ry. -: : FHHiL THE FINANCIAL STRUCTURE UF THE FOREIGN AFFILIATES OF U.S. DIRECT INVESTORS APRIL 1974 V WW "fi c % S 'ATtS O* K / U.S. DEPARTMENT OF COMMERCE Office of Foreign Direct investments THE FINANCIAL STRUCTURE OF THE FOREIGN AFFILIATES OF U.S. DIRECT INVESTORS Anthony E. Scaperlanda Senior Economic Adviser U.S. DEPARTMENT OF COMMERCE Frederick B. Dent, Secretary §" Office of Foreign Direct Investments <-> Robert H. Enslow, Director I April 1974 1 o. 4) a t/5 =5 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price $1.45 Stock Number 0316-00001 PREFACE This study, based on foreign affiliates' balance sheet data from 440 large United States direct investors, has two aims. One is to make basic research resources generally available. Those interested in research will find useful both the basic data as presented in the Appendix of Basic Data, and the analyses of estimated relationships found in Chapter 3. Another purpose is to build on OFDI's Foreign Affiliate Financial Sur- veys of 1970 and 1971 (together covering the period 1966-69) by Philip D. Berlin. To this end various effects of the Foreign Direct Investment Pro- gram (FDIP) as well as other effects are analyzed. These analyses are intended for two groups, not necessarily mutually exclusive — informed non-economists, and those with more formal economics training. Various members of the OFDI staff contributed significantly to the study's development. Robert V. Burke did the programming for the esti- mates presented in Chapter 3, and Larry T. Fitzgerald programmed the production of the tables presented in Chapter 4. In addition, Guy Stevens read, in its entirety, a previous version of the study and made a number of helpful comments. If deficiencies persist, the author takes responsibility Anthony E. Scaperlanda Washington, D.C. August 15, 1973 in Contents Chapter Page Preface iii 1. Summary and Introduction 1 A. Summary 1 B. Introduction 2 2. AFN Financial Structure, General Analysis 5 A. All Industries in All Countries except Canada 7 B. All Industries in Canada 7 C. By Industry, General 9 D. By Industry, All Countries except Canada 10 E. By Industry, Canada 12 F. Annual Changes in the Financial Structures of Foreign Affiliates 12 G. Selected Effects of the Program 14 1. Effects on the Financial Structures of AFNs 14 2. Balance of Payments Effects 16 3. Debt Overhang 19 H. Revaluation Effects 20 3. AFN Financial Structure, Econometric Inquiries 23 A. The Determinants of Direct Investment 23 B. AFN Uses of Funds by Source, 1967-71 36 Glossary of Symbols 47 Appendix of Basic Data (Appendix A) 49 Appendix B — Summary of the Foreign Direct Investment Regulations 85 Bibliography of Related Literature 89 Digitized by the Internet Archive in 2012 with funding from LYRASIS Members and Sloan Foundation http://www.archive.org/details/financialstructuOOscap LIST OF FIGURES Page 1. Distribution of the Stock of Worldwide AFN Financing, By Type of Financial Instrument, 1971 6 2. Distribution of the Stock of Worldwide Equity and Interest-Bearing Liability Financing, By Type of Financial Instrument, 1971 11 3. AFNs and U.S. Domestic Total Liabilities/ Total Liabilities and Equity, Annual Flow Data for 1967-1971 15 4. Ratios of Interest-Bearing Debt and Minority Equity: Employed Capital for Schedules A, B, C and Canada, Total Manufacturing, 1966-71 17 5. Stock of Employed Capital, Direct Investment and Fixed Assets, Schedules A, B, C and Canada, All Industries, 1966-71 18 LIST OF TABLES 2- 1 Industrial Distribution of Direct Investment, Schedules A, B, C and Canada, 1966 and 1971 9 2- 2 Interest-Bearing Debt and Minority Equity/ Employed Capital Relationships, Schedules A, B, and C, by Industry 10 2- 3 Interest-Bearing Debt and Minority Equity/ Employed Capital Relationships, Canada, by Industry 12 2- 4 Indices of Selected Ratios of Annual AFN Data (1966-67 = 100) 13 2- 5 AFNs and U.S. Domestic Total Liabilities/Total Liabilities + Equity, Annual Flow Data for 1967-1971 14 2- 6 Cumulative Balance of Payments Effects of Changes in AFN Financial Structures 19 2- 7 Alternative Estimates of FDIP-Induced AFN Debt 20 2- 8 AFN Current Assets, 1970 and 1971 20 2- 9 AFN Gains or Losses from 1971 Currency Revaluation 21 vii LIST OF TABLES — (Continued) Page 3- 1 Regression Results for Aggregate U.S. Foreign Direct Investment, 1971 26 3- 2 Regression Results for Manufacturing U.S. Foreign Direct Investment, 1971 26 3- 3 Regression Results for Extractive U.S. Foreign Direct Investment, 1971 26 3- 4 Regression Results for Capital Transfers of All Industries, 1971 28 3- 5 Regression Results for Capital Transfers of Manufacturing Industries, 1971 28 3- 6 Regression Results for Capital Transfers of Extractive Industries, 1971 28 3- 7 Regression Results for Reinvested Earnings of All Industries, 1971 30 3- 8 Regression Results for Reinvested Earnings of Manufacturing Industries, 1971 30 3- 9 Regression Results for Reinvested Earnings of Extractive Industries, 1971 30 3-10 Regression Results for Dividends, by Industry, 1971 32 3-11 Regression Results for Reinvested Earnings for All Industries (Model 4) , 1971 32 3-12 Regression Results for Reinvested Earnings for Manufacturing Industries (Model 4), 1971 32 3-13 Regression Results for Aggregate U.S. Foreign Direct Investment, 1968-71 33 3-14 Regression Results for Manufacturing U.S. Foreign Direct Investment, 1968-71 33 3-15 Regression Results for Extractive U.S. Foreign Direct Investment, 1968-71 33 3-16 Regression Results for Capital Transfers of All Industries, 1968-71 34 3-17 Regression Results for Capital Transfers of Manufacturing Industries, 1968-71 34 3-18 Regression Results for Capital Transfers of Extractive Industries, 1968-71 34 3-19 Regression Results for Reinvested Earnings of All Industries, 1968-71 35 viii LIST OF TABLES — (Continued) Page 3-20 Regression Results for Reinvested Earnings of Manufacturing Industries, 1968-71 35 3-21 Regression Results for Reinvested Earnings of Extractive Industries, 1968-71 35 3-22 Regression Results for Reinvested Earnings of Manufacturing Industries (Model 4), 1967-71 35 3-23 Regression Results for Dividends of All Industries, 1967-71 37 3-24 Regression Results for Dividends of Manufacturing Industries, 1967-71 37 3-25 Regression Results for Dividends of Extractive Industries, 1967-71 37 3-26 Uses of Increments in Direct Investment, Regression Results for All Industries, 1967-71 38 3-27 Uses of Increments in Direct Investment, Regression Results for Manufacturing Industries, 1967-71 38 3-28 Uses of Increments in Direct Investment, Regression Results for Extractive Industries, 1967-71 38 3-29 Uses of Increments in Total Liabilities, Regression Results for All Industries, 1967-71 39 3-30 Uses of Increments in Total Liabilities, Regression Results for Manufacturing Industries, 1967-71 39 3-31 Uses of Increments in Total Liabilities, Regression Results for Extractive Industries, 1967-71 39 3-32 Uses of Increments in Short-term Liabilities, Regression Results for All Industries, 1967-71 40 3-33 Uses of Increments in Short-term Liabilities, Regression Results for Manufacturing Industries, 1967-71 40 3-34 Uses of Increments in Short-term Liabilities, Regression Results for Extractive Industries, 1967-71 40 3-35 Uses of Increments in Long-term Liabilities, Regression Results for All Industries, 1967-71 42 IX LIST OF TABLES — (Continued) Page 3-36 Uses of Increments in Long-term Liabilities, Regression Results for Manufacturing Industries, 1967-71 42 3-37 Uses of Increments in Long-term Liabilities, Regression Results for Extractive Industries, 1967-71 42 3-38 Uses of Increments in Short-term Interest Bearing Liabilities, Regression Results for All Industries, 1967-71 43 3-39 Uses of Increments in Short-term Interest Bearing Liabilities, Regression Results for Manufacturing Industries, 1967-71 43 3-40 Uses of Increments in Short-term Interest Bearing Liabilities, Regression Results for Extractive Industries, 1967-71 43 3-41 Uses of Increments in Short-term Non-interest Bearing Liabilities, Regression Results for All Industries, 1967-71 44 3-42 Uses of Increments in Short-term Non-interest Bearing Liabilities, Regression Results for Manu- facturing Industries, 1967-71 44 3-43 Uses of Increments in Short-term Non-interest Bearing Liabilities, Regression Results for Extractive Industries, 1967-71 44 3-44 Uses of Increments in Long-term Interest Bearing Liabilities, Regression Results for All Industries, 1967-71 45 3-45 Uses of Increments in Long-term Interest Bearing Liabilities, Regression Results for Manufacturing Industries, 1967-71 45 3-46 Uses of Increments in Long-term Interest Bearing Liabilities, Regression Results for Extractive Industries, 1967-71 45 3-47 Uses of Increments in Long-term Non- interest Bearing Liabilities, Regression Results for all Industries, 1967-71 46 3-48 Uses of Increments in Long-term Non-interest Bearing Liabilities, Regression Results for Manufacturing Industries, 1967-71 46 LIST OF TABLES — (Continued) Page 3-49 Uses of Increments in Long-term Non-interest Bearing Liabilities, Regression Results for Extractive Industries, 1967-71 46 4- 1 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, All Industries 52 4- 2 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, Extractive Industries 53 4- 3 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, Manufacturing Industries 54 4- 4 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, Chemical and Allied Industries 55 4- 5 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, Electrical Machinery Industries 56 4- 6 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, Non-Electrical Machinery Industries 57 4- 7 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, Transportation Equipment Industries 