Foreign Direct Investment in the United States Review and Analysis of Current Developments A Report in Response to a Request by the U.S. Congress til OF c •^TES OV U.S. Department of Commerce Economics and Statistics Administration Office of the Chief Economist August 1991 si C 5"^. J- : ^ 7 £ •- Foreign Direct Investment in the United States Review and Analysis of Current Developments A Report Submitted to the Committee on Energy and Commerce, the Committee on Ways and Means, and the Committee on Foreign Affairs of the House of Representa- tives, to the Committee on Finance, the Committee on Commerce, Science and Transportation, and the Commit- tee on Foreign Relations of the Senate, and to the Joint Economic Committee of the Congress in Response to Sec- tion 3(a) of the Foreign Direct Investment and Interna- tional Financial Data Improvements Act of 1990. PENNSYLVANIA STATE UNIVERSITY OCTC U.S. Department of Commerce Economics and Statistics Administration Office of the Chief Economist August 1991 ACKNOWLEDGEMENTS Foreign Direct Investment in the United States was prepared under the direction of Michael R. Darby, Under Secretary for Economic Affairs and Administrator of the Economics and Statistics Administration, Mark W. Plant, Deputy Under Secretary for Economic Affairs, and J. Antonio Villamil, Chief Economist and Special Adviser to the Secretary. Project director for this report was Sumiye Okubo McGuire, Director of the Office of Macroeconomic Analysis. Assistance in editing and preparation of the report was provided mainly by Lester A. Davis, as well as William B. Brown, Paul Wilcox, and Peter R. Davis of the Office of Macroeconomic Analysis, and by Ned Howenstine and Betty L. Barker of the Bureau of Economic Analysis. Authors of the individual chapters are indicated on those pages. The cooperation of several other government agencies in providing data and other assistance is gratefully acknowledged, especially the Bureau of Economic Analysis, as well as the Bureau of the Census, the International Trade Administration, and The Federal Reserve Board and the Department of Treasury. Questions concerning the content of this report should be directed to the Office of Macroeconomic Analysis, Room 4868, U.S. Department of Commerce, Washington, D.C. 20230. Phone (202) 377-1675. n FOREIGN DIRECT INVESTMENT IN THE UNITED STATES —A Review and Analysis of Current Developments CONTENTS Introduction and issues 1 a.p defining and measuring foreign direct investment in the united states 3 /2. (^factors driving foreign direct investment 9 3. macroeconomic setting for foreign direct investment ... 13 / 4. patterns and trends in foreign direct investment in & the united states 20 5. role of foreign-owned u.s. affiliates in the u.s. economy 30 6. foreign direct investment in the u.s. electronics industry 39 /f. foreign direct investment in the u.s. automotive industry 52 8. foreign direct investment in the u.s. steel industry 60 9. foreign direct investment in the u.s. chemicals industry 67 10. foreign investment in the u.s. banking industry 74 11. linking bea and census data 81 12. conclusions and outlook 84 appendix: A. Glossary 90 B. Legislative Request For Study 93 C. Statistics 103 in INTRODUCTION by Sumiye Okubo McGuire* After years of concerns about the effects of U.S. direct investments abroad on U. S. trade, employment, and growth, public attention began turning in the mid-1980s to the impact of foreign investment in the United States. As the pace and magnitude of foreign investment, both portfolio and direct, into the United States have risen over the past decade or so, policy makers, businessmen, and the general public have become increasingly interested in assessing the impact of this investment on the U.S. economy. For the most part, the American public has given foreign direct investment in the United States mixed reviews, and are increasingly coming down on one side or the other of the issue: it is good or bad, positive or negative, growth promoting or detracting, for the economy as a whole or particularly, for specific industries. Often armed with anecdotal evidence -- press articles, speeches, and books have warned against the possible detrimental effects of foreign investment, such as fears of ownership of our real estate or control over our natural resources, productive capacity, technological capability, of an excessive influ- ence over the political process, and of the potential threat to our national security. 1 On the other hand, proponents of foreign investment defend foreign investment as a means of promoting U.S. employment, technological progress, and U.S. competitiveness, and others conclude that it poses no threat to the U.S. economy. 2 Questions about the impact of foreign-owned businesses at the industry level can be attributed partly to the limitations of available data and analytical methods. *Director, Office of Macroeconomic Analysis, Office ofthe Chief Econo- mist, Economics and Statistics Administration, U.S. Department of Com- merce. 'For examples of opponents of foreign direct investment in the United States, see Martin and Susan Tolchin, Buying into America: How Foreign Money is Changing the Face of Our Nation (New York: Times Books, 1988); Pat Choate, Agents of Influence: How Japan's Lobbyists in the United States Manipulate America 's Political and Economic System(New York: Alfred Knopf, 1990). 2 For proponents of foreign direct investment in the United States, see Edward M. Graham and Paul R. Knigman, "Foreign Direct Investment in the United Slates," paperpresented at the American Economic Association Meetings, December 19, 1990, and Foreign Direct Investment in the United States (Washington, D.C.: Institute for International Economics, 1989); Michael Becker, Myths about Foreign Investment (Washington, D.C.: Citizens for a Sound Economy Foundation, 1989); Norman J. Glickman and Douglas P. Woodward, The New Competitors: How Foreign Investors Are Changing the U.S. Economy (New York: Basic Books, 1990). The U.S. government's policy position on foreign direct investment in the United States is reflected in the following statement in the Economic Report ofthe Presi- dent, Transmitted to the Congress, February 1991. The Administration supports maintaining an open foreign investment policy, with limited exceptions related to national security. This policy produces the greatest possible national benefits from all investments made in the U.S. economy. The United States has long recognized that unhindered international investment is beneficial to all nations, that it is a "positive sum game." 3 To improve the federal government's information on foreign direct investment, on November 7, 1990, the President signed into law the "Foreign Direct Investment and International Financial Data Improvements Act of 1990." This legislation requires the Bureau of Economic Analysis (BEA) to exchange and share its confidential data on foreign direct investment in the United States with the Bureau of Census and the Bureau of Labor Statistics (BLS), and the Census Bureau to share its confidential data with BEA. These data have been collected for different objectives, using different methodologies, and can comple- ment one another to permit fuller analysis of FDIUS. Other federal agencies with relevant data on FDI are authorized to share data. This sharing of data enhances the systematic examination of the impact of these invest- ments. The law also requires that the Secretary of Com- merce report annually to the Congress on the role and significance of foreign direct investment into the United States. This study responds to this requirement. Objectives of the Study This study examines the role and significance of foreign direct investment in the United States from 1977- 1988, with updates to 1990 when data are available. The approach followed is to provide an overview ofthe scope 'Page 262, Economic Report ofthe President. Transmitted to the Congress. February 1991. together with Tlie Annual Report ofthe Council of Eco- nomic Advisers (Washington: U.S. Government Printing Office. 1991). 1 and extent of foreign direct investment into the United States, and review where investment is being channeled and the importance of foreign investment in various U.S. industries. The study first reviews definition and measurement issues, and then provides the macroeconomic and microeconomic theoretical foundations underlying fac- tors motivating international investment flows, including their relation to balance-of-payments current and capital account balances. It then examines the macroeconomic factors influencing foreign investment, both direct and portfolio, and the benefits from foreign investment. The fourth section analyzes trends and patterns in foreign investment into the United States and provides an over- view of the importance of foreign investment, changes in its role, comparisons with other countries, and the impact on the U. S . balance of payments. Section five explores the characteristics and performance of U.S. affiliates of for- eign firms. The report then examines foreign investment in five key industries — electronics, automobiles, steel, chemicals, and banking — in which foreign ownership is large and/or significant. The last section covers progress in the data linkage projects of Census, BEA, and BLS, and issues which need to be addressed in the future. The analysis in this study is limited by large gaps and discontinuities in the data and lack of comparability in the currently available databases. Nonetheless, it provides a clear indication of the overall magnitude and importance of foreign investment in the United States. A more informed and complete analysis will be provided in the next annual report, which will be able to make use of the linked data from the Bureau of Economic Analysis, the Bureau of the Census, and the Bureau of Labor Statistics. Results of the reconciliation of BEA-Census data and BEA-BLS data, obtained from establishment-level data for foreign-owned companies, are expected to be available in 1992. J DEFINING AND MEASURING FOREIGN DIRECT INVESTMENT IN THE UNITED STATES by Sumiye Okubo McGuire* The United States remains, after three centuries, an attrac- tive place for investment by foreigners in a variety of U.S. assets. 1 Indeed, foreign corporations, such as Royal Dutch Shell, Unilever, and Bayer, which have owned U.S. assets for decades, have benefited from, and made important contributions to, the growth of the U.S. economy. Through- out the past, the level of U.S. concerns about the benefits or potentially adverse impacts of external investments have periodically waned and heightened. As foreign ownership of U.S. assets expanded over the past decade, questions once again have been raised about the role and extent of their contributions to the U.S. economy. In response to the rapid growth of foreign invest- ment in the United States over the 1980s, the U.S. govern- ment has increased its efforts to develop an analytical picture of these developments and their impacts. Action' has been taken to improve the data needed to identify and track foreign direct investment in the United States, including efforts to solve a number of definitional, statis- tical, and tracking questions. These issues are covered in the following sections. Tracking Foreign Direct Investment The U.S. government has recorded international flows associated with foreign direct investment in the United States and U.S. direct investment abroad for many years for several reasons. Data on foreign direct and portfolio investment have been collected since the early 1920s for producing the U.S. balance of payments and international investment position. These statistics are needed to monitor and assess the impacts of these invest- ments on the U.S. economy. These efforts were formal- ized in the early 1940s when survey questionnaires on foreign investments in the United States were begun by the Treasury Department, and subsequently taken over by the •Director of (he Office of Macroeconomic Analysis, Office of the Chief Economist, Economics and Statistics Administration, U.S. Department of Commerce. 'For historical background, see Robert E. Lipsey, "Changing Patterns of International Investment in and by the United States," in The United States in the World Economy, ed. by Martin Feldstein (Chicago: University of Chicago Press, 1988). Department of Commerce in 1946. The Department of Commerce began systematic collection of financial and operating data on U. S. affil iates of foreign firms (as well as foreign affiliates of U.S. firms) in the 1950s. These important additional data provide information on the overall operations of the affiliates, as opposed to transactions and positions between parent firms and their affiliates (as shown in balance of payments and direct investment position data). Major benchmark surveys requesting detailed data were conducted for out- ward investments in 1950, 1957, 1966, 1977, 1982, and 1989, and for inward direct investments in 1959, 1974, 1980, and 1987. Annual, less detailed surveys of samples of nonbank affiliates began in 1977 for inward direct investments and in 1983 for outward investments. Sur- veys to collect data on newly acquired or established inward direct investments began in 1979. Surveys are also conducted to collect data on capital expenditures of major- ity-owned foreign affiliates of U.S. firms. Defining Foreign Direct Investment The two types of private foreign investment are direct investment and portfolio investment. Accounting, legal, and statistical complexities make distinguishing between the two types confusing, and assessing then- importance, often difficult. Thus, definitions ofboth types are crucial to understanding their trends and impacts. Foreign direct investment in the United States, as defined by the U.S. government for reporting and statisti- cal purposes, is the ownership by a foreign person or business often percent or more of the voting equity of a firm located in the United States. 2 A ten percent or more equity interest is considered evidence of a long-term interest in, and a measure of influence over, the manage- ment of the company. This definition of direct investment is specified in the International Investment and Trade in Services Survey Act. 3 New foreign direct investment can 2 Forthe official definitions, see U.S. Department of Commerce. Bureau of Economic Analysis, Foreign Direct Investment in the United Slates. 1987 Benchmark Sur\-ey. Final Results (Washington, D.C.: U.S. Printing Office. August 1990). 'Prior to 1974, the percentage cutoff was 25 percent. take two forms — acquisition of an existing business through "buyout" of all or part of a company's stock, or establishing a new facility or "greenfield" investment. Direct investment does not necessarily involve an international transfer of financial capital. The investing foreign firm can acquire ownership partly or wholly, in exchange for technical know-how or managerial exper- tise, rather than financial capital. Moreover, financial capital that is exchanged can be wholly or partly raised from U.S. financial sources. In contrast to direct invest- ment, portf olio investment can be in the form of bonds of U.S. firms or the U.S. government, and bank accounts. It can also be investment in securities, representing less than ten percent voting interest, and does not amount to man- agement influence over the activities of the companies. Less than 25 percent of the large and increasing volume of investment flows, both abroad and into the United States, are direct investments. More than 60 percent of the investment flows into and out of the United States are portfolio investments (Figure 1.1). Theremain- derare government transactions. While U.S. direct invest- ment abroad (USDIA) has continued to grow steadily, foreign direct investment in the United States (FDIUS) has been growing much more rapidly. However, the differ- ence in pace of growth depends on what method is used to value direct investment positions. Based on book- value data, in 1 989, the foreign direct investment position in the United States surpassed the U.S. direct investment posi- tion overseas (Figure 1-2). Revaluations of direct invest- Figure I- 1 International Investment Position, 1989 (Billions of dollars) U.S. ASSETS ABROAD FOREIGN ASSETS IN U.S. Figure 1-2 Foreign Direct Investment Position at Yearend $ Billion, bg scale 500 300 200 100 VS. ASSETS ABROAD FOREIGN ASSETS IN US. 1980 Note: based on historical cost basis. Source: Bureau of Eocnomic Analysis. Figure 1-3 Net Direct Investment Positions in the United States at Yearend Billion dollars JUU Market costs ^ 250 200 "'■---.. / Current costs 150 100 50 ^^ Historical costs i i I I i i I 1 1 87 88 89 90 1982 83 84 85 86 Source: Bureau of Economic Analsyis. ment data to market values and current (or replacement) costs do not show such a crossover in 1 989. On the current cost basis, which attempts to value only tangible capital at replacement costs, USDIA has grown less in dollar terms from a much larger 1982 base than has FDIUS. On the market value basis USDIA has grown more in dollar terms but less in percentage terms than FDIUS which was relatively very low in the early 1980s (Figure 1-3). 4 U.S. capital inflows also show that the pattern of direct investment in the United States differed from that of portfolio investments during the 1980s. These patterns suggest that factors motivating foreign direct investments in the United States differed substantially from those Note: Based on historical cost basis. Source: Bureau of Economic Analysys. 4 See J. Steven Landefeld and Ann Lawson, "Valuation of the U.S. Net International Investment Position," Survey of Current Business (May 1991), pp. 40-49. motivating port folio investment inflows. Portfolio invest- ment inflows grew in the early 1980s, peaked in 1986, steadily declined from 1986 to 1989, and dropped sharply in 1990. Direct investment in the United States, on the other hand, rose steadily until 1 989, and decreased slightly in 1990 (Figure 1-4). Measuring Foreign Direct Investment The principal sources of data on foreign direct investment in all industries in the United States are two agencies of the Department of Commerce, the Economics and Statistics Administration's Bureau of Economic Analy- sis (BEA) and the International Trade Administration (ITA). Data on selected industries are collected by other agencies. For example, the Department of Agriculture collects information on foreign-owned agricultural land, and the Department of Energy collects information on foreign direct investment in U.S. energy sources and supplies. BEA, in response to a mandate under the Interna- tional Investment and Trade in Services Survey Act, conducts quarterly, annual, and benchmark surveys (every five years) of foreign direct investment in the United States. 5 These data are a comprehensive and reliable source of information on direct investment needed for inclusion in the U.S. international transactions accounts, the international investment position, and the national 5 For a discussion of data collected by the Bureau of Economic Analysis, see Alicia M. Quijano, "A Guide to BEA Statistics on Foreign Direct Invest- ment in the United States, Survey of Current Business (February 1990), pp. 29-37; and Bureau of Economic Analysis,/! User 's Guide to BEA Informa- tion (March 1991). Figure 1-4 U.S. Capital Inflows, by Type of Investment Billion dollars 250 -50 1983 84 86 87 88 89 90 Note: Direct investment based on historical cost basis. Source: Bureau of Economic Analsyis. income and product accounts, as well as for assessments of the impacts of direct investment for public policy decision making. Each successive benchmark survey has refined and expanded the data collected. The benchmark surveys are complete censuses, and comprise more infor- mation and cover more companies than the interim (quar- terly and annual) surveys. BEA data can be grouped into three broad catego- ries: o Direct investment position and balance of pay- ments data. o Data on financial structure and overall operations of U.S. affiliates of foreign companies (hereafter referred to as U.S. affiliates). o Data on U.S. business enterprises newly acquired or established by foreign direct investors. The first type covers transactions and positions between U.S. affiliates and their foreign parents. These data are the source of official estimates of direct invest- ment for the U.S. balance of payments accounts (formally the U.S. international transactions accounts), the U.S. national income and product accounts, and the interna- tional investment position of the United States. Balance of payments data include data on direct investment capital inflows from foreign parent groups to their U.S. affiliates and payments of income, royalties and license fees, and other service fees by U.S. affiliates to their parents. The second category includes data on the overall operations of U.S. affiliates. These data include: balance sheets and income statements, sales of goods and services, external financial position, property, plant and equipment expenditures, employment and employee compensation, U.S. merchandise trade, research and development expen- ditures, U.S. land owned and leased, and selected informa- tion by state in which the affiliate is located. The last type covers new investments, specifically, businesses that are newly acquired or established by foreign direct investors. Information is collected on investments outlays ~ how much foreign direct investors spend in a given year to acquire or establish new U.S. affiliates — and on the portion of outlays funded by foreign sources. The survey also obtains data on the number and type of investments and investors and selected items on the operations of the new U.S. affiliates, including total assets, sales, net income, employment, and acres of U.S. land owned. BEA data give a detailed picture of the levels, growth, origin and regional and industry distribution of the investment, and of the operating characteristics of the U.S. affiliates of foreign firms. The data are collected at the three-digit industry level, and are available for 135 sepa- rate industries. The data can be disaggregated by industry of U.S. affiliate, by country of foreign parent, by country and industry of the ultimate beneficial owner, or by the state in which it is located. Thev can also be cross- classified by industry and country, by state and country, or by state and industry. BEA collects data on a consolidated enterprise (firm) basis to meet the originally intended legislative requirement of analyzing the overall significance of and trends in direct investment. The enterprise is the sum of all activities or establishments of the firm and the estab- lishment is a set of activities of a firm at one physical location. The critical, nonduplicative financial and oper- ating data, such as balance sheets and income statements, that are needed to analyze the overall performance of U.S. affiliates only exist at the enterprise level. For any given enterprise, the sum of the operations of its establishments can contain significant double-counting of intercompany transactions and positions, and could include in its sales, for example, a number of intermediate transactions before reaching the final goods stage. When an enterprise fully consolidates its financial and operating information over all of its establishments, such duplication of intercompany transactions is eliminated and the sale of goods is recorded only once. These data allow analyses of these enterprises vis-a- vis all other U.S. enterprises, but cannot be used to examine the detailed activities within diverse enterprises. Such an examination requires data collected at the estab- lishment (plant) level. BEA does not collect data at the establishment level because collection of such data would greatly increase respondent burden. However, establish- ment level data are collected for all U.S. businesses by the Census Bureau and the Labor Department, and projects are underway to link BEA data on U.S. affiliates with the data collected by these agencies. These links will provide establishment level data for foreign-owned U.S. compa- nies without any increase in the companies' reporting burden and without the need for BEA to duplicate data collected by the other agencies. The International Trade Administration (IT A), De- partment of Commerce, collects information on specific foreign direct investment transactions under Executive Order 1 1858, which is based on the Foreign Investment Study Act of 1974, PL 93-479, andunder Executive Order 11961, which is based on the International Investment and Trade in Services Survey Act. ITA compiles these data in an annual report, which analyzes major trends and signifi- cant individual transactions. 6 ITA uses the same defini- tion of foreign direct investment as BEA. Data are collected only from available public sources, such as print media, transaction participants, and other contacts, as well as from the public files of Federal regulatory agencies, such as the Securities and Exchange Commission, the Federal Trade Commission, and the Federal Reserve Tor the most recent transactions data, see U.S. Department of Commerce, International Trade Administration, Foreign Direct Investment in the United States, 1989 Transactions (Washington, D.C.: May 1990). 'Some data series, however, are collectedby these agencies on an enterprise basis, such as: U.S. Bureau of the Census, Quarterly Financial Report for Manufacturing, Mining, and Trade Corporations. Board, but not confidential BEA surveys. The aggregate ITA data are not comparable to BEA data, because cover- age is not as comprehensive. Unlike BEA data, the ITA data have the advantage of identifying from public data individual transactions and their associated values ~ information which BEA cannot lawfully disclose. Data Problems Limitations in measuring and tracking foreign direct investment in the United States have long been recognized by analysts, Congress, and the Administration. Many of these limitations have been addressed over the past 15 years, particularly as a result of passage of the Interna- tional Investment and Trade in Services Survey Act that authorized the collection of complete and accurate infor- mation on such investment. A major remaining difficulty in assessing the extent and impact of these investments, particularly at a detailed industry level, is indicated in a report from the House of Representatives, Committee on Energy and Commerce on the "Foreign Direct Investment and International Finan- cial Data Improvements Act of 1990." In the report, Section 2, Findings, states that data collected by the Department of Commerce, Bureau of Economic Analysis, limit analysis of the activities of U.S. affiliates of foreign firms or comparisons to all U.S. industry, by industry groupings, because they are largely compiled on an "en- terprise" basis, rather than on an "establishment" basis used by a number of other statistical agencies. 7 This data distinction underlies many of the problems inassessing the extent of foreign direct investment in particular industries. Both BEA and ITA data bases have problems that impair identifying, tracking, and assessing the perfor- mance and impact of U.S. affiliates of foreign firms, especially at the detailed industry level. ITA data repre- sent only completed publicly reported transactions and should not be considered a comprehensive data base of the universe of foreign-owned U.S. companies. Also, ITA listings contain only the reported total cost of individual investments and are not considered to be a data base of financial and operating statistics. ITA data collection procedures do not enable determination of the proportion of the foreign-owned universe, or types of firms or indus- tries, excluded in its reports. BEA, on the other hand, has attempted to be sure that its benchmarks survey all trans- actors. Only very small affiliates are exempt from reporting in the benchmark surveys, and in 1987, coverage was close to 99 percent of value at the all-industries level for key items such as assets and sales. Coverage was slightly lower for land ownership, at about 96 percent of value. 8 See Lois Stekler and Guy V.G. Stevens, "The Adequacy of U.S. Direct Investment Data," in International Economic Transactions: Issues in Measurement and Empirical Research, ed. by Peter Hooper and J. David Richardson (Chicago: Chicago University Press, forthcoming), for a full discussion of problems with BEA data. Most BEA methodology issues can be grouped into four classes: scope, comparability with all U.S. industry data (for example, those collected by the Bureau of the Census and the Bureau of Labor Statistics), frequency and timing, and valuation. 8 Scope Although BEA data cover all sectors of the U.S. economy, information on foreign-owned affiliates in bank- ing is not as comprehensive as that for nonbank affiliates. BEA publishes annual and quarterly data on the direct investment position and balance of payments flows, an- nual data on new acquisitions and establishments of banks, and, in benchmark years, data on the number of affiliates and employees; employee compensation; property, plant, and equipment; net income on total assets and sales; and selected data by state. Financial and operating data for banks are published only in benchmark survey years. Banks are required by law to report details on financial and operating data to the Federal Reserve System and the U.S. Treasury, and thus, BEA does not collect these data, in large part to limit the burden of reporting. Some data on U.S. affiliates' operations that would help in assessing the performance of these affiliates are not available from BEA because of the sizable burden on respondents to provide these data. For example, BEA reports data on total compensation to labor, including fringe benefits, but no information on hours worked or hourly compensation. Such data could help in comparing wage rates of all U.S. affiliates with those of U.S. produc- ers. Price data also are not available to compute output or gross product in constant dollar terms in order to examine real growth in output and productivity. Comparability with Other U.S. Industry Data Problems in comparability mainly stem from differ- ences in the scope of the business entity on which data are collected - basically, enterprise versus establishment basis. MuchmoreotherU.S. government data by industry are collected on an establishment basis. This method of collection allows the firm to report data separately on each of its establishments, and each establishment's industry reflects its own activity. In contrast, in BEA surveys, most data for the whole enterprise is shown in the single major industry of the enterprise, even though some of the enterprise's individual establishments may be operating in other industries. 9 For example, a U.S. affiliate, which derives 51 percent of its sales from an establishment in wholesaling, and 49 percent from an establishment in 'For a description of BEA classification procedures, see Bureau of Eco- nomic Analysis, Foreign Direct Investment in the United Stales, 1987 Benchmark Survey, Final Results (Washington, D.C.: August, 1990). manufacturing, is considered to be in the wholesale trade industry. In this case, comparing the sales and perfor- mance of U.S. affiliates in wholesale trade to the total U.S. wholesale trade industry would tend to overstate the importance of wholesale trade for the affiliates, and to understate their manufacturing activities (or whatever other industries in which they participate). In its 1980 and 1987 benchmark surveys and in its annual surveys, however, BEA has required that U.S. affiliates distribute data on sales and employment among the sub-industries in which they have sales. These sales and employment data by industry of sales approximate those classified by industry of establishment and can be used to compare U.S. affiliates' performance with that of other U.S. businesses in individual U.S. industries. Standard measures of the U.S. affiliates' perfor- mance are not completely comparable to those of any given U.S. sector or industry as a whole: o International trade data for U.S. affiliates in benchmark years are collected by product, and are reasonably comparable to data for all U.S. industry, collected by the U.S. Bureau of the Census from export and import documents filed with U.S. Customs, and classified on a product basis. How- ever, only very broad product categories are collect. Also, in non-benchmark years, trade data for U.S. affiliates are available only by industry of affiliate, and hence, are not comparable to Census trade data by product. o Changes in productivity of U.S. affiliates cannot be compared to the corresponding overall U.S. industry because value added (gross product originating) data for U.S. affiliates are available only on an industry of affiliate, rather than industry of sales, or establishment basis. o Compensation per employee suffers from similar comparability deficiencies, at least for detailed industry groups. Aggregate information, for total manufacturing, is consistent, however. o Property, plant, and equipment data also are collected on an industry of affiliate basis, and thus, are not comparable to all-U.S. industry data on an establishment basis. o R&D data for U.S. industry are collected on an enterprise basis by BEA and the National Science Foundation, but the definition of an enterprise by BEA and the National Science Foundation is sometimes not consistent. More importantly, neither database can be used to examine the extent to which research and development of leading edge, or critical, technologies are being pursued by any industry or sub-industry grouping. Such data are not available from corporations, domestic or foreign. o In addition, geographic locations of each U.S. affiliates' separate activities are difficult to deter- mine with any specificity, because data are collected on an enterprise basis, rather than on an establishment basis. These problems in comparability will, in large part, be resolved with the availability of the results from the BEA data link project. Frequency and Timing Particular difficulties arise in attempting to observe performance and the operations of U.S. affiliates of for- eign companies over a period of years. Industry defini- tions and other classifications used in one benchmark survey sometimes differ from those used in earlier sur- veys, while data collected in an earlier survey are no longer included, because of the tradeoff between new information needed and company reporting burdens. It is, therefore, not possible at present to examine year-to-year developments, for example, in imports of capital equip- ment versus components. In addition, data are published on outlays by foreign firms to acquire and establish U.S. affiliates in any given year, but follow-up information on subsequent sales of parts of an acquired firm after purchase is not provided. Similarly, only first year expenditures are included in new establishment data, and expansions are difficult to deter- mine. The data are not published separately on the opera- tions of the two categories of affiliates. Such data would be useful in examining the impact of foreign direct invest- ment on U. S . trade because the export and import behavior of a new establishment could differ from that of an 10 Ibid., pp. 18-20. "See Robert Eisner and Paul J. Peiper, "The World's Greatest Debtor Nation," paper presented to Joint Session of North American Economics and Finance Association and American Economic Association, New York, New York, 1988; Michael Ulan and William G. Dewald, "The U.S. Net International Investment Position: Misstated and Misunderstood," in James A. Dorn and William A. Niskanen, eds., Dollars, Deficits, and Trade (Boston, MA: Kluwer Academic Publishers, 1989). acquired affiliate. 10 In addition, data are not provided so that the evolution of a given set of affiliates' activities over time from, for example, wholesaling to assembly to more sophisticated manufacturing, to undertaking R&D, can be examined. Valuation A number of researchers have raised the issue of underestimation of foreign direct investment because, in the past, BEA has used the historical book value provided by companies, rather than market values, to measure direct investment position." Depending on the method used to estimate market values, the range of the extent of underestimation is wide. BEArecently undertook amajor project to revalue the foreign direct investment positions to current market values, and these estimates are published in the Survey of Current Business, May 1991. Historical costs are used throughout this report because the revaluations of foreign direct investment have been made for only total accumulated values of FDI. The recently released revaluations on current costs and market values are not used in this report except in a few clearly labeled discussions of aggregate values. BEA has not revalued to these new bases the FDI for individual indus- tries nor operating data for U.S. affiliates of foreign firms. Historical costs are thus used as a means of gauging performance of U.S. affiliates in the aggregate and in the specific industries examined in this report. Report Analysis The following sections of this report provide an overview of trends in foreign direct investment in the United States and case studies of several key industries. While the depth, scope, andaccuracy have been somewhat limited by the methodology issues identified, the available data provide a fairly clear picture of developments in foreign direct investment in the United States. When appropriate, problems of comparability and consistency are noted, and the conclusions, duly qualified. Future reports will have the benefit of further data collection improvements, including the BEA-Census linked data project underway at the time of this report. FACTORS DRIVING FOREIGN DIRECT INVESTMENT by Sumiye Okubo McGuire and J. Steven Landefeld* Analysts in this country and abroad have produced a large body of literature examining the factors that drive foreign investment flows. Although no fully successful formal model has been developed, these studies provide analyti- cal frameworks to explain the causes of foreign invest- ment, and in particular, foreign direct investment. These frameworks do not distinguish between the basic motiva- tions of foreign investors in the United States and those of U.S. investors abroad. The major differences lie in international economic conditions and national treatment. The following brief review of the determinants that help explain why foreign direct investment takes place provides a means for understanding the recent increases in foreign direct investment in the United States, and a basis for drawing judgments about the performance of U.S. affiliates of foreign firms and their effects on the U.S. economy and U.S. -owned businesses. Analytical studies generally approach foreign direct investment from one of two perspectives: classical investment theory and indus- trial organization theory. 1 Two Analytical Approaches The first perspective, sometimes called the cost-of- capital approach, is based on classical investment theory which, extended to the international realm, says that capital moves in response to changes in real interest rate differentials between countries, and transactions take place between independent buyers and sellers of financial assets. Foreign, like domestic, investors weigh incremen- tal expected returns against the marginal cost of capital, and are motivated by the desire to earn the highest rates of return for any given level of risk, and to hedge against interest- and exchange-rate fluctuations, by diversifying asset holdings. 2 This approach explains portfolio, as well as direct, investment by foreigners. The second perspective, often termed the industrial organization approach, is based on the theory of the firm, and explains investment activity in terms of strategic behavior of the firm, specifically, the multinational corpo- *Director, Office of Macroeconomic Analysis, Office of the Chief Econo- mist, Economics and Statistics Administration; and Associate Director for International Economics, Bureau of Economic Analysis, Economics and Statistics Adminiistration, U.S. Department of Commerce. ration. This approach explains why a multinational firm makes direct investments abroad and why it attempts to extend control over its sales of goods and services outside of its own national boundaries. A firm expands its activities overseas: (1) to maintain profitability while reducing its prices when faced with lower competitors' prices ~ sometimes due to its own rising production costs, rising wages, or declining productivity, or it may be facing adverse changes in foreign currency exchange rates; (2) to maintain or increase worldwide market share; (3) to gain or retain access in an overseas market, especially in times when trade restrictions are threatened; (4) to exploit, and maintain control over, an advantage specific to the firm such as a management, marketing, and/or technology, or a comparative advantage in producing in the foreign market; (5) to improve the firm's ability to meet the overseas market's needs through special product design and/or service; and, among other factors, (6) to take advantage of the political stability and open-door policy that exist in the United States. 3 'See Edward M.Graham and Paul R. Krugman, Foreign Direct Investment in the United States ( Washington, D.C.: Institute for International Econom- ics, 1989); and Saul Lizondo, "Foreign Direct Investment," in Determi- nants and Systemic Consequences of International Capital Flows, a Study by the Research Department of the International Monetary Fund (Washing- ton, D.C.: International Monetary Fund, March 1991). Lizondo provides a detailed review and classification of the various theories of foreign direct investment. 2 See Gary C. Hufbauer, "The Multinational Corporation and Direct Invest- ment, " in International Trade and Finance: Frontiers/or Research, ed . by Peter B. Kenen (Cambridge: Cambridge University Press, 1975); Jamuna P. Agarwal, "Determinants of Foreign Direct Investment: A Survey," Weltwirtschaftliches Archiv, Vol. 116, Heft 4 (1980). 3 See Stephen H. Hymer, "The International Operations of National Firms: A Study of Direct Foreign Investment," a Ph. D. Dissertation. 1960. Massachusetts Institute of Technology (Cambridge, MIT Press, 1976); John H. Dunning and Alan M. Rugman, "The Influence of Hymer's Dissertation on the Theory of Foreign Direct Investment," in honor of Stephen H. Hymer: The First Quarter Century of the Theory of Foreign Direct Investment, The American Economic Review, (May 1985). pp. 228- 232; David J. Teece, "Multinational Enterprise. Internal Governance, and Industrial Organization," in honorof Stephen H. Hymer: The First Quarter Century of the Theory of Foreign Direct Investment. The American Eco- nomic Review (May 1985). pp. 233-238. Macroeconomic and Microeconomic Influences These analytical approaches explain what motivates foreign direct investment. Specifically, they help to explain the large capital inflows into the United States during the first half of the 1980s. At the macroeconomic level, capital flows responded to real interest-rate differ- entials which reflected the savings and investment imbal- ances in the United States and major industrial countries, divergences in the monetary-fiscal policy mix in the United States and other countries, specifically, Japan and West Germany, 4 and in relative rates of inflation (Figure 2.1). The United States in the early 1980s saw a rising relative rate of return on investment, as its saving declined, real interest rates rose, and the dollar appreciated as the demand for dollars increased. Increased demand for dollars to purchase U.S. assets contributed to a 64 percent rise in the real multilateral trade-weighted value of the dollar between 1980and 1985. Although changes in trade respond with a lag to changes in exchange rates, the rapid rise in the dollar significantly reduced the price competi- tiveness of U.S. exports, increased the attractiveness of U.S. imports, and pushed the current account deficit to record levels in the mid-1980s (Figure 2-2). FigUre 2- 1 Saving and Investment as Share of Gross Domestic Product, 1988 United States japan Germany OECD SAVING INVESTMENT 10 15 20 Percent 25 30 35 Source: OECD National Accounts. 