csy, 5 : f- >y A UNITED STATES DEPARTMENT OF COMMERCE PUBLICATION ► *<°'/ percent of total increases of $Ij..l billion in such liabilities. Further examination shows affiliate long-term liabilities in 1968 were in total only about $20 million lower than predicted by the model; total short-term liabilities were thus about $620 million higher than predicted. On a more disaggregated level, it was determined that short-term interest- bearing liabilities to others in 1968 were, in total, about $8I|.0 million less than predicted. This reduction may be due to the sharp rises in interest rates which began in 1968, at least in some foreign countries. Short-term non-interest-bearing liabilities of affiliates (mainly payables), on the other hand, were about $1.3 billion in total higher than predicted. Assuming that a rise in interest costs (or limited availability of credit) — not taken directly into account in the model — would ordinarily cause firms to stretch out payables, an increase in payables (plus other non-interest -bearing liabilities) of about $500 million in 1968, may be attributable to the Program. Looking to 1969 ^ we find actual affiliate liabilities totalling about $8^0 million more than predicted by the model. This amount includes the $1.2 billion by which actual short-term liabilities exceeded the level predicted by the model, less the $35>0 million by which actual long-term liabilities fell short of the predicted value, this shortfall probably caused by tight monetary conditions. Actual short-term interest-bearing liabilities were about The $0.14. million difference between the shortfall of average parent flows ($1.7 million) and the increase in affiliate liabilities to foreigners ($1.3 million) is accounted for by increases in minority equity. Ill $375 million under the predicted level, while short-term non-interest-bearing liabilities were fully $1.6 billion higher than predicted by the model. Apparently payables were again substituted for interest -bearing liabilities. Assuming this to have been the case, the full $8^0 million differential between predicted and actual affiliate liabilities to foreigners was again in 1969 due to an increase in payables. IV. Conclusion Although this study is restricted to analysis of data available from the FDI-105 ? it nonetheless suggests a number of relatively important conclusions. First, it appears that the direct investment program may well have affected the course of asset expansion of U. S. foreign affiliates. The growth of fixed assets during the first two years of the existence of the Program was below that to be expected on the basis of 1967 experience, while the growth rate of current assets exceeded that expected rate, perhaps as affiliates increased their foreign borrowings and held the proceeds as cash balances instead of investing them in fixed assets. Analysis of the data showed that the Program may have been responsible for "excess" affiliate borrowing amounting to about $1.1+ billion in 1968 and 1969. However, it is possible that this figure may have been inflated by a tendency for current assets (receivables) and their financing (payables) to be closely associated with one another so that the reduction of one could be expected to be associated with the reduction of the other. The study gives support to the hypothesis that direct investors differentiate between sources of funds depending on the type of foreign asset they are financing. The results obtained, however, do not substantiate the frequently-heard contention that they finance current assets with current liabilities denominated in foreign currencies. Rather, if there is any tendency at all to hedge foreign assets against foreign currency devaluations or other types of risks, such hedging applies to all assets, fixed as well as current. However, the data, and consequently the results, do not distinguish between foreign investments in various countries whose currencies may be more or less susceptible to parity changes, or where other types of risks, such as expropriation, may be present. 15 Technical Notes and Appendix 1/ For 1967 , the last year prior to the Program, this relationship was best expressed by ACA = 3.87 + .36AR f .09R+-1 - .21+CA. y, (R 2 = .513), (3.19) (21.7) (11.7) " (10.0) where ACA represents the change in current assets, AR change in affiliate revenues, Rt-1 revenues in 1966 and CA -£__]_ current assets in 1966. The numbers in parentheses are "t -ratios" and show a high degree of statistical significance for the individual coefficients. The equation suggests an overall relationship between current assets and revenues which is modified by expected revenues, here represented in proxy by the change in current revenues, AR. 2/ Program pressure is defined as gross annual allowables divided by