58 4- 8 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, "Other Manufacturing" Industries 59 4- 9 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, All Schedules, "Other" Industries 60 4-10 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, All Industries 61 4-11 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, Extractive Industries 62 4-12 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, Manufacturing Industries 63 4-13 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, Chemical and Allied Industries 64 xi LIST OF TABLES— (Continued) Page 4-14 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, Electrical Equipment Industries 65 4-15 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, Non-Electrical Equipment Industries 66 4-16 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, Transportation Equipment Industries 67 4-17 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, "Other Manufacturing" Industries 68 4-18 Structure of Foreign Affiliate Assets, Liabilities, and Equity, 1966-71, Canada, "Other" Industries 69 4-19 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, All Industries 70 4-20 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, Extractive Industries 70 4-21 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, Manufacturing Industries 71 4-22 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, Chemical and Allied Industries 71 4-23 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, Electrical Equipment Industries ' 72 4-24 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, Non-Electrical Equipment Industries 72 4-25 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, Transportation Equipment Industries 73 xn LIST OF TABLES — (Continued) Page 4-26 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, "Other Manufacturing" Industries 73 4-27 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, All Schedules, "Other" Industries 74 4-28 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, All Industries 74 4-29 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, Extractive Industries 75 4-30 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, Manufacturing Industries 75 4-31 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, Chemical and Allied Industries 76 4-32 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, Electrical Equipment Industries 76 4-33 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, Non-Electrical Equipment Industries 77 4-34 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, Transportation Equipment Industries 77 4-35 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, "Other Manufacturing" Industries 78 4-36 Sources and Uses of Funds of Majority-Owned Foreign Affiliates, 1966-71, Canada, "Other" Industries 78 4-37 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, All Industries 79 4-38 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, Extractive Industries 79 xiii LIST OF TABLES — (Continued) Page 4-39 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, Manufacturing Industries 80 4-40 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, Chemical and Allied Industries 80 4-41 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, Electrical Equipment Industries 81 4-42 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, Non-Electrical Equipment Industries 81 4-43 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, Transportation Equipment Industries 82 4-44 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, "Other Manufacturing" Industries 82 4-45 Selected Financial Data for Foreign Affiliates, 1966-71, All Schedules and Canada, "Other" Industries 83 xiv CHAPTER 1 SUMMARY AND INTRODUCTION Summary (1) During the 1966-71 period, important changes took place in the aggregate financial structure of foreign affiliates (AFNs) of U.S. direct investors (DIs) in the Scheduled Areas. These changes include greater reliance on lia- bilities to finance AFNs and a growth in the proportion of short-term assets in AFNs rela- tive to total assets. (2) In Canada, AFN assets and liabilities expanded at a slower pace than in the rest of the world. However, the 56% increase in assets and the 73% increase in liabilities, while direct investment was expanding 52%, results in a pattern similar to that observed in the Sched- uled Areas. (3) In general, AFNs have increased their reliance on non-interest-bearing liabilities to finance asset formation. (4) If these liabilities are eliminated, one continues to observe in the Scheduled Areas a declining reliance on direct investment as a means of financing asset formation. Further, the short-term asset/short-term liability rela- tionship suggests that the build-up of current assets noted above was not unusual. (5) There was less evidence in the Canadian data of a decline in the reliance on direct invest- ment. Where changes are observed, their perma- nence is less certain than for the Scheduled Areas. However, changes in Canadian AFNs' working capital position follow a pattern simi- lar to that in the Scheduled Areas, which lends further support to the idea that the growth of current assets in those areas has not been ab- normal. (6) Annual flow data suggest that the pat- tern of using short-term liabilities to finance current assets and long-term liabilities to fi- nance fixed assets fluctuates from year to year depending on the sum of market influences. (7) Despite Foreign Direct Investment Pro- gram (FDIP) constraints, revenues and earn- ings have grown more rapidly in the Scheduled Areas than in unconstrained Canada. (8) The effect of the FDIP on the financial structure of AFNs is not perfectly clear. If comparisons are made with available domestic data or with pre-Program Schedular experience, little FDIP effect is observed. The experience of Canadian AFNs, which were constrained under the latter part of the Voluntary Program and the first three months of the FDIP, sug- gests that capital controls may alter the financial structure of AFNs. If this is the case, the evi- dence suggests that the Voluntary Controls had an impact similar to that of the mandatory FDIP. (9) What is clear from some of the economet- ric work in the second half of Chapter 3 is that DIs altered the uses to which they put various sources of funds in response to the FDIP. For example, compared to subsequent years, in 1968 (when the Program was most restrictive) a relatively higher proportion of manufacturing AFNs' fixed assets were financed by short-term liabilities. ( 10) The shifts in the way AFN asset forma- tion is financed, have had a favorable, immedi- ate $2.5 billion effect on the U.S. balance of payments. (11) Since some of the shifts which provide the basis for this balance of payments gain are not FDIP related, one would expect the refinancing of AFN debt from U.S. sources to be less than $2.5 billion when the Program ends. Probably the maximum actual amount would be in the $1.5-2.0 billion range. (12) The evidence indicates that American direct investors were able to protect themselves from exchange rate fluctuations during the 1971 revaluation. The 287 direct investors replying to the relevant questions indicate a net gain on short-term assets and liabilities of $316 million (2.3%). Positioning in anticipation of revalu- ation seems to have begun about two and a half years before the actual revaluation. (13) The econometric work in the second half of Chapter 3 also provides some idea of internal adjustments which DIs made to protect themselves from revaluation effects. For ex- ample, in manufacturing there was an im- portant increase in the use of short-term liabilities to finance fixed assets and other as- sets in 1970. Such an increase involved de- creasing the use of short-term liabilities to finance long-term receivables. Under certain assumptions these and similar shifts can be explained as positioning in anticipation of re- valuation. (14) A flexible accelerator model modified by the addition of variables leads to the con- clusion that the host country's market size, market growth, AFNs' internal cash flow, and the replacement of the stock of direct invest- ment were statistically significant determinants of direct investment. Foreign withholding taxes on dividends do not seem to have discouraged dividend payments in manufacturing industries. Use of Proceeds and Specific Authorizations were found to be significant, not as determi- nants, but rather in not impeding direct invest- ment. 1 (15) Viewing similar annual equations over the 1967-1971 period, one is able to view the changing effect of the FDIP. Generally, the pattern seems to indicate that the Office was successful in its effort to liberalize the Pro- gram. Introduction Multinational enterprises have exerted vary- ing degrees of influence on international eco- nomic relations at least since the Mercantilist period. In the contemporary world, the last quarter century has been a period in which international business relations, disrupted first by the depression of the 1930's and subsequently by World War II, have been reconstructed. One prominent aspect of this process has been the resurgence of the multinational firm. At once benefiting from and encouraging improved rela- tions and closer international economic ties, the multinational firms of the U.S., Europe, and 1 Extra-allowable direct investment may be offset by allocation of the proceeds from foreign borrowing (Use of Proceeds) ; alternatively, such direct investment may be specifically authorized by the Office on a case by case basis (Specific Authorizations). 