4 See Morris Goldstein, Donald J. Mathieson, and Timothy Lane, ' 'Determi- nants and Systemic Consequences of International Capital Flows," in Determinants and Systemic Consequences of International Capital Flows, A Study by the Research Department of the International Monetary Fund (Washington, D.C.: International Monetary Fund, March 1991), pp. 1-45. Figure 2-2 Trade Balance and Exchange Rate (Current Account/Nominal GNP) & Real Exchange Rate, 1 982-90 Percent 140 Percent 80 - -2 1982 64 86 88 90 Note: Exchange rates are lagged eight quarters to illustsrate their lagged relationship to the change in the trade balance. Source: Bureau of Economic Analysis, Bureau of the Census, and Federal Reserve Board. The U.S. market became a more desirable place to invest, providing more attractive investment opportuni- ties between 1981-86 than earlier, in part, due to changes in the regulatory environment and tax rules which encour- aged capital investment. Lower tax rates and reduced inflation in the 1980s also contributed to robust economic growth in the United States relative to Europe and other countries. In the first half of the 1980s, rapid growth of domestic demand in the United States relative to growth in other countries spurred U.S. demand for imports and restrained foreign demand for U.S. exports. Overseas investors benefited from an improving return on foreign investment in the United States. In the first half of the 1980s, European investors, in particular, benefited from better economic performance of the U.S. economy and higher returns than at home. For many investors in countries outside of Europe, the U.S. offered a positive climate from higher taxes, debilitating inflation, and structural rigidities. Foreign investors sought to reduce portfolio risk by diversifying investments in the U.S. stock market. Capital flight from the exchange and capital controls imposed by the governments of heavily- indebted third world nations in an attempt to contain their rapidly mounting debts also spurred demand for U.S. assets. After 1985, a number of changes in macroeconomic conditions influenced relative rates of return, exchange rates, trade, and foreign investment in the United States. In early 1985, the dollar and exchange rate started to decline, and the United States began to ease monetary policy. Moreover, changes in U.S. tax laws, including the Tax Equity and Fiscal Responsibility Act of 1 982 (TEFRA) and the Tax Reform Act of 1986, coupled with improve- 10 Figure 2-3 Growth of Real Domestic Demand U.S. versus Other G-7 Countries, 1982-89 Percent 10 1982 United States 83 84 BS B6 8/ 88 89 Note: Domestic demand equals GNP less net exports. Source: OECD Economic Outlook, and OECD Historical Statistics. selling its special knowledge and skills or technologies. Empirical studies indicate that depending on the market is particularly costly in industries with vertically integrated manufacturing processes, knowledge-intensive and/or communication-intensive products, or goods requiring quality assurance. These advantages are not uniformly distributed across countries, industries, or enterprises, and can change over time. Thus, the level and pace of foreign direct investments in the United States are likely to differ across industries and countries, and to change over time. 5 Strategic decisions are particularly affected by fac- tors external to the firm when there are only a few large firms world-wide in the same industry. In that instance, in order to gain or maintain market share, one firm's foreign direct investment in one national industry is likely to induce its competitors to quickly follow suit. Similarly, one firm may invest in a foreign rival firm's home market to increase market share. Changing Global Financial Markets ments in relative economic growth and the business cli- mate abroad, and improvements in the U.S. fiscal deficit, reduced the gap between U.S. and foreign real interest rates and the after-tax rate of return on U.S. investments (Figure 2.3) U.S. demand for imports declined, and foreign demand for U.S. exports rose, but only after a lag in the decline in the U.S. dollar. These changes, in essence, reflected a narrowing of the saving and invest- ment gap, and a fall in the current account deficit, which peaked in 1987. At the microeconomic level, these macroeconomic conditions explain the aggregate inflow of foreign direct investments in the United States — not its composition. Interest-rate differentials, exchange rate changes, and differences in tax policies all also influence the timing of the direct investment decision. They are included in the strategic decisions of the multinational corporation, as it decideswhere to locate its investment, in what industry(ies), what form (acquisition versus new plant establishment — "greenfield' '), and extent of its involvement in the opera- tions of the firm. The strategic decisions of the multinational cor- poration on foreign direct investment hinge on factors internal and external to the firm, as explained by the industrial organization approach to foreign direct invest- ment. There is suggestive evidence that a firm chooses to invest abroad when internal factors or firm-specific ad- vantages outweigh the additional costs of establishing operations in distant, culturally diverse locations. These advantages could include brand name, technological and managerial superiority, marketing skills, access to mar- kets, and economies of scale. The firm, in its desire to maintain control over these advantages or assets, prefers to substitute transactions within the firm for transactions in the market place, such as exporting its products or While these analytical approaches provide insights into causes of foreign investment and its composition, a number of important developments have taken place over the past decade in the world economy and in the interna- tional financial markets which have encouraged inte- grated and relatively open global financial markets. Inte- grated financial markets have greatly increased net and gross capital flows among industrial countries, especially in direct and other investments into the United States, as investors sought the highest rates of return on assets, and foreign investors and foreign financial institutions sought participation in major financial markets. These changes include the deregulation of financial markets among ma- jor industrial countries, elimination of capital controls by a number of major industrial countries, and advances in communications technologies. o Many industrial countries, including the United States, Japan, and the United Kingdom, began deregulating financial markets, leading to rapid changes in the financial institutions within these countries, the types of financial instruments used. and an increased volume of transactions, which these institutions could manage. o A number of industrial countries, including Japan, Italy, and France, also began eliminating controls and barriers to international financial transactions. These changes greatly facilitated the international flows of capital, especially into the United States. o The rapid advances in telecommunications tech- nologies enabled companies to set up worldwide networks to link lenders and borrowers, twenty- 5 See op. cit., Lizondo and Graham and Krugman. 11 four hours a day around the globe. These technolo- gies also eased the management control of multina- tional corporations' operations, encouraging the globalization of R&D, production, and distribution in many of the fastest growing industries and markets. Another major factor shifting the scale of FDI upward in the United States in the 1980s has been the fact that the U.S. financial market is sufficiently large to accommodate efficiently massive blocks of funds which may flow out of foreign capital markets, as a result of very high levels of national saving relative to investment opportunities. 6 The large increase in the volume of foreign direct investment over the past decade also reflects the expanded role of multinational corporations in the world economy. They have changed the way they reach markets — not only through exports, but increasingly through production and sales by affiliates. Capital flows have become as impor- tant as the substantial flows of goods and services traded in and out of the United States. 7 'See Rachel McCulloch, "Why Foreign Companies Are Buying into U.S. Business," The Annals of the American Academy of Political and Social Science (forthcoming, July 1991). 'See DeAnne Julius, Global Companies and Public Policy: The Growing Challenge of Foreign Direct Investment (New York: Council on Foreign Relations Press, 1990), especially Chapter 2. 12 MACROECONOMIC SETTING OF FOREIGN DIRECT INVESTMENT by Michael R. Darby and Sumiye Okubo McGuire* Macroeconomic factors here and abroad have been the major determinants of the size and the rate of increase in foreign investment—direct and portfolio—in the United States in the last decade. These factors include saving and investment rates, monetary and fiscal policies, interest rates, inflation, and exchange rates. This chapter exam- ines foreign investment from a macroeconomic as op- posed to a microeconomic perspective. It provides a broad macroeconomic context for assessing the economic im- pact of foreign investment on the U.S. economy through its effect on interest rates, capital formation, employment, productivity, and standards of living. It does not consider microeconomic factors, such as relative costs, the need to establish distribution outlets in the world' s largest market, and the desire to reduce trade frictions, all of which determine the distribution of foreign direct investment across industries and of total investment between direct and portfolio investment. Macroeconomic Causes of Foreign Investment in the United States A major factor encouraging the rapid growth in the inflow of foreign capital — direct and portfolio — into the United States in the 1980s was the saving- investment imbalance here and abroad. Gross saving in other coun- tries, such as Japan and West Germany, exceeded then- domestic investment demand, while U.S. gross saving did not keep pace with the rapidly increasing U.S. capital needs. Throughout most of the postwar period up to the 1980s, U.S. gross domestic saving moved roughly in line with, and was more than sufficient to finance, U.S. gross private domestic investment. However, in 1983, the U.S. saving and investment growth rates began to diverge, as the United States started a long period of economic expansion. The divergence in the saving and investment *Under Secretary for Economic Affairs and Administrator, and Director, Office of Macroeconomic Analysis, Office of the Chief Economist, respec- tively, Economics and Statistics Administration, U.S. Department of Com- merce. The authors acknowledge the assistance of J. Stephen Landefeld, Associate Director for International Economics, Bureau of Economic Analysis, Economics and Statistics Administration, U.S. Department of Commerce. rates produced a large absolute gap between gross saving and investment, in 1987 peaking at $155 billion (Figure 3-1) and as a share of GNP (Figure 3-2). Figure 3-1 U.S. Gross Private Domestic Investment Outpaces U.S. Gross Saving Starting in 1983 Billion dollars 1975 1980 99C Source: Bureau of Economic Analysis. Figure 3-2 Ratio of Gross Private Domestic Investment & Gross Saving to U.S. GNP (In current dollars) Percent 20 1 18 16 H 12 10 Investment Siving J I I I I I I I L. -J I I L_ 1950 60 70 Source: Bureau of Eonomic Analysis. 80 9-0 13 In the early 1980s, U.S. gross domestic investment rose, reflecting reductions in taxes on business investment and the effects of economic recovery. Moreover, the expected real after-tax rates of return on investment in the United States increased, significantly improving the at- tractiveness of U.S. investment (Figure 3-3). U.S. tax reform and a reduction in inflation lowered effective tax rates on investment, and there was a shift away from an anti-business political climate in the United States. Gross domestic saving failed to keep pace with this growth in domestic investment in the 1980s. Government dissaving rose, as a result of a sharp increase in the federal budget deficit, which more than offset arise in the surplus in state and local government budgets. Private saving fell, as a drop in the household saving rate more than offset the small rise in the business saving rate. The increase in domestic investment demand rela- tive to desired domestic saving raised real interest rates in the United States relative to other countries. These high real interest rates in the United States and improved expectations for after tax rates of return significantly improved the attractiveness of both portfolio and direct investment in the United States relative to elsewhere. Contributing to the attractiveness of investment in the United States was the liberalization of capital markets and capital flows by several major industrial countries, par- ticularly Japan. This increase in the attractiveness of investment in the United States caused a large inflow of foreign capital into the United States. The resultant appreciation of the dollar exchange rate had a negative impact on the U.S. trade balance, and the current account deficit reached record levels in the mid-1980s. The increase in the U.S. current account deficit was also due to U.S. demand for imports that was spurred by robust relative growth in the United States and foreign demand Figure 3-3 Real Long-Term Interest Rates (Average annual rate) Percent 10 United States 1980 82 84 86 88 Note: 1989 and 1990 are OECD estimates. Source: OECD Economic Outlook Historical Statistics. for U.S. goods that was restrained due to slower economic growth abroad. 1 Although foreign capital inflows into the United States remained large throughout the 1980s, in the latter half of the decade, the rate of increase in these inflows slowed, as the gap between U.S. saving and U.S. invest- ment narrowed. Macroeconomic conditions changed, influencing capital flows, relative rates of return, ex- change rates, and trade . In the mid- 1 9 80s, the rate of U. S. economic growth slowed compared to other industrial countries, the United States raised taxes on capital, the dollar exchange rate began to decline, and ultimately the growth of U.S. demand for imports fell and foreign demand for U.S. exports rose. The difference between U.S. and foreign real rates of interest was reduced, and changes in U.S. tax laws, including TEFRA and the Tax Reform Act of 1986, removed many of the tax incentives created by the 1981-82 Tax Act to encourage U.S. corpo- rate investment. 2 The rate of increase of U.S. domestic investment dropped as a result of the fall in economic growth and a reduction in the relative after-tax real rates of return. U.S. saving rebounded partially as the federal deficit declined as apercent of GNP, although this reduc- tion was offsetby further declines in the private saving rate in the late 1980s (Figure 3-2). U.S. Saving-Investment Imbalance The gross saving-investment identity in the national income and product accounts (NIPAs) provides a useful way of summarizing the macroeconomic factors influenc- ing foreign investment, both portfolio and direct. Gross saving is the sum of gross private saving ~ personal saving and business saving — and government saving. Gross saving equals the sum of gross private domestic invest- ment and net foreign investment. Gross private domestic investment includes new plant and equipment, invento- ries, and housing. Net foreign investment equals the current account balance, which measures the excess of receipts from foreigners (such as payments for exports) less payments to foreigners (such as our payments for imports and interest paid on government bonds owned by foreigners). Alternatively, net foreign investment is equal to the international capital account balance which mea- 'Commentary by Michael R Darby on "The U.S. External Deficit: Its Causes and Persistence," by Peter Hooper and Catherine L. Mann in U.S. Trade Deficit: Causes, Conbsequences, and Cures, Proceedings of the Twelfth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis, ed. by Albert E. Burger (Norwell, Massachusetts: Kluwer Academic Publishers, 1989). 2 See Joel Slemrod, "The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States." Working PaperNo. 3234, National Bureau of Economic Research (January 1990), and Myron S. Scholes and Mark A. Wolfson, "The Effects of Changes in Tax Laws on Corporate Reorganization Activity," Working Paper No. 3095, National Bureau of Economic Research (September 1989), for a discussion of the hypothesis that changes in the tax laws encouraged foreign direct invest- ment, especially through mergers and acquisitions by foreign firms. 14 sures the excess of foreign capital inflows less U.S. capital outflows. 3 Gross saving = Gross private domestic investment + Net foreign investment Gross saving = Personal saving + Corporate saving Noncorporate saving + Government saving + This accounting identity holds at all times. If gross private domestic investment rises and saving does not match this increase or if gross saving — government and private — falls and gross private domestic investment does not decline proportionately, the gap is closed by an increase in net foreign investment. An alternative way of viewing this saving-investment identity is as follows: a fall in national saving or rise in gross private domestic investment is equivalent to arise in spending by individu- als, government, and business. When domestic spending exceeds domestic production~as it did in the United States in the 1980s--the excess is supplied by net imports of goods and services. The role of foreign capital was particularly impor- tant in the 1980s, since the United States has one of the lower investment rates among the major industrialized nations of the world. Without foreign capital, a reduction in the U.S. investment rate would have likely taken place, leading to a fall in U.S. productivity growth and future standards of living. Untilthe 1980s, U.S. gross savinghad been sufficient to finance gross private domestic invest- 3 Errors and omissions—the statistical discrepancy between the current accountbalance--is ignored in this discussion and the numbers that follow. It is implicitly assumed that thebulk of errors and omissions are unrecorded capital flows, which is consistent with most analysts' assessment of the U.S. statistical discrepancy. ment, as well as investment abroad (Table 3- 1 ). However, in the 1980s, as the federal budget deficit rose, the government saving rate fell from an average of -0.4 percent of GNP between 1950 and 1979 to -2.5 percent between 1980 and 1990. Federal dissaving was partly offset by a rise in State and local government saving. Private saving declined somewhat, as a sharp de- cline in household saving — from a 5.0 percent average between 1950 and 1979 to a 3.7 percent average between 1980 and 1990 — was partly offset by a rise in business saving -- from a 1 1.8 percent average to a 12.7 percent average. Although this decline in private saving is imper- fectly understood, it has been attributed to changes in demographics and the rise in stock market values during the 1980s. The rise in the proportion of younger and older families, with low saving rates, and the fall in the propor- tion of middle-aged groups with high saving rates, have reduced overall saving. Darby, Gillingham, and Greenlees, however, show that private saving in the 1980s conforms almost exactly to that predicted based on a model of consumer spending driven by permanent income, transi- tory income, and real money balances. In their analysis private saving is actually increased by higher government deficits, but this effect is dominated in the mid-1980s by those due to transitory income and real money balances. 4 The net result of these changes in private and government saving rates was a decline in the national saving rate from an average of 16.3 percent of GNP between 1950 and 1979 to 13.9 percent between 1980 and 1990. Gross private domestic investment in the 1980s 4 Foradditional insights into consumption and savingbehavior in the Untied States from 1981 to 1989, see Michael R Darby, Robert Gillingham, and John S. Greenless, "The Impact of Government Deficits on Personal and National Saving Rates," Contemporary Policy Issues, forthcoming. Figure 3-4 Net Foreign Capital Inflows as Percent of Gross Private Domestic Investment 1980 82 84 Source: Bureau of Economic Analysis. Table 3-1 Sources of Finance for Domestic Investment, 1950-90 (In percent of GNP) 1950-79 1980-90 Gross private domestic investment 16.0 15.5 Equals: National saving 16.3 13.9 Private 16.8 16.4 Household 5.0 3.7 Business I 1.8 12.7 Government -0.4 -2.5 Federal -0.6 -3.7 State & local 0.2 1.2 Plus: Net foreign capital inflows -0.3 1.6 Note: Detail may not add to totals because of rounding. Source: Department of Commerce. Bureau of Economic Analysis. 15 exceeded national saving, which was supplemented by net capital inflows from abroad, with roughly one- fifth of the net inflows accounted for by direct investment. Foreign Saving-Investment Imbalances Just as the U.S. saving-investment gap is the main factor explaining capital inflows into the United States, saving- investment imbalances abroad help explain the capital outflows from surplus countries such as West Germany and Japan. For example, while the United States has one of the lowest saving rates among the major industrialized nations, Japan has the highest saving rate. Moreover, the high saving rate helps to explain the large capital inflow from Japan into the United States. High prices for land, housing, and consumer goods along with Japanese tax policies encourage saving in Japan. While the excess of saving over investment creates very low real rates of return in Japan, the high U.S. real rates of return make investment in the United States very attractive to Japanese investors. Increasing Integration of World Capital Markets Increasingly integrated world capital markets have contributed to capital inflows into the United States. Increased capital mobility and interdependent national capital markets have resulted from the widespread appli- cation of improved communications technologies, and the deregulation of financial markets and easing of restric- tions on capital flows in a number of countries. Effective monetary and fiscal policies must take into account the policies of other countries. Despite this openness, foreign investment, and espe- cially direct investment, in the United States remains, in relative terms, below that of many other nations. Avail- able data indicate that direct investment plays a smaller Table 3-2 Foreign Direct Investment, 1989 (Holdings as Percent of Host-Country GDP) Foreign holdings U.S. holdings in the in the United States Foreign Country United Kingdom 2.3 Japan 1 .3 Netherlands 1 .2 Canada 0.6 West Germany 0.5 Switzerland 0.4 France 0.3 7.5 0.7* 6.9 11.9 1.8 10.8 1.4 ♦Data for 1988. Sources: Department of Commerce and International Monetary Fund. role in the U.S. economy than in other major economies. Indeed, with the exception of Japan, cumulative direct investment by the United States in other countries substan- tially exceeds foreigners' cumulative direct investment in the United States (Table 3-2). 5 In 1989 the current-cost value of foreign direct investment assets in the United States was $433.7 billion as compared to U.S. direct investment assets abroad of $536.1 billion, for aU.S. net worth on direct investment assets of $102.3 billion. In 1989 the total value of U.S. domestic wealth—excluding government owned assets-- was $16,017 billion and U.S. national net worth was $15,602 billion. Foreign direct investment assets in the United States accounted for only 2.7 percent of U.S. domestic wealth and U.S. networthon direct investment assets added 0.7 percent to national net worth. In 1989 the value of total foreign investment in the United States—direct and portfolio— was $ 1 556 billion as compared to total U.S . investment assets abroad of $ 1 025 . 6 Total foreign assets in the United States equalled 9.7 percent of U.S. domestic wealth and the negative U.S. net worth on foreign investment equalled 3.4 percent from national net worth. BENEFITS OF FOREIGN INVESTMENT Foreign investment creates jobs in the short-term, but its lasting impact on the U.S. economy is through new investment and productivity growth. In the medium-term, U.S. employment and economic growth are mainly deter- mined by monetary and tax policies, or by supply shocks, such as the rise in oil prices triggered by the events in the Middle East. During the 1980s, unemployment dropped as a result of credible non-inflationary monetary policies andimproved incentives through tax cuts. Over time, U.S. economic growth, competitiveness, and standards of liv- ing depend on productivity growth, which in large part hinges on investment in new plant and equipment. In other words, higherinvestment is the key to higherproductivity, higher wages, and higher standards of living. Foreign investment — portfolio and direct — raises investment and U.S. capital formation. Higher investment improves 5 D. Julius and S. Thomsen, "Foreign-owned Firms, Trade, and Economic Integration," Tokyo Club Papers 2. London: Royal Institute of Interna- tional Affairs, 1988. It should be noted that are significant measurement difficulties in comparing direct investment data across countries. However, the United States has one of the broadest definitions of direct investment among the G-7 nations, and hence the U.S. share cited above is probably biased up relative to the other estimates. 6 The aggregate international investment position data presented here are reported on the Federal Reserve Board's flow of funds basis so as to allow comparision of foreign investment to the Board's national wealth estimates. For a discussion of differences in the series — which are in the classification of portfolio rafherthan direct investment -- see, Sarah A. Hookerand John F. Wilson, "A Reconciliation of Flow of Funds and Commerce Department Statistics on U.S. International Transactions and Foreign Investment Posi- tion," Finance and Economics Discussion Series, No. 84, August 1989, Federal Reserve Board, Washington, D.C. 16 productivity by increasing the amount of capital each worker has to use, and also speeds the rate at which new technologies are adopted, thus providing each worker with both more and better equipment. Estimating the Benefits: A Macroeconomic Approach The estimated contribution of foreign investment to the U.S. economy is indicated by the domestic saving and investment rates and the net capital inflows — portfolio and direct — into the United States during the 1980s. Prior to 1982, U.S. domestic saving was sufficient to fund domestic investment, but after 1982, it became increas- ingly inadequate due to an increase in investment demand. As a result, this gap was filled by net capital inflows, which rose dramatically, peaking at 22 percent of U.S. gross domestic investment in 1987 (Figure 3-4). Without the availability of the net foreign capital inflow, a lower level investment would have been re- flected in a significantly reduced level of GNP in the 1980s. Between 1982 and 1987, net capital inflows from abroad — direct and portfolio — added estimated roughly $745 billion to gross private domestic investment in the United States. Applying the average rate of depreciation on the U.S. capital stock to these inflows suggests that they added about $640 billion to the U.S. net capital stock by 1989. During the postwar period, the elasticity of capital to output — the percentage change in GNP arising from a one percent change in the net capital stock, or capital's contri- bution to economic growth, has averaged roughly one- third, which is also equal to its postwar share of GNP. If this postwar elasticity of one-third is applied to net foreign capital inflows' contribution to the U.S. capital stock, it suggests that this increase in the capital stock raised GNP for 1989 by roughly $2 1 billion (Table 3-3). The average rate of return to foreign investment in the United States in 1989 was 9.1 percent. Applying this rate of return to net capital inflows from abroad in the 1980s suggests that the United States paid $62 billion to foreigners for a capital investment that produced $210 billion in additional U.S. output for a possible net benefit of about $150 billion in 1989. These estimates provide only a very rough order of magnitude of the contribution of foreign capital and embody simplifying assumptions about macroeconomic relationships in the U.S. economy. The estimates pre- sented above are rough approximations, and represent one way of modeling relationships in the U.S. economy. The estimates are based on long-run relationships and abstract from short-term macroeconomic fluctuations. Alterna- tive models would provide additional estimates for gaug- ing the sensitivity of the estimates and the validity of the assumptions made. The most important of simplifying assumptions made for the set of long-run estimates are as follows: o The post-World War II average contribution of capital to GNP of approximately one third is representative for the 1980s. o Gross saving would not have risen to offset any reduction in net capital inflows from abroad. o The rate of return on incremental or net capital inflows was the same as the average rate of return on all foreign assets in the United States. o Alternative depreciation patterns would not change the results. The most sensitive of these assumptions is probably the elasticity of output to capital. Although productivity Table 3-3 Illustrative Estimates of Macroeconomic Impact of Net Foreign Capital Inflows, 1982-89 (Billions of dollars) 1982 1983 1984 I98S 1986 1987 1988 1989 Total net foreign investment" 1.0 33.5 90.9 114.4 135.8 154.6 119.2 96.8 Increase in U.S. net capital stock b 1.0 34.4 123.6 231.6 359.2 492.1 587.8 638.6 Increase in U.S. GNP, assuming Capital elasticity of 1/6 0.2 5.7 20.6 38.6 59.9 82.0 98.0 106.4 Capital elasticity of 1/3 0.3 11.4 40.8 76.4 118.5 162.4 194.0 210.7 Increase in payments to foreigners' 0.1 3.3 12.0 22.5 34.8 47.7 57.0 61.9 Net benefit, assuming: Capital elasticity of 1/6 0.1 2.6 9.4 17.5 27.2 37.2 44.5 48.3 Capital elasticity of 1/3 0.2 8.2 29.5 55.4 85.8 117.6 140.5 152.6 'Portfolio and direct investment. b Derived using: net foreign investment, 19-year average service life (U.S. average during the 1980s), straight line depreciation, and the implicit price deflator for gross domestic investment. ""Derived using the average rate of return on the replacement cost stock of foreign investment in the United States (portfolio and direct) , including capital gains and losses. 17 rebounded in the 1980s, measured productivity growth remains below the postwar average and capital productiv- ity may well be below the 1989 — and postwar — share of capital in GNP of one third. If it is assumed that capital's productivity has been reduced by one half, and an elastic- ity of one-sixth is used rather than one third, the 1989 increase in GNP would be $ 1 05 billion and the net benefit would be $48 billion. The second critical assumption is that gross saving would not have risen to offset any reduction in net foreign capital inflows. If, for example, foreign capital inflows had been curtailed, U.S. interest rates would have risen and U.S. saving might be expected to rise in response to the rise in interest rates so that the full brunt of a reduction in capital inflows need not have been borne by gross invest- ment. Private saving, however, has not been very respon- sive to changes in real interest rates. Indeed, the household saving rate in the United States actually declined from an average 5.0 percent of GNP between 1950 and 1979 to an average 3.7 percent between 1980 and 1990. 7 In addition to these direct benefits from foreign direct investment are anumber of indirect benefits. Higher levels of investment also speed the rate of technological change by accelerating the rate of adoption of new tech- nologies, especially those embodied in new capital stock. Moreover, because direct investment involves the invest- ment of entrepreneurial, management, and technological, as well as financial resources, these skills are also trans- ferred across countries. These transfers can no longer be viewed as one way—with a net transfer to other nations of U.S. expertise— and today there is much that the U.S. can learn from other developed nations. It is probably these indirect effects that explain why researchers who have examined the effect of changes in saving/investment rates on GNP have found increases that exceed capital's direct contribution (of roughly one third) to GNP. 8 Indeed various studies have found nearly one- for-one changes in real GNP and net investment, which would produce considerably larger net benefit than the 'Although other wealth and life cycle effects appear to have offset the effects of higher real rates of return in the 1980s; private saving in the post- war period has not been very responsive to variations in real rates of return. 8 See for example, Paul Romer, "Crazy Explanations for the Productivity Slowdown," NBER Macroeconomics Manual, pp. 163-201, 1987. A recent article, Benhabib and Jovanovic (1991), reexamines the high correlation between changes in capital and changes in output and suggests that the correlation may be due to other factors than technical change embodied in physical capital. See Jess Benhabib and Boyan Javanovic, "Externalities and Growth Accounting," American Economic Review, pp. 82-1 13, March 1991. Alternative explanations include that of potential interactions between the investment rate and the rate of technical change suggested by Boskin (1988), "Learning by-doing effects in investment may positively link the rate of investment and technical change. A society with ahigherinvestment rate might not have a temporarily higher growth rate in its transition to a higher growth path, but actually might also increase the long-run rate of growth." See Michael J. Boskin, "Tax Policy and Economic Growth: Lessons From the 1980s," Journal of Economic Perspectives, pp. 71-98, Fall 1988. $48 to $150 billion range illustrated above. Another indirect benefit of foreign direct invest- ment to the U.S. economy is the stability of this invest- ment. It is less destabilizing than portfolio investment because by its nature it is a less liquid asset. Portfolio capital flows are extremely mobile, and in recent years, policy makers and financial market participants have observed sharp shifts in capital flows and domestic interest rates as foreign capital has moved into or out of the United States in response to changes in foreign and domestic interest rate differentials. Direct investment is by defini- tion an investment by a foreign firm to obtain a lasting interest in a firm; and if a foreign firm were suddenly to dispose of its U.S. subsidiary, even in today's world of mergers and acquisitions, selling a company is signifi- cantly more difficult than selling a few shares in a com- pany. What then are the economic costs of direct invest- ment? Presumably they arise mainly in response to a concern that the interests of foreign owners do no corre- spond with those of domestic owners or workers. Al- though discussed in detail in subsequent chapters of this report, in general, foreign-owned firms do not appear to have significantly different interests from U.S. citizens and U.S. -owned companies. For example, available evi- dence suggests that foreign-owned firms pay their workers significantly more than the average worker — $30,5 1 7 in compensation per worker versus an average of $25 ,480 per worker for all U.S. workers in 1988. Foreign-owned firms also appear to spend more on investment in plant and equipment per worker than the average U. S . firm — $ 1 1 , 1 84 per worker versus an all U. S. average of $4,284 per worker in 1988. Although these differences are explained partly by differences in the mix of industries between FDIUS and all U.S. investment, inspection of individual industry data on compensation and plant and equipment spending per worker show smaller but persistently larger compensation and plant and equip- ment spending by U.S. affiliates than the U.S. average. Perhaps the greatest area of concern is that foreign parents may cut back on R&D activities at U.S. affiliates, preferring to locate such activities, and the benefits that accrue to them, at the parents' headquarters abroad. De- spite these concerns, the available evidence suggests that R&D spending by foreign-owned manufacturing firms appeared significantly higher than that by all U.S. manu- facturing firms. In 1987, the most recent year for which data are available, U.S. manufacturing affiliates' R&D spending as a ratio to their value added was 7.6 percent, compared with 6.5 percent for all U.S. manufacturing firms. Much of this difference may be due to differences in the mix of manufacturing firms in the two groups. Data on technology transfer also fails to suggest a net outflow from the United States through U.S. affiliates. As discussed in Chapter 4, U.S. affiliates' payments to their foreign parents for royalties and fees are substantially larger than receipts, indicating net imports of intangible 18 property rights by U.S. affiliates from their foreign par- ents. In 1 990, U.S. affiliates paid their foreign parents $ 1 .9 billion in royalties and license fees for the use of intangible property rights and assets, such as patents, techniques, formulas, designs, copyrights, and manufacturing rights. In contrast, foreign parents paid their U.S. affiliates $0.3 billion for such rights, yielding net imports on royalties and fees of $1.6 billion. Although this list of concerns about the possible adverse economic effects of direct investment is far from exhaustive and ignores important noneconomic concerns such as national security and political influence, these data suggest that there is little quantitative evidence to support large economic costs from direct investment in the United States. Indeed, the largest concern regarding direct invest- ment relates to constraints that would unduly inhibit direct investment. While the overall volume of capital flows is mainly determined by macroeconomic factors, regula- tions that constrain direct investment may lower its actual or perceived return and as a result lower the supply of capital to the United States since portfolio investment is not a perfect substitute for direct investment. Perhaps even more important, U.S. constraints on direct invest- ment could well be countered by controls on U.S. invest- ment abroad. The United States is the largest direct investor in the world and constraints on U.S. investment abroad could reduce the significant efficiencies, competi- tiveness, and protection U.S. firms reap from their loca- tions abroad. Therefore, the optimum policy response is to continue U.S. multilateral efforts towards an open trade and invetment regime worldwide. 19 TRENDS AND PATTERNS IN FOREIGN DIRECT INVESTMENT INTHE UNITED STATES byJohnW.Rutter* A review of the data on international direct investment during the 1980s shows a major surge in capital outflows from the G-5 — the United States, the United Kingdom, West Germany, France, and Japan — although the rate of capital outflows for U.S. direct investment abroad de- clined in the early 1980s (Figure 4.1). The United States became a major recipient of inward investment. 1 During this decade, foreign direct investment in the United States (FDIUS) 2 increased very rapidly, especially after 1985, although its growth rate fell sharply in 1990. The United Kingdom, Japan, the Netherlands, Canada, and West Germany were the major sources of FDIUS. The manufac- turing industry was the major recipient, although other sectors also received large amounts of investment. The United States became the world's largest recipient of inward direct investment, while remaining the world's largest source of the stock of outward direct investment — although its share of outward flows fell dramatically in the early 1980s. Nonetheless, the United States still has the lowest proportion of inward foreign direct investment (FDI) among industrial counties, except for Japan. Figure 4-1 FDI Outflows by G-5 Countries (Billions of dollars) Billion dollars 120 100 80 60 40 20 1970 72 Source: DeAnne Julius. Global Companies & Public Policy: The Growing Challenge of Foreign Direct Investment. Council on Foreign Relations Press, New York, 1990. More recently, FDIUS stock data for 1990 indicate that a shift in the global trend may be underway. The increase in FDIUS was only about $30 billion in 1990, substantially less than the $60 billion average for the previous three years, 1987-89. (Data on FDIUS capital flows for the first quarter of 1991 indicate that the slower growth in the FDIUS position is continuing.) Factors contributing to the slower growth in the FDIUS position include: (1) a weakening U.S. economy in 1990, which helped generate substantial operating losses and encour- aged foreign companies to shift their investments else- where; (2) the increasing integration of the EC and the reunification of Germany, which required more capital investment in Europe; and (3) tighter monetary policies abroad and worldwide bank restructuring. Changes in interest rate differentials in 1990 encouraged some foreign companies to borrow more in the United States through their U.S. affiliates to finance their investments both in the United States and in other countries. (Such local borrow- ing in the United States is not included in the FDIUS position.) European companies made only $ 1 3 billion in direct investment in the United States in 1990, down sharply from an average of over $40 billion in 1987-89. Japanese direct investment in the United States in 1990 was about $16 billion, about the same as in 1987-89. Canada and Kuwait had net disinvestment in 1990. Some major Canadian companies in retail trade and real estate had incurred large operating losses, especially in 1990, due to the U.S. economic slowdown and severe financial prob- lems in the U.S. real estate industry. Kuwait shifted the ownership of some of its investments from Kuwait to other countries in order to conduct business operations during the Gulf conflict. 3 This chapter briefly reviews global foreign direct international Economist in the Office of Trade and Investment Analysis, Trade Information and Analysis, International Trade Administration. 'DeAnne Julius, Global Companies and Public Policy: The Growing Challenge of Foreign Direct Investment (New York: Council on Foreign Relations Press, 1990), pp. 20-35. 2 Data discussed in this chapter are on a historical cost basis, rather than current cost or market value bases, to retain consistency throughout the report. 'Additional detail on FDIUS in 1990 are published in the Survey of Current Business, August 1991. 20 1980 EC( 1 2) 37.0% Other Europe 5.0% Canada 10.2% Figure 4-2 World Stock of Inward Direct Investment By Major Host Country or Region (Percentage Share) 1989 U.S. 16.5% Asian LDCs 7.1% African LDCs 2.6% EC(I2) 34.5% Other Developed 9.3% W. Hemisphere LDCs 12.3% Other Europoe 4.0% Canada 7.3% U.S. 28.6% Asian LDCs 9.7% African LDCs 2.1% W. Hemisphere LDCs 7.4% \ Other Developed 6.4% Source: U.S. Department of Commerce, International Trade Administration, Office of Trade and Investment Analysis. investment trends and their importance in major countries. It then provides an overview of the FDIUS position. 4 This overview includes changes in the composition of financ- ing, shifts in countries investing in the United States, trends in industry composition, and changes in the balance of payments, which reflect FDIUS activity. Global Trends in Foreign Direct Investment The United States attracted an increasing share of international direct investment in the 1970s and 1980s. While the world stock of inward direct investment in- creased rapidly during the last two decades, from $208 billion in 1973 to$505 billion in 1980 and to $1,403 billion in 1989, the FDIUS position rose proportionally faster, from $21 billion to $83 billion and to $401 billion, respectively. As a percent of the world stock of inward direct investment, the U.S. share grew rapidly from 10.1 percent to 16.5 percent and to 28.6 percent over the same period (Figure 4-2). The world growth rate of FDI slowed in the 1980s, but nonetheless remained higher than the growth rate of either world trade or world output. Excluding the United States, the world stock of inward direct investment in- creased at a 12.3 percent average annual rate between 4 The FDIUS position is defined as the cumulative net book value of foreign investors' equity in, and net outstanding loans to, U.S. business enterprises (U.S. affiliates) in which foreign investors hold 10 percent or more of the voting securities. Unless otherwise indicated, position data are classified by country of the first foreign parent in the ownership chain. 