total affiliate asset changes, whether financed by parent or affiliate. The measure has a number of weaknesses, particularly since it does not take account of changes in total affiliate assets which may have been induced by the Program, but implicitly assumes these to have been unaffected — upwards or do wnwar ds - -by the Program. In addition, different direct investors may ordinarily have financed affiliate asset changes with varying mixes of parent and affiliate borrowing, so that direct investors with the same "program pressure" ratio may show different use of third party debt by affiliates when on a consolidated worldwide basis. Obligations to third parties may have changed in a similar manner. Nevertheless, this measure was the best we could devise and is a useful indicator. 3/ Changes in net plant and equipment expenditures were tested against changes in revenues, lagged revenues and lagged net fixed assets in much the same way as with changes in current assets. The model primarily tested was a lagged capital-stock adjustment ("accelerator") model. The best-fitting relationship for I967 was NPE = .96 + .19 A R + .01R+ ]_ + 2 . . (.760) (10.8) (1.07) .OtfNK, -JJt - .1x1) where NPE is net plant and equipment expenditures, Z\R and R t-1 are as defined in Footnote 1, and NK t _ 1 is net capital stock for the previous year (1966). This equation, which fit the data better than other similar equations, may have both the wrong signs and the wrong orders of magnitude. Affiliate revenues for the FDI-105 sample, however, include resales of goods imported from the parent, so that ordinary accelerator-type relationships between production capacity and sales (which represent about 95 percent of the revenue data collected by OFDI) cannot be expected to hold. For this reason the sample was stratified according to average capital/revenue ratios for 1966 -69 (K/R) and the stratification was found to be statistically significant. The results are somewhat puzzling, particularly since the best fits were obtained for direct investors whose aggregate affiliate capital revenue 16 ratios were on the high and. low ends of the averages. 1. K/R> 1.0 (59 obs.) NPE = U.33 + 1.73AR + 1.11% -> - .76NK t -, (IT = .91) (2.75) (23.9) (12.6) (lU.O) 2. 1.0>K/R >.25 (206 obs.) NPE - .88 + .17 AR - .02R+.! + .16NK+ -, (R = .52) (,3h9) (6.810 (1.17) " (3.76) 3. K/R < .25 (2 01; obs.) NPE = -.01; + .17AR - .03R+ i - .ll;NK, -, (R = .71) (.113) (21.5) (6.U9J (U.15) h/ 1968 1. K/R> 1.0 (^9 obs.) 2 NPE = 2.88 + .28AR + .HiR+_i - .05NK t -, (R = .375) (1.35) (1.18) (.720) " (.366) A slightly better fit (corrected for degrees of freedom) resulted when lagged revenues were dropped: NPE = 2.59 + .39AR + .OUNK, -. (R^ = .381) (1.21;) (2.33) (.9^9) 2. loO>K/R>.25 (206 obs.) NPE = 3.53 + .10AR - .03Rt-l + .09NK t 1 (R 2 = .510 (2.02) (3.69) (2.11;) (3.I4I) 3. K/R < .25 (201; obs.) NPE = 1.07 + .05AR - .005R + -1 + .08NK, -. (R = .56) (.U18) (11.1) (1.35) (3.65) t_i 1969 1. K/R^ 1.0 (^9 obs.) NPE = 8.I4.3 + .85AR + 1.56R t -, - 1.07NK, -. (? = .73) (2.5U) (10.8) (7.77) (7.09) t_± 2. 1.0 :> K/R > .25 (206 obs.) ? NPE = 2.31 + .12 AR - .03R + 1 + .08NK, -, (R = .20) (.916) (3.67) (1.76)" (2.1*9) 3. K/R >~.25 (201; obs.) NPE = .13 + .OliAR - .002R, ■, + .03NK f -, (R = .06) (.288) (3.17) (.358) " (.965) Conspicuously poor fits, particularly in 1969, probably mean that excluded variables, such as foreign profit and interest rates, played an important role in foreign fixed asset accumulation. 17 5/ Thus the uses of funds for different types of asset increases were taken as exogenous variables, which is ultimately" tantamount to assuming affiliate asset formation to have been unaffected by the Program. "While we have seen that this was not the case, our analysis does suggest that induced changes may have been roughly offsetting. The data available did not lend themselves to being treated in a fully consistent system of simultaneous equations. 6/ The leverage effect can be represented by the equation AV = a + bAA + u, where AsV is equal to changes in the parent's share in net worth plus changes in affiliate liabilities to the parent (the two are not further distinguished). A A represents the change in total affiliate assets and b indicates the degree of leverage, or the change in parent funds associated with a change in total assets. These figures are for net asset increases and thus exclude depreciation as a source of funds. 1967 results were AV = .09 + .