2 The term "multinational enterprise" has enjoyed a variety of meanings. OFDI terminology does not use the phrase, but refers to direct investors (DIs) and their foreign affiliates (AFNs), in turn further specified as incorporated and unincorporated. Together these would fit the definition of multinational corporation used by Rolfe (p. 12). Alternatively, Aharoni (1971, p. 35) would call most of the units in the sample used in this study multinational clusters, with the direct in- Japan have expanded greatly, both in terms of numbers and in terms of industries. 2 Two other phenomena became apparent simultaneously. First, it was increasingly evi- dent that traditional economic theory was in- adequate to explain the motives, the domestic and foreign effects, and other aspects of direct investment by enterprises operating multina- tional^. Second, the U.S., the country of origin of a substantial portion of new direct invest- ment during the 1950's and 1960's, encountered increasingly difficult balance of payments prob- lems. This development led to the establishment of U.S. voluntary controls on the outflow of direct investment from 1965 through 1967. These were followed by more stringent manda- tory controls on January 1, 1968, in the form of the Foreign Direct Investment Program (FDIP or the Program). The Office of Foreign Direct Investment (OFDI) was established to administer the mandatory controls. Part of that administrative mission has been to analyze the Program's effects. Such analyses assist in understanding and improving the Pro- gram and provide insights into the motives and contributions of direct investors. The impor- tance of the Office's research is heightened by the fact that the expansion of multinational enterprises continues to be vigorous and the subject of active debate in various forums. 3 OFDI research focuses principally on either the direct investor (DI) or on the affiliates of the DI (in the parlance of the Office, affiliated foreign nationals or AFNs.) 4 Most of the em- phasis is placed on the DI. This study, closely akin to the Office's Foreign Affiliate Financial vestor designated as the multinational corporation. To avoid confusion here, we usually refer either to the di- rect investor or to its foreign affiliates. In those few instances when reference is made to both collectively, the term multinational enterprise is used. 3 Examples of international considerations of the treatment of direct investment are: OECD Council, Re- port by High Level Group on Trade and Related Prob- lems, Policy Perspective for International Trade and Economic Relations, Paris, September 1972, pp. 50-53; and International Monetary Fund, A Report by the Ex- ecutive Directors to the Board of Governors, Reform of the International Monetary System, Washington, D.C., 1972, pp. 45-47. 4 OFDI defines a direct investor as: ". . . Any person within the United States which directly or indirectly owns or acquires a 10% interest in a corporation or partnership organized under the laws of a foreign country or in a business venture conducted within a foreign country as described . . ." in the section of OFDI regulations defining an affiliated foreign national. An A FN is defined as any foreign enterprise in which a U.S. DI has at least a 10% interest, except those with less than $50,000 gross assets, of less than one year's duration, and specified non-profit organizations. Survey, 1966-1969 of July 1971 and the similar publication of July 1970, is the Office's principal study of the AFNs. In the most general sense, the purpose of this study is to describe the financial structure of the AFNs of United States DIs. The delineation of the basic financial structure of AFNs is of fundamental interest. Further, it is of interest to evaluate the extent to which the AFN financial structures have changed. Since among the forces influencing the financial structures of DIs is the pressure brought to bear by OFDI, the FDIP's effects on the financial structures of AFNs is considered. In addition, as indicated in the chapters which follow, the analysis also provides insight into such questions as whether there is any affiliate debt which might be repaid if the Program were terminated, the balance of payments effects of the Program, and the effect of the 1971 revaluation on the financial struc- ture of AFNs. To achieve this, we have assembled balance sheet data for the AFNs of the large DIs sam- pled. 15 Each DI in the sample is asked to con- solidate balance sheet data for all AFNs having assets in excess of $500,000. The consolidation is also across all countries except Canada. Since Canada is exempted from the Program, Cana- dian data are reported separately on the Form FDI-105 used to collect the data. The present analysis covers 440 DIs for which data were available for the years 1966-71. 6 The analyses of the data are presented in two forms. Chapter 2 contains an analysis for the 5 Form 105 was completed and filed initially by all DIs making 1969 direct investment in excess of $1 million or which had made cumulative long-term foreign borrowings during the 1965-69 period of $5 million or more. Subsequently the same DIs have been asked to file the data upon which this study is based. 6 Earlier presentations of 105 data were based on somewhat larger samples of DIs. In the 1970 Foreign Affiliate Financial Survey, 515 DIs were included; in 1971, 469. The present sample encompasses more than 90 percent of the 1971 DI sample. Relating the FDI- 105 sample to the OFDI universe, it can be noted that annual direct investment of the DIs in the 105 sample averaged 74.6% of the OFDI universe over the 1969-71 period. During the same period the sample equalled informed non-economist. Analysis more directly tailored for the economist is presented in Chap- ter 3. The econometric analysis is useful because a number of factors simultaneously influence the direct investment process and the resulting financial structure of AFNs. Only by analyzing the data in a properly specified, relatively rigor- ous model, can one gain insight into the role of a particular factor in influencing the process. Following the analytical chapters is an Appen- dix of Basic Data, Appendix B which contains a brief summary of the Program and A Bibliog- raphy of Related Literature. 78.9% of the Bureau of Economic Analysis' universe (where the universe composition is slightly different than OFDI's). It is also useful to compare selected items of these data to similar items available for 1966 and 1970 in: U.S. Department of Commerce, Bureau of Economic Analysis, Special Survey of U.S. Multina- tional Companies, 1970, a supplement to The Survey of Current Business, 1972. Comparing only items available in the BEA statistics, one finds the following for 1970: (millions of dollars) BEA (298 DIs) OFDI (440 DIs) Total Assets 102.396 101,199 Total Liabilities 59,829 42,414 Net Worth 42,566 58,785 Plant & Equipment 41.280 44,409 The OFDI data contain no DIs whose primary func- tion is financial. This probably accounts for the rela- tively larger proportion of plant and equipment in OFDI data. In the distribution of liabilities and net worth, OFDI classifies liabilities to the parent DI as net worth. The reasoning is that equity plus receivables from the AFN equals the sum of DIs' claims on AFNs' assets. Another point to be noted is that BEA collects data on each AFN of a given DI. Thus each AFN reports these data without consideration of what other AFNs are reporting. In contrast, OFDI requires that each reporting DI consolidate the data of its AFNs and report only the consolidated data. A central point here is that the DIs are required to net out inter-AFN trans- actions in order to report the net overseas position of the DI. The effect of the netting-out requirement is indicated by the fact that the inter-AFN liabilities outstanding at the end of 1971 which were netted out of OFDI data equalled $8.5 billion. In the OFDI data, AFN liabilities to others at the end of 1971 included $2.2 billion liabilities to U.S. persons other than the reporter. CHAPTER 2 AFN FINANCIAL STRUCTURE: A GENERAL ANALYSIS The FDIP aims at limiting the balance of payments impact of direct investment outflows by inducing offsetting foreign borrowing. If direct investment outflows (capital transfers and reinvested earnings) exceed prescribed "al- lowables", 1 DIs can bring themselves into com- pliance with the regulations by undertaking long-term borrowing from sources outside the U.S. and subtracting the proceeds of the bor- rowing from the actual direct investment. The remaining direct investment, known as "regu- lated direct investment", must be equal to or less than the DI's allowable. 2 In balance of pay- ments accounting terms, the borrowings are recorded as capital inflows into the U.S., off- setting the direct investment outflow. 3 As this implies, the focus of the FDIP is on the actions of the direct investor. However, funding from the DI is but one component of the total funding of the foreign affiliate. Thus it is also of interest to analyze the financial structures of AFNs in an attempt to identify 1 Allowables have generally been liberalized over the life of the Program by increasing the size of the world- wide minimum allowable ($2 million in 1971) and by the introduction of the earnings allowable. A DI might elect to use either the earnings or the historical allow- able. In 1971 a DI electing the earnings allowable was permitted direct investment equivalent to 40 percent of the previous years' earnings in each scheduled area. A DI electing the historical allowable is permitted to make, without offsetting actions, investments equal to 110 percent of the 1965-66 average in Schedule A; 65 percent of the 1965-66 average in Schedule B; and 35 percent of the period's average in Schedule C. As an alternative to the simple minimum allowable, a DI might elect the minimum allowable of $2 million for Schedules B and C with a supplemental allowable for Schedule A of $4 million. Beginning with 1973 (not covered in this analysis) this last option has been modified so that a general worldwide minimum allow- able of $6 million is in effect. 