry of affiliate, the largest increases were in wholesale trade ($11 billion) and manufacturing ($9 billion). By country of UBO, the largest increase was for affiliates with Japanese UBO's ($15 billion).

Net income of U.S. affiliates was $5 billion, down $4 billion from 1984. By industry of affiliate, the largest drop ($3 billion) was in manufacturing. By country of UBO, affiliates with UBO's in Canada had the largest drop ($2 billion).

Employment of U.S. affiliates was 2,854,000, up 139,000 from 1984. Employee compensation was $80 billion, up $7 billion.

U.S. affiliates owned 15 million acres of U.S. land, an increase of 1 million acres from 1984. The gross book value of U.S. affiliates' property, plant, and equipment was $294 billion, up $24 billion.

U.S. exports shipped by affiliates were $56 billion, down $2 billion, and U.S. imports shipped to affiliates were $112 billion, up $11 billion.

Employment in 1985

Although the accompanying tables present other key items on U.S. affiliates' operations, the remainder of this article focuses on 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 5 percent, to 2,854,000, in 1985, after increasing 7 percent in 1984 (table 1). Growth slowed mainly because of an increase in the number of employees lost due to sales or liquidations of U.S. affiliates and a decrease in the number added due to expansions in the operations of existing affiliates.

The number of employees lost due to sales or liquidations of affiliates increased from 66,000 to 109,000 (table 2, line 4).3 Three particularly large affiliates --each with more than 10,000 employees--were sold to U.S. buyers in 1985. The number of employees added because of expansions in the operations of existing affiliates dropped from 76,000 to 60,000 (table 2, line 3). This drop mirrored a slowdown in growth of the employment of all U.S. businesses and probably reflects weaker growth in the U.S. economy in 1985. Partly offsetting these changes was an increase--from 179,000 to 215,000--in the number of employees added because of new investments (table 2, line 2).4 Substantial numbers of employees were added as a result of acquisitions of U.S. companies in retail trade, paper and food manufacturing, and "services.'

3. In table 2, all of the change for a given affiliate is shown on a single line, even if the change was caused by more than one of the factors shown. See the note to table 2 for a more detailed description of the procedures used to derive the estimates.

4. New investments are (1) acquisitions of a 10-percent-or-more ownership interest in existing U.S. business enterprises either directly by foreign direct investors or indirectly through the investors' existing U.S. affiliates, or (2) the establishment of new U.S. affiliates by foreign direct investors.

Data on increases in employment associated with new investments are also available from another BEA survey covering U.S. business enterprises newly acquired or established by foreign direct investors. Data from that survey were not used in table 2 because of differences in methodology, timing, and coverage. Revised results of the 1985 survey of new acquisitions and establishments appear in "U.S. Businesses Acquired or Established By Foreign Direct Investors in 1986,' in this issue.

Employment in the 1982-85 Period

The slow growth in total employment in 1985 continued a pattern that began in 1982. During the 1982-85 period, growth averaged only 4 percent per year and the rate of growth for a single year never exceeded 7 percent. In contrast, during the 4 years before 1982, growth averaged 19 percent per year and the rate of growth for a single year was never less than 16 percent. Because 1985 continued the pattern that began earlier, the remainder of this article discusses the entire 1982-85 period, rather than 1985 alone.

The slow growth in 1982-85 was attributable to several factors. First, the worldwide economic recession in 1982 weakened the financial condition of foreign multinational companies, limiting their ability to make new direct investments in that and later years. The recession also forced many existing affiliates to cut employment.

Second, several U.S. industries-- such as petroleum and some manufacturing subindustries--in which affiliate employment was relatively large experienced excess capacity and weak profits because of shifts in demand patterns (for example, the shift toward more energy-efficient cars), changes in technology, and increased international competition. In these industries, both U.S. affiliates and other U.S. companies discontinued or reduced the size of their operations.

Third, the appreciation of the U.S. dollar that began in late 1980 and that continued through 1985 may have dampened the pace of new investment activity, mainly by raising the foreign currency cost of acquiring U.S. businesses. It may also have reduced the U.S. dollar cost of imports, which would have made production abroad a relatively more attractive means of serving U.S. markets.

Fourth, disinvestment by foreign parents probably increased in 1982-85, as some of the many acquisitions made during the 1978-81 period proved unprofitable. Also, foreigners tended to restructure companies acquired in 1982-85 by immediately selling off unprofitable operations or unwanted lines of business. Sometimes, operations were sold to obtain funds to repay loans used originally to finance the acquisition. Thus, even if the acquisition was large, the number of employees ultimately added to the direct investment universe may have been relatively small.

By industry

Among major industries, the pattern of growth for affiliates closely followed that for all U.S. businesses in 1982-85. Employment of both affiliates and other U.S. businesses grew slowly or declined in most goods-producing industries--such as manufacturing, mining, and petroleum--and grew comparatively fast in services-producing industries--notably, finance and "services'--and in retail trade.5 There were some exceptions to this pattern, however. In construction, for example, affiliate employment declined substantially but all-U.S. business employment increased.