^3A\A; (R 2 = .79). (.01) (Ul.6) = a + bi NPE + b 2 ACA + bj A 0A + b^ALR + u. 7/ The fundamental relationships were put into equation form as AV^ AL A L is equal to changes in total affiliate liabilities to others (including a small portion of such liabilities owed to unaffiliated U. S. persons). NPE is net plant and equipment expenditures, ACA changes in current assets, A 0A changes in other assets, A LR changes in long-term receivables. The sum of these four terms is equal to the change in total affiliate assets, and u is the so-called "unexplained residual." AV and AL comprise virtually the entire source of funds in the model with the exception of changes in foreign equity ownership, quantitatively generally quite small. Econometricians will recognize that treating AV and A L as independent of one another will tend to bias somewhat the results of the regressions. In addition, AL was broken down into its individual components, short- and long-term, interest-bearing and non-interest-bearing. It should be remembered that AV includes funds borrowed abroad by the parent. 8/ The asset stock variant was expressed by AV = a + b-i NPE + b 2 NIA_i + bo ACA + bi. GA+ -, + b^AOA + b A 0A, . + b 7 A LR + boLR, , + u. NK, 1 ■ + *■ U a t "^+ 1 5, , „ t_i .7 8 t-1 . .t-1 is net fixed capital stock for the previous year, and the remaining variables with the t-1 subscript are the lagged year-end (stock) values for the other asset components in question. Inserting the lagged values into the basic equation given in Footnote 7, besides taking into account lags in adjustments, may also reflect the leverage effect. This could be the case where a rapid rate of growth of a given asset — if it ordinarily has a particular source of funds associated with it — can increase or decrease overall leverage. For example, should a direct investor try to maintain a particular relationship between 18 current assets and affiliate borrowings, where current assets increase at an unusually rapid rate, he may find his foreign liabilities representing a greater proportion of total investment than he wishes. The existence of the stock values in the equation takes the percentage rates of growth of the different assets into account and should thus partially reflect the leverage effect. 9/ However, the value of the intercept shifts from 1.18 in 1967 to -2.17 in 1968 and -1.3k in 1969. An examination of the relationships between affiliate asset changes and liabilities to others presents a somewhat different picture. Here we find the percentage of increases in current assets financed by foreign affiliate borrowings falling from k9 percent in 1967 to 36 percent in 1968 and then rising sharply to 55 percent in 1969. Financing of net plant and equipment expenditures from foreign affiliate borrowings fell equivalently from U8 percent in 1968 to 38 percent in 1969. We do not have any explanation for this anomalous result, which is clearly inconsistent with the results when examined from the point of view of parent funds; it is possible that the apparent inconsistencies can be explained by changes in minority equity. 10/ Use of the working capital concept is equivalent to assuming that short- term liabilities finance only current assets. This is, of course, not true: in 1967, around 27 percent of plant and equipment expenditures were financed by short-term liabilities to others; this fell to about k percent in 1968 and rose back to 18 percent in 1969. 11/ AV = -1.52 + .67 HPE' + .U7ACA' + 1.21+AOA' + .lilALR'; (R 2 = .902) (2.93) (21.8) (23.5) (13.5) (3.69) Primes indicate average values . 12/ The trend was indicated by the fact that for each of the three years, 1967 to 1969, changes in the flows of parent funds are positively related to both current year changes in fixed assets and to the year- end total for the previous year. At the same time increases in flows of parent funds are positively related to current asset changes (as expected), but negatively related to the year-end value of total current assets for the prior year. Even though the individual coefficients relating changes in parent funds to individual asset changes (or prior-year asset stocks) shift over the course of period under study, the overall trend persists. Changes in affiliate liabilities to others behave in exactly the opposite way, with a positive relation- ship shown for both current asset changes and current asset stocks, but a negative relationship vis-a-vis fixed asset stocks. It is of course possible that the lagged stock adjustment model in question, which should have positive signs with flow coefficients and negative signs with lagged stock coefficients, is in fact borne out by the results, since the trend effect may have simply swamped the stock adjustment 19 effect. However, it was not possible to determine to what extent the lagged stock adjustment equation also incorporates the "leverage effect" described on p. 8. Very likely it was responsible for some of the shifts in the relevant coefficients which are observed over the period under study. 20 * CO CO g c o 13 •1-1 H fe 4-1 W rw 3 rH" o a* ai CO W EH w CO , — i S !