2 For a survey of the volumes of investment involved see: OFDI, Foreign Direct Investment Program, Se- lected Statistics, August 1972, p. 5. 8 For a brief summary of the program, see Appendix B. Program effects. Such an inquiry may also yield other insights into the financial structures of the foreign affiliates of U.S. multinational en- terprises. An initial understanding of the aggregate financial structure for the 440 DIs included in this study can be gained from Figure 1. As of the end of 1971, direct investors had directly provided the financing for 54 percent (41 per- cent majority equity and 13 percent liabilities to DI) of existing AFN assets. Minority owner- ship had provided 3 percent of the financing. Total debt had been used to finance 43 percent of the total ( 14 percent long-term and 29 percent short-term). Focusing on equity, if liabilities to the parent are included in DI equity (as done above), one finds that the DIs provide 95 percent of the equity of AFNs. Focusing only on aggregate direct investment, one finds that actual majority equity is approximately three times more utilized than AFN liabilities to DI as the form which the DIs' "equity claims" actually take. In the analysis which follows, the description of the data first focuses on the financial struc- ture of AFNs in the "Scheduled Areas". 4 Sub- sequently Canadian data (direct investment in Canada is exempted from the Program's con- trols) are reviewed and compared to the data for Scheduled Areas. The stock, or straight bal- ance sheet data, are considered first. Changes in the stock, or flow data, are then considered, followed by a consideration of ratios of selected data. 4 Schedule A includes all developing nations except selected oil producing countries. These oil producing countries, selected countries from the sterling bloc and Japan were placed in Schedule B; Spain was included in Schedule B in 1970. Countries not included in Schedules A or B were placed in Schedule C. Canada, in Schedule B, was exempted from the Program in March 1968. Figure 1 Distribution of the Stock of Worldwide AFN Financing by Type of Financial Instrument, 1971 Minority Equity Source: Tables 4-1 and 4-10. Note: Shaded area equalsdirect investment. All Industries in All Countries Except Canada The data for all industries found in Table 4-1 (Page 52) show that total AFN assets of the DIs in the sample increased 92 percent be- tween 1966 and the end of 1971. The claims of direct investors, however, increased only 75 percent during the same period. This points up one of the more interesting phenomena ob- served: AFN liabilities increased 119 percent during the period (27 percentage points faster than total assets). 5 To attribute the more rapid increase solely to the FDIP may be presump- tuous because of the small amount of pre- program data available. Nonetheless, for 1966 and 1967, the pre-Program years for which data are available, the share of assets against which DIs had a direct claim was relatively stable at approximately 58 percent. By 1971 the DIs' position had declined five percentage points to about 53 percent. Delving into these data, one finds that the di- rect ownership component (majority equity) of DIs' claims increased at about the same pace as AFN liabilities to DIs. Turning to the rapidly expanding liabilities, one finds that long-term liabilities grew more rapidly than short-term liabilities (134 percent and 113 percent respec- tively) . In both categories of liabilities, interest- bearing liabilities increased more rapidly than non-interest-bearing liabilities (usually asso- ciated with supplier credit). The more rapid growth of interest-bearing liabilities may re- flect several forces at work. First, it would seem that AFN asset expansion continued to be viewed favorably enough (anticipated rate of return greater than interest costs) to justify borrowing to finance it. Second, the fact that long-term liabilities grew more rapidly than short-term liabilities could be an indication that FDIP pressure on the DIs forced a shift in the financial structure of AFNs. 6 A hypothesis 6 A useful distinction to be made is between asset formation and direct investment formation. Assets can increase without increasing direct investment. To do this, either more debt or more foreign equity could be used to finance the asset formation. The FDIP's opti- mum goal is to have a positive balance of payments effect without slowing the growth of foreign assets. The empirical evidence suggests that any slowing of AFN growth is not noticeable. The expansion of direct investment has also been strong and consistent, al- though possibly somewhat slower than might otherwise have occurred. The increased reliance on debt financing may be suggestive here. At any rate, OFDI seems to have been successful in generating a balance of pay- ments effect without having a noticeable adverse effect on AFN growth. which may be offered as an alternative to the second explanation could be that DI borrowing experience induced by the FDIP has had a demonstration effect on the AFNs. If so, it is possible that a structural shift has occurred by which AFNs will permanently rely more heavily on debt financing available in European capital markets. Third, the U.S. direct investors probably preferred to finance the acquisition of foreign assets with AFN liabilities in order to minimize exchange risk. Finally, it is possible that changes in AFN practice reflected similar changes undertaken by the parent DI. Another structural shift is the change in the composition of the asset structure. In 1966 and 1967, fixed (long-term) assets and current (short-term) assets each made up between 45 and 46 percent of assets. By 1970 and 1971, current assets were larger by approximately seven percentage points. This more rapid ex- pansion of current assets (101 percent com- pared to 77 for fixed assets) may indicate that AFNs are extending more credit and maintain- ing larger inventory balances than they were five years ago. If this explanation is valid, it may also account for the growing use of debt to finance AFN expansion. That is, rather than being Program-related, the decreased reliance on direct investment may reflect a general ma- turing of the average AFN enterprise. 7 In summary, a number of important changes have taken place in the aggregate financial structure of foreign affiliates of United States direct investors since 1966. To gain additional perspective on the forces at work, we now con- sider the Canadian data. All Industries In Canada The relevant data for Canada are found in Table 4-10 (Page 61). AFN assets in Canada for the sample considered here expanded 56 per- cent in the years 1966 through 1971. During the same period, liabilities increased 73 percent, while the claims of DIs expanded only 52 per- cent. The relative growth of assets and liabili- ties is almost identical for Canada and for the 8 This is not a perfectly clear situation, since short- term debt is often refinanced repeatedly thereby chang- ing its characteristics to long-term. 7 This explanation is developed with the knowledge that FDI-105 reporters are large, well-established direct investors. However, if their expansion of direct invest- ment involves establishing locations in new areas or moving into new product lines, what is taking place may be the establishment of new sales facilities. The asset composition of these new facilities, which would decrease the direct dependence upon the DI, would probably emphasize current assets (e.g. inventories). Scheduled Areas. The comparison of the relative expansion of assets and direct investment is hampered because minority equity plays a more important role in financing AFNs in Canada than in the rest of the world. In Canada minority equity has averaged approximately 9 percent of total equity (lines 1 plus 2 in the tables) for the six years for which data are available, compared to 5 percent for the rest of the world. The relative growth of Canadian AFN liabili- ties may be taken as an indication that the similar growth in Schedules A, B, and C was not entirely a direct result of the FDIP, which became effective January 1, 1968. Rather these developments may more closely reflect a funda- mental adjustment in the financial structure of U.S. foreign affiliates which might eventually have occurred even in the absence of the Pro- gram. 8 It may be, however, that by forcing U.S. DIs to take a closer look at foreign sources of finance, the adjustment process was accelerated. Looking further at the Canadian data in Table 4-10, it is interesting to note the differ- ence in the composition of the expansion of the value of direct investment (as compared to the Schedule A, B, and C data in Table 4-1). In Canada the outright ownership expanded al- most as rapidly (67 percent) as in the rest of the world (75 percent). In comparison the lia- bilities of Canadian AFNs to the parent DI were only 1 percent greater in 1971 than they were in 1966. (In Schedules A, B, and C, as in- dicated above, this type of DI claim on AFN assets expanded at a pace similar to that of majority equity). This Canadian experience (where the direct investment is generally some- what more mature) may indicate yet a more advanced stage in the financial independence of the AFN. That is, Canadian AFNs may be ma- ture enough to exert their financial independ- ence sufficiently to repay liabilities to the parent firm. 9 Also, the substantial increase in