5. "Services-producing industries' is broadly defined to include, in addition to the narrowly defined "services' division of the Standard Industrial Classification a number of other industries that produce services Wholesale and retail trade and construction, however are considered goods rather than services producing For further discussion, see "U.S. Sales of Service to Foreigners,' SURVEY 67 (January 1987): 27.

The declines in employment in goods-producing industries contributed significantly to the slow growth in total affiliate employment during the period. In construction, affiliate employment declined 17,000. Most of the decline was in the employment of affiliates that build structures--such as refineries, pipelines, and marine terminals --for the oil industry. Construction of this type dropped sharply with the slowdown in the U.S. oil industry. Employment by several affiliates in other nonresidential construction also declined substantially, even though, for the United States as a whole, growth in such construction was strong during the period. Employment by these affiliates may have declined because the affiliates were located in areas of the country that did not share in the strong growth.

Affiliate employment also declined substantially in industrial chemicals and nonelectrical machinery manufacturing (24,000 and 22,000, respectively). The declines coincided with significant declines for other U.S. businesses in the same industries. Weak demand and increased international competition pushed rates of return in these industries well below those in other manufacturing industries and caused businesses to sell or liquidate operations. In some cases, the decreases in affiliate employment may also have resulted from foreign parents selling all of their interests in their affiliates to U.S. buyers.

Affiliate employment in metals wholesale trade declined 21,000. The decline largely reflected the long-term slump in the U.S. metals industry. A number of large affiliates classified in metals wholesale trade, but that also had significant metals manufacturing operations, made substantial cuts in the latter during the period. In addition, a major affiliate with both large international metals trading and investment banking operations substantially cut its metals trading activities and sharply expanded its investment banking operations. As a result, its classification--and that of all of its employees--shifted from metals wholesale trade to "finance, except banking' in 1984.

As noted earlier, in 1982-85, affiliate employment grew relatively fast in "finance, except banking,' services, and retail trade. Among these industries, the most employees (136,000) were added in retail trade. Of this total, 97,000 were added in "retail trade other than food stores and eating and drinking places.' This growth was largely due to acquisitions of U.S. businesses by foreign investors. The largest such acquisitions were of jewelry, department, and book store chains and of a firm that sells and develops photographic film.

In "services,' affiliates added 93,000 employees. This increase, like that in retail trade, occurred largely as a result of acquisitions. A few of the acquired companies were sizable, particularly those engaged in building cleaning and maintenance, nursing home services, and operating a chain of beauty salons. Most of the increase in "services,' however, reflected a large number of smaller acquisitions. These acquisitions included firms providing personal, health, and business services.

In "finance, except banking,' affiliates added 28,000 employees. Acquisitions of major U.S. investment banking and securities firms accounted for most of the growth. The shift, from wholesale trade to finance, in the industry classification of the large affiliate with both metals trading and investment banking operations also boosted employment.6

6. This change in industry classification had a much greater effect on assets than on employment because, compared with other affiliates in finance, the assets of this affiliate were proportionately much larger than its employment. As a result, affiliates' assets in "finance, except banking' increased more than 80 percent in 1984, much faster than in 1983, even though growth in employment slowed. Growth in these affiliates' assets was also fast--over 50 percent--in 1985. The 1985 growth reflected exceptionally strong increases by several of the largest investment banking and securities affiliates. Sharp jumps in these affiliates' holdings of U.S. Government securities during 1985 accounted for a major portion of the increases.

By country

The 4-percent average annual employment growth rate in 1982-85 for affiliates in all areas combined largely reflected the relatively slow growth--3 percent a year, on average --in the employment of affiliates with UBO's in Europe. The slow growth for these affiliates had a large impact on overall growth because they accounted for about two-thirds of total affiliate employment. Employment of affiliates with UBO's in most other areas grew much faster. Growth was particularly rapid for affiliates with UBO's in Latin America (13 percent), "other Africa, Asia, and Pacific' (12 percent), and Japan (11 percent). Employment of affiliates with Canadian UBO's grew at a 5-percent rate.

The slow growth for affiliates with European UBO's reflected declines in the employment of French- and Netherlands-owned affiliates and slow growth (2 percent per year) for German-owned affiliates. Growth rates for Swiss- and British-owned affiliates were comparatively high--7 and 5 percent, respectively.

This uneven pattern of growth among affiliates with European UBO's partly reflected differences in the distribution of affiliate employment by industry. For example, affiliates with Netherlands UBO's were relatively heavily concentrated in petroleum and paper manufacturing; those with German UBO's in industrial chemicals; and those with French UBO's, in paper manufacturing --all U.S. industries that had comparatively weak economic performance during this period. Affiliates of UBO's in Switzerland and the United Kingdom, however, were more concentrated in the faster growing U.S. industries--affiliates with Swiss UBO's, in food manufacturing and "services,' and affiliates with British UBO's, in retail trade, food manufacturing, and "services.'