1973 and 1980, but dropped to a 10.1 percent average rate from 1980-89. European countries, Canada, and Australia experienced major slowdowns in inward direct investment in the early 1980s, and a rapid growth of inward direct investment from 1985 to 1989. For the United States, the growth rate of FDI declined slightly in the early 1980s compared with the 1970s, and increased after 1985. In developing countries as a whole, FDI continued to in- crease at about the same rate in the 1980s as in the 1970s, with the faster growth of FDI in Asian and African developing countries offset by slower growth in highly leveraged Latin American countries. Measurement Issues Affecting the Analysis of Global Trends These comparisons across countries must take into account three major measurement problems in interna- tional direct investment. First, differences among coun- tries in the concepts and methodologies used in collecting and computing foreign direct investment make data com- parisons difficult, but the data do provide an approxima- tion of the relative magnitudes over time. Second, ex- change rate fluctuations create distortions over time in the international data, further complicating an analysis of global trends in FDI stocks. Third, use of historical book value accounting understates long-term investments made many years earlier. This valuation issue has been ad- dressed by the Bureau of Economic Analysis, and esti- mates of market values, at least for U.S. data, are now available. These data were reported too late to be used in this first annual report. By and large, other countries have not addressed this valuation issue in their FDI data. 21 Table 4- 1 Measures of the Proportion of FDIUS in the U.S. Economy (Percentage Share) FDIUS Position as a Proportion of Total U.S. Domestic Net Worth (1989) 4.5 Total Assets of U.S. Affiliates in Manufacturing as a Proportion of Total Assets of All U.S. Manufacturing Companies (1988) 14.7 Stockholder's Equity of U.S. Affiliates in Manu- facturing as a Proportion of Stockholder's Equity of All U.S. Manufacturing Companies (1988) 12.9 Sales of U.S. Affiliates in Manufacturing as a Proportion of Sales of All U.S. Manufacturing Companies (1988) 12.2 Employment of Nonbank U.S. Affiliates as a Proportion of Total U.S. Private Nonbank Employment (1988) 4. 1 Employment of U.S. Affiliates in Manufacturing as a Proportion of All U.S. Manufacturing Companies (1988) 8.5 Value Added of Nonbank U.S. Affiliates as a Proportion of U.S. Gross Domestic Product (1987) 4.3 Value Added of U.S. Affiliates in Manufacturing as a Proportion of All U.S. Manufacturing Companies (1987) 10.5 Sources: Calculated based on data from the Bureau of Economic Analysis and Bureau of the Census, U.S. Department of Commerce, and data on the net worth of the U.S. domestic economy (excluding households and nonprofit institutions) from the Federal Reserve Bo&rd'sBalance Sheetsfor the U.S. Economy, October 1990. > Table 4-2 Measures of the Proportion of FDI in the Economies of Major Industrial Countries (Percentage Share) Value- Employ- Assets Sales added ment Canada* 25(1987) 27(1987) 44(1986) 34(1986) France 1 " 26(1987) 27(1987) 25(1987) 22(1987) Germany 17(1986) 19(1986) N.A. 20(1985) Japan* 1 1(1984) 1(1984) N.A. 0.4(1984) United Kingdom* 14(1983) 20(1985) 19(1985) 14(1985) United States' 15(1988) 12(1988) 4(1987) 4(1988) N.A. - Not available. 'Assets and sales are for all nonfinancial corporations; value added and employment are for manufacturing only. b Data are for manufacturing and petroleum sectors only. c Data are for all nonfinancial corporations. d Data are for all industries. 'Assets are for all large companies; sales, value added and employment for manufacturing companies only. 'Assets and sales are for manufacturing companies only; value added and employment for all industries except banking. Note: Years in parentheses are year for which data was collected. Sources: For Canada, assets and sales from Corporations and Labor Unions Returns Act, Part I, 1987; value added and employment are from Statistics Canada. For France, Ministry of Industry, SESSI, January 1988. For Germany, Japan and the United Kingdom, Inward Investment and Foreign-owned Firms in the (7-5, by De Anne Julius and Stephen Thomsen, Royal Institute for International Affairs, 1989. For the United States, calculations based on data from the Bureau of Economic Analysis and the Bureau of the Census, U.S. Department of Commerce. Relative Importance of FDI in Major Host Countries In terms of the size of the U.S. economy, FDIUS is relatively small whatever measure of scale is used. How- ever, because the U.S. economy is so very large, the United States surpassed Canada in 1 978 as the then single-largest host country of FDI, and, in 1988, held a direct investment position that was nearly three times the size of the next largest host country, the United Kingdom. The FDIUS position of $401 billion in 1989 was the equivalent of 4.5 percent of the total U.S. domestic net worth. Similarly, U.S. affiliates' employment, assets, and value added reflect small participation in the total U.S. economy (Table 4.1). Compared to other major industrial countries, ex- cept Japan, FDI remains a relatively small part of the U.S. economy. All the various measures of the macroeconomic importance of FDI in an economy — none of which is superior for all purposes — show lower proportions for the United States. Because the statistics necessary to develop the ratio of FDI positions as proportions of the net worth of domestic business are not generally available for coun- tries other than the United States, other measures are used to compare the importance of FDI across countries (Table 4-2). Of the major industrial countries, only the United States and France have experienced significant increases in their proportions of FDI in recent years. The U.S. affiliate share of total U.S. nonbank employment more than doubled from 1.6 percent in 1977 to 4.1 percent by 1988, and employment of affiliates of foreign firms in France increased from 1 8 percent of total employment in 1977 to 21 percent in 1985. The shares of employment by affiliates of foreign firms in Germany, Japan, and the United Kingdom declined slightly (about one percent in each country) during the same period. Foreign Direct Investment in the United States The FDIUS position increased at a relatively fast pace throughout the 1 980s, but at a relatively lower rate than total foreign investment until 1990, when foreign portfolio investment increased at a relatively lower rate (Figure 4-3). From 1980 to 1985, the FDIUS position increased from $83 billion to $ 1 85 billion, or at an average annual rate of growth of 17 percent. From 1985 to 1989, the FDIUS position grew slightly faster at an average annual rate of growth of 2 1 percent to $40 1 billion. After 22 Figure 4-3 Recent Trends in the FDIUS Position, 1980-90 (Billions of Dollars) 1980 1962 1984 1986 1988 I990e E - Estimated based on FDIUS capital inflows for 1990. Source: U.S. Department of Commerce, Bureau of Economic Analysis. 1985, the rate of growth of foreign investment from European countries, Japan and Canada increased, while that from other developed countries (mainly Australia, New Zealand, and South Africa) and from developing countries slowed (Table 4-3). This pattern changed in 1990 as total FDIUS capital inflows fell from $72 billion in 1 989 to $26 billion in 1 990, the smallest amount since 1985. This sharp decline in FDIUS in 1 990 occurred in all three components of capital inflows — intercompany debt, equity investment, and reinvested earnings. Intercompany debt inflows fell from $26 billion in 1989 to only $ 1 billion in 1990, reflecting a preference for holding U.S. debt rather than foreign debt, as real U.S. interest rates declined relative to interest rates abroad and the dollar continued to depreciate. This shift in intercompany debt financing serves to highlight the influence of relative interest rate differen- tials on the behavior of foreign investors in financing FDIUS. Foreign direct investors may seek to borrow funds at the lowest interest rate available globally, or seek to invest liquid assets at the highest interest rate available worldwide, in addition to the more strategic motivations for making direct investments abroad. Composition of Financing of FDIUS Position Nearly 90 percent of the increase in FDIUS position since 1980 came from equity and intercompany flows of capital, while less than 4 percent came from reinvested earnings of existing foreign-owned U.S. affiliates (Figure 4-4). Another 6 percent of the increase came from valuation adjustments. 5 Much of the large increase in equity and intercompany inflows went to finance acquisi- tions of U. S. companies in a broad range of industries, with the largest portion going for acquisitions in manufactur- ing. Table 4-3 Recent Trends in the FDIUS Position, Year end 1980, 1985, 1989 (Billion dollars or percentage) Average Annual Rate of Growth 1980 1985 1989 1980-85 1985-89 All Countries 33.0 184,6 4QQ.8 111 ZL4 Developed Countries 72.0 161.2 369.? UA 23.1 Canada 12.2 17.1 31.5 7.1 16.5 Europe 54.7 121.4 262.0 17.3 21.2 EC- 12 47.3 107.4 234.8 17.8 21.6 Other Europe 7.4 14.0 27.2 13.7 18.0 Japan 4.7 19.3 69.7 32.5 37.8 Other Developed 0.4 3.3 6.5 50.7 18.5 Developing Countri* £ 1LQ 214 3_L£ 16.3 11 Latin America 9.7 16.8 20.3 11.7 4.9 Middle East 0.9 5.0 6.4 40.2 '..7 Other Africa, Asia and Pacific 0.5 1.7 4.3 27.7 26.1 Addendum: OPEC Countries 0.6 4.6 7.5 48.3 13.0 Note: Growth rates calculated from Appendix Table 4-2. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Equity capital inflows also declined from $47 bil- lion in 1989 to $35 billion in 1990, reflecting a slowdown in acquisitions and establishments of U.S. companies by foreign investors. Reinvested earnings fell from a nega- tive $0 . 1 billion in 1 989 to a negative $ 1 billion in 1 990, as the U.S. economy slowed and losses were incurred by U.S. affiliates in the finance and banking sectors. Earnings, and therefore reinvested earnings, of U.S. affiliates have been relatively small throughout the 1980s, possibly reflecting 1) high start-up costs for foreign inves- tors either unfamiliar with U.S. markets or for the estab- lishment of new businesses; 2) high interest expenses on large amounts of debt incurred by some foreign multina- tional corporations (MNCs) toacquire U.S. companies; 3) operating losses from those business ventures that have proven unsuccessful or are affected by slower U.S. eco- nomic growth; (4) specific problems in the banking, finance or real estate industries; and/or 5) inter-company pricing and cost allocation practices of foreign investors. 'Valuation adjustments represent accounting adjustments of the hook value of assets, liabilities or owners' equity due to such items as major changes in the value of oil reserves, fire losses, or changes in the value of goodwill. They may also reflect statistical adjustments by the Bureau of Economic Analysis based on Benchmark Survey reports that more accurately reflect the value of foreign investors' equity in their U.S. affiliates. 23 Figure 4-4 Sources of Additions to FDIUS by Component (Percentage Share) £3 Equity flows I Reinvested Earnings bSl Intercompany Debt I | Valuation Adjustments Note: Reinvested earnings and valuation adjustments in 1989 were -0.1 percent and -0.4 percent, respectively. FDIUS capital flows for 1 990 only; valuation adjustments not available. Source: U.S. Department of Commerce, Bureau of Economic Analysis. FDIUS by Major Source Country or Region Developed Countries Nearly two-thirds ($262 billion) of the FDIUS posi- tion at year end 1989 was held by European countries, mostly EC countries (Figure 4-5). The United Kingdom led the EC in increasing its direct investment, and holds nearly one-third ($119 billion) of total FDIUS, up from a 17 percent share in 1980 (Table 4-4). The rapid surge of FDIUS from the EC countries in the 1980s, especially after 1985, reflects not only the shifting of productive capacity in response to dollar depreciation, but also the perceived need of foreign MNCs to increase their overall size and Table 4-4 Ten Largest Source Countries of FDIUS, by Rank Order in 1989 (Percentage Share of Total Position) 1989 1980 1900 17.0 (2) 5.7 (7) 23.1 (1) 14.6 (3) 9.2 (4) 6.1 (6) 4.5 (8) 8.0 (5) 0.4(12) 2.2 (9) 9.2 All countries 10Q.O United Kingdom 29.7 (1) Japan 17.4 (2) Netherlands 15.1 (3) Canada 7.9 (4) West Germany 7.0 (5) Switzerland 4.8 (6) France 4.1 (7) Netherlands Antilles 2.6 (8) Australia 1.6 (9) Belgium and Luxembourg 1.4 (10) Other Countries 8.4 Source: U.S. Department of Commerce, Bureau of Economic Analysis. access to technology and markets in order to improve their ability to compete globally, as well as in the EC after 1992 when more complete integration takes place. The unusually large and rapid increase in FDIUS by U.K. companies appears to be due to factors unique to the United Kingdom. These factors include the deregulation of financial markets or "Big Bang", which encouraged mergers and acquisitions by, and of, British companies; the expansion of U.S. investment banks in London which facilitated acquisitions of U.S. companies by British com- panies; and increased cash flow and profits of British companies beyond their domestic investment needs as a result of changes in U.K. tax and regulatory policies. 6 6 RobertN. McCauley and Dan P. Eldridge, "The British Invasion: Explain- ing the Strength of UK Acquisitions of US Firms in the Late 1980s," International Capital Flows, Exchange Rate Determination and Persistent Current-Account Imbalances, Bank for International Settlements, June 1990. Figure 4-5 FDIUS Position by Region or Major Source Country (Percentage Share) 1980 1989 Europe 65.9% Canada 14.6% Europe 65.4% Other LDCs 1 .6% W. Hemisphere LDCs I 1 .7% ^- Other Developed 0.5% Japan 5.7% Canada 7.9% Other LDCs 2.6% W. Hemisphere LDCs 5.1% V V Other Developed 1 .6% Japan 17.4% Source: U.S. Department of Commerce, Bureau of Economic Analysis. 24 Japanese direct investment increased at a higher average annual rate during the 1980s than any of the other major investing countries, especially after 1985, when it increased by about one- third each year. As a result, by 1988, Japan became the second-largest source country of FDIUS; its share of total FDIUS was 1 7 percent by the end of 1989. Most of the $65 billion increase in Japanese direct investment during the 1980s went into three industries: wholesale trade ($17 billion); manufacturing ($16 bil- lion); and real estate ($14 billion). 7 The large increase in wholesale trade primarily financed expansion in the op- erations of affiliates that import motor vehicles and parts and other durable goods into the United States. These imports are passed through wholesale trade affiliates on their way to retailers. This increase in wholesale trade also reflects the operations of Japanese companies involved in worldwide trading of raw materials, such as metals, min- erals, and crude oil. Japanese direct investment in manu- facturing is concentrated in electric and electronic equip- ment, primary and fabricated metals, and transportation equipment, reflecting competitive advantages in those industries. The special circumstances surrounding Japa- nese investment in real estate are discussed later when trends in FDIUS in real estate are examined. Canada's direct investment position in the United States nearly doubled from 1985 to 1989, $17 billion to $32 billion. However, Canada's share of total FDIUS fell to 8 percent by year end 1989, a post World War II low, as FDIUS from most European countries, Japan and Austra- lia rose faster. Developing Countries Latin America's direct investment in the United States increased at less than the average annual rate of total FDIUS throughout the 1980s, especially after 1985. The Netherlands Antilles and Panama account for the major share of FDIUS from Latin America. These two countries serve as intermediary locations for foreign investors in other countries, seeking anonymity and lower taxes. The Netherlands Antilles' position has not grown since 1984, when U.S. withholding taxes on interest payments to foreigners were eliminated. 8 Nearly 90 percent of FDIUS from the Middle East is from just two countries, Kuwait and Saudi Arabia. Kuwait increased its FDIUS rapidly in the early 1980s, chiefly by acquiring a large U. S. petroleum services and construction company. Three countries, Hong Kong, Singapore and Tai- wan, hold nearly three-quarters of FDIUS from other developing countries in Africa, East Asia and the Pacific. A number of MNCs based in those countries have in recent years achieved the size necessary for international opera- 7 The percentages are likely lobe substantially modified as a reultofthe data link project. The data link will improve information about the activities of U.S. affiliates because they will no longerbe classified only in the industry of major activity, but in the industry of actual activity of any separate establishments. tions, aided by the assimilation of technology and mana- gerial skills through licensing or through working with foreign MNCs from developed countries. Rising local wage rates, combined with currency appreciation against the U.S. dollar, also encouraged MNCs in Hong Kong, Singapore, South Korea and Taiwan to expand production abroad — in the United States and not just in relatively low- wage developing nations. Wealthy individuals and MNCs from Hong Kong have an additional incentive to establish operations abroad because of the uncertainties surround- ing the reversion in 1997 of Hong Kong to the People's Republic of China. Much of Hong Kong's direct invest- ment in the United States has gone into finance and real estate, two areas in which investors from that country have significant expertise. FDIUS by Country of Ultimate Beneficial Owner Databy country of ultimate beneficial owner (UBO), 9 rather than country of foreign parent, are needed in order to gain insight as to the ultimate source of control over FDIUS made through intermediary locations. A few countries, such as the Netherlands Antilles and Panama, show unusually large amounts of FDIUS, considering the size of their economies. In fact, these two countries and others are used as intermediary locations by investors in third countries, including the United States, to make investments in the United States. For reasons of control, taxes, and privacy, the legal organizational structures of both foreign- and U.S. -based MNCs and individual inves- tors have become more complex over time. Comparing the pattern of FDIUS between two sets of data— position by UBO and by first foreign parent- suggests the importance of taxes, privacy, and other factors in identifying the intermediary locations versus the UBOs. For 1987, the most recent FDIUS position data by country of UBO, major intermediary locations for FDIUS are the Netherlands (mainly because of an extensive network of tax treaties), Panama, the Netherlands Antilles, and the Cayman and British Virgin Islands. When classi- fied by UBO versus by first foreign parent, the FDIUS positions for those countries decline. On the other hand, when classified by country of UBO, the positions of Canada, several major European countries (including France and Germany), the United States, several OPEC countries (including Kuwait and Saudi Arabia), Australia and Hong Kong increase, indicating that the investors in these countries are the ultimate owners of much of the 8 The elimination of U.S. withholding taxes on interest payments to foreign- ers in 1984 largely nullified the unique advantage of the Netherlands Antilles which, because of a tax treaty with the United Stales that existed until 1987, offered an exemption from the withholding tax on interest payments. "An ultimate beneficial owner (UBO) of a U.S. affiliate is that person. proceeding up the ownership chain beginning with and including the foreign parent, that is not owned more lluin 5(1 percent by another) A U.S. UBO must be owned by a foreign investor in order to be classified as FDIUS. See appendix for further discussion of UBO and how UBO is determined. 25 investment made through intermediary locations. Less than one percent of the FDIUS position was held by U.S. UBOs through intermediary investments in foreign coun- tries in 1987. Trends in Industry Composition, 1980-89 In all industries, the acquisition of existing U.S. companies was the overwhelming method of investment rather than the establishment of new operations. The establishment of new factories has added to the U.S. capital stock and U.S. manufacturing productivity. Pro- ductivity improvements associated with foreign acquisi- tions of existing companies, while not so obvious, can be substantial since many of the same bene fits may flow from takeovers as from greenfield investment, i.e., gains from specialization, increasing returns to scale, and more com- petition. In addition, the foreign firm may introduce new technologies or managerial skills, which are adopted by domestic firms, thus improving productivity in the long run. By far the largest share (40 percent of the dollar increase) in FDIUS during the 1980s went into manufac- turing. The FDIUS position in manufacturing rose nearly five-fold between 1980 and 1989, from $33 billion in 1980 (39.8 percent of total FDIUS) to over $160 billion (Table 4-5 and Figure 4-6). The pace of growth of FDIUS in manufacturing in the early 1980s was lower than in other industries, but, after 1985, it increased at a higher rate ~ reflecting, in part, the effects of dollar depreciation which began in early 1985. Almost two-fifths of the rise in manufacturing FDIUS occurred in just two years, 1988 and 1989, coming mostly from the United Kingdom, Japan, the Netherlands, Germany, and France. Within manufacturing, although FDIUS has grown Table 4-5 Recent Trends in the FDIUS Position By Industry, Year end 1980, 1985, 1989 (Billion Dollars or Percentage Average Annual Rate of Growth 1980 1985 1989 1980-85 1985-89 All Industries 83.0 184.6 400.8 17.3% 21.4% Petroleum 12.2 28.3 35.1 18.3 5.5 Manufacturing 33.0 59.6 160.2 12.6 28.0 Trade 15.2 35.9 71.4 18.8 18.8 Banking 4.6 11.4 19.6 19.9 14.5 Finance & Insurance 7.4 16.1 34.1 16.8 20.6 Real Estate 6.1 19.4 35.9 26.0 16.6 Other Industries 4.5 14.1 44.6 25.7 33.4 Source: U.S. Department of Commerce, Bureau of Economic Analysis. at different rates, the relative shares have not changed significantly from 1980 to 1989, although two sectors show particularly fast growth, "Other Manufacturing," particularly printing and publishing, instruments and re- lated products, and transportation equipment (Figure 4-7). In 1989, the largest share of FDIUS continued to be held by chemicals manufacturing (29 percent), followed by food processing (14.9 percent), primary and fabricated metals (11.6 percent), electric and electronic equipment (10.2 percent) and nonelectrical machinery (6.4 percent). FDIUS in wholesale and retail trade comprised the second largest major industry sector in 1989 (17.8 per- cent), its share declining slightly since 1980 (18.3 per- cent). The share of FDIUS in wholesale trade may be slightly overstated, to the extent that wholesale trade in motor vehicles includes manufacturing of motor vehicles because of the classification methodology used to allocate industry statistics. However, sales from the manufactur- ing of motor vehicles can be expected to become larger than the sales of vehicles imported for resale by certain Japanese-owned U.S. affiliates now classified in whole- sale trade as the U.S. affiliates become established, and these affiliates will be reclassified out of wholesale trade and into manufacturing. When this happens, FDIUS in transportation equipment manufacturing will rise and in wholesale trade of motor vehicles will fall. This problem will be resolved with the completion of the data link project. Real estate was the third largest industry sector at year end 1989, with an 8.9 percent share ($35.9 billion), down from its peak share of 1 0. 8 percent in 1 984. It should be noted that the FDIUS position in U. S. real estate, as well as in any other industry, represents only foreign investors' own equity in and net outstanding loans to U.S. affiliates classified in that industry, and does not include domestic U.S. borrowing. Moreover, real estate held for personal use is excluded from FDIUS by definition. The FDIUS position in real estate represents the investment of foreign parents in U.S. affiliates whose major activity is real estate, and significant amounts of U.S. real estate are held by affiliates classified in other industries. 10 The FDIUS position of $35.9 billion does not represent the value of total assets of U. S . affiliates in real estate (as is true in other industries), which is much larger because of the high debt leverage typical in the real estate industry. Over 80 percent of FDIUS in real estate is held by owners from just five countries, Japan, the United King- dom, Canada, the Netherlands and the Netherlands Antilles. Over half of the increase of FDIUS in real estate occurred after 1 985, especially in a surge of investment from Japan from 1987-89. A combination of economic factors en- couraged Japanese direct investment in U.S. real estate 10 In addition, foreign ownership ofU.S. real estate maybe understated to the extent that foreign investors have participated in such investments as limited partnerships, which may not be aware of the reporting requirements to the U.S. Government. 26 Figure 4-6 Trends in Industry Composition of FDIUS, 1980 and 1989 (Percentage Share) 1980 1989 Trade 18.3% Petroleum 14.7% Manufacturing 39.8% Trade 17.8% Other industries 5.4% Real estate 7.4% ^ Banking 5.5% Petroleum 8.8% finance & insurance 8.9% 4 v / Banking 4 Manufacturing 40.0 % Other industries 11.1% eal estate 8.9% 9% finance & insurance 8.5% Source: U.S. Department of Commerce, Bureau of Economic Analysis. Figure 4-7 Industry Composition of FDIUS in Manufacturing, 1980 and 1989 (Percentage Share) 1980 1989 Chemicals 3 1 .5% Metals 10.9% Nonelectric machinery 8.8% Food processing 14.8% Chemicals 28.9% Metals I 1 .6% Other mfring. 2 1 .6% Nonelectric machinery Food processing 14.9% Other mfring. 28.0% Electric & electronic machinery 12.4% Electric and electronic machinery 10.2% Source: U.S. Department of Commerce, Bureau of Economic Analysis. during those years, including 1) large dollar depreciation which for Japanese investors raised the value of yen- denominated equity in dollar terms and lowered the cost of dollar-denominated debt in yen terms; 2) a lower cost of capital for Japanese investors due to relatively lower interest rates, a surging Japanese stock market and liberal bank lending practices in Japan; and 3) the relatively small available supply and much higher price of Japanese real estate compared with U.S. real estate. Direct investment flows from Japan in U.S. real estate slowed substantially in 1990, reflecting a rise in the cost of capital and falling equity and real estate prices in Japan. However, to the extent that a shift to U.S. sources of financing may have occurred, additions in Japanese-owned U.S. real estate are not reflected in the balance of payments data. FDIUS in real estate from other countries increased more gradually starting in the late 1970s and early 1980s, but has also subsided recently. Finance and insurance accounted for 8.5 percent of the total FDIUS position in 1989, down slightly from 8.9 percent in 1980. FDIUS from Japan, the Netherlands. Switzerland, Canada and the United Kingdom— where major financial markets are located— more than accounted for investment in these sectors. FDIUS in finance from Australia and the United Kingdom Islands-Caribbean has been negative since 1987, and could reflect borrowing in U.S. capital markets. The FDIUS position in banking increased steadily during the 1980s, but not as fast as in other major indus- tries. The share of FDIUS in banking declined from 5.5 percent in 1980 to 4.9 percent in 1989. Portfolio invest- ment and lending and borrowing activities have been more 27 prevalent than direct investment (permanent debt and equity investment) in U.S. banks. As of June 1990, foreign-owned or controlled U.S. banks held over 20 percent of the assets of all U.S. banks, over 17 percent of all loans and nearly 14 percent of all deposits." The amount of FDIUS in petroleum leveled off after 1987, contributing to a share decline to 8.8 percent in 1989 from 14.7 percent in 1980. There were fewer major acquisitions in petroleum than in most other industries during the 1980s. The increased world supply and slower growth of world demand for petroleum in the 1980s have generally depressed oil prices, leading to a relatively lower rate of growth of both foreign and domestic invest- ment in the U.S. petroleum industry. In "Other Industries," FDIUS increased rapidly to 11.1 percent of the total by year end 1989. Nearly all of the growth was in services industries, chiefly business services and hotels, and water and air transportation. Current Account Flows While the foreign direct investment capital flows are reported in the capital account of the U.S. balance of payments, the international operating transactions of the U.S. affiliates in which these investments are made are reported in the current account. These operating transac- tions include payments and receipts for goods, services (including licenses, royalties, and fees), and international income payments. The timing and level of the FDIUS flows reported in the capital account do not significantly correspond to the timing and level of the overall business transactions of U.S. affiliates in which those investments are made. "Federal Reserve Board, "Selected Assets and Liabilities of U.S. Offices of Foreign Banks," September 1990. Figure 4-8 Balance of Payments Impact of FDIUS (Billion Dollars) Percent 100 50 " ■SO •100 -150 FDIUS capital inflows Net royalties & license fees V Income payments / Net imports of goods & services / 1980 1982 1984 1986 1988 Note: Net imports of goods and services not yet available for 1989. Source: U.S. Department of Commerce, Bureau of Economic Analysis. The linkage between the timing and level of interna- tional capital and current account transactions for U.S. affiliates is therefore weak. On the capital side, they obviously exclude investment in U.S. affiliates by U.S. partners. Moreover, investments made by foreign owners from borrowing in the United States are not included. The timing of the operating transactions recorded in the current account is affected by whether foreign investments were for acquisitions of already existing facilities (the most common form) or for newly constructed "greenfield" facilities; that is, how long it takes U.S. affiliates to begin operations. The timing and level of these international operating transactions are also a function of the industry in which the U.S. affiliate is operating (for example, wholesaling ver- sus manufacturing) and whether the U. S . affiliate is shrink- ing or growing. Also determining these transactions are such factors as prices and exchange rates. Recognizing the distinction between transactions recorded in the capital and current accounts, the data indicate that the various types of international transactions reported in the current account have been rising over the long term. The following briefly describes the current account transactions attributed to U.S. affiliates. U.S. Affiliate Trade in Goods By far the largest entries, as well as net balance, in the current account for U.S. affiliates appears in the trade in goods. Merchandise trade conducted by U.S. affiliates is much larger than their trade in services. For example, net merchandise imports (exports minus imports) by U.S. affiliates were $90 billion in 1988 (the latest year avail- able), compared with income payments of $ 14 billion, and $0.3 billion in overall net services payments (including net royalty and license fee payments of $1.0 billion) (Figure 4-8). U.S. Affiliate Merchandise Imports U.S. affiliate merchandise imports were $150 bil- lion (over one-third of total U.S. imports) in 1988 and are highly concentrated by country and by industry. o In 1988 nearly three quarters of total U.S. affiliate imports were by wholesale trade affiliates ($110 billion), of which Japanese-owned wholesale trade affiliates accounted for nearly two-thirds ($7 1 billion). o From 1980 to 1988, imports of motor vehicles and equipment by Japanese-owned wholesale trade affiliates increased from $12 billion to $33 billion, and wholesale trade imports of computers, electric and electronic equipment, and other durable goods increased from $6 billion to $29 billion. 28 o European-owned wholesale trade affiliates im- ported another one-quarter of total imports by wholesale trade affdiates, mostly motor vehicles and equipment and nondurable goods. About one-fifth of total U.S. affiliate imports in 1988 were by manufacturing affiliates, of which Euro- pean-owned affiliates accounted for three-fifths and Japa- nese-owned affiliates about one-fifth. Most of the imports by European-owned manufacturing affiliates were in the chemicals, electric and electronic equipment, and nonelectrical machinery industries. Japanese-owned af- filiates in electric and electronic equipment and in motor vehicles and equipment accounted for two-thirds of the total imports by Japanese-owned manufacturing affili- ates. U.S. Affiliate Merchandise Exports U.S. affiliate merchandise exports were $60 billion in 1988, about one-fifth of total U.S. exports. In contrast to U.S. affiliate imports, U.S. affiliate exports grew slowly from 1980tol988. From $52 billion in 1980,US. affiliate exports peaked at $64 billion in 1981, generally declined to$48billionbyl987,andthenroseto$60billioninl988. Most of U.S. affiliates' exports ($60 billion) in 1988 was shipped by Japanese-owned affiliates ($24.5 billion) and European-owned affiliates ($23.6 billion). Canadian- owned affiliates exported another $6 billion. The compo- sition of exports from European-owned affiliates shifted between 1980 and 1988. The proportion of manufacturing exports increased from 27 percent in 1980 to 53 percent in 1988, and food and raw materials exports declined from 52 percent in 1980 to 3 1 percent in 1988. In contrast, during the same period, exports from Japanese-owned affiliates showed a less dramatic change: manufacturing exports rose from 4 percent in 1980 to 7 percent in 1988, while raw materials exports fell from 78 percent in 1980 to 52 percent in 1988. U.S. Affiliate Services Transactions In 1989, U.S. affiliates' total trade in services - licenses, royalties, and fees, plus "other" services — were in deficit, with receipts of $3.9 billion and payments of $4.6 billion. Royalty and license fees paid by U.S. affiliates include those for the use of technology, copyrights, trade- marks, franchises or other intangible property rights needed to produce or market the purchaser's products. Net royalty and license fee payments increased fourfold during the 1980s, but were still relatively small at $1.4 billion in 1989. Payments of royalties and license fees are much larger than receipts, reflecting the much higher level of imports of intangible property rights used by U.S. affili- ates toproduce andmarket their products and services than the intangible property rights transferred to foreign firms. In contrast, U.S. affiliates' trade in "other" services were in surplus in 1989, with receipts of $3.5 billion and payments of $2.9 billion. Among "other" services compo- nents, for example, affiliates' receipts for warranty work on imported motor vehicles, are much larger than pay- ments for services rendered by foreign parents and charged to U.S. affiliates. U.S. Affiliate Income Payments U.S. affiliate income payments to their foreign parents are reflected in the balance of payments. Income payments are the foreign parent company's return on its investment as measured by its share of net income of its U.S. affiliates after U.S. taxes plus net interest payments to the parent. Income payments increased more slowly than the FDIUS position, from $9 billion in 1980 to $14 billion in 1989. The relatively slow growth of income payments is probably due to the same factors described previously for small or negative reinvested earnings, i.e., high start-up costs, high interest expenses reflecting large amounts of debt, and operating losses from some unsuc- cessful business strategies. FDIUS income payments are also relatively small compared with other investment income payments in 1989, such as payments on foreign portfolio investment ($78 billion), U.S. government payments ($36 billion), or income receipts on U.S. direct investment abroad ($54 billion). Income payments are very volatile, with profits shifting to losses and vice versa from year to year in some countries and industry sectors. In 1989, European-owned affiliates recorded over four-fifths ($11.8 billion) of total income payments. British-, Dutch- and Swiss-owned affiliates generated the largest income payments, prima- rily from manufacturing, petroleum, wholesale and retail trade, insurance and banking operations. Japanese-owned affiliates generated $1.3 billion of income, mostly from banking, wholesale trade and real estate. Japanese-owned manufacturing affiliates have had negative income for several years, reflecting in part start-up costs associated with new motor vehicle and other manufacturing facili- ties, which have more than offset profits from other older manufacturing operations. 29 ROLE OF FOREIGN-OWNED U.S. AFFILIATES IN THE U.S. ECONOMY, 1977-88 by Gerald R. Moody* The highly visible growth of foreign direct investment in the 1980s stimulated considerable public interest in its role in the U.S. economy. This chapter examines the contributions of foreign-owned affiliates to U.S. eco- nomic growth, employment, and merchandise trade; their importance in individual U.S. industries and states; and their principal foreign national ownership. The major points that emerge from examining the role of U.S. foreign-owned affiliates are that (1) overall, they account for a still small share of the U.S. economy, even though their share doubled between the late 1970s and early 1980s, (2) they play a considerably more impor- tant role in the output, employment, and foreign trade of several industries ' than others , and (3 ) during 1 9 84- 87 , the share of the overall U.S. trade deficit represented by non- manufacturing (primarily wholesaling) U.S. affiliates was relatively large and growing compared to that represented by all other U.S. businesses. (Hereinafter the U.S. foreign affiliates owned by foreign companies will mainly be referred to simply as the "U.S. affiliates".) To state the obvious — U.S. affiliates located in the United States are, by definition, a part of U.S. productive assets. Their output of goods and services are included in the U.S. gross domestic product, their workers are in- cluded in total U. S . employment, their exports and imports of goods and services are included in U.S. aggregate foreign trade, and their research and development expen- ditures are part of total U.S. technology investment and the results they yield are part of U.S. technology progress. The timing of a U.S. affiliate's contribution to the U.S. economy is considerably affected by the way that business is created by the foreign owner, just as in the case of businesses created by U.S. owners. Acquisition of an existing business (by buy-out), rather than by construction of a new business facility (a "green-field" facility), results in an immediate substitutional shift in the U.S.- owned versus foreign-owned share of U.S. economic activity. The shift in share of economic activity takes longer if a new facility is constructed. Creation of U.S. affiliate businesses through both acquisition of existing businesses and through creation of new facilities has been on a strong upward trend since the •Senior Economist in the Office of Policy Analysis, Economics and Statistics Administration, U.S. Department of Commerce. mid-1980s. Acquisition of existing business is by far the dominant basis for foreign owners to obtain U.S. busi- nesses - in 1989, reaching $55.8 billion and accounting for 86 percent of the total outlays for U.S. affiliates by foreigners. Contribution to the U.S. Economy In the 1980s, U.S. affiliates increased their partici- pation in the U.S. economy in terms of several important indicators. Between 1977 and 1988, U.S. affiliatesat least nearly doubled their share of total U.S. private output, sales, employment, research and development expendi- tures, and imports. The exception to these indicators is the actual decline in their share of U.S. merchandise exports since the early 1980s (Table 5-1). Table 5-1 Shares of Key U.S. Economic Indicators Accounted for by U.S. Affiliates of Foreign Companies (In percent) 1977 1980 1988 All nonbank private affiliates: Gross product 2.3 3.3 4.1* Employment 1.8 2.7 4.1 Manufacturing affiliates: Assets 6.3 8.3 14.7 Sales 5.0 7.1 12.2 Gross product 5.0 7.9 10.5* R&D expenditures 6 4.1 5.7 10.9 Total U.S. merchandise trade: Exports 20.2 26.8 18.9 Imports 29.1 31.5 35.0 '1987 data. b Excludes petroleum refining. Sources: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; and National Science Foundation. 30 Gross Product of Affiliates 1 Between 1977 and 1987, U.S. affiliates made a small but important contribution to the growth in U.S. domestic output, with their share of the total gross product of nonbank U.S. businesses almost doubling from 1977 to 1981 and then holding at slightly over four percent through- out the remainder of the 1980s (Figure 5-1). From 1977 to 1981, affiliates' gross product grew at a very rapid 29.4 percent average annual rate, followed by only 7.4 percent from 1981 to 1987. In the first four years, the growth rate of affiliates' gross product exceeded that of all U.S. business by 18.3 percent, but affiliates and all U.S. busi- ness exhibited nearly identical growth from 1981 to 1987. U.S. affiliates' contribution to U.S. output in 1987 (the latest data year) was mainly concentrated in manufac- 1 "Gross product" is used by the Bureau of Economic Analysis in place of the more commonly used term "value added", which is also equal to gross product originating. This chapter follows the Bureau's use of these terms. Figures- 1 U.S. Affiliates Support Over 4 Percent of U.S. Nonbank Gross Product in the I 980s 1977 79 61 83 Source: Bureau of Economic Analysis. 85 87 Figure 5-2 Changes in Composition of Gross Product Of U.S. Affiliates and All U.S. Nonbank Business, 1 977-87 Nonbank Affiliates, 1977 Nonbank Affiliates, 1987 Finance ex. banking 0.7% Insurance 2.6% Wholesale trade 14.9% Retail trade 6.6% Services 3.3% Other 6.5% Other 8.6% Manufacturing 65.5% Rnance, ex. banking 4.3% Insurance 3.5% Wholesale trade 13.8% Retail trade 6.9% Services 4.4% Manufacturing 58-5% All U.S. Nonbank Businesses, 1977 All U.S. Nonbank Businesses, 1987 Other 29.9% Finance, ex. banking 0.7% Insurance 2.5% Wholesale trade 9.0% Manufacturing 29.8% Other 28.6% Services 15.8% Retail trade I 2.3% Rnance ex. banking 2.0% Insurance 2.8% Wholesale trade 8.8% Retail trade I 1.9% Manufacturing 24.0% Services 22.0% Source: Bureau of Economic Analysis. 31 turing and wholesaling, which accounted for 58 and 14 percent, respectively, of the U.S. affiliates' total gross product (Figure 5-2). U.S. affiliate output is far more concentrated in these two sectors than is all U.S. business output — for which the total business shares in the two sectors in 1987 were 24 and 9 percent, respectively. U.S. affiliates also are a much more important apparent contributor to the growth of output in manufac- turing than in other sectors, such as wholesaling, finance, and services. Their share of the gross product of all U.S. manufacturingrosefrom5.0to 10.5 percent between 1977 and 1987. Compared with all nonbank business in the same sector and in current dollars, U.S. affiliates' overall gross product grew more strongly. The U.S. affiliates' gross product in manufacturing rose at a 14.4 percent rate (versus 6.2 percent for the whole manufacturing sector), and in all other business sectors the affiliates' gross product rose at an average 17.9 percent rate (versus 9.4 percent for that group as a whole). In real terms, the gross product of U.S. affiliates in manufacturing rose nearly four times as fast as all manu- facturing establishments between 1980 and 1987 (96 percent versus 24 percent). (Lack of appropriate price deflators for affiliates prevents a similar comparison for U.S. affiliates in nonmanufacturing sectors.) The largest contributors to the gross product of U.S. affiliates were those owned by parents in the United Figure 5-3 Changes in National Ownership Shares of U.S. Affiliates, 1977-1987 1977 Other 2 1. 9% Switzerland 5.7% West Germany 8.3% Netherlands 18.1% United Kingdom 21.8% Canada 17.0% ^^ Japan 7.1% 1987 Other 23.4% Switzerland 5.6% West Germany 10.0% Netherlands 10.3% United Kingdom 21.0% Canada 18.6% Japan 11.1% Source: Bureau of Economic Analysis. Kingdom and Canada, accounting for 21 and 18 percent, respectively, of the total affiliates' gross product in 1987. While U.K.-owned U.S. affiliates have long been, and continue to be, the largest U.S. affiliates in terms of gross product, Japanese-owned affiliates are the fastest growing group (Figure 5-3). 