long-term 8 The possibility exists that the heavier reliance on minority equity in Canada biases this impression. Ref- erence to Tables 4-1 and 4-10 suggest the neutrality of minority equity in this setting. In both Canada and the Schedular Areas, minority equity has declined relatively as a source of financing by similar percentages. e It could be argued that Canadian AFNs' paydowns of liabilities to parents DIs was related to anticipated exchange rate shifts. Although this is plausible, both the small magnitudes and the fact that the paydowns occurred on both sides of the 1970 date on which Canada altered its exchange rate policy suggest that the major determinants of the paydowns are not exchange rates. It is suggestive that the 1968-69 paydowns were con- centrated in manufacturing and the 1970-71 paydowns were predominantly in extractive industries. non-interest-bearing liabilities of Canadian AFNs (154 percent since 1966) may account to some degree for the negligible growth in AFN liabilities to parents. What may be manifested is merely a shift in the source from which the credit is extended. As one might expect, the rapid expansion of non-interest-bearing long- term liabilities biased the changes which oc- curred in the liability structure of Canadian AFNs. Thus a comparison with the liability experience of AFNs in the rest of the world is not very meaningful. One can say, however, that the Canadian experience (except for the non-interest-bearing long-term liability cate- gory) is of much slower expansion than that recorded in Schedules A, B, and C. This could be interpreted as reflecting the greater maturity of Canadian direct investment. Finally, in contrast to the experience in Schedules A, B, and C where current assets expanded more rapidly than fixed assets, the Canadian experience records approximately the same rate of expansion for each type of asset since 1967. As a result, the Canadian asset structure continues to be dominated by fixed assets. This may be but a manifestation of industry-specific considerations. However, ref- erence to the industrial structure of U.S. direct investment in 1971, as portrayed in Table 2-1, lends little general support for this position. In general, from this table one concludes that the industrial structures of U.S. direct invest- ment in Canada and the rest of the world are similar. The most important differences in struc- ture are found in "other industries", the "non- electrical machinery industry", and "other manufacturing industries". But these excep- tions probably would not account for the differ- ence in the asset structure. For an alternative explanation, one might re- fer back to Tables 4-1 and 4-10. As mentioned earlier, these tables show that expansion of both direct investment and total assets was more rapid in the Scheduled Areas than in Canada. It is reasonable to surmise that the ascendancy of investment in the rest of the world may have shifted the asset composition over the period for which data are available. In this context, relative stability in the indus- trial composition of U.S. direct investment in the rest of the world in future years may result in a relative shift in asset composition back to the predominance of fixed assets. In other words, as argued in footnote 7 above, the pres- ent relationship between fixed assets and cur- rent assets in the rest of the world may be transitory rather than permanent. For a more adequate understanding of the question, and hopefully to begin discovering some answers, attention is now turned to similar data grouped by industry. 8 Table 2-1 Industrial Distribution of Direct Investment, Schedules A, B, C and Canada, 1966 & 1971 (per cent) Industry Schedules A, B, and C 1966 1971 Canada 1966 1971 Extractive Manufacturing Chemical and Allied Industries. Electrical Machinery Non-Electrical Machinery Transportation Equipment Other Manufacturing Total Manfacturing Other Industries TOTAL Source: Table 4-1 to 4-18 36 36 12 5 10 10 20 11 6 10 8 19 57 7 100 56 8 100 33 12 7 6 11 24 60 7 100 11 7 5 10 25 31 58 11 100 By Industry, General 10 Table 2-1 shows the allocation of direct in- vestment by industry, and shows that invest- ment in manufacturing is the most important. Within the manufacturing category, "other manufacturing" is most important. These data show only minor distributional changes in di- rect investment between 1966 and 1971. The biggest change (4 percentage points) was in U.S. investment in Canadian "other industries". The industry distribution of direct invest- ment shown in Table 2-1 provides only partial insight into the distribution of the value of AFNs of U.S. direct investors. As discussed in connection with Figure 2-1, investment in AFNs can also be increased by incurring debt through normal banking channels. If the use of debt financing were the same in all indus- tries, one could assume that the relationship between direct investment and total assets would be the same in all industries. However, if the use of debt is industry-specific, it would be useful to measure the extent to which direct 10 Data are grouped to preserve the anonymity of DIs while presenting meaningful categories. The in- dustry definitions are as follows: Industry SIC Code Number of DIs included a. All All 440 b. Extractive 10 to 14 and 29 55 c. Manufacturing 19 to 39 excl. 29 296 d. Chemicals and Allied 28 61 e. Electrical Machinery 36 42 f. Non-electrical Machinery 35 42 8. Transportation Equipment 371 to 376 and 379 19 h. Other Manufacturing All category c not included in d through g 132 i. Other industry All category a not included in b and c 89 investment is relied upon to finance AFNs. This can be done by calculating a "leverage" ratio — the ratio of total liabilities and minority equity to total assets. 11 Of interest is not only the lever- age ratio, but also whether it varies by industry or over time. A leverage ratio (L) expressed as Total Liabilities and Minority Equity L = Total Assets, can be adjusted for analytical purposes by ex- cluding non-interest-bearing liabilities and an equivalent amount of assets from the ratio cal- culation. Such a distinction is not intended to suggest that a direct connection between specific assets and specific liabilities can be ascertained. Rather it is a recognition that a firm, attempt- ing to maximize its value, will attempt to lower its average cost of capital by prudently maxi- mizing its use of non-interest-bearing liabili- ties. 12 If the firm's ability to use non-interest- bearing liabilities changes over time, other changes of more direct interest may be ob- scured. Thus, use of interest-bearing debt and minority equity seems to be the most precise analytic tool. Given this consideration, the asset definition used in leverage analysis which fol- lows is net of assets financed by non-interest- bearing liabilities. The most straight-forward expression of this relationship is: L' Interest-bearing Debt and Minority Equity Employed Capital where Employed Capital is defined as assets 11 If the assets of AFNs are financed primarily by the direct investor with credit and equity contributions, the leverage ratio is relatively low. If AFNs' assets are financed primarily by liabilities and minority equity interests, the leverage ratio is relatively high. 12 Trade credit is included with non-interest-bearing liabilities. financed by direct investment, minority equity, and interest-bearing liabilities. 13 Tables 4-1 and 4-10 show that in the aggre- gate, AFNs have increasingly relied on non- interest-bearing liabilities to third parties as a source of financing. Industry-specific shifts have been mixed. However, the aggregate changes seem to suggest an institutional change has occurred which could manifest itself as a de- creasing reliance on direct investment as a source of financial capital. By moving to the analytic leverage concept, the influence of this institutional change is eliminated. Thus, the implications of the findings can be narrowed more than might otherwise be the case. Perspective on the leverage concept used here — interest bearing debt and minority equity/ employed capital — is provided by Figure 2, which shows that as of the end of 1971 direct investment accounted for 70 percent of market- financed assets of AFNs in the sample. Minority equity accounted for 4 percent, and total interest-bearing liabilities accounted for 26 per- cent. Comparing these data to those in Figure 1, the most interesting feature revealed by the deletion of assets financed by non-interest- bearing liabilities is the lesser relative weight of interest-bearing liabilities as opposed to equity. Otherwise, as expected, the equity com- ponents increased in relative importance as a result of the deletion of assets financed by non- interest-bearing liabilities. By Industry, All Countries Except Canada Table 2-1 shows that 36 percent of direct investment in the Scheduled Areas was in ex- 13 Alternatively, total assets minus assets financed by non-interest-bearing liabilities. This leverage ratio should not be construed to apply to any particular asset category. tractive industries in both 1966 and 1971. Dur- ing the same period, employed capital in the extractive industries declined from 33 to 32 percent of total invested capital. This was oc- curring while the interest-bearing debt and minority equity — employed capital leverage ratio was increasing from 17.9 percent to 19.8 percent in the extractive industries. Concur- rently, the leverage for all manufacturing in- creased from 29.6 percent to 35.6 percent. Thus, although manufacturing investment as a fraction of total investment dropped only one percentage point between 1966 and 1971, each unit of direct investment came to control