The uneven pattern of growth also partly reflected differences among European countries in the pace of their new direct investment in the United States in 1982-85. Spending by British and Swiss investors to acquire or establish new U.S. affiliates was significantly higher than that by investors in other European countries.7 The particularly strong spending by British investors may have occurred mainly because more rapid economic growth in Britain than in other major European countries left British companies with more funds available for foreign investment. In addition, Britain relaxed controls on foreign exchange transactions in 1979, which made it easier for British companies to invest abroad.

7. See "U.S. Business Enterprises Acquired or Established' in this issue.

The high growth rates for the employment of affiliates with UBO's in Latin America and "other Africa, Asia, and Pacific' partly reflect the relatively small base from which the rates were calculated; in 1981, employment of these affiliates was only 75,000 and 17,000, respectively. The growth for affiliates with UBO's in Latin America was largely attributable to those with UBO's in Panama and Bermuda; in "other Africa, Asia, and Pacific,' it was largely attributable to affiliates with UBO's in Hong Kong.

The rapid growth in employment of affiliates with Japanese UBO's reflects two main factors: (1) Strong growth in Japanese exports to the United States, which, in turn, induced increases in the employment of U.S. affiliates enaged in the wholesale distribution of these products within the United States, and (2) the startup or expansion of manufacturing operations here by several Japanese companies, partly because of U.S. pressure on Japan to restrain its exports, particularly of automobiles, to the United States.

A large share of the growth in the employment of Japanese-owned affiliates, unlike that of most other affiliates, was in goods-producing industries, mainly wholesale trade. Growth in motor vehicles and "other durable goods' wholesale trade was particularly strong. In motor vehicles, the growth was largely attributable to the startup and expansion of motorcycle, automobile, and light truck manufacturing operations. (These affiliates were classified in wholesale trade through 1985 because revenue from their wholesale trade operations exceeded that from their manufacturing operations.) In "other durable goods,' the growth in employment resulted largely because affiliates expanded their distribution operations in the United States to support increased exports from their foreign parents, particularly of consumer electronic goods and office machinery. Also, as in motor vehicles wholesale trade, some affiliates either started or expanded manufacturing operations.

Employment by Japanese-owned affiliates also increased significantly in primary metals manufacturing and retail trade. In each, a single acquisition accounted for most of the increase.

By U.S. region and State

Among U.S. regions, affiliate employment declined in the Rocky Mountains and grew relatively slowly in both the Mideast and the Plains (table 3). The most rapid growth was in the Great Lakes; growth was also relatively strong in the Southeast and the Far West. Growth in New England and the Southwest was at about the same rate as the average for all affiliates. Except for the Rocky Mountains and the Great Lakes, this pattern parallels that of all U.S. businesses.

In the Rocky Mountains, although affiliate employment declined in four of the five States in the region, most of the decline resulted from a cutback in an affiliate's large copper mining operation in Utah.

In the Great Lakes, affiliate employment grew faster, but all-U.S. business employment grew slower, than in any other region. The rapid growth for affiliates was largely concentrated in Ohio and Illinois. In both States, many existing affiliates cut their employment because of comparatively weak economic conditions, but these cuts were more than offset by increases in employment due to new acquisitions or establishments.

By State, growth rates ranged from 15 percent in the District of Columbia to a negative 11 percent in Utah. Among the States with the largest affiliate employment, that is, those with more than 50,000 employees in 1981, growth rates ranged from 8 percent in Ohio and Georgia to less than 1 percent in Wisconsin. In terms of numbers of employees added, the largest increases were in California (51,000) and Ohio (38,000).

Table: 1.--Employment of Nonbank U.S. Affiliates, 1981-85, by Industry of Affiliate and Country of Ultimate Beneficial Owner

Table: 2.--Sources of Change in Affiliate Employment, 1984 and 1985

Table: 3.--Employment of Nonbank U.S. Affiliates, 1981-85, by State

Table: 4.--Selected Data of Nonbank U.S. Affiliates, 1984, by Industry of Affiliate

Table: 5.--Selected Data of Nonbank U.S. Affiliates, 1985, by Industry of Affiliate

Table: 6.--Selected Data of Nonbank U.S. Affiliates, 1984, by Country and Industry of Ultimate Beneficial Owner

Table: 7.--Selected Data of Nonbank U.S. Affiliates, 1985, by Country and Industry of Ultimate Beneficial Owner

Table: 8.--Employment of Nonbank U.S. Affiliates, 1984, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 9.--Employment of Nonbank U.S. Affiliates, 1985, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 10.--Total Assets of Nonbank U.S. Affiliates, 1984, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 11.--Total Assets of Nonbank U.S. Affiliates, 1985, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 12.--Employment and Property, Plant, and Equipment of Nonbank U.S. Affiliates, 1984-85, by State

Table: 13.--Employment of Nonbank U.S. Affiliates, 1984, State by Country of Ultimate Beneficial Owner

Table: 14.--Employment of Nonbank U.S. Affiliates, 1985, State by Country of Ultimate Beneficial Owner