2 Japanese-owned U.S. affiliates in- creased their share of the group's total gross product from 7 to 1 1 percent between 1977 and 1987. In contrast, the share of Netherlands-owned U.S. affiliates dropped sharply from 18 to 10 percent. Japanese-owned U.S. affiliates increased their gross product (in current dollars) at about twice the pace averaged by all other U.S. affiliates be- tween 1977 and 1987 - by nearly 600 percent compared with about 300 percent. Japanese-owned affiliates are far more important in terms of total sales than gross product, accounting in 1 987 for 25 percent of the U.S. affiliates' total sales. The Japanese-owned affiliates' larger share in sales than gross product reflects their large share in wholesaling -- 19 percent compared to 8 percent for all U.S. affiliates in 1988. Typically, the gross product to sales ratio is much lower in wholesaling than, for example, in manufacturing. Shifts in Import Content of U.S. Affiliates' Output In recent years considerable public attention has been raised about the rising use of imported inputs by U.S. industry in their output of goods and services. Attention has been particularly directed to the operations of U.S. affiliates because of their direct links to foreign parent corporations. In an accounting sense, the contribution that U.S. affiliates (or other U.S. businesses) make to U.S. economic growth is not determined by the share of their total purchased inputs of goods and services that are imported. The gross product (or value added) originating in any firm is found by subtracting all inputs — imported or domestic — from the firm's sales. For example, the gross product originating in abusiness wholesaling cars (whether foreign or domestically owned) is the value of the domes- tic resources used by that business — wages, profits, and rent, and excluding intermediate inputs — regardless of whether the business sells cars produced here or abroad. On average, across all sectors, the great bulk of purchased goods inputs used by U.S. affiliates appears to have been U.S. -produced. In 1987, imports accounted for about 24 percent of the total goods inputs purchased by nonbank U.S. affiliates, higher than the 19-20 percent shares in the early 1 980s, but lower than the 27-28 percent shares in the late 1970s (Figure 5-4). The extent that U.S. affiliates depend on imported inputs varies very widely across industries and country of affiliate ownership — with those in manufacturing much ^ross product, as well as the subsequently discussed employment, by country of U.S. affiliate ownership is based on the country of "ultimate beneficial owner". See the glossary of terms in this report's appendix. 32 Figure 5-4 Import Share of Total U.S. Affiliates' Input Purchases Percent 35 30 - 25 - 20 10 Non-manufacturing All nonbank Manufacturing 1977 79 81 Source: Bureau of Economic Analysis. 83 85 87 less dependent on imports than all other affiliates, on average. In 1987, the import share of U.S. affiliates' total merchandise input purchases averaged 16 percent for those in manufacturing versus 41 percent in wholesaling. Moreover, the ratio of imported inputs to total sales value averaged 1 1 percent for U.S. affiliates in manufacturing and 19 percent in all industries. The higher imported-input to sales ratio for "all industries" reflects the substantial share of total affiliate sales in the wholesale industry (36.3 percent in 1988), which often merely distributes foreign-made products. The imported-input dependence of affiliates in wholesal- ing also varies widely, depending on the product sold. For example, U.S. affiliates in wholesaling of motor vehicles, equipment and parts, depended on imports for 65 percent of total input purchases in 1987. The degree of dependence on imports also varies widely by country of U.S. affiliate ownership. Japanese- owned U. S. affiliates, particularly those in manufacturing, have averaged a much greater dependence on imported input purchases, as a ratio to total input purchases and to sales, than most other U.S. affiliates. In 1987, the im- ported share of input purchases by Japanese-owned affili- ates was 43 percent versus 24 percent for all U.S. affiliates in all industries, and for those in manufacturing was 37 and 1 6 percent, respectively. Moreover, Japanese-owned U. S. affiliates substantially increased their dependence on im- ported inputs — rising from 3 3 to 43 percent between 1 977 and 1987 — while non-Japanese-owned U.S. affiliates showed virtually no growth in their dependence on im- ported inputs between 1977 and 1987. The increased dependence of these Japanese-owned firms on imported inputs is also reflected in the drop in the ratio of their U.S. - content to sales value — the ratio for those in manufactur- ing dropping from 88 to 74 percent between 1977 and 1987, and in wholesaling from 64 to 55 percent. Contributing to the larger dependence of Japanese- owned than other affiliates on imported goods inputs has been their far higher share of sales in wholesaling than the share of all other U.S. affiliates (67 versus 34 percent in 1987), and probably the large share of their sales in wholesaling comprising their own Japanese parents' prod- ucts, such as automobiles and parts. Another significant factor explaining the differ- ences between Japanese and other affiliates is the fact that Japanese affiliates are on average much newer to the American market than are affiliates of other nations. Generally, U.S. affiliates increasingly "go native" in purchasing and employment practices as they mature, learn about, and adapt to the American market. That same pattern tended to occur in the behaviour of affiliates of U.S. multinationals in Europe. 3 Across individual manufacturing industries, the degree of dependence on imported inputs varied widely between Japanese-owned andallotherU.S. affiliates. For example, the import content of sales by Japanese-owned affiliates in food processing, chemicals and metals indus- tries was 10 percent or less — not substantially different from the average share for all U.S. affiliates. In contrast, the shares for Japanese-owned affiliates in machinery and other manufacturing industries were substantially higher than for all U.S. affiliates, and were particularly higher in electronics and transportation products, including auto- mobile manufacturing. Employment Supported by U.S. Affiliates Nonbank U.S. affiliates increased their employment from 1.2 to 3.7 million workers between 1977 and 1988. Their employment tripled while employment by all other U.S. private business employment rose by slightly over one-fourth, and thus accounted for a rapidly rising share of the U.S. total -- their share rising from 1.8 to 4.1 percent of the total (Figure 5-5). As pointed out earlier, a large rise in acquisitions is a major contributor to that share rise. Manufacturing accounts for nearly one-half of total U.S. affiliate employment, accounting in 1988 for 1.7 out of the total 3.7 million workers employed by U.S. affili- ates. Retailing plus wholesaling accounted for over one- fourth of the total U.S. affiliate employment. Within manufacturing, U.S. affiliate employment was widely distributed, with the largest shares in chemicals, and electric and electronic products. Notwithstanding the advent and notoriety of the Japanese auto manufacturing "transplant" facilities in the United States, in 1988 U.S. affiliates in the motor vehicle manufacturing industry employed 64,000 workers -- only 2 percent of total U.S. affiliate employment and 6 percent of total Japanese- owned U.S. affiliate employment. 'Page 26 1 , Economic Report of the President. Transmitted to the Congress. February 1991. together with The Annual Report of the Council of Eco- nomic Advisers (Washington: U.S. Government Printing Office. 1991). 33 Between 1980 and 1988, U.S. affiliate employment in almost all individual goods and services industries significantly rose as a share of total U.S. employment in those industries. The largest share growth during 1980-88, as well as the largest share in 1988, was in the chemicals industry, with the U.S. affiliate share rising from 14 to 26 percent (Figure 5-6). The largest number of U.S. jobs supported by U.S. nonbank affiliates are those in Canadian- and United Kingdom-owned facilities, in 1988 accounting for 19 and 20 percent respectively of total employment by U.S. affiliates. Other important U.S. affiliate employers in- Figure 5-5 U.S. Affiliates' Share of Nonbank Business Employment, 1977-88 1977 1979 1981 1983 Source: Bureau of Economic Analysis. 1985 1987 Figure 5-6 U.S. Affiliates' Shares of Employment Highest in percent Chemicals Industry, 1980 and 1988 28 24 20 16 Chemi- Primary cats metals Stone & Elec. glass equip. Source: Bureau of Economic Analysis. Food eluded those with owners in Japan and Germany. The highest proportionate rise in number of jobs supported by affiliates between 1980 and 1988 were those with Japa- nese owners, their share of the total doubling from 5.7 to 10.9 percent. In broad terms, Japanese-owned U.S. nonbank af- filiates grew in relative importance mainly in sectors other than manufacturing and wholesaling, their principal sec- tors. The largest employment share gains of Japanese- owned U.S. affiliates were in finance, business services, and construction. Within manufacturing, a number of industries' shares actually decreased. Nevertheless, ma- jor share increases occurred in motor vehicles and parts, and in rubber products, including tires. The rapid expansion of Canadian-owned U.S. affili- ates in retailing from 1980 to 1988 resulted in a corre- spondingly large rise in the number of U.S. jobs they supported in retailing. As a result the shares of employ- ment in Canadian-owned affiliates sharply rose from 14 to 37 percent, largely at the expense of the share of Canadian- owned affiliates' employment in manufacturing, which dropped from 50 to 33 percent. Proponents of foreign direct investment often argue that foreign firms are a source of technology input and thus also make a contribution to productivity growth. A commonly used indicator of relative productivity is output per employee. In both 1980 and 1987, average gross product per employee was higher for U.S. affiliates in manufacturing than the U.S. manufacturing sector as a whole, no doubt partly due to differences in product com- position. Moreover, over this period, productivity grew more rapidly in U.S. manufacturing affiliates than in the manufacturing sector as a whole — in real terms rising by 42 and 32 percent, respectively, between 1980 and 1987 . 4 Comparable data on productivity are not available for other sectors. There is also some question whether U.S. affiliates are more capital intensive than other U.S. businesses, particularly those in manufacturing, implying, for ex- ample, that because they are more automated they support less employment. Since the overall U.S. unemployment rate has displayed no trend up or down in the last century, it is more correct to conclude that higher capital intensity tends to increase wages paid to U. S. workers who are more productive when they have more and better tools. Although data are not available to measure capital intensity directly, some indirect insight can be inferred for those in manufactuing from data on annual plant and equipment expenditures per employee. These data sug- gest that on average the U.S. affiliates are considerably more capital intensive than all other U.S. manufacturing. In 1988 new plant and equipment expenditures (in 1982 4 Excludespetroleum and coal products manufacturing. These productivity growth rate estimates assume equal output price increases and constant output composition for U.S. affiliates and all U.S. industry in manufactur- ing. 34 Figure 5-7 Capital-Intensity by Country of Ownership of U.S. Affiliates, I 980 and I 988 (Plant & Equip. Expenditure per Employee) Thousand 1982 J Canada Europe Source: Bureau of Economic Analysis. Japan Average All Countries Figure 5-8 U.S. Affiliates' Technology Intensity Highest in Chemicals & Machinery Industries (Ratio of R&D Expenditure to Gross Product) Percent M - 12 10 " Chemicals _/ / \ / / 8 / Machinery y ^^^~~ 6 ^^~/ ./ All Manufacturing 1977 1979 1981 1983 Source: Bureau of Economic Analysis. 1985 1987 dollars) by U.S. affiliates were 45 percent higher than by all other manufacturing businesses — $12,200 versus $8,400 per employee, respectively. 5 Between 1980 and 1988, expenditures per worker were also much higher in Japanese-owned affiliates than the average for all other foreign-owned U.S. addiliates, with Japanese-owned af- filiates' expenditures at $14,600 per worker and all U.S. affiliates averaging $9,000 per worker (Figure 5-7). As reported in Chapter 3 above, wages of employees of U.S. affiliates were some 20 percent higher than for all U.S. workers in 1988. However, all wages, not only those of affiliates' employees, are increased by the larger aggre- gate capital stock shared by all firms as a result of increased foreign investment in the United States. Contribution to Technology Investment and Progress U.S. affiliates make a contribution to the technology base of U.S. industry through the inward transfer of technology from foreign parents and other foreigners, from in-house technology improvements, and from other U.S. sources. Measuring the actual inflow of technology is difficult, if not impossible. A frequently used, albeit incomplete, indicator of technology inflow is payments for royalties and license fees, which in the case of U.S. 5 New plant and expenditure and employment data for U.S. affiliates are on an enterprise basis and forall manufacturing are on an establishment basis and are therefore not comparable. This problem will be resolved with the data-link project. affiliates, doubled in little more than three years from $800 million in 1986 to $1 .7 billion in 1989 and suggests a rapid rise in technology inflow to U.S. affiliates. A second, often used indicator of the contribution to the U.S. technology base is the ratio of research and development expenditures to output, or gross product, commonly referred to as the technology intensity of output. In recent years, over 85 percent of R&D expendi- tures by U.S. affiliates have been by those in manufactur- ing industries. Between 1977 and 1987, U.S. affiliates in manufac- turing increased the technology intensity of their gross product by two-thirds, the ratio rising from 4.5 to 7.6 percent. The ratio peaked in 19 86 and edged down slightly in 1987. The rise in their technology intensity was produced by the much more rapid increase in their R&D spending than the growth in their gross product. U.S. affiliates have also been funding more R&D per dollar of gross product than other manufacturing companies, with technology intensity in the affiliates in 1987 averaging one-sixth higher (at 7.6 percent) than the average in all U.S. manufacturing (6.5 percent). The higher technology intensity of U.S. affiliates' output than that of all manufacturing was partly due to the higher share of the affiliates' gross product in more technology-intensive industries, such as chemicals. Be- tween 1977 and 1986, by far the largest share of the affiliates' R&D expenditures and, therefore, their highest technology intensive gross product, was in chemicals and machinery industries (including computers and electron- ics) (Figure 5-8). 35 Figure 5-9 Components of the U.S. Merchandise Trade Deficit Billion dollars 25 -175 Other businesses J I I I I I I I I I L 1977 79 81 83 85 87 Sources: Bureau of Economic Analysis and Bureau of the Census. Role in U.S. Merchandise Trade U.S. affiliates occupy a considerably larger role in U.S. merchandise trade than they do in other aspects of U.S. economic activity. In 1988, U.S. affiliates accounted for 19 percent of total U.S. merchandise exports and one- third of total U.S. imports. 6 This heavy involvement is hardly surprising since almost by definition U.S. affiliates are aware of and participants in the international market. In some cases they are part of a multinational corporation producing particular products for the entire world operation. In other 'These trade shares do not take into account purchases of imported goods and sales of exported goods through other businesses. cases, notably for automobiles, they are the local market- ing offices for products produced by their parents in the parents' home countries. As sales to the United States reach a sufficiently large amount, firms typically switch from independent (and U.S. owned) sales representatives to U.S. affiliates. Similar patterns would be observed for overseas affiliates of U.S. corporations. The discussion in Chapter 3 showed that the overall level of the current account or trade deficit is determined by underlying trends with respect to national investment and saving. Therefore, while we can compute separate trade balances for U.S. affiliates and other U.S. busi- nesses, we must be careful to note that the causation runs from the overall trade deficit to these components and not the other way around. These data lead to four major conclusions: (1) U.S. affiliates' export sales — like that of other U.S. businesses — were retarded by the appreciation of the dollar through 1985. (2) A disproportionate share of the rise in imports associated with the dollar apprecia- tion was initially handled by U.S. owned businesses. (3) However, as firms adjusted marketing arrangements to their larger U.S. sales, the share of imports which flowed through affiliates rebounded. (4) Most of the movement in trade totals of U.S. affiliates in the 1980s were concen- trated in movements of imports of nonmanufacturing businesses from their parents ~ apparently increases in sales through local marketing arms in response to eco- nomic fundamentals. From 1977 through 1982, the U.S. affiliates' trade deficit was virtually equal to the overall U.S. merchandise trade deficit, fluctuating around $25 billion (Figure 5-9). After 1982, the U.S. affiliates' trade deficit first rose more slowly than the total trade deficit through 1984. Then the gap between the total and affiliates' trade deficits nar- rowed only slightly through 1987, and finally declined substantially in 1988 (the last year for which data are Figure 5-10 U.S. Affiliates Trade, by Manufacturing and Non-Manufacturing Business, 1 977-87 U.S. Manufacturing Affiliates 1977 79 81 83 Source: Bureau of Economic Analysis. 85 U.S. Non-Manufacturing Affiliates Billion dollars 140 120 100 80 60 40 20 1977 Imports Deficit _1 I l_ 79 81 83 85 87 36 available). Turning to Figures 5-10 and 5- 1 1 , we can see that for the most part the increase in the U.S. affiliates' trade deficit after 1982 was concentrated in transactions with parents by non-manufacturing (primarily wholesaling) affiliates. The increase in the deficit reflected an increase in imports while exports stagnated due to dollar apprecia- tion. As with imports by U.S. -owned firms, the merchan- dise trade data do not provide information on the compo- sition of imports by U.S. affiliates in terms of whether they were goods for resale or for their own use as intermediate inputs or capital goods. U.S. affiliates' exports generally declined from 1982 through 1987 — although this was alleviated to the extent that parents provided a protected market. A dominant share of both total imports and exports are accounted for by the U.S. affiliates in wholesaling. Wholesalers accounted for over 70 percent of imports by Figure 5-1 1 U.S. Affiliates' Trade with Parents and Non-Parents, 1977-88 U.S. Affiliates' Trade with Parents U.S. Affiliates' Trade with Non-Parents 1977 79 61 83 Source: Bureau of Economic Analysis. 85 87 U.S. affiliates in both 1980 and 1987. In 1988, U.S. affiliates in wholesaling accounted for 73 percent of the total imports by all U.S. affiliates and 59 percent of their total exports. Moreover, in 1988, U.S. affiliates in whole- saling accounted for $74 billion (83 percent) of the total deficit of all U.S. affiliates of $90 billion. The major share of U.S. affiliates' foreign trade is with their own foreign parents, with the parents share in 1988 far larger in the affiliates' imports (76 percent) than in their exports (42 percent). The parents' share of imports was highest for affiliates in wholesaling (81 percent of their total imports) compared, for example, with those on average in all manufacturing industries (69 percent) and petroleum (46 percent). However, the share of total imports obtained from parents was far higher for U.S. affiliates in motor vehicle and parts manufacturing (85 percent) than the average for all manufacturing (69 per- cent). The 89 percent rise in imports from parents over 1980-87 (the latest data year for commodity composition of trade with parents) was mainly in machinery products (up 212 percent) and motor vehicles and parts (up 195 percent). The U.S. affiliates' weak export performance largely reflected declining exports of food and inedible crude materials, except fuels, which were their largest export categories and accounted for 55 percent of their total exports in 1980. The 1980-1987 fall in their exports in these two important categories ~ a 44 percent decrease - paralleled the fall in total value of U.S. exports in those two categories. However, the 1980-87 drop in U.S. affiliates' exports of food and inedible crude materials was more than offset by major increases in their exports of chemi- cals, machinery, and other manufactured products. State Output and Employment Supported by U.S. Affiliates Individual U.S. states and communities compete vigorously to attract new investment and to retain existing production facilities, whether domestically- or foreign- owned. They point out their attractiveness in terms of climate, resource base, transportation system, labor force, purchasing power of residents, proximity to suppliers of raw materials and other inputs of goods and services, and educational institutions. Their offers to prospective inves- tors often include tax benefits and targeted public spend- ing on infrastructure, such as roads. These efforts have contributed to new U.S. affiliates locating where their industry was not previously impor- tant, such as the location of a number of Japanese-owned motor vehicle plants in the south-eastern U.S. farm-belt. In recent years, employment by U.S. affiliates, as in U.S. employment generally, has grown more rapidly in the south-eastern states, the Far West, and the Southwest. Relatively slow U.S. affiliate employment growth has occurred in the Great Lakes and mid-eastern states. In 37 Figure 5-12 Top Six States in U.S. Affiliates' Employment, 1 977 and 1988 Figure 5-13 Top Six States in U.S. Affiliates' Shares of Employment, 1 977 and 1988 Thousands 450 Percent California Texas New York New Jersey inois Pennsylvania Delaware Source: Bureau of Economic Analysis. Hawaii Source: Bureau of Economic Analysis South I North Carolina New Carolina Nebraska Jersey 1988, the largest shares of nonbank employment by U.S. affiliates were in California, New York, Texas, Illinois, New Jersey, and Pennsylvania (Figure 5-12). However, those states differ from states where U.S. affiliates have the largest relative share of employment, which include (in descending share of total nonbank employment): Dela- ware (14. 6 percent), Hawaii (7.8 percent), South Carolina, New Jersey, North Carolina, Nebraska, Georgia, West Virginia, Tennessee, Alaska, Maine, and others (Figure 5- 13). State location of U.S. affiliate employment across industries differs widely in importance (in terms of the industry of manufacturing affiliates' principal output), with chemicals important in Delaware, California, and New Jersey, petroleum in Alaska, machinery (including computers and electronics) manufacturing in California and North Carolina, metals manufacturing in Illinois and Ohio, and food products manufacturing in California and Illinois. 38 FOREIGN DIRECT INVESTMENT IN THE U.S. ELECTRONICS INDUSTRY by Donald hi. Dalton* U.S. affiliates of foreign firms in the electronics industry rapidly expanded their participation in the U.S. market during the 1980s, as indicated by increases in property, plant, and equipment, employment, and sales. ' Moreover, data on U.S. affiliates' activities suggest that they have supported U.S. employment, output growth, and technol- ogy. Some countries' affiliates are concentrated in sub- groups within the electronics industry, with Japanese- owned affiliates concentrating in computers and office equipment, consumer electronics, and electronic compo- nents, and European-owned affiliates concentrating in telecommunications and instruments. Both national groups show some degree of vertical integration, with the very large multinational corporations' directly investing up- stream and downstream. As the world's largest single market of electronics equipment and components, the U.S. market is important to European, Canadian, and Japanese electronics produc- ers. In the 1970s and early 1980s, foreign producers made major inroads into the U.S. market, gaining large market share through imports, which in turn, generated trade frictions between the United States and its trading part- ners, especially Japan. Foreign direct investment in the United States became an alternative means of serving the U.S. market, increasing the opportunity for economies of scale, and providing better direct access to the U.S. distribution networks and to the U.S. technology base. In the first half of the 1980s, the rising import share of U.S. electronics market caused some observers to have serious questions about U.S. competitiveness in this in- dustry. By the mid-1980s, imports held a large and apparently permanent share of major segments of the U.S. electronics market (Figure 6.1). •Industry Economist in the Office of Business Analysis, Economics and Statistics Administration, U.S. Department of Commerce. 'The U.S. electronics industry, as broadly defined in this chapter, includes office and computing machinery (SIC 357), household audio, video, and communications equipment (SIC 366), electronic components and acces- sories (SIC 367), and instruments (SIC 38). BEA data have been supple- mented with a data set created forthis study from publicly available sources by the Office of Business Analysis, Economics and Statistics Administra- tion, to give added insight into the nature of FDIUS on each of these four industries, plus semiconductor materials and equipment (SM&E). These additional data are not whollycomparable to BEA data. Foreign direct investment has been revalued from historical cost to current cost and market value bases at the aggregate level, but not for individual industries. Hence, historical costs are used in the analysis. Figure 6- 1 A U.S. Total Trade in Semiconductors, 1978-90 Billion dollars H 10 Imports / / / Exports Imports from japan i i i I I I I I I l_ 1978 80 82 84 86 88 90 Source: Bureau of the Census, and International Trade Administration, Office of Microelectronics. Figure 6- IB U.S. Total Trade in Computers & Peripherals, 1978-90 Billion dollars 2S ^ Exports / ,' / / 2U / / / / / / X / x / 15 x / ^ — / ■ ' / / Imports 10 • s s y Imports s from J»p»n — ' i i •"• 1 1 i < i i i i : 1978 80 %1 w 66 ee 90 Source: Bureau of Economic Analsysis, and International Trade Adminis- tration, Office of Microelectronics . 39 o Imports of computers and peripherals increased from$l billion in 1980 to $1 1 billion in 1986, and $19 billion in 1990. o Imports of semiconductors more than doubled in four years, rising from $3. 3 billion in 1980 to $7. 6 billion in 1984, reaching $12 billion in 1990. o The growth in imports in telecommunications equipment was also substantial — the import share rising from 4 percent in 1980 to 45 percent by 1984, with Northern Telecom of Canada gain- ing most of share lost by U.S. companies. 2 East Asian nations, particularly Japan, were the major source of these electronics imports, as the bilateral trade deficits with these nations, especially in computers, grew rapidly from 1980 to 1988. The trade deficits in semiconductors and telecommunications equipment gen- erated significant trade frictions with U.S. trading part- ners, and Japan in particular, over reciprocal market access. Growth of Foreign Direct Investment in Electronics Foreign producers have invested in the United States, partly in response to trade frictions, as a means of assuring access to the large U.S. market, and of achieving econo- mies of scale. Foreign direct investment is also a means of exploiting technological advantages the foreign firm has, as well as keeping abreast of advances in U.S. technologies. The participation of foreign firms in the U.S. elec- tronics industry has steadily risen over the decade, al- though the character and impact of the increase is not easy to assess. This industry is dynamic, with the competitive- ness of its firms vitally dependent on rapidly changing technologies with short-life cycles. Also, major, continu- ing shifts in U.S. versus foreign ownership of firms in this industry make judgments about trends in foreign owner- ship rather tenuous. For example, the ratio of U.S. affiliates' employment to total U.S. employment in the electronics industry shows increased participation of U. S. affiliates, with a doubling of share of the total over the 1980s. However, changing ownership, with foreign own- ers buying and selling facilities, and with the remaining divisions and facilities, accordingly, reclassified in other sectors or subindustries, complicates assessment of the importance of this increase. 1988 (in book value/historic cost terms). European- owned affiliates accounted for 59 percent of gross PP&E of all foreign countries in 1988. The largest share of investment in PP&E in 1988 was held by foreign firms from the Netherlands, followed by Japan, United King- dom, France, Germany, and Canada. 4 Growth among the subsectors of the electronics industry was not uniform, and the data suggest that the composition of FDIUS in the electronics industry changed dramatically between 1980 and 1988. Of the four major electronic industries, foreign investment in PP&E in the household video, audio, and communications equipment industry increased most rapidly, at 29.5 percent per year, and moved from 1 7 percent of total U. S. -affiliate PP&E in 1980 to 35 percent, the largest percentage of the total by 1988. PP&E also rose rapidly in the instruments and related products, growing at 27 percent a year and shifting from 1 1 percent in 1980to25percentoftotalU.S. -affiliate PP&E by 1988. The pace of increase in foreign investment in computers and office equipment was slightly slower, at 24.5 percent a year, accounting for 13 percent of the total U.S. -affiliate PP&E in 1980 and 20 percent in 1988. Growth of PP&E in electronic components was the lowest, at 2.9 percent ayear, and its share of the total dropped from 58 percent in 1980 to 19 percent in 1988 (Figure 6-2). This slow growth of PP&E in components and decline in share of the total U.S. -affiliate PP&E reflect in large part the publicly reported sale of a large components facility by a foreign owner during this period. Such changes in the firm composition of the industry will be better explained by the project linking confidential Census and BE A data on foreign direct investment. Employment Data on U.S. affiliate employment are probably a better measure of the growth of U.S. affiliates in the electronics industry than PP&E data, which include price increases. Employment data show a less rapid rise than PP&E in the 1980s, growing at about 4.2 percent a year, from 177,700 workers in 1980 to 247,200 employees in 1988. The data also reflect ownership changes taking place in the electronics industry. Employment grew fastest in computers and office machinery (9.1 percent a year), followed by household video, audio, and communi- cations equipment (8.7 percent a year) and instruments (5 . 6 percent a year) . Components and accessories showed a decline of 2.2 percent a year in employment between 1980 to 1988, reflecting the sale of a large component facility to a U.S. owner (Figure 6-3). Property, Plant, and Equipment 3 Gross property, plant, and equipment (PP&E) of U.S. affiliates more than tripled between 1980 and 1988, increasing from $3.5 billion in 1980 to $13.4 billion in National Telecommunications and Information Administration, Office of Policy Analysis and Development. 3 These data on gross property, plant, and equipment are based on their historical book value, and may understate their market value. ■"Because of disclosure restrictions, PP&E valuesby individual country are not available. 40 Figure 6-2 Stock of Property, Plant & Equipment of U.S. Affiliates in the Electronics Industry Computers A off. eq. Video, audio, & comm Electronic components Instruments Souce: Bureau of Economic Analysis. the largest share of foreign-affiliated sales in 1980, but declined in relative importance in the U.S. -affiliate elec- tronics sales to only 13.5 percent of the total by 1988. The fall in electronic components' importance is due in part to the sale of a large components facility during the period. U.S. affiliate sales of instruments and related products rose from 14.2 percent of total affiliates sales to 22 percent by 1988. The share held by computers and office equip- ment increased slightly, to 15 percent of the total by 1988. Role of U.S. Affiliates in the U.S. Economy U.S. electronics affiliates of foreign firms have played a small, but growing role in the U.S. economy. They have supported U.S. employment, output growth, and technology. U.S. affiliates in the electronics industry have also been active importers and exporters. Figure 6-3 Employment by U.S. Affiliates inthe Electronics Industry Employment and Market Share Employment data indicate the increasing participa- tion of U.S. electronics affiliates of foreign firms in the Computers & off. eq. Video, audio, & comm. Electronic components Instruments 40 60 Thousands Source: Bureau of Economic Analysis. Figure 6-4 Sales of U.S. Affiliates in the Electronics Industry Video, audio & comm. Electronic components Measuring inst- 1 980 Sales $11.1 Billion Sales Sales of U.S. affiliates increased at 13.7 percent a year (in current dollars), from $11.4 billion in 1980 to $29.2billion in 1988. U.S. affiliate sales in some electron- icssectors grewmore rapidly than others (Figure 6-4). The household video, audio, and communications category had the largest increase, climbing from 20.3 percent of total affiliate sales in 1980 to 48 percent or $14.1 billion in 1 988, and accounting for the largest share of the total in 1988. This rise was mostly the result of large foreign acquisitions in household video, audio, and communica- tions equipment in the 1980s. Electronic components held Video, audio & comm. \ Electronic components ^^ffl Computers & off. eq. Photographic eq. Medical eq. Mcasurin| inst. 1 988 Sales $31.0 Billion Souce: Bureau of Economic Analysis. 41 U.S. electronics market. They have provided jobs for a rising proportion of U.S. workers, accounting for 14.5 percent of the 1.7 million employees of all electronics companies in the United States in 1988, up from 7.7 percent in 1980 (Figure 6-5). 5 The shifts in U.S. affiliates' shares of total U.S. employment within the four electron- ics industry groups between 1980 and 1988 indicate then- increased relative importance as employers in video, audio, and communications equipment and instruments manufacturing, and decreased importance in components manufacturing (Table 6. 1). This change in importance is partly due to shifts in ownership — foreign versus domestic — in the components industry; specifically, the sale of a large electronic components and accessories facility. The data, therefore, cannot be used, without numerous quali- fications, in analyzing the performance of U.S. affiliates -- for example, changes in capital to labor ratios, in economies of scale, in product composition and lines of business. One indicator of U.S. affiliates' support to the U.S. economy is the growing number of high-wage jobs in the economy. Wages in the U.S. electronics industry are substantially higher than the average for all manufactur- ing. U.S. affiliates, paying these standard electronics industry wages, are providing a rising proportion of these high-wage jobs in the electronics industry. Another often used indicator is compensation per employee for U.S. affiliates. Compensation (measured on an enterprise basis), includes wages, salaries, and benefits that affiliates paid to U.S. workers. Affiliates in comput- ers and office equipment had the highest compensation per worker in 1988, $45,260, followed by household video, audio, and communications equipment ($35,605). Two industry groups, components and instruments, ranked Table 6. 1 U.S. Affiliates' Share of Total U.S. Employment in the Electronics Industry (In percent) 1980 1988 Computers & office equip 4.1 9.3 Video, audio, & communications equip 5.9 29.3 Electronic components & accessories 13.0 12.2 Instruments 7.2 23.9 Total 7.7 14.5 Source: Bureau of Economic Analysis and U.S. Bureau of Labor Statistics. slightlybelow the compensation per employee for all U.S. affiliates in manufacturing, which averaged $33,700 in 1988. Compensation paid by U.S. affiliates in these industries in 1988 appears comparable with the estimated average compensation paid by all U.S. manufacturing companies (Figure 6-6) 6 . These comparisons of compensation per employee for U.S. affiliates with that for U.S. electronics industries should, however, be qualified. Compensation data for U.S. affiliates are available on an industry of affiliate, or enterprise basis, and data on U.S . industry, on an establish- ment basis. Consequently, to the extent that U.S. affiliates are classified under manufacturing, when they in fact also are in the wholesale trade industry (or vice versa), for 5 U.S. affiliates' employment by industry of sales, rather than industry of affiliate; complete definitions are available in AppendixGlossary. Industry of sales data are more comparable to U.S. industry employment informa- tion, which is collected on an establishment basis. 6 U.S. data from the Bureau of the Census. Figure 6-5 U.S. Affiliates' Share of U.S. Electronic Industry's Employment Percent 35 30 25 20 15 10 1! ■ _ ihii Computers & & off. eq. Video, audio & comm. Components Sources: Bureau of Economic Analysis and International Trade Adminis- tration. Figure 6-6 Compensation per Employee in the U.S. Electronics Industry, 1 988 Computers & off eq. 10 20 30 $ 1 .000 per employee Source: Bureau of Economic Analysis and Bureau of the Census. 50 42 example, could understate (or overstate) the comparison. This bias would appear to reduce affiliates' wages relative to overall wages since wholesaling wages are lower than those in manufacturing. The bias in the comparison should be taken into account in drawing any conclusions about relative labor compensation. These comparisons can be made with the linked data from the BEA-Census project. Growth in sales of U.S. affiliates reflects their increasing presence in the U.S. electronics industry, as foreign investors acquired more U.S. companies and set up new facilities. Sales of U.S. affiliates tripled during the 1980s. 7 This growth in sales cannot, however, be com- pared against that of the total U.S. industry, to determine changes in market share of U.S. affiliates, although em- ployment data provide some means for gauging inroads made in market share . Data on U. S. industry sales for each of the four electronics subsectors (three-digit SIC) are not available, and shipments data, which are collected on U. S. industry, are not comparable to sales of U.S. affiliates data. ports rising 19.4 percent a year, and exports, 23.5 percent a year over this time period. Imports by electronic components affiliates showed a slower growth at 8.8 percent a year, and exports, a decline of 1 1 percent a year; however, the sales of a large facility to a U.S. owner during this period makes any conclusions about these changes questionable. For the U.S. electronics industry, the trade balance was a $9,771.7 million surplus in 1980, with surpluses in all four subindustries. Like U.S. affiliates, the trade balance moved to a deficit by 1987 ($8,41 8.1 million) and 1988 ($7,527.5 million). Although computers and office equipment and instruments continued to show surpluses, these surpluses were considerably smaller than in 1980- one-half the size for computers and office equipment and one-fifth the size for instruments. Household audio, 'Sales data are on an industry of sales basis, in current prices. 8 The separate 1980 trade balance is not reported for the U.S. affiliates in the electronics sector in order to avoid the disclosure of individual businesses' exports in the audio, video, and communications equipment sector. Merchandise Trade Both exports and imports of U.S. electronics affili- ates grew over the 1980s. The pace of increase paralleled that of exports and imports for all U.S. electronics indus- try. Exports doubled for both U.S. affiliates and the U.S. electronics industry, and imports quadrupled. Growth of merchandise trade within the electronics industry was not uniform, however, for U.S. affiliates and U.S. industry as a whole (compare Figures 6-7 and 6-8). Differences for U.S affiliates can be attributed, in part, to changes in the classification of one affiliate as previously discussed as well as to acquisitions which brought firms into the affiliates figures for 1988 which were not in the 1980 base data. The trade balance of U.S. affiliates of foreign firms showed a small surplus in 1980, with surpluses in comput- ers and office equipment and electronic components, and deficits in audio, video, and communications equipment and instruments. The trade balance moved to a deficit by 1987 and 1988, with imports exceeding exports in all four subindustries (Figure 6-8). 8 The deficits ranged from $1.4 billion for household video, audio and communications equipment to $298 million for computers and office equipment. Paralleling the entire industry, between 1980 and 1988, imports for U. S. affiliates increased at an annual rate of 1 7 percent, more than double that of their export growth. Imports by U.S. affiliates in computers and office equip- ment grew fastest at 22.5 percent a year between 1980 and 1988, while their exports grew at only 8.6 percent over the same period. Although imports by U.S. affiliates in the audio, video, and communications equipment industry grew rapidly at 21.5 percent a year from 1980 to 1988, exports from this group rose slightly faster. Trade of instruments affiliates showed a similar pattern, with im- Figure 6-7 U.S. Total Trade in Electronics Products In 1980 Computers & off. eq. Instruments In 1988 Computers & Video, audio off. eq. & comm. Source: Bureau of the Census. Electronic components Instruments 43 video, and communications equipment and electronic components and accessories had relatively large deficits by 1988, going from surpluses of $165.2 million and $715.1 million, respectively, in 1980 to deficits of $3, 899.9 million and $7,107.5 million, respectively, in 1988 (Fig- ure 6.8). Any conclusions about comparisons of U.S. affili- ates' trade to total U.S. imports and exports of electronics should be drawn with caution. Data for U.S. affiliates are on an industry of affiliate or enterprise basis, while data for total U.S. imports and exports are on a product basis. Hence , the data are not comparable . Trade information on U.S. affiliates may be biased upward or downward, de- pending on how the U.S. affiliate was classified by indus- try. That is, whether or not 5 1 percent or more of the U.S. affiliate's activities are in the manufacture of electronics products, or in wholesale trade of electronics. Moreover, the reported trade data reflect the exports and imports of Figure 6-8 U.S. Electronics Affiliates' U.S. Trade Million dollars 1.000 800 In 1980 600 400 200 Computer & off. eq. Instruments In 1988 Computers & off.eq. *Not published to avoid disclosure of buisiness operations. Source: Bureau of Economic Analysis. Instruments Table 6-2 Ratio of Exports to Sales (Shipments), 1 988 (In percent) U.S Affiliates U.S Industry Computers & office equip Audio, video & comm. equip Elec. components & accessories .... 