sub- stantially more employed capital. This increase in leverage was more rapid in manufacturing than in extractive industries. An examination of leverage factors by indus- try (Table 2-2) shows that the greatest use of leverage is in the electrical equipment sector, with the least in the non-electrical machinery sector. Leverage increased in all manufacturing industries, with the biggest increase in "other manufactures", and the smallest in transporta- tion equipment. In summary, during a period when assets of AFNs were increasing 95 percent in manufac- turing industries, significant changes were taking place in the financial structures of the relevant firms (as well as in firms in the extrac- tive and other categories). Basically, direct in- vestment came to be a relatively less important source of financing, while AFN borrowing (in- terest-bearing) became more important. Non- interest-bearing debt increased more rapidly than direct investment, but not as rapidly as interest-bearing debt. Finally, at the aggregate manufacturing level, growth of current assets was faster than that of fixed assets. If one assumes that a given relationship should exist between current assets and current liabilities, one concludes that no fundamental change is Table 2-2 Interest-Bearing Debt and Minority Equity /Employed Capital Relationships Schedules A, B, and C, By Industry (Percent) Industry 1966 1967 1968 1969 1970 1971 Manufacturing, Total 29.6 30.9 32.3 33.0 35.3 35.6 Chemical and Allied Industries .._.___._. 24.0 26.3 28.6 26.8 27.4 31.3 Electrical Machinery. . . 41.6 43.0 46.0 46.3 50.3 45.7 Non-Electrical Machinery . . 21.7 23.8 26.1 25.9 30.1 26.9 Transportation Equipment . . 35.6 36.4 34.4 34.6 36.9 37.9 Other Manufactures ... .__. 28.7 29.0 31.1 33.8 35.4 37.2 Source: Table 4-3 to 4-18. 10 Figure 2 Distribution of the Stock of Worldwide AFIM Equity and Interest Bearing Liability Financing by Type of Financial Instrument, 1971 Source: Tables4-1 and 4-10. Note: Shaded area equals direct investment. reflected in the rapid expansion of current assets. In fact, the interest-bearing short-term liabilities increased from approximately 22 per- cent of current assets for the 1966-68 period to 23 percent for the 1969-71 period. By Industry, Canada As Table 2-1 indicates, 31 percent of U.S. direct investment in Canada was in the extrac- tive industries in 1971, down from 33 percent in 1966. This decline of relative position was not, however, absorbed by manufacturing, the relative position of which also declined. The relative gains were in the category identified as "other industries" in which the share of direct investment increased from 7 to 11 percent. Within manufacturing only "other manufac- tures" improved its relative position with "elec- trical machinery" maintaining its position. Direct investment expanded in the rest of the world more rapidly than in Canada in both the manufacturing and the extractive industries. Comparing these two groupings of direct in- vestors, one finds that over the 1966-71 period investment in extractive industries expanded more rapidly in the Scheduled Areas, while in Canada investment in manufacturing increased more rapidly than investment in extractive industries. A comparison of interest bearing debt and minority equity — employed capital leverage ratios shows that leverage in Canada manufac- turing declined from 26.6 percent in 1966 to 25.6 percent in 1971. In contrast, leverage in Canadian extractive industries increased from 26.4 percent to 30.2 percent. This pattern re- verses that found in the rest of the world. An examination of Canadian leverage ratios in Table 2-3 by type of manufacturing shows that the decline in leverage in manufacturing was essentially a 1971 phenomenon, perhaps only transitory. Probably a more important phenomenon is observable in the difference be- tween the pattern of leverage changes in Canada and the rest of the world. As noted earlier when discussing Table 2-2, except the chemical industry, DI leverage increased in manufacturing in the rest of the world during the 1966-71 period in a consistent and rather orderly pattern. In contrast, two of the five subcategories of Canadian manufactures re- corded declines in leverage over the period. The remaining three subcategories demonstrate much less orderliness in the pattern of change in leverage. One conclusion that might be reached about the financing of AFNs is that the choice between debt and equity is a more volatile matter in Canada than elsewhere. A second conclusion is that the pattern of general re- liance on a larger proportion of commercial debt observed in connection with the financing of other AFNs is not found in Canada. In Canada, even where more debt is being used, the pattern does not yet show whether these are permanent changes. The asset structure in Canadian manufactur- ing AFNs gives less indication of a permanent increase in the relative position of current as- sets than was found in the Scheduled Areas. Interest-bearing short-term liabilities increased from 15 percent of current assets during 1966- 68 to 17 percent during 1969-71. Although the magnitudes of the percentages are 65-75 per- cent of those for the rest of the world, the percentage point change between the two peri- ods is very similar. Thus current liabilities in Canadian AFNs seem to be increasing as in the rest of the world. This seems to offer support for the idea that the increase in current assets of manufacturing AFNs in the rest of the world has not been abnormal. Annual Changes in the Financial Structures of Foreign Affiliates The preceding data were stock in nature, and at each point in time cumulative. The data for Table 2-3 Interest-Bearing Debt and Minority Equity/Employed Capital Relationships Canada, By Industry (Percent) Industry 1966 1967 1968 1969 1970 1971 Manufacturing, Total... . . . 26.6 28.5 26.4 26.8 26.3 25.6 29.8 27.3 22.4 21.9 23.3 22.0 Electrical Machinery. . . . 39.0 38.9 33.2 38.1 40.6 41.6 Non-Electrical Machinery .. 23.2 27.8 27.2 25.8 29.5 26.8 Transportation Equipment. . . . . 20.4 28.1 29.9 31.9 22.9 25.3 Other Manufactures . 24.0 24.3 23.0 21.5 22.2 20.8 Source: Table 4-13 to 4-18. 12 annual changes in the stocks therefore yield marginal estimates when used for calculations. The data showing annual flows influencing fi- nancial structures of AFNs are found in Tables 4-19 to 4-27 (Pages 70-74) for affiliates subject to the FDIP, and Tables 4-28 to 4-36 (Pages 74-78) for Canada. The format of these tables is similar to that of Tables 4-1 to 4-18. The major difference being the inclusion of depreciation in Tables 4-19 to 4-36. As a "source of funds" the inclusion is made ex- plicitly. As a "use of funds", depreciation is added to fixed assets. Thus, in Tables 4-19 to 4-36 fixed assets assume the definition of gross annual investment (new investment plus re- placement investment) . Annual new investment is obtained by subtracting the depreciation from the gross. New investment can alternatively be obtained by calculating the change in the stock of fixed assets from the data in Tables 4-1 to 4-18. A priori one would expect these annual data to be more volatile than the cumulative data. An illustration of this is minority equity in Table 4-19. Generally, it would appear that the incremental role of minority equity in financing direct investment in the Scheduled Areas has been substantially reduced since 1968. However, the 1970 data cloud the picture somewhat. An- other example is found in the 1970 increase and the 1971 decrease in the use of short-term interest-bearing liabilities to finance annual changes in assets. Moreover, the changing im- portance of direct investment as a source of financing is heavily influenced by the extension of credit by DIs to AFNs, which constituted 16.2 percent of the flow of funds in 1969 and 13.6 percent in 1971, but only 3.5 percent, 4.3 percent, and 4.7 percent in 1967, 1968, and 1970. Table 4-28 presents similar data for Canada. Compared to the rest of the world, the role of minority equity has retained a relatively strong position. Shifts from year to year among lia- bilities is at least as pronounced as in the rest of the world. Another interesting aspect of these data is the role played by depreciation in financing asset maintenance in Canada and the rest of the world. In the latter, depreciation has accounted, on the average, for 31 percent of the total source of funds. In Canada the average is 39 percent. However, the use of total source of funds as the base creates a misleading impres- sion because of the lower reliance on debt as an annual source of funds in Canada (mean 18 per- cent for the five years) than in the rest of the world (32 percent). If liabilities are deleted from the base, depreciation as a percent of di- rect investment plus depreciation averaged 45 percent in Canada and 52 percent in the rest of the world over the five years under considera- tion. Alternatively, an examination of internal cash flow (reinvested earnings plus deprecia- tion), shows that depreciation comprises a greater source of funds in the rest of the world than in Canada. In general, the data in these tables give the impression that the precise source of funds is somewhat irrelevant in the short-run. On an annual basis, substantial shifts among sources of financing have taken place. This suggests that the primary goal of DIs is to expand in response to forces not reflected in the data which are presented in the tables. In this con- text the way the investments are financed be- comes secondary. In the short-run, DIs generally seem to let AFNs use whatever source of funding is most readily available at a given time. When financial conditions change, the short-run actions can be modified so that the result better fits the desired long-run pattern. For example, in Table 4-1 one sees that short- term interest-bearing liabilities increased rapidly in 1969 and 1970. During these years long-term interest-bearing liabilities increased more slowly. However, in 1971 the pattern was reversed. Tables 4-37 to 4-45 present selected annual data in a ratio (expressed in percentages) for- mat. In addition to data derived from earlier tables, these tables present AFN earnings and revenues. The stability of the ratios is one of the several interesting impressions one gets from these data. Another is that investment in the rest of the world is relatively more profit- able than in Canada. Although this may reflect accounting practice, it is probably, to some Table 2-4 Indices of Selected Ratios of Annual AFN Data (1966-67 = 100) Identity Schedules A,B,C Canada Earnings Revenue Earnings/Revenue Earnings/Total Assets Debt/Equity Earnings/Equity Earnings/Long-Term Debt and Equity Fixed Assets /Revenue Total Assets /Revenue Short-term Assets/ Short-term Liabilities Fixed Assets/Equity Short-term Liabilities/ Long-term Debt + Equity . Long-term Liabilities/ Long-term Debt + Equity. Source: Table 4-37. 