=> cri O ^ H r^ -i CO ^ 4-1 H < O 1 p?i CO S-i c_3 u 4-» H u rn Ph I s - o vD CO CT> c C 0) CU C 'PC H u w cd 0) r=! rH 4J JO o cd •H o r4 4-1 crt > CO CD 4J ■H c 4-) 01 •H T3 i—( c •H CD J3 p. ca CD •H a ►J <* O O CO Q> CO r^ CM CO r-» CO 00 m \JD en r^ co ^ ^ _ ^ / _ N x> n cm en H CM CO n£> rH CM en * H CO H r- r c^ O vO O rH 4c ^^ I s - I s - CO vD vD en vO O CM r- I s - rH CM CO CM I s - cr- C~ r-4 f* . /— . 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O C^v CM un CO VO On H H-3 ON VO ON H h5 P 1 •H ^ 2. £ cr 1 W CO -p CH £ o U -P CO Oh CO bo •H £^ -P -H •H TJ H 2 •H H -° 2 CO £ •H H UN CM UN VO 00 CO H UN 00 CO CM On c^ CO CM UN CO 00 CM CO H O- " H UNVO H -cf vn en oo o o • vo 1 ON 0"N UN [>_ tn • Cn • - O • O- H CM H H 0~\ 00 UN UN CO UN CM CM CO CN M0 O- CM un .3- H -d" CO rH On H ON H CN CM CA I en -3- en CM • • O H CM H -d" H f ON ON CM -d" O -3- cnvO H CM 00 oo n en o en . O-C0 On en O- CM IN- CN- VO O- O- rH rH ON ON cn o O ON I H ON ON O - • H I H CO CM O Cv. 1 UN rH CM O u~\ UN . UN - - O - CO CM H U\ U"N ON .3- CO . UN . H • -3- CM CM UN - UN . O • -3- CM rH VO CM O H o o H en H CO -3" UN 00 H CM ON UN .3- - cn • . m . O rH rH Cv- 1A un H CM - CM u\ MD • • rH vO o- O- ts- en UN . UN . • UN . O. rH H -x- -x- cb .3- cn-cr H un envo {N- C"> CM CM rH "N CNVO ONHNO r\ir\uMA H H H H CM en rH rH H CM H CM H CM © -p UN -P cn H H H o CO CO cO •H -p -P -P tH o O O •H En EH &H bO •H to Cn- CO ON v0 vo vo -p ON ON ON o > < t> ^. 22 The Survey Tables These tables summarize balance sheet data for majority-owned affiliate foreign nationals for the years 1966-1969 as reported to OFDI by the l\69 direct investors filing Form FDI-105 in 1969, and 1970. The data are broken down into "all schedules (excluding Canada)" which include the areas of the world subject to Program restriction, and Canada, which is exempt from restriction. Structure of Foreign Affiliate Assets and Liabilities tables (Tables la, b - Vila, b) represent year-end balance sheet data taken directly from the FDI- 105 reports. These tables exclude accumulated depreciation charges; accordingly, fixed assets are net of depreciation. Sources and Uses tables (Tables Ic - VIIc ) were derived from the reported balance sheet data and can, for the most part, be reconstructed by the reader from Tables la, b - Vila, b. However, they include depreciation charges as a source of funds, so that the fixed asset figures in these tables are gross of depreciation. Unlike many sources and uses of funds tables, these do not include earnings or dividends as the data were not available from the FDI-105 forrrio Retained earnings data were also not directly available from the form, but were estimated from information filed on Form FDI-102F. Tables Id - VEId include various earnings, debt-equity, and capital revenue ratios of general interest. Unlike sections a - c of the tables, these do include estimates of affiliate earnings as derived from the FDI-102 reports. It should be noted, however, that although earnings data are for the same set of direct investors reporting for the FDI-10^, they include data for non-majority affiliates as well as for the majority-owned affiliates covered in this survey. Tables la - d cover all I4.69 direct investors filing FDI-105; the sample of direct investors filing was not restricted to any particular industries. As noted in Part I of this study, all data filed are consolidated by the direct investor, so that where industry breakdowns are provided, such breakdowns are on the basis of the parent's Standard Industrial Classification (SIC) code, rather than that of the affiliate. Tables II a - d cover the 6l direct investors primarily engaged in the extractive industries and include SIC codes 10 - lit and 29; the bulk of the assets covered is, of course, employed in the petroleum industry. Tables IHa - d cover 313 direct investors engaged in manufacturing (SIC 19 - 39, excluding 29), leaving 95 direct investors primarily engaged in other industries such as printing and publishing, sales and finance, real estate, etc. This residual category Is not broken out from Tables la - d. 23 Direct investors engaged primarily in manufacturing whose affiliates were covered in the survey were further broken down into "chemical and allied" (SIC 28), of which there were 6 5 direct investors covered in Tables IVa - d, and "electrical machinery, " of which US were included in Tables Va - d (SIC 36). Finally, Tables Via - d cover the I4.6 direct investors reporting for "non- electrical machinery" (SIC 35 )j and Tables Vila - d include data from the 20 direct investors primarily engaged in the production of "transportation equipment" (SIC 371 - 375, 379). c-, w H c/-) r/i CO £3 < p ■/. w H < 0) M c^ G vO crt X X. 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