15.0 8.3 8.5 12.2 10.3 37.7 4.1 23.5 Instruments 59.0 Total 24.9 Sources: Bureau of Economic Analysis, and Bureau of the Census, International Trade Administration, U.S.Industrial Outlook, 1991. U.S. electronics affiliates, butnot necessarily their exports and imports of electronics products. Although trade data for U.S. affiliates and the U.S. electronics industry as whole are not comparable, some very rough comparisons of their activities have been made. Using the ratios of exports to sales for U.S. affiliates, and exports to shipments for U.S. electronics industry as a whole, ihe data suggest that U.S. affiliates tend to be less export oriented than U.S. electronics firms in 1988, 9 except in the household audio, video, and com- munications industry. For U.S . affiliates, the lower ratios may reflect the strategic objectives of the direct invest- ments to serve the U.S. market. The importance of exports differs widely among sub-industries of electronics, none- theless (Table 6-2). Trade of U.S. affiliates of different foreign parents followed different patterns. Grouped by country of own- ership, Japanese-owned affiliates led in imports in 1988, followed by Dutch, German, and U.K. affiliates. Nether- lands-owned affiliates generated the most exports in 1988, followed by affiliates of the United Kingdom, Japan, France, and Germany. In terms of sub industries, however, exports and imports tended to be dominated by affiliates of foreign parents from the same countries. Affiliates producing electronic components, with Japanese and West German parents, led imports and exports. o Instruments affiliates, with parents from the United Kingdom, led imports and exports. o Affiliates of Japanese and French parents, produc- ing computers and office equipment, led exports, while affiliates of foreign parents from Japan and the Netherlands led imports. o In audio, video, and communications equipment, the Netherlands, U.K., and Japanese affiliates were the leading exporters, and the leading importers were U.S. affiliates with parents from Japan and the Netherlands. 9 A comparison for 1980 is not possible because export dataforaudio, video, and communications equipment cannot be disclosed. 44 Technology Whether U.S. affiliates of foreign firms have played a role in U.S. technology development, or have transferred technology out of the country, has been a hotly debated issue. A full assessment of the contribution of U.S. affiliates to U.S. technological advance requires more information than is available for U.S. affiliates. Informa- tion is needed on the levels, nature, and focus of affiliates' R&D activity. Disaggregated data are needed on kinds of R&D activity at their U.S. labs and proportion of funds devoted to each type of activity, contracts paid to U.S. firms to do work for them, support of R&D at U.S. universities, and sources and types of inward technology transfer from parent firms or from others. Such data, however, are company proprietary, not disclosed by U.S. affiliates or, for that matter by U.S. firms, and thus, are not expected to become available from the data link project. A partial picture of the R&D activity of U.S. affiliates, nonetheless, can be provided by R&D expenditure data from BEA and information on research facilities from the International Trade Administration of the Department of Commerce. R&D spending by foreign-affiliated companies in the U.S. electronics sector rose from nearly $400 million in 1980 to $1.6 billion in 1988, according to surveys by BEA. 10 The sector with the fastest growth in R&D spending by U.S. affiliates was household video, audio, and communications equipment. In 1988, the shares of U.S. affiliates R&D spending were: o Video, audio, and communications equipment, 45 percent, o Computers and office equipment, 25 percent, o Electronic components, 17 percent, o Instruments, 14 percent. The share of R&D by electronics components declined between 1980 (49 percent of the total) and 1988, because of the sale of a large components facility (Figure 6-9). A common indicator of technology intensity of output is the ratio of R&D expenditures to sales. Since 1980, the ratio of R&D spending to sales for U.S. electron- ics affiliates has increased for all industry groups (Figure 6-10). The average ratio rose from 3.4 percent in 1980 to 5.6 percent in 1988. In 1988, the ratio for U.S. affiliates ranged from: 9 percent for computers and office equip- ment; to 7 percent for components; 5 percent for house- hold video, audio, and communications equipment; and 3.3 percent for instruments and related products. The average ratio has also been rising in the 1980s for U.S. electronics industries. 10 R&D data collected by BEA on U.S. affiliates are on an "industry of affiliate" or enterprise basis. Data collected by the National Science Foundation on U.S. companies are also on an enterprise basis. A comparison of U.S. electronics affiliates' ratio of R&D spending to sales to that of all U.S. electronics companies shows that foreign-owned affiliates spent some- what fewer internal resources on R&D in the United States in all electronics categories except video, audio, and communications (Figure 6-11). However, except for instruments, the ratios do not appear to be significantly different in 1988. U.S. companies in computers and office equipment had a R&D-to-sales ratio of 1 1.5 percent in 1988, according to the National Science Foundation," compared with the ratio of 9 percent for affiliates, using BEA data. The gap was widest in instruments and related products, with U.S. companies spending 7.3 percent of "National Science Foundation, Selected Data on Research and Develop- ment in Industry: J 989, February 1991. NSF data include only companies that perform R&D, and the sales data reflect the sales of only companies that perform R&D. Thus, the ratios for U.S. companies may be biased upward to the extent that sales of companies not performing R&D are excluded. However, in the electronics industry, the numbers of firms not performing R&D are likely to be minimal. The 1988 data are based on panel data, rather than a census; the data, however, should be representative of the universe of electronics firms. Figure 6-9 Share of U.S. Electronics Affiliates' R&D Spending by Sector 1 980 R&D $393 Million Computers & off. eq. Instruments 1988 R&D $1.6 Billion Computers & off. eq. Instruments Electronic compontnents Source: Bureau of Economic Analysis. 45 sales on R&D, while affiliates spent 3 percent. U.S. affiliates had a higher ratio of R&D to sales in the category for video, audio, and communications equipment. Another way of gauging R&D activity by U.S. affiliates is the number of research facilities. The list of R&D facilities of U.S. affiliates, compiled by the Interna- tional Trade Administration's Office of Computers and Business Machines, shows that in 1990, 36 U.S. affiliates Figure 6-10 U.S. Electronics Affiliates' Ratio of R&D Spending to Sales Computers & off. eq. Instruments Total 4 6 Percent 10 Source: Bureau of Economic Analysis. of foreign companies had 85 major electronics research facilities in the United States. The list includes only newly established R&D facilities, and does not adjust for the size of the facilities, which ranges from 20 to 200 employees. No attempt has been made to determine how representa- tive the list is of the universe of R&D facilities of U.S. affiliates. The list shows by country ownership that in 1990, seven European-owned electronics companies with 21 U.S. R&D facilities, one Canadian-owned firm (Northern Telecom) had 4 R&D facilities, and 28 Japanese-owned companies had 60 R&D facilities. Generally, each mul- tinational company has established a R&D facility for each major line of business, including semiconductors. The U.S. affiliate of Siemens (Germany) had the most R&D facilities, with 9 different R&D sites. Two U.S. affiliates of Fujitsu and NEC (Japan) each had 6 R&D facilities, and three Japanese- owned companies (Hitachi, Matsushita, and Sony) each had 5 R&D sites. Although the numbers of U.S. affiliates' R&D fa- cilities and their proximity to major U.S. universities shed some light on the types of technology they pursued, more information is needed to determine the role of affiliates in U.S. technology development. The contribution of affili- ates to the U.S. technology base has been subject to doubt by some technology analysts because a portion of their R&D spending is believed to be used for monitoring U.S. innovations. However, some U.S. affiliates conduct mean- ingful R&D, resulting in mutual exchanges (two-way) of technology between parent companies and subsidiaries, which does contribute to the U.S. economy and technol- ogy base. Critical Technologies Figure 6-1 1 Ratio of R&D Spending to Sales by All U.S. Companies & U.S. Affiliates in the Electronics Industry, 1988 Computers & off. eq. ^^— i Video, audio, & comm. ■— UiA«l»,„ Other U.S. Electronic components ^^^^^^^^^^ Instruments i . i . i i . i 6 Percent 10 Source: Bureau of Eocnomic Analysis and the National Science Founda- tion. Critical technologies are those technologies identi- fied as important to providing weapons systems and to U.S. national security by the U.S. Department of De- fense. 12 A wide range of critical technologies is embodied in the electronics goods produced in U.S. affiliates. Indeed, many of these technologies are at the leading edge, and have both civil and military applications. These technolo- gies include, among others, composite materials, machine intelligence and robotics, parallel computer architectures, and semiconductor materials and microelectronic cir- cuits. Semiconductor Materials and Equipment Semiconductor materials and equipment have been designated by the Department of Defense as critical technologies. Moreover, the National Advisory Commit- n Report to Congress on the Defense Industrial Base: Critical Industries Planning, Department of Defense, October 1990. 46 tee on Semiconductors has pointed out that financial and technological weaknesses in U.S. semiconductor equip- ment and materials suppliers reduce the competitiveness of U.S. semiconductor component manufacturers in the world electronics product markets. 13 The manufacture of the fastest and most powerful semiconductors requires silicon and other materials of highest purity and equip- ment meeting the closest tolerances at the micron and submicron levels. Semiconductor materials and equipment (SM&E) do not fit into a single SIC classification, as they include products of at least seven industries. As pointed out earlier in this chapter, the SM&E data were compiled by the Office of Business Analysis of the Economics and Statis- tics Administration. The SM&E industries include pro- ducers of equipment used in semiconductor manufactur- ing (SIC 35596), semiconductor testing (SIC 3825), and electron beam accelerators (SIC 3669) for x-ray lithogra- phy. Semiconductor materials manufacturing uses silicon ingots, wafers, and polycrystalline silicon (SIC 3339), ceramic packages (SIC 3264), lead frames (SIC 3469), sputtering targets (SIC 3499), and photo masks (SIC 3861). Foreign direct investment in the SM&E industries is largest in the semiconductor materials industries. In 1990, U.S. affiliates producing semiconductor materials em- ployed 6,700 workers at 32 plants. This production is concentrated in silicon wafers in plants obtained mostly through acquisitions, and in ceramic packages produced mostly in new facilities built by affiliates. Japanese- owned affiliates account for 90 percent of the foreign direct investment in this segment. European-owned firms account for the balance. U.S. affiliates making semiconductor manufactur- ing equipment employed in 1 990 over 3,100 workers at 26 manufacturing plants. Japanese-owned affiliates account for about 80 percent of the foreign direct investment and employment in these plants. European-owned affiliates make up the remaining 20 percent. Although data are not available to gauge the market share of these foreign-owned facilities, it is not surprising that Japanese companies have invested in U.S. SM&E producing firms. Japan is the world's second largest market for semiconductor components and accessories, has some of the largest electronics producers in the world, and thus, represents a large market for SM&E goods. According to industry analysts, the Japanese market for semiconductor manufacturing equipment represents 50 percent of the world market. 14 Country Concentration in Electronics Industry Country ownership of U. S. affiliates shifted over the 1980s. BE A data show that Japanese firms concentrated their direct investments in computers and office equip- ment and electronic components, and European firms, in communications equipment and instruments. Information on detailed industry groups was collected by the Office of Business Analysis, Economics and Statistics Administra- tion, to add to that reported by BEA, to gain some insights into concentration of direct investment by country of ownership. Country Ownership Firms from some countries have dominated foreign direct investment in the electronics sector, and have focused their investments in specific segments of the industry, reflecting their comparative advantage and also their interest in vertical integration of their business. BEA sales data show that Japanese companies expanded their direct investment activities faster than others. Although European-owned firms continued to account for most of the sales of output by U.S. affiliates, their share of affili- ates' sales declined from 61 percent in 1980 to 57 percent in 1988 (Figure 6-12). The share of sales of Japanese- owned affiliates increased rapidly from 4 percent in 1980 to 20 percent in 1988. Sales share of other countries' affiliates, including Canadian-owned affiliates, also de- clined. By individual country, sales of Japanese-owned af- filiates ranked first in 1988 at $6.6 billion, followed by British-owned affiliates with sales of $5.7 billion. The next highest sales by were affiliates owned by firms from Canada, France, Netherlands, and Germany; sales of affiliates with parents in some individual countries are not always available from BEA because of legal confidential- ity requirements. Firms from some countries have concentrated direct investments in specific segments of the electronics indus- try, tending to reflect their national comparative advan- tages, as evidenced by BEA data on sales in 1988: o In computers and office equipment, the BEA data show that Japanese-owned affiliates led sales, fol- lowed affiliates with parents in the Netherlands and France. o In household video, audio, and communications equipment, Canadian-owned affiliates led sales, followed by French- and Japanese-owned affiliates. o In electronic components, Japanese-owned affili- ates led sales, followed by affiliates of German and Netherlands parents. "National Advisory Committee on Semiconductor. A Strategic Industry- at Risk: A Report to the President and the Congress. November 1989. "See U.S. Industrial Outlook. 1991. U.S. Department of Commerce. International Trade Administration (Washington. D.C.: U.S. Department of Commerce, January 1991). 47 o In instruments, U.K.-owned affiliates dominated sales, followed by affiliates of Canadian and German parents. Industry Specialization by Countries BEA data on U.S. affiliates' activities in the elec- tronics sector are available at the 3-digit SIC level, up to 1988. To get more current information and additional details on industry investment (SIC 4-digit industries), including names of investing companies, another set of data was collected from diverse sources for this report. This data set collected information from industry sources on establishments or plants of the U.S. affiliates of foreign companies, and is comprised of information on 537 elec- tronics manufacturing facilities with 202,100 workers in 1990. It also includes information on additional subindustries, semiconductor manufacturing equipment, semiconductor materials, and computer- and audio-re- lated products, not included in the BEA data. It is not, however, scientifically collected or representative of the Figure 6- 1 2 U.S. Electronics Industry Affiliates's Sales by Country of Ownership 1 980 Sales $11.1 Billion Europe 61% Japan 4% Others 35% 1 988 Sales $31 Billion Europe 57% Others Japan 20% Source: Bureau of Economic Analysis. universe, although it is large enough to show patterns of direct investment across industries. More complete and reliable establishment data will be available in 1992 as a result of the BEA-Census data link project. The data set on establishments and firms shows that Japanese investors have tended to invest more in smaller, start-up U.S. electronics companies, while European in- vestors have tended to acquire larger U.S. companies. European- and Canadian-owned affiliates employed more workers (53 percent) in 1990 than all other electronics affiliates, but Japanese-owned affiliates led in numbers of plants (52 percent). Most of the investment is concentrated in producing final electronics goods in telecommunications, comput- ers, consumer electronics, and measuring instruments. In terms of numbers of workers, the largest subgroup of foreign direct investment was in computers and peripher- als (SIC 3571-77). In 1990, U.S. affiliates in the sample operated 7 1 plants producing electronic computing equip- ment, and employed 33 ,000 plant workers. In telecommu- nications equipment, the second largest industry of for- eign investment, affiliates operated 60 manufacturing facilities with over 31,000 plant workers in 1990, or 24 percent of total workers. In this sample, U.S. affiliates in household video and audio (SIC 365 1) employed the bulk of plant workers. There is only one remaining U.S. -owned television manufacturer (Zenith). All of the large foreign multinational electronics companies are involved in producing parts and compo- nents for their final products, and this group of industries has more direct investment than any single final product industry. In 1990, U.S. affiliates of foreign companies operated 1 3 6 manufacturing plants with over 5 8,400 work- ers producing electronic components (SIC 3671-79), such as printed circuit boards, capacitors, resistors, TV picture tubes, wiring assembly boards, and semiconductors. Within the semiconductor and electronic components industry (SIC 367), U.S. affiliates producing semiconductors oper- ated the most plants (49) in 1990 and employed 18,420 workers, or about 19 percent of all U.S. production work- ers in the semiconductor and electronic components in- dustry. Foreign direct investment in electronics is domi- nated by the large multinational corporations of Europe, Japan, and Canada. The major European and Canadian multinational electronics firms are Philips (Netherlands); Siemens (Germany); Alcatel, Groupe Bull, and Thomson (France); and Northern Telecom (Canada). The major Japanese multinational corporations with significant U.S. investments are Toshiba, NEC, Hitachi, Fujitsu, Sony, and Matsushita. Although detailed public data are not readily available on a consistent and comprehensive company- by-company basis, available information suggests that the very largest multinationals have enhanced their market positions through links in semiconductors, components, and entertainment companies, and through horizontal links across several electronics industries. Vertical links 48 by affiliatesalso extend to the semiconductor manufactur- ing equipment and materials industries. Computers and Peripherals In computers and peripherals, Japanese- and French- owned affiliates accounted for a significant share of the employment in the sample. One of the largest European investments was made by Groupe Bull (France), acquiring 85 percent of Honeywell's computer division (NEC owns 15 percent) and the computer division of Zenith Data Systems. Some of the major Japanese computer firms, such as Toshiba and NEC, have built new U.S. production facilities, andothers have acquired existing U.S. computer manufacturers. Since 1989, companies from Taiwan, Korea, Singapore, and Hong Kong have also made rela- tively small manufacturing acquisitions. Telecommunications Equipment European- and Canadian-owned affiliates dominate foreign investment in the production of telephone appara- tus (SIC 3661) and communications equipment (SIC 3663). Most of the major European telephone equipment companies own manufacturing facilities in the United States: Siemens (Germany), Alcatel (France), Plessey (U.K.), and Ericcsson (Sweden). The Canadian firm, Northern Telecom, has major investments in U.S. manu- facturing, and accounts for about 40 percent of the U.S. market sales of central office switching equipment, and an 18 percent market share in private branch exchanges (PBX) - second only to AT&T in these markets. 15 In 1989, Siemens purchased a majority interest in the then second largest U.S. -owned producer of telephone switching equip- ment, IBM's Rolm division. Most of the Japanese-owned U.S. telecommunica- tions production is concentrated in producing PBXs and cellular mobile phone equipment, although NEC and Fujitsu have some production facilities for central office switching equipment. Consumer Electronics In the U.S. household video and audio industry (SIC 365 1 ) Japanese-owned affiliates in 1 990 owned 26 plants, with 6 specializing in car radios for Japanese-owned auto producers in the United States. European companies have established a substantial U.S. production capacity in U.S. television production (SIC 3651) since 1985. Of the major European television companies — Thomson (France) ac- quired the RCA/GE television plants, and Philips (Neth- erlands) manufactures Magnavox consumer electronics in the United States. Other Asian companies with U.S. television plants are Samsung (Korea) and Tatung (Tai- wan). Measuring Instruments In instruments (SIC 38), European-owned affiliates provided a dominant share U.S. affiliates' employment of plant workers in 1990. Companies from the United Kingdom, such as Fisons and Siebe PLC have made several large acquisitions. Other European firms with U.S. manufacturing facilities include Schlumberger and Matra (France), Philips (Netherlands), Beijer (Switzer- land), while ABB (Sweden-Switzerland) acquired Com- bustion Engineering in 1990. Japanese companies spe- cialize in instruments for measuring and testing of elec- tricity and electrical signals (SIC 3825). Medical Equipment European firms account for a significant proportion of employment in the sample for the industries producing medical equipment and supplies (SIC 3841-45), but this employment is dwarfed by the immense size of the U.S. market for health-related equipment. The major European companies with U.S. affiliates are Siemens (Germany), Philips (Netherlands), and General Electric PLC (United Kingdom); European affiliates are large producers of cardiac pacemakers. Japanese firms, such as Toshiba, focus their U.S. investment in electromedical apparatus (SIC 3845), especially the most expensive and advanced medical equipment: CAT scanners, magnetic resonance imaging scanners, and ultrasound diagnostics. Electronic Components Foreign direct investment by multinational corpora- tions in the U.S. electronics sector has increased in com- ponents production, including semiconductors. The Japa- nese multinational firms producing electronic compo- nents in the United States (printed circuit boards, TV picture tubes, wiring assemblies) are: Toshiba, NEC, Fujitsu, Hitachi, Matsushita, and Sony. Kyocera (Japan) acquired AVX in 1989, the largest U.S. producer of electronic capacitors. The major European multinational firms producing components in U.S. facilities include Siemens and Philips. Northern Telecom of Canada also owns U.S. components manufacturing facilities. Semiconductors Semiconductor-producing facilities account for the largest share of U.S. affiliate employment in the electronic components category, with Japanese-owned affiliates ac- counting for about half of the employment in the sample data set, and many more plants than owned by U.S. affiliates of European firms. The European firms with major U.S. semiconductor manufacturing facilities are "U.S. Department of Commerce (NTIA & ITA). U.S. Telecommunications in a Global Economy: Competitiveness at a Crossroads. August 1990. 49 Philips (Netherlands), Siemens (Germany), and Schlumberger (France). Almost all of the larger Japanese semiconductor companies own production facilities in the United States: Fujitsu, Matsushita, NEC, Oki Electric, Mitsubishi Elec- tric, Sony, Sanken, and Toshiba. Japanese steel compa- nies have been investing in joint ventures with U.S. electronics companies in recent years as part of a corporate strategy to diversify into electronics and gain technical expertise in this area. Firms from other East Asian countries have made relatively small investments in the U.S. electronics industry, and include Samsung (Korea), and Hualong and Tatung (Taiwan). Semiconductor Materials and Equipment Japanese materials companies have dominated U.S. affiliate employment in manufacturing semiconductor test equipment and semiconductor materials — accounting for about 80 percent of employment in the sample, mainly through acquisitions of U.S. companies. Schlumberger of France, a maker of test equipment, is a major European firm with U.S. production facilities in the equipment industries. In semiconductor materials, most of the small European-owned share is Huels AG (Germany), which acquired Monsanto' s materials division— a major U.S. producer of silicon wafers. Tapes, CDs, Computer Disks Foreign direct investment in the U.S. magnetic recording media industry (SIC 3695) accounts for a very large share of this industry 's employment — accounting for 54 percent of total employment in the sample. Foreign direct investment in this group is dominated by Japanese companies, such as Sony and TDK, which have built new U.S. production facilities for magnetic tape and computer disks (hard and floppy). The European-owned affiliates producing magnetic recording tape include BASF, a Ger- man chemicals company, and Philips (Netherlands) which manufactures compact disks for its U.S. record compa- nies. Regional Concentration of Manufacturing Facilities 16 Although some investment is dispersed in 37 states, foreign direct investment in the U.S. electronics sector is concentrated in a small number of states. These states in which U.S. affiliate electronic producers are located ac- counted for 77 percent of their total employment and 77 percent of their plants. The largest number of plants are located in California (197) — in 1990, accounting for the most production workers (60,825 workers) in 1990, fol- lowed by Massachusetts (30 plants and 1 8,415 workers). Also in the top 5 states were Florida (16 plants and 16,000 workers), Texas (25 plants and 11,000 workers), and Tennessee (9,500 workers in 10 plants). The concentration of U.S. affiliates producing electronics in a small number of states generally parallels the pattern for the U.S. industry as a whole. California has attracted numerous acquisitions and start-ups by foreign investors because it accounts for a substantial share of total U.S. electronics manufacturing, comprising 4,630 plants and 213,000 production workers. Florida ranks second because of investments by European electronics compa- nies, and has only one Japanese-owned affiliate. Massa- chusetts has attracted foreign investors because of the large concentrations of computer companies and univer- sities in the Boston suburbs. In some states in the top ten, such as Georgia, Tennessee, and Indiana, U.S. affiliate production accounts for most of the electronics manufac- turing in these states. ,6 Data discussed in this section were collected by the Office of Business Analysis, Economics and Statistics Administration, U.S. Department of Commerce. 50 51 FOREIGN DIRECT INVESTMENT INTHE US. AUTOMOTIVE INDUSTRY 1 by Donald H. Dalton* In the 1980s, foreign automotive products manufacturers rapidly increased their sales in the U. S. market with goods produced in plants located in the United States. Foreign direct investment has rapidly increased in U.S. manufac- turing of autos, trucks, tires and automotive parts and components. Foreign-owned auto manufacturing, in par- ticular, has achieved considerable notoriety. The seven U.S. affiliate auto manufacturing operations (all either wholly Japanese-owned or jointly-owned withU.S. -owned producers) have increased from very small to over one- fifth their share of the U.S. auto production in only eight years. Nevertheless, the largest share of foreign direct investment in the U. S . automotive manufacturing industry is in parts and tires. The increase in the number of foreign-owned plants in the United States in the 1980s has contributed substan- tially to the transformation of the U.S. automotive sector, through technical advance and increased productivity, including the closing of older, non- competitive U.S.- owned plants and the opening of many new U.S.- and foreign-owned facilities. Foreign ownership in the auto- motive sector has spilled over from autos to trucks, parts, and tires. Indeed, most of the U.S. tire industry's facilities are now owned by foreign-owned U.S. affiliates. While the major geographic concentration of both U.S- and foreign-owned automotive plants has remained in the Great Lakes states, a substantial share has shifted to new manufacturing locations in the Southeastern states. Bureau of Economic Analysis (BEA) data also indicate that the foreign-owned automotive manufactur- ing operations are spending less on research and develop- ment than U.S. -owned producers. Moreover, compared with all U.S. manufacturing affiliates, the automotive manufacturing U.S. affiliates record a large and growing overall trade deficit, particularly with their foreign parent firms, mainly due to the extensive use of imported inputs to their manufacturing operations. ■"Industry Economist in the Office of Business Analysis, Economics and Statistics Administration, U.S. Department of Commerce. 'Foreign direct investment has been revalued from historical cost to current cost and market value bases at the aggregate level but not for individual industries. Hence, historical costs are used in the analysis. The Rise in U.S. Imports The United States is the world's largest market for autos, trucks, tires, and auto parts. This market is also the world's largest foreign market for foreign producers in Europe, Canada, and Asia. Their sales to this market have afforded their operations large economies of scale. In the 1970s and early 1980s foreign producers, particularly Japanese auto and tire producers, greatly expanded ex- ports to the U.S. market. However, those large export increases generated intense trade frictions between the United States and its trading partners, especially Japan. U.S. auto imports became an important competi- tiveness issue in the late 1970s, starting with the rapid expansion of their import share of the U.S. small-car market. German cars, mostly Volkswagens, were the first wave of imports in the early 1970s, but were quickly overtaken in the late 1970s by a surge of small cars from Japan. The import share of U.S. new car sales increased rapidly from 15 percent in 1970 to 27 percent in 1980 (Figure 7-1). Japanese-produced autos now dominate the U.S. import market, rising from 4 percent of U.S. sales in 1970 to 22 percent in 1980, and roughly stabilizing at that Figure 7-1 Japan Dominant Supplier of U.S. Imported Auto Sales Since 1 978 Percent 35 30 25 20 IS 10 Total Imported Cars 1970 1975 1980 1985 1990 Sources: Wards Automotive Reports, and U.S. Department of Commerce, Office of Automotive Affairs. 52 level thereafter. The Japanese began voluntary restraints on exports of autos to the United States in 1981, and this appears to have restrained their market share. The Japanese restraints on autos exported to the United States are frequently cited as the cause of the shift in the composition of imported Japanese autos toward more expensive, and more profitable, models and as having played a major role in the decision of Japanese auto producers to invest in U.S. auto production facilities. However, these events might have occurred in any case as a natural extension of the shift to higher value-added output and the rising cost of production in Japanese plants. Establishing U.S. affiliates was the most expedi- tious means for Japanese auto producers to circumvent the sales limits set by the VRAs. U.S. production also helped free-up the intra-company rigidity in U.S. market shares imposed by the Japanese government allocations under the restraints. The risk of expanding production to the United States was greatly reduced by the Japanese compa- nies' already well established U.S. retail and wholesale distribution networks and strong U.S. consumer accep- tance of their products. By 1990, six Japanese auto producers owned seven U.S. auto manufacturing affili- ates, including their joint production with U.S. producers. The rise of Japanese auto production in the United States in the 1980s created additional trade frictions that spilled over from the large rise in those plants' use of Japanese-produced importedparts. Auto parts had already become a sensitive issue because of the U.S. automotive parts producers' difficulty in obtaining certification by Japanese auto producers as authorized suppliers of repair and replacement parts for Japanese brand autos. Auto parts became an increasingly important component of total U.S. automotive imports from Japan, shifting from 14 percent of the total in 1 9 83 to 3 2 percent in 1 9 89 . The new trade friction in automotive parts led to their selection as one of the industries for the annual Market-Oriented Specific-Sector (MOSS) talks with Japan, which began in 1985. Partly in response to trade frictions over U.S. auto parts imports and U.S. industry complaints about lack of U.S. -produced content, a wave of U.S. investment by Japanese auto parts producers occurred in the second half of the 1980s. Industry Scope This chapter covers all foreign-owned affiliates in the United States that mainly manufacture automotive products. It does not cover affiliates that mainly wholesale automotive products. A key problem impairing analysis of U.S. foreign-owned affiliates in the automotive sector is the definition of the automotive parts and accessories sector. BEA data on U.S. affiliates in this sector are restricted to enterprises whose principal business is motor vehicles and accessories production under Standard In- dustrial Classification (SIC) 371. However, the actual scope of the industry is far larger, including the very large number of U.S. affiliates mainly producing products for use in motor vehicles, such as tires, stampings, windows, bearings, seats, air conditioners, and other parts, but classified in BEA data under other SIC groups. Prior to 1 988, except for benchmark years, the BEA data also do not, for enterprises that are mainly wholesal- ers, differentiate between their establishments engaged mainly in wholesaling and those mainly in production. For example, the principal business of two major Japanese- owned U.S. affiliates is the wholesaling of autos (includ- ing imported autos). As a result, the BEA data on U.S. affiliates in the automotive manufacturing industry ex- clude the manufacturing portion of these two enterprises and substantially understate the actual operations of all U.S. affiliates producing autos. In the benchmark surveys and from 1988 onward, BEA has been collecting data by industry of sales that distinguish between wholesaling and manufacturing, but has not been publishing the data cross- classified by industry of affiliate at a detailed industry level. An additional problem is that the BEA data on U.S. affiliates included in that industry provide no disaggrega- tion between U.S. affiliates producing autos and those producing auto parts. The effect of the characteristics of the SIC classifi- cation system, the composition of the affiliates manufac- turing versus wholesaling operations, and the restriction on publishing data to avoid disclosure of individual busi- nesses' operations on the availability of BEA data on the sales by the automotive manufacturing industry is illus- trated for 1988 in Table 7-1. Completion of the data link project will help reduce these problems. The following sections on the automotive manufac- turing industry that are based on BEA data reflecting the narrower SIC definition of the motor vehicle and equip- ment industry (SIC 73 1) are so noted. Where feasible, the following sections also discuss the operations of this industry on the basis of a broader data base compiled by the Office of Business Analysis (OBA) of the Economics and Statistics Administration, and are so noted. U.S. Affiliates' Growth The stock of investment in property, plant and equipment by U.S. automotive manufacturing affiliates (according to BEA data) grew rapidly from SI .4 billion in 1980 to $4.0 billion at the end of 1988 (Figure 7-2). 2 Investment by Japanese-owned firms has dominated the total, and by 1988 their share of the total annual invest- ment by U. S. automotive manufacturing affiliates reached 85 percent and their share of the accumulated stock of the affiliates total investment reached 67 percent. U.S. affiliates' automotive manufacturing sales (according to BEA data on an industry of sales basis) increased from $6.7 billion in 1980 to $ 1 6 billion in 1988. 2 PP&E data are based on historical book value, and may understate their current market value. 53 Table 7-1 Selected BEA Data on Sales of Motor Vehicles & Equipment in 1 988 By U.S. Foreign Owned Affiliates, By Industries Of Affiliate & Sales (In billion dollars) Industry of Sales Industry of Affiliate All "Other Manufacturing" Wholesaling All Industries Total Of Which Total Of Which Motor Vehicles Motor Vehicles & Equipment & Equipment Manufacturing Wholesaling Other All industries 853.3 Motor vehicles & equipment manufacturing (SIC 371) 15.9 Other motor vehicle equipment manufacturing * * Not published. Source: Bureau of Economic Analysis. 76.2 6.4 7.2 309.7 8.8 83.7 467.4 0.7 and accounted for 7.3 percent of the total U.S. automotive manufacturing industry's sales in 1988 (Figure 7-3). Sales by these U.S. affiliates increased faster than employment in automotive manufacturing in the 1980s, partly because the new auto facilities of the affiliates relied heavily on imported parts. In 1 988, sales by Japanese-owned affiliates reached $8.6 billion , and ac counted for over one-half (54 percent) of the total U.S. affiliates' automotive sales, followed by German-owned affiliates at $2.4 billion (8 percent) and French-owned affiliates third. U.S.-produced content. Many observers are con- cerned over the extent that U.S. affiliates rely on use of imported inputs in the production of their output. Japa- nese-owned affiliates have been increasing the U.S.- produced content of their U.S. production, according to the U.S. General Accounting Office. 3 The GAO report also indicates that the U.S.-content share of output by Japanese-owned U.S. auto affiliates increased by one- fourth in one year - from 3 8 percent in 1988 to 50 percent in 1989. This share was still far below the U.S.-content in U.S.-owned auto plants, which averaged 88 percent in 1989. U.S. affiliates' employment in U.S. automotive manufacturing (according to BEA data on industry of sales basis) appears to have only varied little during the 1980s - reaching 64,000 in 1988, up only slightly from 59,000 workers in 1980 (Figure 7-4). The reported number of workers employed by these U.S. affiliates equalled 7.5 3 U.S. General Accounting Office. Foreign Investment: Japanese-Affiliated Automakers ' 1989 U.S. Production 's Impact on Jobs. Washington, D.C., October 1990. Figure 7-2 U.S. Automotive Manufacturing Affiliates' Stock of PP&E Investment Billion dollars 1980 I9B7 1988 Source: Data by industry of affiliate, Bureau of Economic Analysis. Figure 7-3 U.S. Affiliates' Automotive Manufacturing Sales 1980 1987 1988 Source: Data by industry of sales, Bureau of Economic Analysis. 54 Figure 7-4 U.S. Affiliates' Employment in Automotive Manufacturing Thousands 1980 1987 1988 Source: Data by industry of sales, Bureau of Economic Analysis. percent of the industry's total employment in 1988. In 1988, (according to BEA data) Japanese-owned companies employed 23,100 workers, accounting for one- third of the total employed by all U.S. automotive manu- facturing affiliates — more workers than in any other nation's U.S. automotive manufacturing affiliates. The next largest groups — German-owned and United-King- dom-owned affiliates — each employed about 11,000 workers. Wages. In 1988, total compensation paid by U.S. automotive affiliatesto U.S. workers reached $1 .4 billion (according to BEA data). Compensation per employee averaged $40,100, substantially above the $33,700 aver- age paid by all U.S. affiliates in all manufacturing indus- tries, but less than the $44,550 average paid by all U.S. automotive manufacturing companies (Figure 7-5). How- ever, the average wages in the BEA data for U.S. affiliates are likely reduced by the relatively high proportion of lower-paid wholesaling employees included compared to U.S. automotive manufacturing companies. U.S. Affiliates' Concentration by Product Sector The following sections are based on OBA data obtained directly from published automotive industry sources. Table 7-2 U.S. Auto Production (In thousands of passenger cars) Company 1987 U.S. -owned: General Motors 3,603 Ford 1,830 Chrysler 1,109 U.S. affiliates: Volkswagen 65 Honda 324 NUMMI 44 Nissan 117 Toyota Mazda 4 Subaru-Isuzu Diamond Star Total, all producers 7,097 U.S.-owned 5,543 U.S. affiliates 554 U.S. affiliates' share (percent) 7.8 1990 2,653 1,377 726 435 204 95 211 184 32 148 6,069 4,757 1,312 21.6 Note: NUMMI is a GM- Toyota joint venture. Diamond Star is a Chrysler- Mitsubishi joint venture. Source: Ward's Automotive Reports. Figure 7-5 U.S. Automotive Affiliates' Average Annual Compensation per Employee Higher than other U.S. Affiliates, but Lower than All U.S. Automotive Manufacturing in 1988 Thousand dollars All U.S firms Auto affiliates All manufacturin| Sources: Bureau of Economic Analysis and Bureau of the Census. Autos The role of U.S. affiliates in U.S. auto production and sales has increased rapidly since the mid- 1 980s, with the rapid rise in the number of Japanese-owned U.S. auto producers. Honda began U.S. auto production in 1982 (for sale in 1 983), Nissan in 1 985 , the Toyota-GMjoint venture NUMMI plant in 1986, Mazda in 1987, Mitsubishi in 19 88, the Toyota wholly-owned plant in 198 8, and Subaru- Isuzu in 1989. In 1988, Volkswagen closed its Pennsylva- nia assembly plant, after only ten years of operations. The U.S. affiliates' share of U.S. auto production (including production in plants jointly owned with U.S.- owned auto producers) rose rapidly from 7.8 percent in 55 1987 (including Volkswagen), to 16.5percentin 1989, and 21.6 percent in 1990 (according to Ward's Automotive Reports) (Table 7-2). In addition, Japanese-owned affili- ates accounted for 19 percent of total U.S. production of pick-up trucks in 1990; they also produced light and heavy-duty trucks. According to the Japan Automobile Manufacturers Association, Japanese investment in U.S. auto production facilities reached $6.4 billion in 1989, and by the end of 1990 those U.S. facilities employed 26,653 workers. Several of those Japanese auto companies have announced future expansions in the United States. Auto Parts and Tires A survey of available sources by OBA indicates that U.S. affiliates mainly producing vehicles and automotive parts are accounted for under 50 separate 4-digit SIC industries. This survey found that in 1990, for the foreign- owned plants identifiable by industry of output, 75 percent of the production workers and 96 percent of the plants in the automotive manufacturing sector are those producing automotive parts. Moreover, of the estimated total num- ber of U.S. affiliates' 416 auto parts plants (with 126,640 workers), 57 percent were Japanese-owned, while Euro- pean and Canadian plants accounted for 58 percent of the total employment. During 1985-90, Japanese auto parts and tire manu- facturing companies wef e attracted to the United States by the growing presence of Japanese auto companies in this country and the sharply reduced relative cost of purchas- ing U.S. facilities resulting from the post-1984 dollar depreciation. During these 5 years, Japanese auto parts companies built or acquired an additional 200 plants. Many of these were small, start-up companies which partly accounts for the large number of plants relative to their number of employees in 1990. In contrast, European and Canadian direct invest- ment in the U.S. automotive parts and tire manufacturing industry began decades ago and has increased only slowly. To gain entry into the U.S. market, they tended to acquire large, existing, established U.S. auto parts firms. U.S. affiliates are widespread in most of the 50 separate auto parts producing industries. The largest concentration of U.S. affiliates, in terms of employment, is in the U. S. tire industry, with even more workers than are employed in affiliates producing autos. In 1990, U.S. affiliates producing tires employed 39,300 workers at 29 plants, with European-owned tire producers employing 60 percent of those workers at 55 percent of the plants. Moreover, U.S. affiliates appear to dominate U.S. tire production -- employing 62 percent of all U.S. production workers in the U.S. tire industry. After tires, the top ten industries in which U.S. automotive affiliates are located (in terms of employees) are stamping, glass, bearings, seats, automotive electrical equipment, auto air conditioners, engine parts, rubber parts, and plastic parts. Considerable concern has been expressed by U.S.