1968 1970 1968 1970 -69 -71 -69 -71 140 178 116 140 130 171 126 155 107 105 91 89 108 104 96 98 111 124 109 111 112 114 99 102 110 110 98 100 95 92 94 92 99 100 95 91 98 94 93 93 100 100 102 105 109 119 112 108 110 119 103 111 13 degree at least, a consequence of greater risk. Since the magnitudes of the ratios differ for Canada and the rest of the world, the meaning- fulness of a direct comparison between them to identify changes over time is difficult. Thus a comparison of changes in the ratios over time may help identify differential changes. Table 2-4 provides such comparisons. By al- most every index, one gets the impression of a stronger performance in Schedule A, B, and C countries than in Canada since the Program began. Despite FDIP constraints, both sales (revenues) and earnings of U.S. AFNs in the rest of the world expanded more rapidly than in Canada, where the controls did not apply. The changes in the fixed assets/revenue ratios are interestingly similar for both Canada and the rest of the world. The indices in Table 2-4 indicate that less fixed assets are now being used per unit of revenue, and that the changes have occurred in a parallel fashion in both Canada and the rest of the world. In contrast, the relationship between total assets and reve- nues has remained more or less constant in the rest of the world, while Canada came to use fewer total assets per unit of revenue. Put differently, current assets have (as observed earlier) expanded relative to revenues in Sched- ules A, B, and C but not in Canada. Impressions such as these would vary as one considered various breakdowns in DIs as found in Tables 4-20 to 4-27, 4-29 to 4-36, and 4-38 to 4-45. Such detailed analysis is not under- taken here. The relevant data are presented in the Appendix of Basic Data for those wishing to study specific industries. Selected Effects of the Program At this point it is useful to return to the stock data (Tables 4-1 to 4-18 on Pages 52- 69) to consider selected effects of the FDIP. Effects on the Financial Structures of AFNs As mentioned earlier, the Foreign Direct In- vestment Program was designed to induce di- rect investors to borrow abroad to offset direct investment outflows. Rather than offsetting 100 percent of direct investments, each DI was re- quired to offset the direct investment which exceeded its allowed direct investment. The Program was thus not intended to influence the financial structure of AFNs. However, if the de- sired level of investment was greater than what was manageable directly by the direct investor, the AFNs may have been forced to borrow to finance the desired asset formation abroad. Alternatively, the experience of the DIs in bor- rowing abroad may have been shared with the AFNs, and the latter may have become more attuned to the possibilities of borrowing. Finally, the growth of local money markets in Europe and of the Euro-currency markets prob- ably was stimulated by FDIP borrowing. After the expansion, AFNs and others could take advantage of the services of the expanded market, perhaps inducing generally increased reliance on debt. To analyze the Program's effect on AFNs, three comparisons were made. Existing (possi- bly Program-affected) AFN financial structures in the Scheduled Areas were compared with (1) those of domestic companies, and (2) those of the same AFNs during the pre-Program years. (3) Canadian AFN financial structures during periods when there were capital con- trol constraints are compared to the structures existing after Canada was exempted from the constraints. Domestic source of funds data for nonfarm, nonfinancial corporations can be compared with AFN source data to evaluate whether AFN experience differs substantially from that of the parent DI. Because these data are from differ- ent data sets, it was thought best not to use the sophisticated leverage concept used else- where in this study. To do so could introduce bias if the definitions used in the two data sets were not identical. Instead, the simpler leverage concept — Total Liabilities/Total Liabilities + Equity (where Equity + Total Liabilities = Total Assets) — is used to analyze the annual sources of funds data. It should further be em- phasized that these comparisons are based on annual flow data, while other analyses in this chapter, using only AFN data, are based on stock data. The relevant leverage ratios given in Table 2-5 are plotted in Figure 3. These data indicate that equity has been relied upon more heavily in incremental Canadian AFN financing than in domestic or schedular AFN financing. More Table 2-5 AFNs and U. S. Domestic Total Liabilities /Total Liabilities + Equity* Annual Flow Data for 1967-1971 (Percent) U. S. # AFNs AFNs Year Domestic Schedules Canada A, B, & C 1967 59.9 46.2 47.8 1968 71.9 60.9 50.7 1969 72.2 75.5 35.6 1970 67.5 61.7 19.7 1971 62.3 68.7 39.7 Source: Table 4-19 and 4-28 and U. S. Department of Commerce, Survey of Current Business, August 1972, p. 36. •Equity +Total Llabllltles= Total Assets. 14 FIGURE 3 AFIM and U.S. Domestic Total Liabilities/Total Liabilities +Equity Annual Flow Data for 1967-1971 Percent 70 - 60 - 50 - 40 - 30 - 20 - 10 /\ U.S. Domestic / / ^» v^ \ / / ^^^\ / / vv^ N X^Nw x / \ *> ^ / / 1 / / / / AFNs Schedule A, B, & C / / % \ — / AFNs Canada » ♦ X * x * — ♦ \ ♦ X * X * X ♦ X • X * x • \ V » ♦ \/ V 1 1 1 1 1 1967 Source: Table 2-5 1968 1969 1970 1971 Years important, however, is the fact that the pattern of equity's incremental use in Schedules A, B, and C AFNs is similar to that found in domestic enterprises. While the patterns are not iden- tical, the similarities are, at least, suggestive that the two data sets are subject to common influences. If such is the case, one must take care to qualify conclusions that observed changes in the financial structure of AFNs are attributable to the FDIP. Indeed, at least part of the observed changes seem to reflect broader forces at work. Turning to the evaluation based on pre- program and Program experiences of Sched- ular AFNs, one can refer to Table 2-2. 14 The data contained therein are stock and utilize the sophisticated leverage concept. During the pre- program years of 1966-67, the use of interest- bearing debt was increasing relative to equity, so that it cannot be said that the FDIP caused this tendency (the 1966-67 period is not a per- fect bench mark because most major DIs were operating under the Voluntary Program during this time). What one observes is that significant institutional adjustments were under way prior to 1968 which continued through the Program years. If these adjustments were influenced by the Voluntary Program, as the Canadian data below suggest was possible, they may be said to have been affected by the capital control programs. As Table 2-3 and Figure 4 show, when Canada was subject to the voluntary controls, the use of interest-bearing debt increased (the leverage ratio increased). 15 As soon as Canada was exempted from the mandatory controls (March 1968) the leverage ratio moved back to about the 1966 position and remained fairly stable until 1971. This would suggest that di- rect investment controls do influence the finan- 14 For the analysis of Program effects it seems desir- able to eliminate extractive industries for several rea- sons. First, the timing of investment in such industries is often determined by the discovery of mineral deposits. Second, because of this, the pattern of direct investment over time is likely to seem rather lumpy. Third, because of the nature of the industry's investment, financing patterns may differ sufficiently from that in manufac- turing to obscure otherwise detectable changes in the data. Finally, the relative movements (Canada and the rest of the world) of the leverage ratio over time in the extractive industries is the reverse of the pattern pre- vailing in manufacturing. Thus the empirical patterns suggest that the other reasons for eliminating extrac- tive industries from the data for the present purpose may be relatively valid. 