- owned auto parts producers about vertical linkage be- tween U.S. affiliates producing autos and those producing auto parts, particularly between Japanese-owned firms. Detailed public data are not readily available on a consis- tent comprehensive company-by- company basis to clearly identify the extent of such linkage. Nevertheless, such information as is available suggests there is some vertical linkage between Japanese-owned U.S. affiliates that ap- pears to somewhat parallel that in Japan, as it appears to extend upstream to various U.S. parts producers and is clearly linked downstream to U.S. auto wholesalers. Japanese-owned U.S. automotive manufacturing operations increased from 39 in 1984 to 276 in 1990 (Figure 7-6). By 1989, of the total 168 Japanese-owned U.S. affiliates producing automotive parts, over 40 per- cent (69 U.S. affiliates) were owned by Japanese parent auto companies. Moreover, the 99 "independent" Japa- nese-owned U.S. automotive parts affiliates tended to have long-term supplier relationships with the parent Japanese auto producers in Japan. 4 Technology Progress Technology Transplants Some of the Japanese-owned U.S. automotive affili- ates have contributed to U.S. productivity growth by bringing to the United States the world's ' 'best practices" production technology — in effect transplanting technol- ogy. Because Japanese-owned plants are newer than U.S. - "•Phyllis A. Genther and Donald H. Dalton. Japanese Direct Investment in U.S. Manufacturing. U.S. Department of Commerce, Washington, D.C., June 1990. Figure 7-6 Number of Japanese-owned Automotive Plants Rose Rapidly in the 1 980s 300 250 200 ISO 100 50 1 980 82 Sources: U.S. Department of Commerce, Japanese Direct Invetment in U.S. Manufacturing, June 1990. 56 owned plants, their state-of-the-art production processes tend to be more efficient than those in most older U.S.- owned and other foreign-owned U.S. plants. R&D Spending In contrast to their contribution through trans- planted technology, spending on research and develop- ment by U.S. automotive affiliates (according to BEA data) has lagged well behind that by U.S. -owned automo- tive producers. Notwithstanding the U.S. affiliates' sub- stantial share of total U.S. auto production, they spent only $50 million on R&D in 1988, compared to $7.3 billion by all U.S. automotive companies (according to the National Science Foundation) (Figure 7-7). Moreover, the 1988 spending by U.S. automotive affiliates was only slightly more than one-half the nearly $90 million level they spent in 1980. Critical Technologies — Robotics A number of key critical technologies are embodied in the production equipment and in the parts and compo- nents used in the production of autos. Among these are robotics, electronics, and new materials. The advent of, and intense competition afforded by, both imported and U.S-produced foreign brand autos appeared to strongly influence the timing, speed and extent to which US- owned auto producers adopted and embodied the use of these technologies. Also influencing their adoption were government gas economy and pollution standards. Robot technology is one of the 12 critical emerging technologies identified by the U.S. Department of Com- merce Technology Administration. The rapid accelera- tion in the U.S. automotive industry's adoption of robotics technology in automotive production was highly moti- Figure 7-7 U.S. Automotive Mfg. Affiliates' R&D Spending Million dollars 100 I960 1987 1988 Source: Bureau of Economic Analysis. vated by the need to reduce costs and improve quality of output. The automotive industry is the largest world-wide user of industrial robots, accounting for about 50 percent of all U.S. robot installations. 5 While the U.S. robotics industry has depended on sales to the auto industry to support early technical devel- opments, the dramatic growth in the U.S. automotive industry's demand for robots has been supplied primarily by imports. The stock of robots installed in all U.S. industries rose dramatically from about 6,000 in 1981 to 39,000 in 1990. However, of the 3,300 additional robots installed in the U.S. plants in 1990, only about 19 percent were assembled in the United States, and most of those were assembled from imported mechanical components. The U.S.-produced contribution to U.S. robot assembly is now largely limited to supplying controllers, sensors, and software. In 1 989, of the total number of robots assembled in the United States, probably less than one-tenth (about 200) were installed in automotive plants. Moreover, about nine-tenths of the robots installed in U.S. automotive plants in 1989 were foreign- produced. The advent of Japanese-owned U.S. auto plants may not have contributed significantly to the failure of U.S. robot producers to capture a large share of the dramatic growth of the U.S. auto production requirements for robots. Foreign robot production, particularly Japanese produced robots, has amply demonstrated a dominant price and reliability competitiveness edge in supplying robots not only to Japanese-owned, but also to U.S. -owned auto plants. Indeed, GMF Robotics, a joint venture with production facilities in Japan between General Motors and Fanuc of Japan, is the predominant supplier of robots to GM's auto assembly plants. The 60 to 70 U.S. robotics companies are relatively small compared to similar Japanese companies, and spe- cialize in the advanced technologies for sensors and manufacturing software. The sensors are used in robot arms for vision, heat detection, and proximity. U.S. companies also produce the world's most advanced and creative computer software forlinkingrobotsandmachine tools on the factory floor. Moreover, nearly all of the U.S. robotics companies have established international coop- erative arrangements with foreign robot producers to reduce risk, share development costs, and expand markets. National Ownership Concentration U.S. affiliates in the automotive sector have tended to concentrate, depending on their country of ownership, in particular product sectors. All U.S. affiliates now producing autos are Japanese, as Volkswagen closed its Pennsylvania plant in 1988, and Renault sold its equity position in American Motors to Chrysler in 1989. 'Page 39, in U.S. Department of Commerce. Bureau of Export Administra- tion, Office of Resource Administration. Strategic Analysis Division. National Security Assessment of the U.S. Robotics Industry. Washington. D.C., March 1991. 57 Trucks Automotive Parts U.S. affiliate production of large trucks is domi- nated by European companies, while Japanese companies specialize in pick-up trucks. Renault of France has had a direct interest in Mack trucks since the late 1970s and gained full control of the firm in 1990, while Volvo of Sweden acquired White Consolidated truck division in 1981 and formed a joint venture with General Motors to manufacture "class 8" trucks in 1988, and Daimler Benz of Germany acquired Freightliner in 1981. European companies from Sweden, France, and Germany became U.S. producers through acquisition of integrated U.S. heavy-duty truck assembly and parts manu- facturing. Japanese companies have constructed new U.S. truck assembly plants, but rely on U.S. contractors for most of their truck parts and import their truck engines from Japan. Nissan and Subaru-Isuzu built new U.S. facilities to manufacture pick-up trucks, and in 1990 accounted for nearly 20 percent of total U.S. production of light trucks (according to Ward's Automotive Reports). Tires French, German, and Italian companies account for most of the U.S. affiliate production of tires. Michelin (France) built five U.S. manufacturing facilities in the 1980s, and in 1990 acquired Uniroyal-Goodrich. Other acquisitions of U.S. tire companies in the 1980s include Continental AG's (Germany) purchase of General Tire, and Pirelli's (Italy) purchase of Armstrong. Since 1987, Japanese tire companies have purchased Firestone, Mohawk, and Dunlop UK and its U.S. subsidiary. Table 7-3 U.S. Tire and Auto Parts Producing Affiliates in 1990 Country of Ownership Tires: Total Japan Europe Canada Parts: Total Japan Europe Canada Plants Production Workers 29 39,400 12 15,258 17 24,150 386 87,240 225 37,992 143 24,150 18 3,060 Source: U.S. Department of Commerce, Economics and Statistics Admin- istration, Office of Business Analysis. U.S. parts-producing affiliates of some nations are highly concentrated in some auto parts industries. For example, with the acquisition of Libby Owens Ford's automotive glass division by Pilkington Brothers PLC, the U.K. -owned affiliates specialize in windows; Japanese- owned affiliates have also focused on glass production. Auto seat production is dominated by Luxembourg- and Japanese-owned plants. U.S. affiliates in automotive stamping are mainly Canadian- and German-owned, while bearings are mainly produced by Swedish- and Japanese- owned plants. Japanese-owned plants account for nearly all of the affiliates' production of auto air conditioning, auto audio equipment, plastic parts, and safety equipment. German- owned affiliates, such as Robert Bosch, have concentrated on fuel-injection systems, and account for nearly all of the foreign-owned U.S. production of pistons, valves, and water and fuel pumps. U.K.-owned affiliates have also concentrated on automotive pollution controls through acquisition of the Robert Shaw Controls division. The European-owned plants tend to be larger plants with more workers and the Japanese-owned plants tend to be smaller start-up plants (Table 7-3). State Location of U.S. Affiliates U.S. automotive affiliates are heavily concentrated in the large automotive states in the Mid- West, such as Michigan, Ohio, and Indiana, although at least some are in a total of 34 states. In 1990, most U.S. affiliates were in the seven states with foreign-owned, or joint U.S.-Japa- nese-owned auto or truck assembly plants, with 67 plants in Ohio employing 22,540 production workers, followed by Tennessee with 44 automotive plants employing 17,595 workers. Both of these states had large Japanese auto assembly plants, which attracted large numbers of Japa- nese-owned auto parts suppliers that provide "just-in- time' ' delivery. Over 70 percent of the Japanese automo- tive foreign direct investment was in Ohio. The Toyota plant in Georgetown, Kentucky also attracted foreign- owned suppliers, with Kentucky ranking fifth largest in foreign-owned automotive investment. Large European investments are in South and North Carolina, with South Carolina ranking fourth among states in automotive foreign direct investment, primarily due to Michelin's four large tire plants, two auto parts plants owned by Robert Bosch of Germany, and the relocation of Renault-owned (France) Mack truck headquarters. Some states, such as Kentucky, Tennessee, and South and North Carolina attract foreign investment be- cause of lower wage costs, partly because of less unioniza- tion of workers. These states also have offered significant incentives to recruit foreign-owned manufacturing plants. 58 Figure 7-8 U.S. Automotive Manufacturing Affiliates Strongly Increase Imports Million dollars 2,500 2,000 1,500 1,000 - 1980 1987 1988 Note: Imports in 1980 are not published to avaoid disclosure of individual companies' opoerations. Source: Bureau of Economic Analysis. Merchandise Trade According to BE A data, U.S. imports by U.S. auto- motive manufacturing affiliates have risen sharply to $ 1 .6 billion in 1987 and $2.0 billion in 1988 from that in 1980 when the number of reporting enterprises was too small to allow publication by BEA (Figure 7-8). Moreover, the actual imports by all U.S. automotive manufacturing affiliates in 1 988 was probably much higher than reported by BEA data, as those data exclude imports by two major U.S. affiliates assembling autos that are classified as wholesalers. Japanese-owned enterprises account for most of the U.S. imports by U.S. automotive manufacturing affiliates. U.S. Bureau of the Census trade statistics on U.S. -Japa- nese automotive trade show a decline in imports of ve- hicles in recent years, as affiliates increased their U.S. production, but this decline in auto imports has been offset by a far larger increase in imports of auto parts. Japanese purchases of U.S. tire companies, such as Firestone, also appears to have facilitated imports, as the acquisition of their U.S. retail distribution networks pro- vides a direct outlet for sales of Japanese-made tires. Imported tires may also be installed on Japanese brand autos assembled in the United States. Imports of Japanese- produced tires have risen over 50 percent since 1986. In contrast to imports, exports by U.S. automotive manufacturing affiliates were far lower in 1987 ($360 million) and in 1988 ($450 million) than the $1 .0 billion exported in 1980. Moreover, in 1988, exports by U.S. manufacturing affiliates were small relative to their total sales (2.8 percent) and relative to total U.S. automotive exports of $25.9 billion (3.9 percent). Indeed, the export share of their sales was far smaller than the export share of the total U.S. automotive sector's sales (12 percent). On balance, the U.S. automotive manufacturing affiliates have had a rising trade deficit, reaching $1.2 billion in 1987 and $1.6 billion in 1988. Most of then- imports are from their parent firms, while virtually none of their exports are to their parents. As a result, the trade deficit with their parents is larger than their overall deficit, reaching $1.4 billion in 1987 and $1.7 billion in 1988. 59 8 FOREIGN DIRECT INVESTMENT INTHE U.S. STEEL INDUSTRY by John T. Harrington Rapidly rising foreign direct investment in the U.S. steel industry in the 1980s occurred during considerable re- structuring within the industry and imposition of new U. S. steel import restrictions. By 1988, U.S. affiliates of foreign firms held interest in approximately 1 5 percent of the U.S. steel industry, as measured in terms of sales volume, compared to only about 5 percent in 1 980. The rate of foreignpurchases appears to have peaked in the mid 1980s, although occasional acquisitions continue to oc- cur. The bulk of this foreign investment has occurred in downstream facilities— specialized milling or alloy plants — where proximity to the customer is increasingly impor- tant and, in many cases, is on a joint venture or partnership basis. Japan replaced Europe as the major foreign investor in the U.S. industry during this period—each major Japa- nese steel firm made investments in the United States ~ while major French and Korean steelmakers also made significant acquisitions. The U.S. steel industry 1 faced very difficult finan- cial conditions in the early 1980s. Beset by a recession fostered decrease in aggregate U.S. demand for steel, Figure 8-1 Total U.S. Steel Mill Product Shipments and Imports, 1980-90 Million short tons 100 80 60 40 20 Shipments Imports 1980 82 84 86 88 Source: American Iron and Steel Institute and U.S. Department of Com- merce. world-wide overcapacity, and continued strong U.S. steel imports during this period (Figure 8-1), the U.S. steel industry accumulated net operating losses of $ 11.6 billion from 1982 through 1986. 2 By the end of 1985, 20 percent of U.S. steel making capacity was owned by companies operating under bankruptcy protection. Employment plunged from 512,000 in 1980 to only 277,000 in 1988 (Figure 8-1). The huge losses suffered by the industry lowered credit ratings and damaged investor confidence. In par- ticular, the large integrated manufacturers that manufac- ture raw steel out of iron ore could raise little of the investment capital needed to upgrade their facilities to levels technologically competitive with foreign firms. Credit that was obtained on the bond market came at high interest rates, in many cases exceeding 1 5 percent on an annual basis. 3 As a result of the industry's poor earnings and its difficulty in raising capital, investment in plant and equip- ment fell from $2,650 million in 1980 to only $862 million in 1986, leaving the industry starved of capital and with an aging technological base. 4 Considerable investments have been made since then and many older plants have been shut down, rationalizing the industry and enhancing its competitiveness. Even so, one American steel executive in 1990 still placed industry capital requirements at be- tween $10 and $15 billion, for the industry to regain a competitive position in world markets. 5 *Industry Analyst in the Office of Metals, Minerals and Commodities, Trade Development, International Trade Administration. 'The steel industry is defined in this report under SIC code 331 as blast furnaces and steel mills and manufacturers of ferro-alloys and non-ferrous alloys by electrometallurgical processes, steel wire and nails, cold-rolled steel, and steel pipe and tube. Foreign direct investment has been revalued from historical cost basis to current cost and market value bases at the aggregate level but not for individual industries. Hence, historical costs are used in the analysis. 2 1989 Annual Statistical Report (Washington: American Iron and Steel Institute, 1990), p. 7. 3 David J. Cantor, "Foreign Direct Investment in the U.S. Steel Industry," Foreign Direct Investment Effects on the United States, Committee on Banking, Finance and Urban Affairs, House of Representatives, (Washing- ton: U.S. Government Printing Office, 1989) p. CRS-106 4 American Iron and Steel Institute, p. 12 5 George W. Hess, "Federal Budget Deficit tops AISI's List," Iron Age, July 1990, p. 8. 60 Motives for Foreign Investment in the United States The difficulties faced by U.S. steel producers in the early 1980s led them in many circumstances to seek outside capital and technology, according to a survey conducted by the International Trade Commission in 1989. 6 Foreign steel companies, moreover, could see important advantages in owning production and process- ing facilities in the United States. These perceived advantages included: o Size and accessibility of the U.S. market. The United States is the second largest consumer of steel after the Soviet Union, and thus an impor- tant market for gaining economies of scale, diver- sifying risks, stabilizing earnings across borders, and exploiting firm-specific competitive advan- tages in technology and capital. o U.S. import restrictions. After 1984, when the United States began negotiating voluntary export restraint agreements (VRAs) with major steel exporting countries, foreign steel exporters real ized that U.S. based production facilities would ensure their access to the U.S. market. o Instability of the dollar. The large swings in the relative values of international currencies and in energy and raw material prices in the early through mid 1980s, demonstrated the need for foreign steel producers-especially Japanese firms which import virtually all of their coking coal and iron ore requirements— to reduce risks by investing in production facilities in the U.S. o Rising overseas production costs. European and Japanese integrated steel firms face con- straints on expansion in their home markets, including rising labor costs, escalating wage rates, high land and energy prices, and environmental controls, all of which have increased their pro- duction cost structure at home relative to the United States. o Customer service requirements and technol- ogy advances. Foreign firms recognize that increasing demands from steel consumers for customized products— made economically pos- sible by computer aided manufacturing and de- sign — is shifting the industry from a producer- oriented, price-based commodity market to one with a stronger customer orientation, better served i U.S. Global Competitiveness: Steel Sheet and Strip Industry (Washington: United States International Trade Commission, January 1988), Chapter 1 1 , p. 13. by local plants, which can better guarantee a stability of supply. o Relocation to the United States of long term clients. New U.S. facilities built by foreign firms, especially in the steel-intensive automo- bile sector, have drawn associated foreign steel suppliers to follow with investments in the United States. Foreign steel companies have been prompted to follow traditional customers to the United States either at the urging of compatriot firms who want a supplier familiar with their products requirements or in order to regain steel sales lost in domestic markets. Foreign Direct Investment Growth Foreign direct investment in the U.S. steel industry has increased markedly over the past decade and has been a major source of capital for the U. S. industry. Whether measured in terms of plant value, sales, or employment, the foreign affiliated share of U.S. steel production rose from 3-5 percent in 1 980 to 15-18 percent in 1 988. Foreign firms control less of the U.S. industry, however, consider- ing that a large number of these affil iates are j ointly owned with U.S. firms. Gross Property, Plant, and Equipment Gross property, plant, and equipment (PP&E) of steel-making affiliates of foreign companies in the United States was assessed at $1.7 billion in 1980 at historical book value, or about 6 percent of total domestic steel industry PP&E, according to BEA and Bureau of Census data. 7 By 1988 this value had increased to $6.2 billion, or 17 percent of the Census compiled total of $36.4 billion. (Figure 8-2). 8 Japanese-owned U.S. steel affiliates held $3.2 bil- lion in gross PP&E, about 9 percent of the U.S. industry total. European-owned affiliates held $919 million in PP&E, less than 3 percent of the industry total. Excluding property, by 1988, U.S. affiliates owned $6.2 billion in plant and equipment assets, or approxi- mately 17 percent of a total $35.3 billion in book value of plant and equipment at the end of 1988 for the entire steel industry. Another indication of the growth in foreign direct investment in the U.S. steel industry is represented by the cumulative value of net foreign capital transferred to the U.S. based affiliates from their overseas parents. This 7 As PP&E data are based on historical book value, they may be understated in current market terms. ^Quarterly Financial Report for Manufacturing. Mining, and Trade Corpo- rations (Washington, Bureau of the Census. Department of Commerce, various issues) pp. 34-36. 61 Figure 8-2 U.S. Steel Affiliates' Total Assets and Sales, 1 977-88 Billion U.S. Dollars 10 1977 79 81 83 Source: Bureau of Economic Analysis. 85 87 grew from $554 millionin 1980 to $2,927 millioninl989. 9 Sales Steel sales by U.S. affiliates of foreign companies increased more than three times from $2.8 billion in 1980 to$9.5billioninl988.RelativetototalU.S.steelsales,the foreign companies in 1988 held roughly 17 percent of U.S. steel industry sales of $54.5 billion, up from only 3.5 percent of industry wide sales of $78.0 billion in 1980. If over $1 billion in sales by two companies with foreign parents in Bermuda and the Netherlands Antilles that are ultimately owned by U.S. firms are excluded in 1988, foreign affiliate market share of industry sales was ap- proximately 15 percent in 1988. 10 Figure 8-3 U.S. Steel Affiliates' U.S. Employment, 1977-88 Thousand Employees 1977 79 81 83 85 87 Note: Industry of affiliate basis. Source: Bureau of Economic Anslysis. Employment In 1988, U.S. affiliates of foreign companies em- ployed 51.5 thousand workers in the manufacture and sale of steel, of which 38.4 thousand worked for affiliates whose primary business was in the steel manufacturing. This represents a 70 percent increase since 1980 but the majority of the increase occurred in 1984 alone. Employ- ment by the affiliates remained static after 1984. Of 277,000 U.S. workers in 1988, foreign affiliates ac- counted for about 18 percent, versus 5 percent in 1980 when industry employment averaged 512,000 workers." Wage rates for employees of U.S. affiliates of for- eign companies in the steel industry are generally compa- rable to or higher than the average for the industry. According to BE A data, in 1988 the annual salaries and wages of all employees of U.S. steel affiliates averaged $33,541 . Although not wholly on the same basis, this rate compares with an average of $31,963 for production workers in the industry as a whole. Only about 54 percent of the employees of the U.S. based affiliates~2 1,000 out of 39,300 in 1987—were covered by collective bargaining agreements, however, compared to 76 percent for the industry as a whole-an estimated 155,000 out of 202,900 (Figure 8-3). n Employment by U.S. steel industry affiliates is mainly concentrated in the Great Lakes states (which had one-third of the total in 1988), and in the individual states of Pennsylvania, California, and Georgia. Sources of Investment Growth BE A data for U.S. affiliates of foreign companies indicates that Japan was the largest direct investor in the U.S. steel industry in the 1980s — a shift away from Europe and Canada and towards Japan. The stock of PP&E of Japanese-owned affiliates jumped from only $89 million in 1980 to reach $3.2 billion by 1988, while the PP&E of European-owned affiliates declined from $1.1 billion to $0.9 billion. This shift is not surprising as the eight largest Japanese steel firms realized accumulated profits of $7.8 billion during 1978-88, and thus possessed ample funds for foreign investment, while the 12 largest European Community steel firms ran cumulative losses of $25.6 billion. 13 French companies, nevertheless, moved up to become the second largest U.S. investors in the steel industry between 1980 and 1988, primarily through acqui- sitions in the United States by their state-owned steel conglomerate. 'For years 1980-84, see Survey of Current Business, Bureau of Economic Analysis, Aug. 1985, p.65. For years 1985-89, see Aug. 1990, p. 54. 10 Ibid. 11 Supplement to Employment and Earnings (Washington:U .S. Department of Labor, Bureau of LaborStatistics) 1980 data, July 1984 issue, p. 5 1 ; 1988 data, August 1989 issue, p. 41 and 42. 12 Estimate by the United Steelworkers of America. u Steel Strategist no. 77(NewYork: Paine Webber Inc., Feb. 1991)p. 118. 62 These data tend to exaggerate Japan's share of the total stock of foreign investment, since they are based upon the book value of gross property, plant, and equip- ment, which understates older and mostly European and Canadian investments. Japan's rising share of investment in the industry between 1980 and 1988 is also reflected, however, in its share of industry sales and employment. Japanese owned affiliates accounted for $3.5 billion or 6 percent of industry-wide sales in 1988 while European owned affiliates accounted for $2.8 billion or 5 percent (Figure 8-4). Japanese Investment— A Dominant Factor Publicly available information indicates that Japa- nese direct investment in the U.S. steel industry began in 1968 with Sumitomo Metal's acquisition of a 10 percent stake in a small California tube manufacturer. Major investments, however, did not begin until 1984 when the United States signed a voluntary restraint agreement (VRA) with Japan, limiting Japanese steel exports to the United States. In August, 1984, just prior to that agreement, NKK, one of the top five steelmakers in the world, acquired 50 percent of National Steel after the U.S. Justice Department had disallowed a bid for National by US Steel on antitrust grounds. That same summer, Nisshin Steel, an affiliate of Nippon Steel, the world's largest steelmaker, entered into a contract with Wheeling Pittsburgh Steel to build a galvanizing line in the U.S. to serve the automotive sector while Kawasaki Steel and the Brazilian steel manufac- turer, CVRD, each purchased a half share in Kaiser Steel's largely closed Fontana, California steel mill. Some of these investments were less than com- pletely successful as many problems developed with Figure 8-4 U.S. Steel Affiliates' PP&E, by Country of Ownership, 1980-88 Billion dollars Europe Source: Bureau of Economic Analysis Canada & Other Countries Japan regard to labor and the condition of the plants. Neverthe- less, numerous Japanese investments have continued since then; for example Kawasaki Steel obtained a 50 percent share of Armco in 1989 and Nippon Steel obtained 13 percent of Inland Steel in a 1990 stock swap. All five of Japan's integrated steel producers have thus made sub- stantial investments in American steel manufacturing facilities. According to the Japan Economic Institute, as of October 1989, of 34 announced investments in the U.S. steel industry, Japanese firms had established 6 wholly- owned new manufacturing subsidiaries, entered into 17 "greenfield" joint ventures, and acquired shares ranging from 33 to 85 percent in 1 1 existing plants or production lines with 8 different American firms. 14 Japanese firms have tended to favor establishing new plants rather than acquiring a stake in already existing manufacturing facilities. This preference for "greenfield" investments may reflect, in part, a desire by Japanese steel firms to exploit their technological advantages in produc- tion engineering. Much of Japanese investment in the U. S. steel industry is concentrated in plants which process raw steel, such as the manufacture of galvanized sheet or mechanical tubing for automobiles. With the exception of NKK's majority interest in National, Kawasaki Steel's 50 percent stake in the Eastern Steel Division of Armco, and Kobe Steel's 50 percent interest inUS Steel's Lorain, Ohio plant, Japanese firms have little exposure to the primary "hot-end" sector of the industry where raw steel is produced and where issues related to the environment and obsolete facilities tend to arise. Japanese-U.S. Joint Ventures Japanese direct investment in the U.S. steel industry has, for the most part, taken the form of joint ventures with existing American steel firms. Exceptions include NKK's equity interest in National, the reciprocal stock swaps between Nippon Steel and Inland Steel, and the outright purchase of several small specialty steel manufacturers. The U.S. partners' motivation for entering such joint ventures is clear— the availability of Japanese capital. For example, the Chairman of Inland Steel pointed to access to Japanese credit as the major reason for entering into its joint venture in 1987 with Nippon Steel. 15 In most joint ventures, the American partners have contributed only a token amount of the initial investment. Out of the eight major joint ventures between Japanese steel firms and U.S. integrated firms, totallingover 1 6 million metric tons of annual production capacity, the Japanese have invested or plan to invest an initial total of $2.04 billion against only $155 million by the American partners, even though the parties typically have equal equity shares." "Japan's Expanding U.S. Manufacturing Presence (Washington: The Japan Economic Institute, October 1989) pp.7 1-72. 15 Sallie Gaines, "Japanese Bankroll Resurgence of U.S. Steel Industry." Washington Post. 1 April 1990, p. 65. 63 In several U.S. specialty product areas, many firms are already wholly foreign-owned. Nevertheless, Japa- nese investors generally seem to prefer entering into joint ventures with American steel manufacturers rather than to purchase them outright due to several economic and political factors. The financial burden of the very large capital requirements of a steel plant can be eased by sharing capital, technological and managerial expertise, sales networks, and customer bases to provide the synergy for decreasing business risks and increasing profit oppor- tunities. Perhaps more importantly, however, joint ven- tures are attractive to Japanese firms because of the ability to direct the investment along narrow product lines aimed at specific high-value markets. By legally separating their investment from less desirable portions of the American partner's assets, Japanese investors can hope to avoid the cost and political embarrassment of problems associated with under-funded pension plans, labor unions, employee layoffs, and environmental issues. Japanese sensitivity to the political ramifications of wholesale acquisitions of American steel manufacturers may be an additional motive for their preference for joint ventures. By engaging a local partner, Japanese firms ameliorate the perception that they are a competitive threat to domestic steel companies. Japanese Finance Much of the impetus for Japanese finance and in- vestment originally came from the U.S. side. Unable to attract capital in the early 1980s because of the steel industry's unprofitability, yet aware that only investment in new technology could make the industry competitive, American steel manufacturers began to accept supplier credits from Japanese machinery and steel firms. Urgent modernization projects were undertaken, in many cases using Japanese technology, to install continuous casting equipment, for example. In fact, in the early to mid 1980s, each of the U.S. integrated mills, with the exception of Bethlehem Steel, utilized Japanese financing to undertake modernization projects. Today, it is no coincidence that Bethlehem Steel remains the only integrated mill that does not have a joint venture with a Japanese steel manufac- turer. I6 The Japanese partners offered longer term, lower interest loans than American banks and in many cases were willing to lease equipment on easy terms. With their close links to Japanese banks and the Japanese steel industry, the Japanese steelmaking equipment suppliers had no difficulty in winning the bulk of steel plant mod- ernization orders. Labor Relations Japanese investors have generally left the responsi- bility of managing labor relations to their American partner. In the past, joint ventures have fallen under the company-wide collective bargaining agreements entered into by the American partner with laborunions. Other than California Steel, which is the joint venture between Kawasaki Steel and a Brazilian company, all major Japa- nese investments in the U.S. steel industry have retained unionized labor forces. Wage rollbacks have not been as much as an issue as in Japanese owned auto plants in the United States. Recently, however, there was an attempt by the Kobe-USS joint venture in Lorain, Ohio, to dissociate itself from the collective bargaining agreement negotiated between USS and the USW. Although the USW local ratified a contract with the Kobe-USS joint venture in February 1991, which is little different from the USS collective bargaining agreement, the attempt by the joint venture to differentiate itself from USS maybe indicative of future labor policy in the foreign-owned steel sector. 17 Previously, the joint venture between US Steel and the Korean company, Pohang Iron & Steel, managed to sepa- rate itself from the USS collective bargaining agreement and win considerable concessions from labor as a separate entity from USS. Japanese Technology The Japanese steel industry is in many applied technology areas, particularly production technology, more advanced than the U.S. steel industry. This is a result of close cooperation with steel mill machinery manufactur- ers and steel consumers, high levels of investment in R&D, and close attention to productivity to compensate for the relatively high cost of energy and raw materials in Japan. According to an American steel executive, as U. S. steel firms slashed in-house engineering departments to cut costs, the U.S. steel industry's start-up rates and learning curves for steel making technology fell consider- ably behind that of Japanese producers. I8 A comparison of corporate R&D expenditures as a percentage of net sales between Japanese and American steel producers between 1985 and 1989 show a marked competitive advantage in favor of Japanese firms, with Japanese-owned affiliates averaging four times more R&D spending per unit of sales than the industry as a whole. Influence of Automobile Industry Much of Japanese investment in the U.S. steel industry has been directed towards servicing the new automobile plants built by Japanese auto firms. A number H Annual Survey Concerning Competitive Conditions in the Steel Industry and Industry Efforts to Adjust and Modernize (Washington: International Trade Commission, October 1989) pp. M 2-3. ir USWOK'sUSS/Kobe Contract," American Metal Market, February 20, 1991, p. 1. '"Thomas J. Usher, "Steel Industry in the Nineties," Iron and Steel Engineer, February 1991, p. 26. 64 of new greenfield plants have been constructed which produce corrosion-resistant zinc or nickel-coated steel sheet for use in the manufacture of motor vehicle bodies. In Japan, auto-makers had long used thinner, less effective anti-corrosion coatings on automobiles due to the high cost of these electricity intensive products. They have, however, recently brought their standards up to U.S. automakers levels. 19 By 1993, Japanese- American joint ventures will have added approximately 3.5 million net tons of annual production capacity in coated steels, prima- rily for sale to auto manufacturers in the United States. 20 Although Japanese firms have provided technical assis- tance to American producers in the coating of steel since the late 1970s, the large volume of steel sheet required by transplanted Japanese automakers in the United States, over 2 million net tons annually by 1991, has attracted investment in the United States by Japanese steel firms familiar with the distinct product specifications of Japa- nese automakers. 21 Shared customer bases are particularly attractive for joint ventures producing high value added steel mill products for the domestic automotive industry. Due to the necessity of ensuring reliable and prompt deliveries of acceptable quality steel and the desirability of inter- industry cooperation in the design and production of automobiles and automotive parts, automotive firms strongly prefer to engage in long term supplier relation- ships with a very limited number of steel firms. American and Japanese automakers have in the last few years reduced the number of their steel suppliers in order to improve the consistency of steel purchases and to make communications with suppliers easier. The Japanese just- in-time inventory systems adopted by American automakers also require few suppliers. European and Canadian Investment While Japanese investment is the prominent foreign direct investment trend in the U.S. steel industry, other countries have been important sources of foreign invest- ment in American steel. France, in particular, through its 100-percent-state-owned steel conglomerate, Usinor- Sacilor, has since 1980 greatly expanded its presence in the U.S. steel industry. Usinor has become the largest steel firm in Europe through aggressive acquisitions and is close to becoming the largest firm in the world. Press reports indicate that in 1990, Usinor was the first foreign firm to acquire 100 percent ownership of a major U.S. steel firm— its $570 million buy-out of J&L Specialty Products, the second large st U.S. stainless flatware producer. Usinor also attempted to acquire a significant minority stake in LTV Steel, the third largest steelmaker in the U.S., but the negotiations fell through due to Usinor' s unwi 11 ingness to assume the pension obligations on which LTV had de- faulted in bankruptcy. Echoing the trend of Japanese steel firms to follow their compatriot auto manufacturers into the United States, Usinor last year purchased a 50 percent stake in Georgetown Steel, a maker of steel cord for use in tires, following the purchase of Uniroyal- Goodrich by the French tire maker, Michelin. 22 According to the press, Usinor, which benefited from an estimated $16 billion in subsidies from the French government during the steel recession of the 1980s, has resources to spend on overseas investments because it has not used up tax credits carried forward from that period. 23 British Steel, only denationalized in 1988, recently signed a letter of intent to study the possibility of forming a joint venture with Bethlehem Steel to produce rail and structural steel using Bethlehem's Steelton, Pennsylvania mill. 24 Last year, British Steel assumed full ownership of Tuscaloosa Steel in Alabama. European investment in the U.S. steel industry is generally concentrated in the specialty steel sector which manufactures alloy and stainless steel. To date, European firms have not made significant investments in, or entered into major joint ventures with American integrated steel manufacturers. Canadian investment in American steel has focused primarily on the mini-mill sector, which produces struc- tural steel using scrap-based electric furnaces. Several important American minimill companies, such as Atlantic Steel and Raritan River Steel, are controlled by Canadian firms. Most of this investment occurred in the early 1980s when the sector's financial and market prospects were optimistic in comparison to the U.S. integrated sector, which was under heavy attack by imports and laden with obsolete steel making capacity. International Trade Throughout the 1980s, the U.S. steel affiliates' for- eign trade was in deficit, but the deficit level was relatively small compared to that of the overall U.S. trade in steel products, at $422 million in 1988 compared with $5.6 billion (Figure 8-5). The U.S. affiliates' exports in the 1980s remained small -- much smaller than their imports — and their trend relatively flat, reaching $135 million in 1988. Imports doubled in the first half of the 1980s, reaching $639 million in 1985, and then tapered down to $559 million in 1988. The U.S. affiliates' exports decreased slightly in the 1980s, despite the sharp rise in foreign direct investment "Constance Grzelka in "The Driving Force behind Ford's Steel, "Automo- tive Steel Supplement, American Metal Market, 17 Dec. 1990, p. 18A. information provided by the Japanese Steel Information Center. 2[ Russ McCulloch, "Keeping the Automarket Covered," Metal Bulletin Monthly, May 1990, pp. 97-99. ^"UsinorSacilorMay Spend $1 Billion to Upgrade LTV's Sheet Produc- tion," Iron Age. May 1990, p. 10. a Laura Jercski, "A Gallic Threat to American Steel." Forbes. 26 Novem- ber 1990, p. 146. 2, Press release, Bethlehem Steel Corp.. 24 January 1991. 65 in the U.S. steel industry and the improved competitive- ness afforded by U.S. dollar devaluation after 1 984. Then- lagging export performance may be partly explained by their orientation towards supplying domestic U.S. steel consumers. The U.S. affiliates' exports constitute only 1 .4 percent of their sales in 1988, even less than the weak 4.0 percent for the steel industry as a whole. The European- owned U.S. steel affiliates had a greater propensity than Japanese affiliates to export, shipping 3.6 percent of their sales overseas in 1987, compared to only 0.2 percent for Japanese-owned affiliates. Publicly available information indicates that the U.S. steel affiliates have tended to be large importers of raw steel—especially the British Steel-owned Tuscaloosa Steel, California Steel, and the USS-Posco joint venture, all of which imported large quantities of semi-finished steel from their parent firms for finishing (according to press reporting). Analysis of affiliates' import character- istics is not feasible, as the BEA trade data, which are on an "industry of affiliate" basis, has not differentiated between imports of capital equipment and imports of raw steel over time. (Data are available only for 1980.) U.S. steel affiliates probably played a role, albeit small, in the overall trend in U.S. steel trade. Imports as a percentage of U.S. apparent consumption of steel mill goods in 1990 dropped to 17.5 percent, the lowest rate since 1980 and markedly down from the rate in 1984 of 26.4 percent. The decline in the overall U.S. steel imports and the rise in U.S. steel exports in the past few years is Figure 8-5 U.S. Steel Affiliates' Foreign Trade, 1 980-88 Million dollars 700 1980 81 82 83 84 Source: Bureau of Economic Analysis. probably primarily attributable to strong overseas demand and the decline of the dollar vis-a-vis the currencies of major trading partners. Some substitution of imports with domestic U.S. output is beginning to appear. This is particularly true as a result of the new "greenfield' ' plants, which are reduc- ing the need for imports of specialty coated steels. The best example of this effect may be seen in imports of galvanized steel sheet and strip from Japan, which have been cut in half in net tonnage terms since 1984, when major Japanese-owned galvanized steel joint ventures first came on stream. Japanese transplanted auto manu- facturers are under political pressure to increase the U.S.- produced content of their U.S. operations and have announced their intention to increase their U.S. parts procurement to 75 percent. 25 Some Japanese transplants, such as Nissan, expect to purchase close to 1 00 percent of their coated steel from U.S. output by 1991, when Japa- nese joint ventures with Armco and LTV are expected to meet Japanese grade and quality specifications. 26 U.S. imports of Japanese galvanized steel are expected to diminish further when additional U.S. galvanizing capac- ity comes on line, such as the 900,000 tons per year from the Inland-Nippon joint venture scheduled to begin in 1991. Research and Development Expenditures of U.S. Affiliates U.S. steel affiliates' expenditures on research and development have been negligible (according to BEA data) relative to the industry as a whole. The U.S. steel affiliates spent on R&D only $4 million in 1980 and $18 million in 1988, compared with the whole U.S. steel industry R&D spending of $338 in 1980 and $257 in 1988. As a ratio to sales, this amounts to only 0. 04 percent for the affiliates, compared with the industry-wide ratio of 0.6 percent. Nevertheless, the foreign parents of the affiliates spend large amounts on R&D in their own countries. The R&D spending to sales ratio of the top six Japanese steel making firms, for instance, was 2.7 percent of sales on R&D in 1989, and these foreign parents often bring their new technology to their U.S. affiliates. ^ Japanese Automotive Manufacturer Sales Expansion Programs, ( Wash- ington: International Trade Administration, 1990). M Bryan Berry, "Galvanizing Puts on New Coats", Iron Age, September 1989, pp. 55-56. 66 FOREIGN DIRECT INVESTMENT IN THE U.S. CHEMICALS INDUSTRY by Sandra D. Cooke and Susan M. LaPorte* and EmilyA.Arakaki** The chemicals industry is one of the most "globalized' ' of all U.S. manufacturing industries. 1 Foreign firms held substantial equity interests in approximately 24 percent of the U.S. industry in 1988, as measured in terms of sales volume, up from 15 percent in 1980. These chemicals- related investments, moreover, account for almost 30 percent of the entire foreign direct investment (FDI) assets held in the U.S. manufacturing sector. Increasing chemical production surpluses world- wide and a maturing market caused prices and profits to decline in the early 1980s, leading to a major restructuring of the industry. Opportunities arose for foreign multina- tionals to expand in the United States and they took advantage of it. The result has been unprecedented levels of foreign investment in the chemicals industry over the past decade. According to industry analysts, the U.S. chemicals industry has prospered from this increase in foreign activity, not in spite of it. The recent growth in foreign direct investment in the chemicals industry can be attributed to several factors. The large size of the U.S. chemical market and the importance of economies of scale have been major incen- tives for foreign direct investment, as also has the need for foreign companies to produce in the United States to lower transportation costs, especially for specialty chemicals, in selling to the U.S. market. Hedging against exchange rate fluctuations and spreading the industry's huge research and development costs over a larger sales volume, have also been important factors as well. The outlook for continued foreign investment in the U.S. chemicals market is excellent. European firms are expected to continue to increase their already large invest- ments while Japanese and developing countries' firms •Economists in the Office of Business Analysis, Economics and Statistics Administration. **International Economist in Basic Industries, Interna- tional Trade Administration. 1 For the purpose of this analysis, the chemicals and allied products industry is subdivided into four subindustries: Industrial Chemicals, which includes industrial inorganic chemicals (SIC 281) industrial organic chemicals (SIC 286) and plastics materials and synthetics (SIC 282); Drugs (SIC 283); Soap, cleaners and toiletries (SIC 284) and "Other" which includes agricultural chemicals (SIC 287), paints and allied products (SIC 285) and miscellaneous chemical products (SIC 289). Foreign direct investment has been revalued from historical cost basis to current cost and market value bases at the aggregate level but not for individual industries. Hence, historical costs are used in the analysis. have just begun to expand their shares of the world chemical market. Highlights: 1980-1988 BEA survey data indicate the following key trends in the performance of U.S. affiliates in the chemicals industry during 1980-1988: U.S. affiliates of foreign companies' share of chemicals industry sales grew from 15 percent to 24 percent. Employment related to foreign investments grew at a 6 percent annual rate compared to a 1 percent per year decline in the industry as a whole. Gross property, plant, and equipment (PPE) held by the affiliates grew from $18.3 to $58.2 billion. PPE per employee increased from $64,800 to $153,000, on a current dollar basis. Industrial chemicals consistently accounted for the highest share of sales, employment, and PPE. Investment outlays to acquire or establish new U.S. chemicals affiliates grew from $253 million to over $11 billion. Compensation per employee for U.S. based affiliates of foreign companies is comparable or slightly higher than that paid by the U.S. chemicals industry as a whole. R&D remained higher throughout the period for the affiliates than that of the industry as a whole—4.8 percent for affiliates in 1988 compared to 4.1 percent for the industry. Affiliates' export performance climbed to 1 1.2 percent of sales in 1988 from 7.6 percent in 1980, but was below the industry average which declined from 13.7 percent to 12.4 percent during this period. The pace of the affiliates' export growth was almost three times that of the industry as a whole. Unlike other industries, affiliates have a large positive trade balance— increasing from S3 89 million in 1980 to $2.3 billion in 1988. Canada was the largest investor in 1988. replacing West Germany which led in 1980. Other major investors include the United Kingdom, Switzerland o 67 and the Netherlands. Japanese firms continue to be relatively less important investors, o Foreign investments were concentrated in the Mideast, Southeast, and Great Lakes regions. New Jersey, California, Texas, and Delaware ranked among the top. Growth in Foreign Direct Investment in the United States Foreign firms have dramatically increased their presence in the United States chemical industry over the past decade, whether measured in terms of sales, employ- ment, or property, plant and equipment (PPE). Activity during 1980-88 The share of chemical industry sales held by U.S. based chemical affiliates of foreign firms increased from 15 percent ($24 billion) to 24 percent ($63 billion) from 1980to 1988, according to BEA data (Figure 9-1). Foreign penetration occurred over broad segments of the industry and was deepest in the industrial chemicals subindustry. Drugs and the "other' ' chemicals subindustries also marked large penetration gains. Foreign firms did not appear to select any one segment of the chemical industry for concentrated invest- ment; rather investments were spread across the industry in approximately the same distribution as were domestic U.S. investments. Somewhat more emphasis was placed by the affiliates on the industrial chemicals subindustry — comprising 54 percent of affiliate investment in both 1980 and 1988 compared to 49 percent for the industry as a whole in 1980 and dropping to 44 percent in 1988. Employment data provide additional evidence of growing foreign investment in the U.S. chemicals indus- try. U.S. chemicals affiliate employment rose from 1 69,900 in 1980 to 280,800 in 1988--an annual growth rate of 6 percent— as the number of foreign related firms increased. The U.S. chemicals industry as a whole, in contrast, recorded a decline of 1 percent per year during the same time period. The affiliates of foreign companies ac- counted for 15 percent of all U.S. chemicals industry employment in 1980, increasing to 26 percent in 1988 (Figure 9-2). The industrial chemicals subindustry ac- counted for over 45 percent of the total chemicals affili- ates' employment in both 1980 and 1988, followed by drugs, "other" chemicals, and soap, cleaners and toilet- ries (Figure 9-3). Figure 9-2 U.S. Chemicals Affiliates' Share of U.S. Chemicals Industry's Employment Rises, 1980 to 1988 Total Industrial Drugs Soap & toiletries Other Source: Bureau of Economic Analysis. Figure 9-1 U.S. Chemicals Affiliates' Share of U.S. Chemicals Industry's Sales Rises, 1980 to 1988 Figure 9-3 U.S. Chemical Affiliates' Employment Share Highest in Industrial Chemicals, 1980 & 1988 Total Industrial Drugs Other Sources : Bureau of Economic Analysis and Bureau of the Census. Industrial Drugs Soaps & toiletries Source: Bureau of Economic Analysis. Other 68 Gross property, plant, and equipment (PPE) held by U.S. chemicals affiliates increased from $18.4 billion in 1980 to $58.2 billion in 1988 (Figure 9-4) in current dollar terms. The industrial chemicals subindustry accounted for almost 80 percent of affiliate PPE in 1988, up from 61 percent in 1980. 2 While affiliate PPE in the drugs and soap, cleaners, and toiletries industries increased from 1980 to 1988, it declined considerably in the "other" category due most likely to the repurchase by a U.S. company of the foreign interest in a large agricultural chemicals affiliate firm. PPE per employee in the affiliates increased sub- stantially in each industry subgroup from 1 980 to 1 988, an indication that the affiliates are becoming more capital intensive. For the chemical sector as a whole, capital per employee increased from $64,800 in 1980 to $153,000 in 1988, an increase that far surpassed the increase due to price increases alone. Activity in 1989 each year there were significantly more acquisitions than establishments, indicating that foreign investors prefer to acquire existing U.S. companies rather than establish new production facilities. The ten largest foreign investment transactions in the chemicals industry, as compiled by the International Trade Administration, are summarized in Table 9- 1 . 3 In 1989, the value of identified chemical industry transac- tions totalled more than $15.7 billion, up sharply from the $3.0 billion in 1988. There were several acquisitions/ mergers of pharmaceutical companies during 1989, the largest of which involved a merger between a British and a U.S. pharmaceutical company, valued at $8.2 billion. Four of the ten largest transactions were in the drugs industry. Six of the ten transactions were acquisitions or mergers and the other four were either equity purchases or new plants. Characteristics of Chemicals Affiliates The most recent Bureau of Economic Analysis survey data available at time of preparation of this report covered only through 1988. Foreign acquisition activity continued in 1989 at a record rate, however. Separate BE A data on the flow of funds from foreign investors into the U.S. chemicals industry show the dramatic additional growth in 1989, for which preliminary data show a more than three-fold increase— the result of one very large transaction. These investment outlays to acquire or estab- lish chemical firms in the United States increased from $253 million in 1980 to over $11 billion in 1989, an average annual growth rate of 52. 1 percent. The invest- ment mainly has been made by foreign investors directly, rather than by the U.S. affiliates of foreign companies. In Figure 9-4 Share of U.S. Chemicals Affilates' Gross Property, Plant & Equipment Rose Most in Industrial Chemicals, 1 980 to 1988 Billion dollar; 70 60 - 50 40 30 20 10 Industrial Jrugj Soap & toiletries Issss Other U.S. affiliates of foreign firms in the chemicals industry differ only slightly from the U.S. chemicals industry as a whole as measured by employee compensa- tion, research and development intensity and the propen- sity to export. Care must be used in interpreting even these differences. The tendency for the affiliates to spend more on R&D, for instance, could be misinterpreted as an indication that foreign investors are more willing to under- take long range investments than the industry as whole 2 PP&E data are based on historical book value, and may understate their current market value. 'International transactions were compiled by the International Trade Ad- ministration and include value of acquisitions/mergers, joint ventures, new plants, plant expansions, equity increases, and real estate investment and therefore are not directly comparable to the data provided by the Bureau of Economic Analysis on acquisitions and establishments. Table 9-1 Ten Largest Foreign Investment Transactions During 1989 Foreign Country U.S. Value of Investor Company Transaction (millions) Beecham Group U.K. Smithkline Beckman $8,253 Unilever Netherlands Faberge $1,550 Govt, of France France Pennwalt $1,050 Fujisawa Pharm. Japan Lyphomed Inc. $798 Henkel KGAA Germany Quantum Chem $480 Yamanouch Pharm. Japan Shaklee $395 Unilever Netherlands Minnetonka $376 Formosa Plastics Taiwan Formosa Plastics $300 Glaxo Holdings U.K. Glaxo $300 Feruzzi Family Italy Ausimont $282 Source: Bureau of Economic Analysis. Source: U.S. Department of Commerce, International Trade Administra- tion. 69 whereas it may simply suggest that R&D intensive firms are of more interest as acquisitions. Similarly, levels of employment compensation and trade activity could be related more to acquisition criteria than to a firm's long term management strategy. Compensation In 1988, compensation per employee of U.S. chemi- cals affiliates averaged $41,500, slightly exceeding the $39,300 recorded by the U.S. chemicals industry as a whole (Figure 9-5). The affiliate's pay structure was higher in each case than the industry as a whole with the exception of the soap, cleaners, and toiletries industry. Compensation levels among the various subindustry af- filiates were distributed the same way they were for the overall industry, with industrial chemicals workers re- ceiving the highest compensation, followed by drugs, "other," and soap, cleaners, and toiletries. Research and Development The affiliates also spent more on research and devel- opment relative to their sales than did the industry as a whole. R&D spending for the entire industry totaled 4.1 percent of sales, up from 2.9 percent in 1980 (Table 9-2). Affiliates, in comparison, spent 4.8 percent of sales on R&D in 1988, up from 3.0 percent in 1980. R&D expenditures by the affiliates in 1988 ($3.6 billion) was more than four times their 1980 level ($834 million) (Figure 9-6). Industrial chemicals affiliates accounted for more than half of this spending in both 1980 and 1988. R&D expenditures in the pharmaceutical industry, how- ever, increased the fastest with a 400 percent jump. Figure 9-5 U.S. Chemicals Affiliates' Compensation per Worker Slightly Higher than Chemicals Industry Average, 1988 Industrial Five major affiliates had R&D expenditures in the United States of at least $1 billion in 1989 . 4 DuPont (Canada), Hoechst (West Germany) and Bayer (West Germany) each invested $1 .4 billion. Ciba-Geigy (Swit- zerland) invested $ 1 .2 billion and BASF (West Germany) invested $1.0 billion. These high levels of R&D spending in the United States by affiliate firms are part of a pattern developing in the industry in which research by a multinational corpora- tion is no longer simply a headquarters, i.e. home country, function but is carried out in many different locations and countries. This is leading to a vastly expanded flow of Table 9-2 Research and Development Expenditures as a Percent of Sales for Chemical Affiliates Compared with All U.S. Chemical Industry Firms U.S. Affiliates Industry" 1980 1988 Change 1980-88 1980 1988 Change 1980-88 All Chemicals 3.0 4.8 1.8 2.9 4.1 1.2 Industrial 6 3.1 4.2 1.0 2.9 3.4 0.5 Drugs 9.5 10.1 0.6 7.9 10.2 2.3 Other' 1.3 2.1 0.8 1.1 2.1 1.0 •U.S. industry ratios were computed using R&D data, from the National Science Foundation and sales from the Bureau of the Census and therefore are lower than ratios published by the NSF, which use net sales. b Industrial chemical includes plastics products. c Other includes soap, cleaners, and toiletries, agricultural, paints and other chemicals not elsewhere classified. Sources: U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census; National Science Foundation. Figure 9-6 U.S. Chemicals Affiliates' R&D Expenditures Rise Rapidly, 1 980 to 1988 Billion dollars u Total Industrial Drugs Soap & toiletries Other Source: Bureau of Economic Analysis. Source: Bureau of Economic Analysis. 4 R&D expenditures for individual chemical firms were obtained from a Chemical Engineering News survey. 70 technology worldwide with benefits for both the United States and other countries. Trade Patterns Among Affiliates Chemicals affiliates are more export oriented than most U. S. affiliates of foreign companies, as evidenced by their trade surplus growing from $389 million in 1980 to $2.3 billion in 1988 (Figure 9-7). Exports by affiliates grew from $2. 1 billion in 1 980 to $8.5 billion in 1 988 while imports increased from $1.7 to $6.2 billion. The fastest export growth occurred in the industrial chemicals subindustry while the fastest import growth occurred in the drugs and related products subindustry. Drug affil iates often purchase the primary inputs for medicinal. iom their foreign parents thus increasing the level of imports into the United States. In 1980, chemicals affiliates in each subindustry exported more than they imported. By 1988, however, three subindustries, drugs, soap, cleaners, and toiletries and "other" chemicals all reversed themselves and im- ported more than they exported (Figure 9-8). In the case of "other" chemicals, there is a sharp decline in both imports and exports from 1985 to 1986, explained by the repurchase by a major U.S. agricultural chemicals firm of interests held by a foreign firm— hence shifting it out of the affiliate category. The positive trade performance of the chemicals affiliates is a reflection of the strong export orientation of the U.S. chemicals industry as a whole, and industrial chemicals in particular (Figure 9-9). From 1980 to 1988, U.S. chemicals exports and imports rose steadily, with imports rising more rapidly than exports, but nevertheless ending with a trade surplus of $12 billion in 1988, com- pared to $14.5 billion in 1980. During 1980-88 exports became an increasingly important outlet for the chemicals affiliates' sales, becom- Figure 9-7 U.S. Chemicals Affiliates' Trade Surplus Rises, 1980-88 Figure 9-8 U.S. Chemicals Affiliates' Trade Surplus in Industrial Chemicals Rises, Small Surpluses Become Deficits in Other Subindustries, 1980 to 1988 Industrial Drugs Soaps & toiletries Other Source: Bureau of Economic Analysis. Figure 9-9 U.S. Chemicals Industry's Exports Rise Sharply in Last Half of 1 980s I960 Source: Bureau of the Census. 1980 82 84 Source: Bureau of Economic Analysis. ing slightly less important for the industry as a whole. Affiliates steadily increased their export share of sales from 7. 6 percent to 11.2percentinthe 1980 to 1988, while the share for the industry declined from 13.7 to 12.4 percent. Country of Investment In terms of sales, employment, and PPE data -- European firms represent a dominant, but declining share of foreign direct investment in the U.S. chemicals indus- try. European-owned chemicals affiliates' share of all U.S. chemicals affiliates declined from almost 93 percent ($22.3 billion) in 1980 to a still dominant share of 75 71 percent in 1988. U.S. affiliates of West German firms retained their important role over this period — accounting for 26 percent of sales in 1980 and 24 percent in 1988. Canadian-owned affiliates made a huge share of sales increase from only 3 percent in 1980 to 19 percent ($11.9 billion) in 1 988, with a large share of their increase accounted for by a Canadian purchase of a 23 percent share in one of the largest U.S. chemicals firms. Under the accounting rules used for international direct investment, all of this company's U.S. operations would be counted as those of a foreign-owned affiliate while its foreign opera- tions would be counted as U.S. -owned because of the majority ownership of American owners. U.K. -owned affiliates maintained approximately the same share over the period, while those of the Netherlands, Switzerland, and France lost market share. Japan, which has become an important participant in most other areas of foreign invest- ment in the United States, has been a small player in the chemicals sector — its share marginally increasing from 1.6 percent to 3.3 percent. Regional Distribution of Foreign Investment Foreign investment in the U.S. chemicals industry is concentrated in four regions: the Southeast, Mideast, Great Lakes, and Far West in order of size based upon employment (Figure 9-10). In terms of employment, North Carolina maintained its lead position in the South- east region throughout the 1980-1988 period. Virginia, with a four fold increase moved to second place in 1988 Figure 9-10 U.S. Chemicals Affiliates' Employment Highest in Southeast and Mideast States, 1980 & 1988 New England I960 H I98B Mideast pSSHHHHSI Mifc™ Great Lakes Plains Southeast pRHSHBHB ^^^^^^^ Southwest HwWl Rocky Mountains Far West PHmm Other [.i.i 40 60 Thousand employees B0 100 followed by South Carolina. New Jersey and New York led the Mideast region in both 1980 and 1988 while the Great Lakes region was led by Illinois, whichremained the leading U.S. chemicals affiliate employer in 1988 despite a decline in employment from 1980. The Southwest and Far West regions, though much smaller, showed large increases in chemical affiliates' employment. By state, New Jersey, Texas, and California had the highest levels of chemical affiliate employment in 1988. When measured in terms of PPE, the distribution changes are due largely to the role of the petrochemical industry with its very low ratio of employment to capital stock. Texas, New Jersey, and Delaware held the top positions in 1988. Recent large acquisitions of petro- chemical related plants in the Southwest have moved that region ahead of the Great Lakes and close to the level of the Mideast states. The Southeast region still, however, was the overall leader with $19.4 billion in total PPE in 1988. Affiliates in three states, Louisiana, North Carolina, and West Virginia, each had PPE valued at more than $3 billion. Foreign Direct Investment in U.S. Biotechnology Biotechnology is one of the key critical technologies identified by the Department of Commerce. Biotechnol- ogy uses organisms or parts of organisms to make new or improved products, plants, and animals. Biotechnology is having a significant impact on health care through the development of new drugs, diagnostics, and approaches to treating diseases. It has the potential for many promising applications in other industries, including plant and ani- mal agriculture, cleanup of environmental wastes, food processing, chemicals, and renewable energy. Because of the profound impact that biotechnology can have on the economy and on national security, the U.S. government placed biotechnology on its lists of critical emerging technologies. More than 550 firms have been formed in the United States to exploit the promise of biotechnology, mostly since 1 975 . An additional 400 firms supply the biological and chemical materials, instrumentation, and equipment essential to perform research and manufacture desired products. Many firms, primarily from the pharmaceutical, chemical, and agribusiness sectors, have established alli- ances with small, new entrepreneurial firms to catch up with technical developments or obtain rights to new products. Corporate alliances have been growing in number, from 30 in 1981 to 400 in 1988, according to the General Accounting Office. Alliances involving foreign partners have played an important part of this process, increasing from 30 percent of all alliances in 1981 to 45 percent in 1988. Source: Bureau of Economic Analysis. 72 Trends in Foreign Direct Investment in U.S. Biotechnology An accurate accounting of foreign direct investment is difficult because of insufficient data. Further, biotech- nology is not a single industry but involves technologies used by a variety of industries. Classifying a company as "biotech" requires some knowledge of the firm's re- search programs or production methods. To obtain a picture of foreign direct investment trends in U.S. biotech- nology, the International Trade Administration (ITA) reviewed publicly available information on investments made by European, Japanese, and Canadian companies between 1981 and the first quarter of 1991. ITA found that about 40 U.S. companies or parts of companies involved in biotechnology research and devel- opment have been acquired by foreign firms. European companies made 36, or 90 percent, of the acquisitions. Most were from France (7), Switzerland (7), Italy (6), and Sweden (6). Japanese firms accounted for four majority- ownership acquisitions. In addition, during the 1981-91 period, at least 36 minority-equity investments (10 to 50 percent) were made. European firms accounted for 72 percent of minority equity purchases, followed by Japa- nese firms with 25 percent. Foreign firms also acquired 14U.S. firms producing instrumentation and chemical and biological materials used in biotechnology R&D and production processes. European companies accounted for 1 of the purchased firms and Japanese companies bought 4 firms. As part of their strategy to expand into plant biotechnology, chemi- cal firms are acquiring seed companies. In the 1980s, at least one dozen U.S. seed companies were bought by European firms - primarily French and Swiss firms. The value of foreign investment in biotechnology and related support firms is difficult to estimate because of insufficient data. A conservative estimate for total foreign investment is $3.5 billion. The value of 32 out of a total of 72 European investments was $2.9 billion. The value of 10 out of 17 Japanese investments was $161 million. The largest of the deals is Hoffmann- La Roche's 1990 acquisition of 60 percent of Genentech for $2.1 billion. The largest Japanese acquisition was Chugai Pharmaceutical's 1989 purchase of Gen-Probe for $93 million. Most reported deals were less than $50 million. Foreign firms also are investing in the United States by establishing research and development facilities of their own. These facilities enable firms to hire scientific teams with diverse skills, and to gain access to research programs at major universities. This process can be cheaper than buying an existing company. At least 20 research and development facilities have been set up, mostly by firms from Japan (6), West Germany (4), and Switzerland (4). Reasons for Foreign Direct Investment in Biotechnology. Foreign direct investment in U.S. biotechnology companies is driven by the foreign firms' need to access new sources of products and the U.S. firm's need for financing. Other factors include the excellent entrepre- neurial environment and the strong university research efforts in the United States. German firms, in particular, have cited an unfavorable regulatory environment for biotechnology research and manufacturing in Germany as playing a major role in their decision to locate research facilities in the United States. Foreign acquisitions of U.S. biotechnology firms increased steadily during the 1980s, reaching a peak in 1989 when 9 companies were acquired. 19 86 was the peak year for minority equity purchases. By the mid-1980s, the market value of biotechnology companies was affirmed through the approval of new biotech-based drugs. Sales of biotech-de rived products, negligible in 1981, surpassed $1 billion by 1988. Further, by early 1986, Hybritech and Genetic Systems, leading firms in monoclonal antibodies, had been acquired by U.S. pharmaceutical firms, setting the stage for foreign acquisitions. The decline in the value of the dollar relative to European and Japanese currencies since 1985 also made U.S. firms easier to purchase. The peak years for foreign direct investment coincide with periods when it was difficult for biotech firms to obtain financing in the United States, especially after the decline of the stock market in October 1987. Many biotechnology companies are in- volved in developing new healthcare and agricultural products that can take many years to bring to market. This situation resulted in acquisitions and mergers between biotechnology companies with similar product goals. Impact of Foreign Investment Foreign investment in biotechnology has had a beneficial effect on the industry according to industry analysts. The infusion of financial resources has allowed companies to survive, retained jobs, increased investment in plant and equipment and R&D to develop new products that might have been dropped due to lack of funding. International investment in biotechnology has by no means been one way. U.S. companies have invested in foreign firms and research facilities in Europe, Japan, and Australia. They have licensed foreign inventions and formed joint ventures, which has given them access to foreign scientific and manufacturing expertise, foreign markets, and partners to sponsor costly clinical trials. 73 \0 FOREIGN INVESTMENT IN U.S. BANKING by David C. Lund* Foreign involvement in the U.S. banking industry has grown rapidly in recent years. Assets of U.S. offices of foreign banks (U.S. subsidiaries, branches, and agencies) grew from $3 2 billion in December 1 9 73 , the first full year of data availability, to $785 billion at the end of 1 990. This twenty- four- fold jump in assets contrasts to a 3.5-fold increase in assets of domestically-owned U.S. banks, to $2.9 trillion, over the same period. The rapid asset rise pushed the foreign share of total U.S. banking assets from 3.8percentof$856billioninl973,to21.2percentof$3.7 trillion in 1990. The foreign share of business lending increased from 7.6 percent ($189 billion) to 30.6 percent ($630 billion) over the same period. The foreign share of total deposits increased from 1.7 percent to 14.3 percent. As of December 1990, there were 727 foreign bank- ing offices in the United States (101 subsidiaries, 370 branches, 224 agencies, and 32 other offices) representing 294 foreign banking "families" (using the Federal Re- serve Board term foragroupof financiallyrelated banking offices) from sixty countries. Byway of comparison, there were 12,338 commercial banks in the United States (in- cluding multiple offices resulting partly from restrictions on interstate branching). These chartered banks, from a regulatory point of view, are equivalent to the 101 U.S. subsidiaries of foreign banks (also including double count- ing). There were 2,994 thrifts (S&Ls and savings banks) and 14,544 state and federal credit unions in the United States at the end of last year, according to the statistical office of the American Banker, but these financial entities are outside the scope of this report. In earlier chapters on nonbank industries, foreign direct investment is defined by the Bureau of Economic Analysis as ownership or control of 1 percent or more of the voting securities of a U.S. affiliate. In banking, direct investment in a U.S. bank subsidiary, according to the Federal Reserve Board, generally refers to banks that are more than 25 percent owned by foreign banks. This chapter uses an even broader definition of foreign involve- ment in the U.S. banking industry in order to include all the major organizational forms used by foreign bankers. Agencies and branches of foreign parent banks and U.S. subsidiaries of foreign banks are the major types of foreign *Senior Adviser to the Chief Economist, U.S. Department of Commerce. offices. Foreign banks also own New York investment companies and U.S. offices of Edge corporations, but due to their relatively small size in terms of assets and num- bers, we will not focus on them. The major forms of financial organizations owned or controlled by foreign banks will be discussed later. A later section also provides more detail on U. S. subsidiaries of foreign banks, an institutional form that corresponds more closely to the more than 12 thousand chartered commercial banks in the United States. These subsidiaries are a relatively small part of the overall foreign presence in value terms, but relatively larger in terms of visibility. Foreign investment in banking has not been a tradi- tional topic covered by U.S. statistical reports on foreign investment. This chapter is only a brief overview that is intended to give some perspective on the relative impor- tance of foreign banks in the U.S. banking industry. Since Japanese banks account for 55 percent of foreign-con- trolled banking assets in the United States, this chapter pays special attention to that group of foreign banks. Additional information on foreign financial institutions in the United States is provided in the 1990 National Treat- ment Study. ' The recent and extensive LaFalce Report 2 on the international competitiveness of U.S. financial institu- tions has also been a very useful resource in the prepara- tion of this report. Some key findings of this chapter follow. o Rapid growth in foreign-owned bank assets has moved foreign asset share from less than 4 per- cent of total U.S. banking assets in 1973 to over 21 percent in 1990. o Earlier growth by foreign banks in the United States partially reflected increased business loans 'U.S. Department of the Treasury, Report to Congress on Foreign Govern- ment Treatment of U.S. Commercial Banking and Securities Organiza- tions, November 30, 1990, p. 76 ff. ^.S. Congress, House of Representatives, Committee on Banking, Fi- nance and Urban Affairs. Subcommittee on Financial Institutions Super- vision, Regulation and Insurance. Report of the Task Force on the International Competitiveness of U.S. Financial Institutions, 101st Con- gress, 2nd Session (Washington, DC: U.S. GPO, October 1990). The task force report is commonly referred to as the LaFalce Report, after the task force's chairman, John J. LaFalce. 74 and other services related to growing foreign direct investment in nonbank sectors. More recently, bank asset growth has been rising more rapidly, and asset shares increasing, in banking services that are not as directly related to the activities of foreign businesses in the United States as they used to be. Large current account surpluses abroad, and the relative attractiveness of the United States for investment, also contrib- uted to increased foreign bank activity. o A more restrictive regulatory environment in foreign financial markets, particularly Japan, also contributed to expanded asset and liability growth of international banks in the United States and other money center markets. The reasons for this large asset movement into the United States and the United Kingdom by Japanese banks in the 1980s paralleled the reasons for the asset shifts offshore by U.S. banks in the 1960s. U.S. Offices of Foreign Banks In the banking sector, a broader measure of foreign direct investment in U.S. banking that includes all signifi- cant foreign-owned banking offices, not just subsidiaries, is necessary if the largest parts of the foreign presence in U.S. banking are to be considered. Assets of branches and agencies of foreign banks, the most prevalent types of foreign-owned banking offices, need to be included. Al- though, in the context of this report, agencies and branches of foreign banks are not, strictly speaking, foreign direct investment, they are a major part of the foreign-owned assets of the U.S. banking system. There are significant differences in the various institutional forms of organization of foreign banks, and the kind and extent of regulatory oversight and restraints on their banking operations. The following are the three most significant organizational forms used by foreign banks in the United States. U.S. subsidiaries of foreign banks are banking entities that from a regulatory point of view are equivalent to domestically-owned U.S. com- mercial banks, with lending based on their own capital. These banks tend to be more heavily oriented toward retail banking activities. Agencies and branches of foreign banks, by contrast, are integral parts of the foreign parent banking organizations, with lending limits based on the worldwide capital of the parent bank. Agencies and branches of foreign banks are the two most common forms of foreign banking office or entity in the United States, both in number and in size of bank assets. Agencies differ from branches in that their deposit-taking powers are limited. 3 U.S. Offices Together, branches and agencies of foreign banks account for 80 percent of the total assets of U.S. offices of foreign banks (Figure 10-1). Most of the remainder of these assets is accounted for by the U.S. subsidiaries of foreign banks. In late 1990, the aggregate asset value of all of these U.S. offices of foreign banks totalled S785 billion, accounting for 21 percent of the $3.7 trillion in total U.S. bank assets (Figure 10-2). The asset value of these U.S. offices of foreign banks does not include offshore activity of these offices in the Cayman Islands. Japanese banks clearly dominate the foreign compo- nent, owning or controlling 55 percent or $433 billion of the total $785 billion foreign assets in U.S. banking. To put the size of the Japanese presence in a Japanese perspective, the total value of Japan's share of U.S. banking assets, $433 billion at the end of 1990, is not much different in size than the asset value of just one of any of the six biggest banks in Japan at the end of fiscal year 1990 (March 1991). These six banks, in approximate declining order of total asset size, are: Dai-Ichi Kangyo, Sumitomo, Mitsui-Taiyo Kobe, Fuji, Mitsubishi, and Sanwa. The aggregate value of the assets of these banks in Japan at the end of the latest fiscal year (ending March 1991) declined, in yen terms, for the first time since the end of World War II. 'Henry Terrell, Senior Economist, International Finance Division, Board of Governors of the Federal Reserve System. Testimony before the Task Force on the International Competitiveness of U.S. Financial Institutions, August 2, 1990. 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JZ (0 c o 0) > 4-i -IZ X XI 3 01 c CO L. c (D 01 4-* o> 0> XL ■M XI ■ .— t — E 0) c JZ 4-< u u C 3 ■ — L_ cn ' — CO ro ra > CL (J > JZ *^ 4-< t_ Oi 4-1 ro ro — - 4-J CO o 4-J 01 a cn (0 O 01 0J CT1 ■•- >. 01 0i o CO — >- 3 3 *+- ra C c • I— — i ro ■ i— 0) 1- i -_* X! - 3 XI XI XI *-i 01 cn c 3 XI c C ■— a 3 o 4-J c_ o o ro 01 —■ JZ ■ 3 3 > 01 ra ■ PB ■ — 4-J XI .— o 01 X CO 4-J ■ *j > o •+- O) XI CO —■ — - -i. c ■ ^~ • ^ r?"S c ro — ' (J — 1 o c ro _J (D 0! (J o 01 c 0) u u u u ■r— L. XI L '*- 01 i_ — ■ .0 JZ 01 3 -j CjO ro XI XI ^J .^ JZ - c c (0 01 ra •- JZ u O g < •#— c ro 4-J — 1 O 01 c 4-J c_ c (A E — • 1 — XI -I-' tfl c C CO H~ 4-i E (_ 4-J 01 X U 3 ZJ o J* Ol o ,'J XI c ■r— o u ro c •- _* CO •r— 01 p • •— N u c c ja 1 •!— — ' C (D ra ra 0' CO o • 1— — ' ro CJ 0i XI DO 4-J (0 (0 CJ Ol 4-J o o s 3 Ol -Q O *-> ■M 4J l_ 4-i Ol Xl vj o > 3 cn CO ■ ■— X CO LU C Ba ro 4-» E O O 01 a (j ra ra ra •r— ro c v 2 CO Q- ro 4-' C ro r--| ro JZ c 8. Q_ 0) 01 c u C- L, 0i /-N /"■N ^-n ^^ ^^ - — » /^s ^ -^ ^^ 3 o 4-J c ro X. o XI 0i M~ Ol JZ II- '— » uo ■•j- Table 5-1 Investment Outlays By Foreign Direct Investors To Acquire or Establish U.S. Business Enterprises ($ Millions or Percent) Acqui- s i t i ons Year $Mil 1979 . . . . 13159 1980 . . . . 8974 1981 . . . . 18151 1982 . . . . 6563 1983 . . . . 4848 1984 . . . . 11836 1985 . . . . 20083 1986 . . . . 31450 1987 . . . . 33933 1988 . . . . 64855 1989 . . . . 55822 Estab- lishments SMi I 2158 3198 5067 4254 3244 3361 3023 7728 6377 7837 8743 Total SMi I 15317 12172 23219 10817 8091 15197 23106 39177 40310 72692 64565 Acquisitions Total as percent Outlays of as percent Total of GNP 85.9 0.61 73.7 0.45 78.2 0.76 60.7 0.34 59.9 0.24 77.9 0.40 86.9 0.58 80.3 0.93 84.2 0.89 89.2 1.49 86.5 1.24 Note: Includes outlays for U.S. banks. Note: Covers enterprises that, in the year they were acquired or established, had total assets of over $1 million or owned at least 200 acres of U.S. land. Note: The figures for 1989 are preliminary and will be revised up to include late reports. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (May 1990), p. 23, and comparable articles in earlier issues. Also. Survey ofCurrent Business (July 1990), p. 40, and comparable tables for earlier years containing GNP data. Table 5-2 Comparison of Average Gross Product Per Employee of Manufacturing Affiliates with that of All U.S. Manufacturing 1980 Manufacturing Affiliates *: Gross Product ($Bil Nominal) 31.0 Employment (Thous) . 1105.0 Deflator (1982=1.00) ** 0.876 Gross Product ($82 Bil) ** 35.4 Gross Product ($82 Thous)/Employee **.... 32.0 Gross Product ($82 Thous)/Employee *** ... 32.4 Gross Product ($ Thous Nominal )/Employee . . 28.0 All Manufacturing *: Gross Product ($Bil Nominal) 564.2 Employment (Thous) 20220.0 Deflator (1982=1.00) *** 0.867 Gross Product ($Bil 1982) *** 651.0 Gross Product ($82 Thous)/Employee *** .... 32.2 Gross Product ($ Thous Nominal )/Employee . . . 27.9 1987 % Change 73.8 138.2 1542.6 39.6 1.067 21.8 69.2 95.6 44.8 40.1 46.0 42.3 47.8 70.6 838.8 48.7 18959.0 -6.2 1.039 19.9 807.1 24.0 42.6 32.2 44.2 58.6 * Excludes petroleum and coal products. * Reflects a deflator developed from BEA industry price deflators for gross product and sales data for affiliates by industry of sales at the 2-digit level of aggregation. This new deflator was thenapplied to the manufacturing affiliate gross product data. *** Reflects deflators for all U.S. manufacturing, except petroleum and coal products. Note: The affiliate gross product and employment data are on an industry of affiliate basis, while the all manufacturing data are on an establishment basis. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Table 5-3 Selected Comparisons of U.S. Affiliates of Foreign Companies with Parents of U.S. Multinational Companies in 1988 (Dollars or Percent) All Nonbank Businesses U.S. Manufacturing U.S. Affiliates Parents of U.S. Affiliates of Foreign Multinational of Foreign Companies Companies Companies Average Compensation per Employee 30517 Gross Product per Employee * 47117 U.S. Intrafirm Exports per Employee 6637 U.S. Intrafirm Imports per Employee 31045 Vertical Integration (Ratio of Gross 21 Product to Sales) * Ratio of Imports to Total Purchases 24 of Inputs * Ratio of Local Inputs to Sales * 81 33154 54229 4491 3777 37 8 95 33726 54401 3180 11495 33 16 91 Data for 1987. Source: Economic Report of the President (February 1991), p. 260; Survey of Current Business , (various issues); and Foreign Direct Investment in the United States (various issues). Table 5-4 Gross Product of U.S. Affiliates and All U.S. Businesses Industry 1977 Manufacturing 5.0 Wholesale Trade 3.8 Retail Trade 1.2 Finance, except Banking 2.2 Insurance 2.4 Real Estate 0.6 Services 0.5 Other Industries 0.5 All Industries 2.3 Affiliate Shares of Gross Product of All U.S. Businesses (Percent) 1981 1987 10.3 10.5 5.0 6.8 2.3 2.5 4.2 9.4 4.0 5.2 2.2 2.3 0.7 0.9 1.0 1.0 4.2 4.3 Gross Product in 1987 Manufacturing .... Wholesale Trade . . . , Retail Trade Finance, except Banking Insurance Real Estate , Services , Other Industries . . . ' All Industries Affi liates % of $ Bil Total 88.8 58.5 21.0 13.8 10.5 6.9 6.5 4.3 5.3 3.5 4.6 3.0 6.7 4.4 8.5 5.6 151.9 100.0 All U.S. Business $ Bil 849.6 311.3 422.4 69.2 100.3 194.8 778.0 817.3 3542.8 % of Total 24.0 8.8 11.9 2.0 2.8 5.5 22.0 23.1 100.0 Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 1990), P. 50. * Table 5-5 Gross Product of Nonbank U.S. Affiliates of Foreign Countries By Country of Ultimate Beneficial Owner ($ Millions) 1977 1980 1986 1987 X Change 1977-87 Canada 5991 Europe 24231 United Kingdom 7687 Germany 2938 Netherlands 6390 France 3153 Switzerland 2005 Latin America and 1349 Other Western Hemisphere Japan 2488 All Countries 35222 10933 50401 17278 8765 11330 6158 3791 2296 4961 70906 27714 85795 29193 13421 15170 8299 8055 3880 13717 142120 28275 91115 31956 15144 15675 8246 8510 4698 16828 151905 372 276 316 415 145 162 324 248 576 331 Source: U.S. Department of Commerce, Bureau of Economic Ana lysis. Survey of Current Business (June 1990), P. 47. Note: Totals include some countries for which separate data are not shown. Table 5-6 Average Expenditures For New Plant and Equipement Per Employee By Nonbank U.S. Affiliates of Foreign Companies, By Country of Ultimate Beneficial Owner (Thousands of 1982 Dollars) Canada . . . Europe . . . Japan .... All Countries 1977 1980 1986 7.3 15.5 8.3 10.1 8.2 7.3 6.1 12.5 15.5 9.1 9.6 8.4 1987 9.1 7.1 16.9 8.6 1988 8.9 8.0 14.6 9.0 Note: The GNP fixed-weighted price index was used to deflate the affiliate plant and equipment expenditure data. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States (various issues) and Economic Report of the President (February 1991), p. 292. Table 5-7 Expenditures For Research and Development By Manufacturing U.S. Affiliates of Foreign Companies By Industry of Affiliate ($ Millions or Percent) Food Products . . Chemicals . . . . Metals Machinery . . . . Other All Manufacturing 977 1980 1981 ($ Millions) 1986 1987 7 19 32 54 58 483 834 1580 2782 3220 37 45 71 174 158 167 507 670 1652 1581 50 200 293 349 556 743 1605 2645 5011 5573 (As Percent of Gross Product) Food Products . . Chemicals . . . . Metals Machinery . . . . Other All Manufacturing 0.27 0.49 0.66 8.99 10.12 8.48 1.84 1.23 1.78 5.23 6.82 7.36 1.43 2.58 2.78 4.46 5.18 5.61 0.85 0.93 12.33 12.53 2.35 2.20 13.83 12.78 1.99 2.49 7.62 7.55 Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States (various years) and Survey of Current Business (June 1990), p. 46. Table 5-8 Average Expenditures for Research and Development Per Employee By Nonbank U.S. Affiliates of Foreign Companies, By Selected Country of Ultimate Beneficial Owner and Industry of Affiliate (Thousands of 1982 Dollars) 1977 1980 1986 1987 1988 All Industries: Canada Europe Japan All Countries . . . Manufacturing: Food Products . . . Chemicals Metals Machinery Other Manufacturing All Manufacturing . 0.57 0.54 2.20 2.36 * 1.35 1.21 1.68 1.68 1.62 0.44 0.89 1.15 0.85 1.04 1.12 1.11 1.72 1.70 1.62 0.14 0.18 0.29 0.34 0.50 3.58 3.41 6.43 6.84 7.75 0.63 0.46 0.96 0.83 0.91 1.52 2.03 4.57 4.08 3.53 0.43 0.78 0.76 0.90 0.84 1.58 1.69 3.09 3.04 2.93 * Suppressed to avoid disclosure of data for an individual company. n.a. Not avai lable. Note: The GNP fixed-weighted price index was used to deflate the affiliate research and development expenditure data. The manufacturing industry data exclude petroleum and coal products. The expenditures exclude spending for R&D conducted for others under contract. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States (various issues) and Economic Report of the President (February 1991), p. 292. Table 5-9 Employment and Gross Product of Nonbank U.S. Affiliates of Foreign Companies, Amounts and as a Share of Totals For Nonbank U.S. Businesses Employment % of Year Thous. Total 1977 . . . 1218.7 1.8 1978 . . . 1429.9 2.0 1979 . . . 1753.2 2.3 1980 . . . 2033.9 2.7 1981 . . . 2416.6 3.2 1982 . . . 2448.1 3.3 1983 . . . 2546.5 3.4 1984 . . . 2714.3 3.4 1985 . . . 2862.2 3.5 1986 . . . 2937.9 3.5 1987 . . . 3224.3 3.7 1988 . . . 3682.2 4.1 Gross Proc uct % of $ 6i I. Total 35.2 2.3 42.9 2.4 55.4 2.8 70.9 3.3 98.8 4.2 103.5 4.2 111.5 4.3 128.8 4.4 134.8 4.3 142.1 4.3 151.9 4.3 n.a. n.a. Note: Data are not available for 1978-80 on the affiliates' share of gross domestic product for all nonbank U.S. businesses. However, based on estimates, it appears that the affiliate percentage rose each year from 1977 to 1981. n.a. Not available. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business , (June 1990), pp. 46 and 50; and (July 1990), p. 131. Also, comparable articles for earlier years and certain unpublished data. Table 5-10 Employment By Nonbank U.S. Affiliates of Foreign Countries By Country of Ultimate Beneficial Owner (Total and Percent) 1977 1980 1986 1987 1988 Total, Thousands 1218.7 Percent of Total: Canada Europe United Kingdom Germany Netherlands France Switzerland Latin America and Other Western Hemisphere Japan 6.3 2033.9 5.7 2937.9 7.5 3224.3 9.4 3682.2 15.5 14.3 20.7 18.4 19.4 70.2 72.6 60.7 60.2 59.6 23.5 21.1 21.2 20.1 20.0 11.0 18.5 10.6 11.4 10.2 12.5 9.2 8.3 8.4 8.2 10.7 10.1 6.1 5.8 6.7 6.6 7.8 6.2 5.9 5.5 6.9 6.3 4.4 4.6 3.1 10.9 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Foreign Direct Investment in the United States. Operations of U.S. Affiliates (various issues). Note: Totals include some countries for which separate data are not shown. Table 5-11 Employment of Affiliates By Industry of Sales, Selected Countries of Ultimate Beneficial Owner (1980) All Industries Total in Thousands . Percent of Total: Manufacturing Chemicals & Allied Products Food & Kindred Products . . . Primary & Fabricated Metals Electric & Electronic Equipment Nonelectric Machinery .... Motor Vehicles & Equipment . . Printing & Publishing .... Stone, Clay, & Glass Products Instruments & Related Products Paper & Allied Products . . . Rubber & Plastics Products . . Textile Products & Apparel . . Other Transportation Lumber, Wood, & Furniture . . Other Manufacturing Wholesale Trade Motor Vehicles & Equipment . . Petroleum Retail Trade Insurance Finance, except Banking Services . . Business Services Real Estate Transportation Mining Construction Communications & Public Utilities . Agriculture, Forestry, & Fishing . Agriculture Unspecified General Administration Offices . . United Kingdom 428.2 Canada 290.0 Japan 115.2 Germany 375.9 All Countries 2033.9 52.6 50.2 41.7 48.2 51.3 8.4 1.1 2.3 13.5 8.1 9.0 4.6 4.2 0.7 5.0 3.3 8.3 6.9 5.4 5.6 5.4 9.0 12.4 4.6 8.0 7.3 5.6 4.5 5.0 5.7 * * * * 3.0 1.1 8.9 0.6 1.2 2.1 1.4 3.6 2.1 1.2 1.8 3.1 * 1.7 5.0 2.6 1.7 * * * 1.7 1.9 1.6 0.9 1.8 1.9 3.1 1.3 2.9 1.2 1.6 * * 0.3 * 1.1. 0.7 0.7 * 0.9 1.0 5.0 1.1 0.9 * 2.0 5.0 3.9 34.7 6.1 7.0 0.9 * 7.8 1.7 1.2 * 3.5 0.3 * 4.5 19.8 13.7 3.4 33.7 18.8 6.7 2.7 * 0.8 3.1 1.3 3.9 * 0.1 1.4 4.7 4.5 9.6 1.7 5.4 0.4 0.5 0.2 * 1.2 0.3 4.2 0.3 0.1 0.9 0.3 6.4 6.2 * * 1.5 4.7 * * 1.7 1.7 1.6 * 4.6 2.1 * 0.3 * 0.0 0.1 * 0.2 0.3 * * 0.5 0.1 0.3 0.5 0.6 * 0.1 1.3 2.0 1.0 4.0 2.9 4.6 3.1 3.6 * Suppressed to avoid disclosure of data of individual companies Note: Percentages are calculated from totals excluding employment in general administration offices. The petroleum category includes petroleum and coal products manufacturing. Because of rounding, the sub-categories may not add to the totals. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States. 1980 (October 1983), Table F-20. Table 5-12 Employment of Affilliates By Industry of Sales, Selected Countries of Ultimate Beneficial Owner (1988) United K i ngdom All Industries Total in Thousands 734.8 Percent of Total: Manufacturing 47.6 Chemicals & Allied Products 7.1 Food & Kindred Products 5.6 Primary & Fabricated Metals 2.7 Electric & Electronic Equipment 5.4 Nonelectric Machinery 4.4 Motor Vehicles & Equipment 1.5 Printing & Publishing 3.6 Stone, Clay, & Glass Products 4.6 Instruments & Related Products 5.2 Paper & Allied Products 0.9 Rubber Products 0.2 Miscellaneous Plastics Products 1.2 Textile Products & Apparel 2.0 Other Transportation 0.6 Lumber, Wood, & Furniture 0.2 Other Manufacturing 2.5 Wholesale Trade 5.7 Motor Vehicles & Equipment 0.5 Petroleum 4.5 Retail Trade 14.3 Insurance 5.4 Finance, except Banking 1.6 Services 9.6 Business Services 5.1 Real Estate 0.4 Transportation 1.4 Mining 2.0 Construction 1.3 Communications & Public Utilities 0.2 Agriculture, Forestry, & Fishing 0.4 Unspecified 5.5 Canada 714.6 Japan 401.0 Germany 376.7 All Countries 3682.2 33.4 43.6 52.4 45.3 8.3 2.5 18.2 7.6 3.5 1.4 1.0 4.5 4.0 7.9 3.6 5.0 3.9 7.8 7.1 6.1 1.6 4.7 4.7 3.9 0.7 5.8 2.9 1.7 4.7 1.7 3.1 2.8 0.4 2.3 1.9 2.5 1.0 1.2 1.9 2.1 1.3 0.8 0.5 1.2 0.5 4.9 2.8 1.1 1.5 0.5 0.8 1.0 1.0 1.2 1.3 1.2 0.3 * 0.5 0.4 0.5 0.1 1.8 0.7 0.2 0.7 0.3 1.1 2.2 19.1 10.8 7.5 0.1 3.8 2.2 1.2 3.0 0.1 0.1 3.3 37.0 4.7 27.4 20.4 1.5 0.1 0.7 3.0 0.9 13.3 0.2 2.7 6.2 11.3 3.2 10.2 0.9 3.6 0.3 4.5 2.1 1.2 0.1 0.8 6.3 2.0 0.4 2.9 2.5 0.1 0.7 1.5 0.7 3.4 2.4 1.5 1.0 0.0 0.0 0.4 0.2 0.4 0.3 0.5 3.1 0.6 1.1 2.1 * Suppressed to avoid disclosure of data of individual companies. Note: The petroleum category includes petroleum and coal products manufacturing. Because of rounding, the sub- categories may not add to the totals. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States. Operations of U.S. Affiliates of Foreign Companies . Preliminary 1988 Estimates (August 1990), Table F-11. Table 5-13 Employment of Nonbank U.S. Affiliates of Foreign Companies By Region (Thousands and Percent) 1977 1980 1987 1988 All States, 1000 .... 1218.7 2033.9 3224.3 3682.2 Percent of Total: Southeast 21.7 22.9 25.0 24.9 Mideast 24.6 22.9 23.0 22.1 Great Lakes 19.0 18.1 16.1 17.1 Far West 11.8 12.6 12.6 12.9 Southwest 6.9 8.7 9.1 8.8 New England 6.2 6.0 6.4 6.4 Plains 5.0 5.1 4.4 4.9 Rocky Mountains ... 1.8 1.9 1.6 1.5 Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States. Operations of U.S. Affiliates (various issues). - Table 5-14 Employment by Nonbank U.S. Affiliates in Individual States Delaware Hawaii South Carolina . . . New Jersey North Carolina . . . Nebraska Georgia West Virginia . . . . Tennessee Alaska Maine New York Illinois Connecticut New Hampshire . . . . Louisiana Texas Ohio Pennsylvania . . . . Virginia Oklahoma Indiana Arizona New Mexico Kentucky Massachusetts . . . . California Wisconsin Arkansas Kansas Maryland Michigan Florida Vermont Alabama Washington Missouri Minnesota Iowa Rhode Island . . . . Colorado Wyoming Mississippi Nevada Oregon Utah District of Columbia Idaho Montana South Dakota . . . . North Dakota . . . . Percent of Employment by All Nonbank Thousands of Employees Businesses 1977 1988 1977 1988 6.2 40.7 3.0 14.6 11.4 31.0 4.0 7.8 35.1 82.1 3.9 6.8 85.0 196.0 3.6 6.3 45.7 153.9 2.4 6.0 3.5 11.5 2.0 5.8 30.7 140.0 1.9 5.8 11.2 26.7 2.2 5.6 26.2 95.6 1.9 5.4 5.1 7.7 4.3 5.2 5.7 23.3 1.8 5.2 121.5 329.7 2.2 4.9 73.8 206.6 1.9 4.7 22.6 69.9 2.0 4.7 8.4 20.5 2.9 4.4 18.4 53.7 1.6 4.4 66.6 226.2 1.6 4.1 55.8 166.5 1.5 4.1 64.5 177.7 1.7 4.1 23.8 90.7 1.6 4.0 8.7 35.0 1.1 3.9 30.4 80.2 1.7 3.9 6.9 46.3 1.0 3.8 2.0 15.6 0.6 3.8 15.5 43.6 1.6 3.8 30.3 102.1 1.5 3.7 124.2 390.3 1.7 3.6 30.6 67.7 2.0 3.6 9.8 25.9 1.6 3.5 8.8 28.7 1.2 3.4 21.5 60.1 1.8 3.4 41.1 107.5 1.4 3.3 28.3 144.2 1.1 3.3 4.7 6.9 3.2 3.2 14.3 39.6 1.4 3.1 11.9 48.4 1.1 2.9 20.2 56.1 1.3 2.9 17.6 49.3 1.3 2.8 9.3 27.2 1.0 2.8 3.8 11.3 1.2 2.8 11.2 32.3 1.3 2.7 2.2 3.8 1.5 2.7 5.7 19.1 0.9 2.7 2.3 12.7 0.9 2.6 5.1 24.3 0.7 2.5 5.9 11.0 1.6 2.1 1.4 8.2 0.4 2.0 1.9 5.6 0.7 1.9 1.4 3.6 0.7 1.6 0.7 2.7 0.4 1.3 1.4 3.5 0.3 0.6 Note: The employment totals for and the District of Columbia for excludes banks, the share of all 1977 may be slightly understated all U.S. businesses used to calculate U.S. affiliate shares for Delaware 1977 include employment by banks. Because employment by U.S. affiliates U.S. employment accounted for by affiliates in these jurisdictions for Source: U.S. Department of Commerce, Bureau of Economic Analysis, unpublished data. Table 5-15 Gross Property, Plant, and Equipment of U.S. Nonbank Affiliates of Foreign Companies, Data For 1987, By State Percent consisting of Mfg Property v Manufact Com- per Mfg Total uring mercial Employee State in $ Millions property property $000 California . . 44275 25.8 40.3 90.5 41591 37.5 23.4 216.1 New York . . . 23069 18.3 57.6 54.3 Alaska .... 18420 * * * Louisiana . . . 14292 46.9 9.2 424.4 Illinois . . . 12920 48.9 28.4 96.5 New Jersey . . 11458 53.9 27.3 87.3 Pennsylvania 10898 55.3 18.8 68.4 Ohio 10622 62.2 18.1 92.1 North Carolina 9727 75.0 15.5 97.5 9574 22.6 53.3 70.6 9059 49.8 34.1 80.9 Michigan . . . 7640 51.8 12.2 76.5 Virginia . . . 6808 49.0 29.8 109.3 South Carolina 6182 77.8 11.8 127.5 Tennessee . . . 5604 72.8 13.9 78.6 Massachusetts . 5214 30.2 47.5 48.5 Oklahoma . . . 5088 18.5 13.3 167.7 West Virginia . 5060 50.7 1.5 177.0 Kentucky . . . 4557 50.5 14.1 109.0 Colorado . . . 4487 15.4 43.9 72.8 Minnesota . . . 4344 31.7 28.6 83.0 Missouri . . . 4233 50.3 19.5 99.1 4183 69.2 12.0 71.1 4103 25.9 34.9 74.9 4011 81.7 4.1 150.9 Washington . . 3588 42.1 32.1 113.5 3474 2.8 82.0 99.0 Delaware . . . 3432 79.9 14.7 228.4 Maryland . . . 3124 42.7 39.1 69.9 Connecticut . . 3092 42.8 39.3 52.5 2962 9.7 1.2 318.9 Wisconsin . . . 2803 59.5 15.8 60.8 New Mexico . . 2751 10.3 7.6 94.0 Utah 2610 17.7 5.6 100.2 Mississippi . . 2425 33.4 7.9 72.3 Kansas .... 2350 29.7 8.7 89.4 Foreign 4 . . . 2165 7.8 1.5 563.3 Oregon .... 1812 35.0 32.1 72.9 Montana .... 1684 14.2 5.5 199.2 1663 59.5 15.3 92.5 District of Coll imbia 1655 0.1 92.6 10.0 1606 2.4 27.5 95.0 Maine 1549 49.6 19.7 108.2 North Dakota 1295 11.4 4.8 147.0 Arkansas . . . 1289 54.2 19.6 62.4 New Hampshire . 736 41.3 33.3 39.5 Rhode Island 605 57.7 20.3 52.1 Puerto Rico . . 558 70.4 7.7 53.8 Nebraska . . . 459 43.4 21.6 73.7 395 18.5 8.4 73.0 Vermont .... 382 52.9 11.0 126.3 South Dakota 378 * * * Other U.S. areas 15019 * 1.3 * All States . . . 353278 36.5 25.5 98.0 * Suppressed. Source: U.S. De partment of Commerce, Bureau of Economic Analysis, Foreign Direct Investmer it in the United States, 1987 Benchmark Survey. Fine I Results (August 1990), f >. 52 and Survey of Current Business (July 1990), p. 142. Table 5-16 State Employment in 1988 By Nonbank U.S. Affiliates of Foreign Companies State Thous California 390.3 New York 329.7 Texas 226.2 Illinois 206.6 New Jersey 196.0 Pennsylvania 177.7 Ohio 166.5 North Carolina .... 153.9 Florida 144.2 Georgia 140.0 Michigan 107.5 Massachusetts 102.1 Tennessee 95.6 Virginia 90.7 South Carolina .... 82.1 Indiana 80.2 Connecticut 69.9 Wisconsin 67.7 Maryland 60.1 Missouri 56.1 Louisiana 53.7 Minnesota 49.3 Washington 48.4 Arizona 46.3 Kentucky 43.6 Delaware 40.7 Alabama 39.6 Oklahoma 35.0 Colorado 32.3 Hawaii 31.0 Kansas 28.7 Iowa 27.2 West Virginia 26.7 Arkansas 25.9 Oregon 24.3 Maine 23.3 New Hampshire 20.5 Mississippi 19.1 New Mexico 15.6 Nevada 12.7 Nebraska 11.5 Rhode Island 11.3 Utah 11.0 District of Columbia . 8.2 Alaska 7.7 Vermont 6.9 Idaho 5.6 Wyoming 3.8 Montana 3.6 North Dakota 3.5 South Dakota 2.7 Total ** 3682.2 Percent Distribution of Employees According to Country of Ultimate Beneficial Owner Canada 15.2 17.8 15.6 14.0 12.2 18.0 17.1 20.3 26.6 23.5 17.7 18.7 19.5 23.8 11.2 20.7 10.7 19.6 24.5 28.5 18.2 22.3 27.1 23.5 25.5 * 18.2 27.1 22.9 2.3 28.2 23.5 48.7 19.7 18.9 52.8 * 15.7 17.3 20.5 10.4 20.4 20.0 23.2 16.9 31.9 28.6 18.4 38.9 20.0 44.4 19.4 Europe 51.6 59.7 63.7 61.9 71.1 67.9 59.0 71.0 50.2 55.1 58.9 61.2 64.1 64.3 74.3 68.1 81.5 66.2 64.2 59.4 53.4 65.9 45.0 43.2 54. 21, 55.8 53.4 59. 8. 58. 62. 48. 52. 55. 40.8 56.6 48. 65. 47. 76.5 72.6 61.8 52.4 41.6 59.4 41.1 55.3 36.1 68.6 51.9 59.6 .4 .9 .4 .4 .5 .5 .7 .9 .6 .7 .4 .2 Japan 21.1 11.4 6.1 16.4 10.2 4.7 12 4 9 9 15 10 4 2 7 4 7 10.0 3.9 6.5 8.1 4.6 16.1 8.6 10.8 2.5 15.4 7.7 6 71 3 9 1 21 16 2 9.3 8.4 1.9 0.0 6.1 3.5 3. 11. 27. 5. 0. 2. 2. 2. 3. 10.9 Manufact- uring as Percent of Total 37.3 24.9 34.5 41.6 36.8 50.4 49.7 56.7 22.3 42.8 53.6 34.6 64.5 43.4 49.7 63.6 41.1 55.5 38.3 42.6 29.4 47.5 33.1 26.3 53.7 31.9 58.8 29.1 27.2 4.8 32.4 58.8 53.9 57.1 43.2 32.6 37.6 66.0 19.9 5.5 37.4 58.4 49.1 6.1 29.9 27.5 30.4 21.1 36.1 31.4 55.6 40.6 * Suppressed to avoid disclosure of data of individual companies. ** The total includes territories for which data are not shown here. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States, Operations of U.S. Affiliates of Foreign Companies, Preliminary 1988 Estimates (August 1990), Tables F-8 and F-13. Table 5-17 Average Compensation Per Employee in 1988 Selected Manufacturing Industries ($ Thousands) Food and Kindred Products . . Chemicals and Allied Products Primary and Fabricated Metals Machinery Office and Computing . . Other Manufacturing All Manufacturing U.S. Parents of U.S Affiliates of Multinational Foreign Compar lies Companies 28.6 25.7 41.5 39.3 35.6 36.1 32.4 39.4 45.3 49.1 30.5 32.3 33.7 37.3 Note: These groupings are by the industry of the affiliate and the industry of the parent. They are on an enterprise basis. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 1990), p. 35 and (July 1990), p. 135. Table 5-18 Employment By Nonbank U.S. Affiliates of Foreign Companies (Total and as a Percent of Employment by all U.S. Businesses) Industry Thousands of Employees 1980 1987 1988 U.S. Affiliates as Percent of All U.S. Business 1980 1987 1988 Manufacturing 1065 1472 1667 5.2 7.7 8.5 Chemicals & Allied Products 160 269 281 14.3 26.2 26.4 Stone, Clay, & Glass Products 35 82 93 5.3 13.9 15.4 Primary Metal Industries 62 90 93 5.4 12.2 12.0 Electric & Electronic Equipment 158 202 225 7.5 9.7 10.8 Instruments & Related Products 51 76 79 7.2 11.0 10.7 Food & Kindred Products 98 137 166 5.7 8.4 10.1 Rubber & Misc Plastic Products 37 56 79 5.1 6.9 9.4 Motor Vehicles & Equipment 59 56 64 7.4 6.6 7.5 Nonelectric Machinery 111 121 145 4.5 6.0 6.9 Paper & Allied Products 34 46 46 4.9 6.8 6.6 Printing & Publishing 41 83 102 3.3 5.4 6.4 Fabricated Metal Products 49 58 91 3.0 4.1 6.3 Textile Mill Products 20 27 32 2.4 3.8 4.3 Other Transportation Equipment 22 12 15 2.0 1.0 1.3 Petroleum & Coal Products 58 71 78 * * * Mining 59 68 69 5.7 9.4 9.7 Finance, except Banking 27 83 98 3.0 5.3 6.2 Insurance 61 81 111 3.5 3.9 5.2 Wholesale Trade 141 282 281 2.7 4.7 4.6 Retail Trade ** 633 768 ** 3.3 3.9 Transportation ** 87 113 ** 2.7 3.4 Real Estate 17 31 31 1.6 2.2 2.2 Services 107 329 375 0.6 1.3 1.4 Construction 42 57 56 1.0 1.1 1.1 Agriculture, Forestry, & Fishing ** 18 19 ** 1.0 1.0 Communication & Public Utilities 2 14 15 0.1 0.6 0.7 All Industries 2034 3224 3682 2.7 3.7 4.1 * Not meaningful because data are not comparable. ** Suppressed to avoid disclosure of data of individual companies. Note: In order to be consistent with the all-U.S. -business data, affiliate employment in the various petroleum subindustries is distributed among the other major industries. The manufacturing and "all industries" totals include some industries for which data are not shown separately. Employment of U.S. affiliates is classified here by industry of sales. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (July issue, various years) and Foreign Direct Investment in the United States. Operations of U.S. Affiliates (various issues). Table 5-19 Comparison of Affiliates' Gross Product and Sales with Total U.S. Imports of Goods and Services ($ Billions or Percent) 1977 1987 Nonbank Affiliates: Gross Product Sales . . . 35.2 194.0 151.9 731.4 Total U.S. Imports of Goods and Services Affiliates' Gross Product as a Percent of Imports of Goods and Services 172.8 20.4 478.0 31.8 Affiliates' Sales as a Percent of Imports of Goods and Services .... 112.3 153.0 Note: The data on U.S. imports of goods and services are on a balance-of-payments basis. Military and other government imports are excluded. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 1990), pp. 51, 76-77. Table 5-20 Merchandise Exports Shipped By and Merchandise Imports Shipped to U.S. Nonbank Affiliates of Foreign Companies ($ Millions or Percent) Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Affiliate Affiliate Exports Imports Exports Imports as a % of as a % of as a % as a % Total Total of Affil. of Affil. U.S. Mdse. U.S. Mdse. Exports Imports Balance Sales Sales Exports Imports 24858 43896 -19038 12.8 22.6 20.6 28.9 32169 56567 -24398 13.3 23.4 22.6 32.1 44341 63039 -18698 13.5 19.2 24.0 29.7 52199 75803 -23604 12.6 18.4 23.3 30.3 64066 82259 -18193 12.6 16.1 27.0 31.0 60236 84290 -24054 11.6 16.3 28.5 34.0 53854 81464 -27610 10.0 15.2 26.7 30.3 58186 100489 -42303 9.8 16.9 26.5 30.2 56401 113331 -56930 8.9 17.9 26.1 33.5 49560 125732 -76172 7.4 18.7 22.2 34.1 48091 143537 -95446 6.0 18.0 19.2 35.0 59812 149713 -89901 7.0 17.5 18.7 33.5 Note: Because of certain reporting problems, the affiliate trade data are not strictly comparable with the total national trade data. Consequently, these percentages are of use only as they reflect trends. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States. Operations of U.S. Affiliates of Foreign Companies (various Issues) and Economic Report of the President (February 1990), p. 412. Table 5-21 Merchandise Imports, Local Content, and Vertical Integration of U.S. Nonbank Affiliates of Foreign Companies All Industries Year 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Merchandise Imports as a Percent of Total Purchases 27.2 28.0 22.5 21.9 19.5 20.2 19.2 21.3 22.5 23.5 24.1 Local Content as a Percent of Sales 78.6 78.1 83.0 82.7 85.8 84.4 84.5 84.2 83.0 82.2 81.4 Vertical Integration (Ratio of Gross Product to Sales) 17.9 17.5 16.5 17.0 19.0 19.8 20.8 21.5 21.1 21.0 20.6 Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 1990), p. 51, and additional data supplied by the Bureau. Table 5-22 Merchandise Imports and Local Content of U.S. Affiliates of Foreign Companies, By Selected Industries of Affiliates: Affiliates of All Nationalities and Those Whose Beneficial Owner is Japanese Data for 1977 : Manufacturing Food & Kindred Products Chemicals & Allied Product Metals Machinery Other Manufacturing . . . Wholesale Trade Motor Vehicles & Equipment All Industries Data for 1987 : Manufacturing Food & Kindred Products Chemicals & Allied Product Metals Machinery Other Manufacturing . . . Wholesale Trade Motor Vehicles & Equipment All Industries Merchandise Imports Local Content as a Percent of as a Percent of Total Purchases Sales All All Japan Count r i es Japan Countries 17 16 88 90 1 17 99 91 4 9 98 95 * 19 * 87 53 28 62 83 * 15 * 92 37 34 64 68 50 56 52 48 33 37 14 9 13 56 50 47 59 43 ~ 27 16 10 11 19 25 14 41 65 24 69 74 90 93 92 60 65 55 45 62 79 91 92 94 86 84 94 62 40 81 * Suppressed to avoid disclosure of data of individual companies or less than $500,000 or 0.5 percent. Note: "Local content of sales" is overstated to the extent that purchases from domestic suppliers include merchandise imports and to the extent that they include purchases of services from foreigners that were not reported separately, and thus could not be broken out. In 1977, the Japanese presence in the U.S. manufacturing sector was very small. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business (June 1990), p. 51, and unpublished data provided by the Bureau. Table 5-23 U.S. Merchandise Exports and Imports By U.S. Aff i liates of Fore gn Companies and ther U.S. Businesses (B ill ion doll ars) All Other Total U.S . Affiliates u. S. Businesses Year Exports Imports Balance Exports Imports Balance Exports Imports Balance 1977 123.2 151.0 -27.8 24.9 43.9 -19.0 98.3 107.1 -8.8 1978 145.9 174.8 -28.8 32.2 56.6 -24.4 113.7 118.2 -4.5 1979 186.5 209.5 -22.9 44.3 63.0 -18.7 142.2 146.5 -4.3 1980 225.7 245.3 -19.5 52.2 75.8 -23.6 173.5 169.5 4.0 1981 238.7 261.0 -22.3 64.1 82.3 -18.2 174.6 178.7 -4.1 1982 216.4 244.0 -27.5 60.2 84.3 -24.1 156.2 159.7 -3.5 1983 205.6 258.0 -52.4 53.9 81.5 -27.6 151.7 176.5 -24.8 1984 224.0 330.7 -106.7 58.2 100.5 -42.3 165.8 230.2 -64.4 1985 218.8 336.5 -117.7 56.4 113.3 -56.9 162.4 223.2 -60.8 1986 227.2 365.4 -138.3 49.6 125.7 -76.2 177.6 239.7 -62.1 1987 254.1 406.2 -152.1 48.1 143.5 -95.4 206.0 262.7 -56.7 1988 322.4 441.0 -118.5 59.8 149.7 -89.9 262.6 291.3 -28.7 1989 363.8 473.2 -109.4 -- -- -- -- -- -- Note: Because of certain reporting problems, the affiliate trade data are not strictly comparable with the total national trade data. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States. Operations of U.S. Affiliates of Foreign Companies (Various Issues) and International Trade Administration, U.S. Foreign Trade Highlights 1990 (May 1991), p. 29. Table 5-24 U.S. Merchandise Exports Shipped by, and Imports Shipped to U.S. Nonbank Affiliates of Foreign Companies (Billion dollars or Percent) Exports Imports To the From the Foreign Foreign Total Parent To Imports Parent From Exports Group Percent Others Total Group Percent Others 1977 .... 24.9 11.7 47.0 13.2 43.9 30.9 70.3 13.0 1978 . 32.2 16.6 51.5 15.6 56.6 39.5 69.8 17.7 1979 . 44.3 22.1 49.8 22.3 63.0 45.3 71.9 17.7 1980 . 52.2 21.0 40.2 31.2 75.8 47.0 62.0 28.8 1981 . 64.1 26.9 42.0 37.2 82.3 52.2 63.5 30.1 1982 . 60.2 25.0 41.5 35.2 84.3 52.0 61.6 32.4 1983 . 53.9 22.6 41.9 31.3 81.5 54.8 67.3 26.7 1984 . 58.2 27.1 46.5 31.1 100.5 70.5 70.1 30.0 1985 . 56.4 25.9 45.9 30.5 113.3 81.7 72.1 31.6 1986 . 49.6 21.9 44.1 27.7 125.7 93.4 74.3 32.3 1987 . 48.1 19.1 39.7 29.0 143.5 108.2 75.4 35.3 1988 . 59.8 24.4 40.9 35.4 149.7 114.3 76.4 35.4 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Table 5-25 U.S. Exports and Inputs by Affiliates by Industry of Affiliate (Bi 1 1 ion dollars) Exports Imports 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Total Mfg. Other Total Mfcj. Other 24.9 3.6 21.3 43.9 5.6 38.3 32.2 4.5 27.6 56.6 7.2 49.4 44.3 6.5 37.8 63.0 8.7 54.5 52.2 9.0 43.2 75.8 10.4 65.4 64.1 13.6 50.5 82.3 13.2 69.0 60.2 12.9 47.4 84.3 12.4 71.9 53.9 12.0 41.8 81.5 14.0 67.4 58.2 13.1 45.1 100.5 18.2 82.3 56.4 12.8 43.6 113.3 18.6 94.7 49.6 12.8 36.8 125.7 20.6 105.1 48.1 15.5 32.6 143.5 24.5 119.0 59.8 21.0 38.9 149.7 29.3 120.4 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Table 5-26 U.S. Exports and Imports By U.S. Nonbank Affiliates of Foreign Companies Selected Product Categories ($ Millions or Percent) Product Food , Chemicals Machinery Crude Materials, Inedible, except Fuels Metal Manufactures Petroleum and Products Coal and Coke , Beverages and Tobacco Road Vehicles and Parts Other Transport equipment Other Total Exports $M i 1 1 i ons Aff i Mate Share of Total Merchandise Exports 1980 1987 1980 1987 19358 9835 69.8 51.3 4411 8055 21.3 30.5 5429 7465 9.5 10.7 9361 6103 39.3 29.9 3186 3412 26.4 53.1 2295 2564 81.0 65.4 2181 1327 47.2 39.4 489 869 18.4 23.7 1219 793 9.3 4.0 878 775 6.2 4.3 3392 6895 9.0 13.2 52199 48091 24.1 19.7 Food , Chemicals , Machinery , Crude Materials, Inedible, except Fuels Metal Manufactures . Petroleum and Products , Coal and Coke Beverages and Tobacco , Road Vehicles and Parts Other Transport equipment , Other , Total , Imports $Mi 11 ions 6452 6400 2955 7112 11465 35790 3744 4193 10806 10662 11719 10915 82 23 777 1739 16070 47416 1001 1544 10731 17747 Aff i liate Share of Total Merchandise Imports 75803 143537 40.9 34.4 35.5 35.6 57.7 15.1 n.a. 27.9 61.5 46.8 21.3 31.0 31.1 43.9 36.0 36.4 42.4 26.3 n.a. 42.4 65.2 27.2 16.3 35.4 n.a. Not available. Note: The affiliate shares are based on total domestic exports. Since the affiliate exports of food may be overstated for 1980 while the affiliate exports of crude materials may be understated for that year, the affiliate export decline from 1980 to 1987 may be smaller for food and larger for crude materials than is indicated here. The affiliate import shares were calculated by using for the denominator data on general imports. Because of certain reporting problems, the BEA affiliate data are not strictly comparable with the data on total trade from the Bureau of the Census. The data come from different sources—the affiliate data are based on company records, while the Census data are compiled from documents filed by the shipper with the U.S. Customs Service. In addition, the affiliate data are on a fiscal year basis, while the total trade data are on a calendar year basis. Further, while affiliates were asked to provide data on a "shipped" rather than a "charged" basis, some cases of erroneous reporting probably occurred and were not identified. Source: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States (October 1983 and August 1990) and Statistical Abstract of the United States 1990 , Table Nos. 1410 and 1411. Table 5-27 Merchandise Exports and Imports in 1987 By U.S. Affiliates of Foreign Companies Industry of Affiliate By Product (Mi 1 1 ion dollars) Industry of Affiliate (a) Product Food Beverages and Tobacco . . . Crude Materials, Inedible, . except Fuels Petroleum and Products . . . Coal and Coke Chemicals Machinery Road Vehicles and Parts . . Other Transportation Equipm Metal Manufactures Other Total Food Beverages and Tobacco . . . Crude Materials, Inedible, . except Fuels Petroleum and Products . . . Coal and Coke Chemicals Machinery Road Vehicles and Parts . . Other Transportation Equipm Metal Manufactures Other Total Wholesale Manu- Pet- Retail Trade facturing roleum Exports Trade Total 9260 448 (b) 9835 (b) 459 (b) 869 5209 619 (b) 6103 2256 85 223 2564 459 (b) (b) 1327 1830 5379 840 8055 3355 3956 11 9 7465 408 383 1 793 (b) 177 775 2643 710 (b) 3412 (b) (b) (b) 41 6895 29165 15487 1186 Imports 948 48091 5419 834 144 6400 (b) 17747 107278 24546 8971 2134 143537 (a) Only selected categories of industries of affiliate are shown here. (b) Suppressed to avoid disclosure of information on individual companies. (c) Less than $500,000. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Foreign Direct Investment in the United States. 1987 Benchmark Survey. Final Results (August 1990), Tables G-10 and G-16. Table 6-1 U.S. Electronics Industry Affiliate's and Total U.S. Electronic Production, 1990 Industry SIC Computers & Peripherals Computers 3571 Peripherals 3575-77 Household Video. Audio (Number in thousands) Percent of Affiliates U.S. Total Total 33.0 24.3 8.7 16.7 103.3 70.6 32.7 26.8 31.9 34.4 26.6 62.3 Tel ecommuni cat i ons Telephone Apparatus Measuring Instruments Ind. Process Controls Electrical Measuring Medical Equipment Search and navigation Photographic, copiers Electronic Components Semiconductors Electron & TV Tubes Components, nee. Audio and Computer- related Magnetic and optical recording media Total 366 3661 31.5 21.7 130.9 71.7 24.0 30.3 382 3823 3852 18.7 6.1 4.4 178.4 34.0 48.0 10.4 17.9 9.2 384 381 386 13.2 4.0 5.0 142.6 93.0 44.1 9.2 4.3 11.4 367 3674 3671 3679 58.4 18.4 10.2 6.9 337.0 94.7 22.3 91.5 17.3 19.4 45.7 7.5 3695 8.8 191.3 16.2 1,072.3 54.3 17.8 Sources: U.S. Department of Labor, Bureau of Labor Statistics. Employment and Earnings . March 1991. Household video and audio based on Census data. Affiliates' data compiled by Economics and Statistics Administration, Office of Business Analysis. Table 6-2 U.S. Electronics Industry Workers and Plants, 1990 No. of No. of SIC Workers Plants 33,008 71 3571 24,275 33 13,000 2 6,830 10 2,160 6 3572 2,864 16 3575 233 3 3577 5,636 19 3651 16,678 33 1509 8 31,491 60 3661 21,720 35 3,818 5 3663 9,271 23 2,188 8 3,300 2 3669 500 2 3821-29 18,682 74 3823 6,068 15 3825 4,384 19 3826 3,935 12 3841-45 13,235 42 3845 6,069 18 265 2 2,135 3 2,228 2 3812 3,972 7 3861 4,982 21 58,402 136 3674 18,419 49 3671 10,205 13 3672 10,815 22 3675 10,164 16 3676-78 1,880 15 3679 6,919 28 Industry Products Computers and Peripherals. total Computers Mainframes PC & Laptops Workstations Computer disc drives Computer monitors Computer Printers, Keyboards Consumer Electronics Color T.V., Radio, Audio Automotive audio, speakers Telecommunications, total Telephone Apparatus Digital PBX Communications Equipment Cellular Mobile Phone Satellites Electronic detection equipment Instruments, total Industrial Process Instruments Electric and Signal Testing Laboratory Instruments Medical Equipment. total Electromedical Apparatus Magnetic Resonance Imaging Ultrasound diagnostic Cardiac pacemakers Other Avionics, radar, sonar Copiers & photographic equip. Semiconductors and Electronic Components, total Semiconductors Electron Tubes, TV and other Printed Circuit Boards Electronic Capacitors Resistors, Coils, Connectors Electronic Components, nee. Semiconductor Manufacturing Equipment. total 3,169 26 Semiconductor Manufacturing 3559 2,086 13 Semiconductor Testing 3825 991 10 Electron beam accelerator 3699 92 3 Semiconductor Materials, total 6,697 32 Silicon ingots and wafers 3339 3,670 15 Polycrystalline silicon 490 2 Silicon wafers 3,050 10 Galium Arsenide wafers 130 2 Semiconductor ceramic packages 3264 2,050 6 Lead frames for semiconductors 3469 375 6 Sputtering targets 3499 325 2 Quartz for semiconductors 3679 217 3 Table 6-2 (cont'd) SIC No. of Workers No. of Plants Computer-Related Products Floppy, hard disks Hard magnetic disks Floppy disks Audio-Related Products, total Pre-recorded records, tapes Blank magnetic tapes, disks TOTAL 3695 3652 3695 3,163 1,930 1,233 6,239 2,550 5,519 202,607 12 4 8 16 5 K 537 Data Sources: Data on employment and plants were compiled by the Economics and Statistics Administration, Office of Business Analysis from the following directories of acquistions and plants published by: International Trade Administration, Japan Economic Institute, Dunn's Industrial Guide , 1990-91; Corptech Directory; Electronics Industry Association—television plants. Table 6-3 U.S. Electronics Sector Production Workers in U.S. Affiliates of Foreign Firms, 1990 State California 60,826 Massachusetts 18,415 Florida 15,953 Texas 11,025 Tennessee 9,519 New York 9,303 Georgia 9,020 Indiana 7,792 New Jersey 6,898 Pennslyvania 6,417 Ohio 6,059 North Carolina 4,943 South Carolina 4,800 Maryland 3,599 Oregon 3,693 I llinois 3,493 Michigan 2,412 Washington 2,497 Utah 1,785 A I abama 1,646 Arizona 1,628 Rhode Island 1,610 Virginia 1,540 Missouri 1,167 ColbTado 1,026 Nebraska 850 Idaho 840 New Hampshire 774 Kansas 547 Connecticut 520 Minnesota 497 Oklahoma 493 Arkansas 450 Ma i ne 310 Wisconsin 300 Louisiana 300 Kentucky 160 Utah 130 Mississippi 130 South Dakota 60 Nevada 15 Affiliates (1990) No. of No. of Workers Plants 197 30 16 25 10 22 22 15 32 17 16 13 5 8 12 21 6 8 4 2 4 3 6 2 7 1 1 6 3 2 4 4 1 2 1 1 3 2 1 1 1 State Total (1987) No. of No. of Plants Workers 4,633 213,200 1,069 53, 000(D) 760 41,500 1,025 51,800 197 10,400 1,438 67.600(D) 256 7,000 (D) 317 16,500 TOTAL 203,442 537 (D) Substantial amounts of employment not disclosed. Sources: Bureau of the Census. Affiliates data compiled by Economics and Statistics Administration. See Database Sources. Table 7-1 U.S. Automotive Industry Affiliate's Workers and Plants, By Industry, 1990 SIC Industry Veh i c I es 3711 Cars and Pickup Trucks 3711 Heavy Duty Trucks 3713 Truck cabs, cargo beds Tires and Parts 3011 Tires for cars and trucks 2296 Tire chord & fabric 2822 Synthetic rubber Stampings 3465 Stampings & welded parts Bearings 3562 Ball and roller bearings Windows and Parts 3211 Automotive glass 3231 Safety glass and mirrors 3442 Window frames, molding, pipe Seats and Parts 2531 Automotive seats 2399 Seat covers 3499 Seat frames Rubber Parts 3053 Rubber products, seals 3052 Rubber hose and belts 3061 Rubber engine mounts, etc. 3069 Weather strip Engine Parts 3592 Pistons, valves, valve seats 3519 Engine and turbocharger parts 3312 Piston rings, etc. 3714 Misc. engine parts Air Conditioners and Parts 3585 Air conditioners and parts 3714 Controls for air conditioning Electrical Equipment for Engines 3694 Wiring harnesses for engines 3678 Connectors for wire harness 3699 Starters, alternators, coils Plastic Parts. Trim 3089 Trim, bumpers, bearings, etc. Safety Equipment 2221 Material for air bags 2399 Seat belts, restraints 3493 Seat belt springs 3829 Sensors for air bags Fuel Injection Systems 3714 Fuel injectors, pumps, etc. Engines 3714 Passenger car engines No. of No. of workers Plants 35.768 26,653 17 8 7,400 1.845 6 3 39.308 37,028 29 25 2,030 3 250 1 9.06123 9,061 23 7,062 7,062 18 18 6,775 4,405 25 9 1,468 11 902 5 6.46930 3,659 19 2,230 8 580 3 5,430 4,129 26 15 460 5 541 5 300 1 4,833 3,602 26 14 303 8 250 1 550 3 4,606 4,106 16 15 500 1 4,555 3,281 17 9 155 3 1,119 5 3,101 3,101 18 18 2.681 8 485 2 1,731 4 100 1 365 1 2.330 5 2,330 5 1.950 1 1,950 Table 7-1 (cont'd) Automotive Springs 1 .831 9 3493 Steel coil and leaf springs 1,831 9 Wheels 1.854 9 3714 Wheels, steel and aluminum 1,566 8 Instrument Panels 1 .529 6 3087 Instrument panels 250 T 3089 Plastic instrument panels 600 3 3714 Instrument panels, dashboards 350 1 3824 Speedometers, gauges 329 Pollution Controls 1.517 3 3714 Pollution controls, thermostats 1,000 1 3714 Catalytic converters 517 2 Audio Equipment 1 .509 8 3651 Automotive audio, speakers 1,509 8 Water and fuel pumps 1 .304 3 3714 Automotive pumps, water, fuel 1,304 3 Radiators and Heaters 1 .285 3 3433 Radiators 85 T 3714 Radiators and heater cores 1,200 2 F uel and Brake Lines 1 .134 10 3317 Steel fuel and brake lines 1,134 10 Sources: Compiled by the Economics and Statistics Administration, Office of Business Analysis from directories of plants published by the Motor Vehicle Manufacturers Association, Japan Economic Institute, Auto Parts International, Dun's Industrial Guide . Rubber and Plastics , and the International Trade Administration. See Database Sources. Table 7-2 U.S. Automotive Industry Affiliate's Workers and Plants, by Industry, 1990 (Vehicles, Tires, Parts) State Affiliates (1990) No. of No. of Plants Workers State Total (1987) No. of No. of Plants Workers 474 128,400 159 20,800 857 230,800 77 (D) 77 3, 500(D) 133 17,500(D) 293 20,800 4035 3,500 Ohio 68 24,148 Tennessee 48 19, 107 . Michigan 58 17,557 Kentucky 39 14,178 South Carolina 13 12,540 North Carolina 22 12,060 Illinois 27 11,921 Indiana 50 11,802 Alabama 7 7,582 California 16 5,759 New York 9 4,969 Pennsylvania 8 4,376 Virginia 10 4,316 Iowa 8 4,134 Oklahoma 2 4,020 Texas 10 2,712 Georgia 10 2,335 Wisconsin 10 2,207 Missouri 11 2,172 Mississippi 4 1,675 New Hampshire 3 1,456 New Jersey 3 740 Arkansas 3 560 Minnesota 1 410 Deleware 2 218 Washington 1 175 Maryland 11 75 Nebraska 1 125 Vermont 1 60 Nevada 1 30 Colorado 1 25 Connecticut 1 25 Maine 2 25 Kansas 1 na. TOTAL 461 175,217 (D) Substantial amounts of employment not disclosed. Sources: Bureau of the Census, and, for affiliates, from database compiled by the Economics and Statistics Administration, Office of Business Analysis. U.S. Table 8-1 Foreign Owned Steel Affiliates by Country of Ownership, 1980,1988 1980 1988 Japan 5 18 Canada 11 5 West Germany 6 4 Sweden 2 4 France 3 4 Belgium 2 3 United Kingdom .... 1 2 United States .... - 2* South Korea Italy Norway Netherlands 2 Turkey Australia 1 China * Affiliates that are ultimately owned by U.S. companies but that have foreign parents in Bermuda and Netherlands Antilles. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Selected Data of U.S. Table 8-2 Steel Industry Foreign Owned Affiliates (Mi I lion dollars) Number of Total Net Year Affiliates Assets Sales I ncome Employees 1977 .... 24 996 1,019 -14 11,858 1978 25 1,118 1,407 36 12,947 1979 34 1,449 1,814 51 17,518 1980 39 2,257 2,786 9 22,562 1981 43 2,972 3,271 49 25,616 1982 43 3,084 2,838 -143 21,645 1983 45 3,017 2,985 -167 21,055 1984 48 5,185 6,218 -11 38,020 1985 51 5,531 6,410 -286 37,480 1986 50 5,114 6,360 -45 32,615 1987 47 5,774 7,509 173 39,300 1988 50 6,425 8,371 268 38,400 Note: Industry of affiliate basis. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Table 9-1 U.S. Chemicals Manufacturing Industry Affi hates' Investment Outlays 1/ (Mi I lions of Dol lars) By Type of Investment Industry Total Acqu i s i t i ons Establishments 1980 All Chemicals & Industries 253 242 10 Industrial 2/ 176 (D) (D) Drugs 20 18 2 Other 3/ 57 (D) (D) 1988 All Chemicals & Industries 2,918 2 ,484 434 Industrial 735 711 24 Drugs 859 496 363 Soap and toiletries 554 554 Other 4/ 769 722 47 1989 All Chemicals & Industries 11,005 10 ,217 788 Industrial 1,703 1 ,703 Drugs 6,632 5 ,900 433 Soap and toiletries 1,732 1 ,731 1 Other 4/ 1,238 883 355 By Type of Investor Foreign direct U.S. Investors Affi I iates 3 250 176 18 1 56 534 2,384 93 642 366 493 37 517 38 731 6,824 4,180 457 1,245 5,885 447 15 1,717 467 771 Note: A (D) indicates that data have been suppressed to avoid disclosure of data of individual companies. 1/ Data on industry of affiliate basis. 2/ Industrial chemicals include plastics and synthetic products (SIC 282). 3/ Includes soap, cleaners and toiletries, agricultural chemicals and chemicals not elsewhere classified. 4/ Includes agricultural and chemicals not elsewhere classified. 5/ Figures for 1989 are preliminary. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Table 9-2 U.S. Chemical Manufacturing Industry Affiliates Gross Stock of Property, Plant and Equipment by Country of UBO 1/ Industry All Ch emical Industrial 2/ Drugs Soap, CI eaners Other 3/ Indust ries and Toi letries (Mil.S) (%) (Mil .S) (%) (Mil.S) (%) (Mil.S) (%) (Mil.S) (%) 1980 All Countries 18,378 100.0 11,273 100.0 1,590 100.0 1,157 100.0 4,357 100.0 Canada 330 1.8 (D) (D) 0.0 (D) (D) (D) (D) Total, Europe 17,562 95.6 11,011 97.7 1,369 86.1 1,127 97.4 4,056 93.1 France 1,129 6.1 528 4.7 (D) (D) (*) 0.0 (D) (D) West Germany 7,430 40.4 3,890 34.5 39 2.5 (D) (D) (D) (D) Netherlands 2,077 11.3 (D) (D) (D) (D) (D) (D) (D) (D) Switzerland 2,171 11.8 (D) (D) (D) (D) 77 6.7 (D) (D) United Kingdom 4,165 22.7 3,788 33.6 (D) (D) 137 11.8 (D) (D) Japan 272 1.5 (D) (D) (D) (D) 2 0.2 (D) (D) 1987 All Countries 54,832 100.0 44,024 100.0 5,793 100.0 2,956 100.0 2,059 100.0 Canada (D) (D) (D) (D) (D) (D) (D) (D) (D) (D) Total, Europe (D) (0) (D) (D) 5,121 88.4 2,883 97.5 1,763 85.6 France (D) (D) (D) (D) (D) (D) (D) (D) (D) (D) West Germany 9,022 16.5 7,630 17.3 337 5.8 720 24.4 336 16.3 Netherlands 2,866 5.2 (D) (D) 0.0 (D) (D) 0.0 Switzerland 4,052 7.4 (D) (D) 3,752 64.8 219 7.4 (D) (D) United Kingdom 6,598 12.0 5,418 12.3 820 14.2 (D) (D) (D) (D) Japan 1,052 1.9 845 . 1.9 172 3.0 0.0 35 1.7 1988 4/ All Countries 58,246 100.0 45,827 100.0 6,526 100.0 3,455 100.0 2,437 100.0 Canada (D) (D) (D) (D) 42 0.6 60 1.7 467 19.2 Total, Europe 27,824 47.8 16,855 36.8 5,789 88.7 3,355 97.1 1,824 74.8 France (D) (D) (D) (D) 0.0 7 0.2 (D) (D) West Germany 9,958 17.1 8,285 18.1 366 5.6 877 25.4 430 17.6 Netherlands 3,340 5.7 (D) (D) 0.0 (D) (D) 0.0 Switzerland 4,571 7.8 42 0.1 4,268 65.4 222 6.4 39 1.6 United Kingdom 6,101 10.5 4,906 10.7 960 14.7 (D) (D) (D) (D) Japan 1,198 2.1 921 2.0 174 2.7 21 0.6 82 3.4 Note: A (D) indicates that data have been suppressed to avoid disclosure of data of individual companies. An (*) indicates a value of between (-S500.000 and $500,000) 1/ On industry of affiliate basis. 2/ Industrial chemicals includes plastics and synthetics (SIC 282) products. 3/ Other includes agricultural chemicals, paints, and other chemicals not elsewhere classified. 4/ Figures for 1988 are preliminary estimates. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and the Office of Business Analysis. Table 9-3 U.S. Chemicals Manufacturing Industry Affiliates' Gross Stock of Property, Plant and Equipment by State, 1980 and 1988 1/ (Millions of Dollars) 1980 1988 2/ 1980 1988 2/ Total, All Regions: 18.378 58,246 New England: 578 1 ,198 Southeast contd.: Connecticut 82 483 Georgia 625 873 Ma i ne (D) 35 Kentucky 131 522 Massachusetts 272 596 Louisiana 932 3,234 New Hampshire 42 15 Mississippi (D) 384 Rhode Island 139 65 North Carolina 1,052 3,169 Vermont (D) 4 South Carolina Tennessee 1,318 553 2,286 1,889 Mideast: 3,747 (D) Virginia 270 2,639 Delaware 200 (D) West Virginia 354 3,124 Dist. of Columbia 3 3 Maryland 226 388 Southwest: 3,077 11,722 New Jersey 2,087 5 ,067 Arizona 62 92 New York 687 1 ,458 New Mexico (D) (D) Pennsylvania 544 1 ,627 Oklahoma Texas (D) 2,678 (D) 10,222 Great Lakes: 1,813 5 ,194 1 1 1 i no i s 619 1 ,790 Rocky Mountains: 253 1,132 Indiana 394 940 Colorado 113 352 Michigan 273 974 Idaho 11 21 Ohio 417 1 ,332 Montana (D) (D) Wisconsin 110 158 Utah Wyoming 33 90 Nebraska 55 82 Washington 90 206 North Dakota (D) (D) South Dakota (D) 1 Other: Alaska 192 (D) 2,741 (D) Southeast: 6,648 19 ,495 Hawaii (D) 27 Alabama 582 924 Puerto Rico 106 346 Arkansas (D) 132 Other U.S. areas (D) (D) Florida 604 319 Foreign 6 Note: A (D) indicates that data have been suppressed to avoid disclosure of data of individual companies. An (*) indicates a value of between (-$500,000 and $500,000). 1/ Data on industry of affiliate basis. 2/ Figures for 1988 are preliminary estimates. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis and the Office of Business Analysis. Table 9-4 U.S. Chemicals Manufacturing Sales by All U.S. Affiliates. (Millions of Dollars) 1/ Product 1980 Total Chemicals Industrial 2/ Drugs Other 3/ 1987 Total Chemicals Industrial 2/ Drugs Other 3/ 1988 4/ Total Chemicals Industrial 2/ Drugs Other 3/ U.S. Aff i Mates Sub industry Value Share $24,036 100 % 13,071 54 3,433 14 7,532 31 $57,533 100 31,124 54 10,070 18 16,339 28 $63,245 100 34,028 54 11,687 18 17,530 28 U .S. Inci ustry Total U.S. Affiliate Subindustry Share of Val ue Share Industry $157,660 100 % 15% 76, 691 49 17 22, 446 14 15 58, 523 37 13 $225, 200 100 26 95, 548 42 33 42, 903 19 23 86, 749 39 19 $262 525 100 24 116 737 44 29 46 490 18 25 99 298 38 18 1/ Data on industry of sales basis. 2/ Industrial chemicals includes plastics and synthetics (SIC 282) products. 3/ Other includes soap, cleaners and toiletries, agricultural chemicals, paints, and other chemicals not elsewhere classified. 4/ Figures for 1988 are preliminary estimates. SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, Bureau of the Census and the Office of Business Analysis. Table 9-5 U.S. Chemical Manufacturing Sales by All U.S. Affiliates, by Country of UBO. 1/ Manufacturing Products Tot al Industris .1 2/ Drug s Soap, Cleaners and Toi letries Other 3/ (Mil.S) (%) (Mil.$) (%) (Mil.$) (%) (Mil.$) (%) (Mil.$) (%) 1980 All countries $24,036 100.0 $13,071 100.0 $3,433 100.0 $2,693 100.0 $4,839 100.0 Canada 636 2.6 (D) (D) 0.0 (D) (D) 499 10.3 Total, Europe 22,336 92.9 12,468 95.4 3,165 92.2 2,482 92.2 4,221 87.2 France 1,459 6.1 547 4.2 191 5.6 (D) (D) (D) (D) West Germany 6,345 26.4 4,009 30.7 683 19.9 505 18.8 1,148 23.7 Netherlands 5,409 22.5 3,527 27.0 (D) (D) (D) (D) 935 19.3 Switzerland 3,428 14.3 (D) (D) 1,530 44.6 479 17.8 (D) (D) United Kingdom 4,596 19.1 2,646 20.2 626 18.2 434 16.1 890 18.4 Japan 395 1.6 188 1.4 (D) (D) (D) (D) 92 1.9 1987 All countries $57,533 100.0 $31,124 100.0 $10,070 100.0 $5,982 100.0 $10,357 100.0 Canada (D) (D) (D) (D) (D) (D) (D) (D) 2,041 19.7 Total, Europe (D) (D) (D) (D) 8,958 89.0 5,772 96.5 7,796 75.3 France 2,389 4.2 1,537 4.9 (D) (D) (D) (D) (D) (D) West Germany 13,403 23.3 8,104 26.0 2,045 20.3 1,018 17.0 2,236 21.6 Netherlands 8,051 14.0 (D) (D) (D) (D) (D) (D) (D) (D) Switzerland 5,782 10.0 1,221 3.9 2,942 29.2 891 14.9 727 7.0 United Kingdom 9,922 17.2 3,848 12.4 3,321 33.0 869 14.5 1,884 18.2 Japan 1,494 2.6 983 3.2 (D) (D) 0.0 (D) (D) 1988 4/ All countries $63,245 100.0 $34,028 100.0 $11,687 100.0 $6,087 100.0 $11,443 100.0 Canada 11,902 18.8 (D) (D) 98 0.8 180 3.0 (D) (Mil.$) (%) (Mil.$) (%) (Mil.S) (%> 1980 All Countries 1,744 100.0 1,138 100.0 187 100.0 133 100.0 286 100.0 Canada (D) (D) (D) (D) 0.0 1 0.8 (D) (D) Total, Europe 1,461 83.8 1,003 88.1 (D) (D) 131 98.5 (D) !-*■>* u - ipfflnga *T\tV» aUi - Hrrrati l99j Demco, Inc. 38-2 93