15 A variant approach providing a guide to the useful- ness of Canadian data as a bench mark would be to compare Canadian AFN data to Canadian domestic data, but such is beyond the scope of this study. cial structures of AFNs since the leverage ratio continued upward in the Scheduled Areas where there was no exemption. In summary, these alternative approaches suggest that recent changes in the financial structure of the AFNs in Schedule A, B, and C countries reflect broad general forces. Both domestic and historical comparisons tend to support this position. Alternatively, the data suggest that capital controls did influence the financial structure of Canadian AFNs during the period when Canada was subject to controls. But U.S. DIs in Canada were subject to capital controls for too short a time for this last bit of evidence to be taken as conclusive. If taken as indicative, and if the domestic-Schedular similarities are ignored, one is at least left with the suggestion that the mandatory FDIP has had an effect on the financial structure of AFNs similar to the effect of the Voluntary Program. Two international implications of the FDIP for AFNs in the Scheduled Areas are analyzed in this Chapter's next two sections. There al- ternative calculations are made to provide an estimated range of Program effect. Although those estimates implicitly attempt to reflect gen- eral market forces, such considerations cannot be introduced explicitly because of data limita- tions. If such forces were introduced explicitly, one might expect to obtain estimates toward the lower end of the estimated ranges. Balance of Payments Effects The consideration undertaken here should be distinguished from the overall balance of pay- ments effects of OFDI. Here there is no con- sideration of the balance of payments effects which result from DIs being required to borrow abroad to offset direct investment. The focus here is on the effect which changes in the fi- nancial structures of AFNs have had on the balance of payments. As a starting point in this inquiry one might refer to Figure 5, which shows changes in em- ployed capital, direct investment, and fixed assets for all industries. In contrast to the situation in which the purpose was to identify the effects of the Program on the financial structure of AFNs, the balance of payments effect is a gross effect and requires the use of data for all industries. In Figure 5 one sees a parallel expansion of employed capital and direct investment in Canada over the 1966-71 period. In contrast, employed capital expanded more rapidly in the Schedular Areas than did direct investment. One might estimate what direct investment might have been in Schedule A, B, and C coun- tries in the absence of the observed changes by assuming that the ratio of employed capital to 16 FIGURE 4 Interest-Bearing Debt and Minority Equity/Employed Capital Ratios Total Manufacturing 1966-1971 Percent 37 Schedules ABC 35 33 31 29 27 25 z / / '\ \ / \ s^ — Canada 1966 1967 1968 1969 1970 1971 Source: Tables 2-2 and 2-3 Years Figure5 Changes in the Stock of Employed Capital, Direct Investment, and Fixed Assets billions of Schedules ABC dollars Canada 70 60 50 40 30 20 10 Employed Capital Direct Investment Fixed Assets Employed Capital Direct Investment Fixed Assets 1 1 966 1 967 1 968 Source: Tables4-1 and 4-10. 1969 1970 1971 Years Table 2-6 Cumulative Balance of Payments Effects of Changes in AFN Financial Structures (sumptions tment ratio years (millions years (millions i irrent* Canadif )66-67 ABC pal is of $'s) 7. Balance of Payments effect assuming the Canadian pattern (line 5 minus line 4) 8. Balance of Payments effect assuming the 1966-1967 ABC pattern (line 6 minus line 4) *Canadian ratio for current year applied to ABC actual invested capital. Source: Tables 4-1 and 4-10. Country or Region and Assumptions 1966 & 1967 1968 & 1969 1970 & 1971 1 Canada-emploved capital/actual direct investment ratio. ._ . _ 1.362 1.364 1.359 •> A, B, C countries-actual EC/DI ratio . _ _ . 1.360 1.400 1.437 3. A, B, C employed capital-actual mean per 2 years (millions of $'s) _ .. 39,086.5 49,797.0 64,152.0 4. A, B, C direct investment actual mean per 2 years (millions of $'s) _ . _ .- 28,750.5 35,563.5 44,652.5 5. A, B, C-Hypothetical direct investment if current* Canadian pattern folio wed-mean per 2 yrs. (millions of $'s) _ _ . _. - __ — 36,502.1 47,215.3 6. A, B, C-Hypothetical direct investment if 1966-67 ABC pattern is assumed over time-mean per 2 yrs. (millions of $'s)__ __ _ _ _ — 36,609.5 47,180.6 938.6 1,045.9 2,562.8 2,528.1 direct investment in Canada would have applied in the Schedule A, B, and C countries. As can be seen in Table 2-6 for the DIs in the sample the cumulative balance of payments effect under this assumption as of the end of 1971 would have been 2.56 billion dollars. Alternatively one might assume that the 1966-67 Schedules A, B, and C employed capi- tal-direct investment ratio should apply in 1970-71. Using this approach it would seem that the institutional change had an effect on the financial structures of AFNs equivalent to a cumulative improvement in the balance of payments of 2.53 billion dollars. These estimates must be considered tentative. If the FDIP retarded the growth of employed capital which might otherwise have occurred, there is an understatement of the balance of payments gains. The fact that the balance of payments gains have been greater during 1970- 71 (when the Program was being liberalized) than during 1968-69 may be taken as an indi- cation that the 1968-69 balance of payments effects are understated. An alternative explana- tion may be that liberalizations have been im- plemented at a pace which did not accommodate completely the growth of desired direct invest- ment. "Debt Overhang" "Debt overhang" is a term which has come to be used to describe that outstanding foreign debt undertaken for FDIP compliance. In the narrowest sense the concept applies only to debt incurred by the direct investors them- selves, which can be accurately measured be- cause it is reported to OFDI. 16 As indicated above, U.S. direct investors may also have ad- justed to the FDIP's constraints by having AFNs increase borrowings beyond what would normally have been undertaken. If this took place, AFN "debt overhang" should be esti- mated for inclusion in the larger picture. The analysis of AFN debt presents the prob- lem of abstracting from that growth of debt which is a function of normal business activity. Only debt in excess of the normal should be identified as "debt overhang". One way to ac- complish this is to examine interest-bearing debt as a component of total employed capital. An alternate approach is to relate interest- bearing debt to AFN revenue. Each of these two perspectives can be ex- amined under different assumptions. One as- sumption might be that the relationship between AFN interest-bearing debt and either employed capital or revenues which prevailed in the pre-Program years would have remained constant through 1971. This assumption has the weakness of overlooking changes in market conditions between 1966-67 and 1971, which can be avoided by using the Canadian experi- ence as a control. Under this approach, sched- ular experience can be compared to the Canadian experience. This alternative assumes that the relationship between schedular AFN practices and Canadian AFN practices re- mained constant from 1966-67 to 1971. That is, it is assumed that Schedular AFNs react to market forces in the same way as Canadian 16 For an analysis of DI debt overhang see: OFDI, Foreign Direct Investment Program, Selected Statistics, August 1972, pp. 7-15. 19 Table 2-7 Alternative Estimates of FDIF '-induced AFN Debt (millions of dollars) When Related to Employed Capital When Related to AFN Revenues Assuming Pre-Program Schedular Experience Constant: Short-term Liabilities. Long-term Liabilities. 1,369.1 1,605.4 887.0 1,190.9 Total 2,974.5 2,077.9 Assuming Schedular Financing Patterns Parallel Canadian Patterns: Short-term Liabilities. Long-term Liabilities. 325.7 1,445.1 —240.1 1,008.5 Total 1,770.8 768.4 Source: Tables 4-1, 4-10, and 4-37. AFNs, and that market forces have been the same in Canada and in Schedular countries. In the analysis, the mean of 1966-67 data is con- sistently used as the base period. Effectively this places the base at mid-year 1967. Table 2-7 sets forth alternative estimates of AFN "debt overhang". The range found there is between $.8 billion and $3.0 billion. The more volatile portion of this debt would be the short- term. Under both assumptions, the larger esti- mate of short-term debt overhang occurs in relation to employed capital. However, the short-term debt is more closely related to day- to-day operations for which revenues probably serve as a better proxy. Within this context the two estimates provide a range between a short- term debt deficiency of —$.2 billion and an excess or "overhang" of debt of $.9 billion. The small size of these figures would seem to indi- cate that the FDIP has prompted little unde- sired borrowing by AFNs, and that the potential AFN debt overhang problem is mini- mal, possibly the maximum would be in the range of $1.5 to 2.0 billion with $1.8 billion being plausible. Revaluation Effects During 1971 there occurred important ex- change rate adjustments in May. Subsequently on August 15 many exchange rates began a period of realignment which basically con- cluded with the Smithsonian Agreement in De- cember of 1971. Both the fundamental disequilibrium which precipitated these changes and the aftermath of the changes introduced new uncertainty into the decision making proc- ess of U.S. direct investors and their AFNs. How well they protected themselves is a basic question to which we now turn. Most of the data to permit reaching an opinion are available in the Appendix of Basic Data. However, in 1970 and 1971, OFDI col- lected disaggregated data for current assets. The introduction of these data in Table 2-8 complements the data in the Appendix of Basic Data, and permits a more complete appraisal of the exchange rate implications of the over- seas operations of U.S. direct investors. Table 2-8 indicates that each of the kinds of short-term asset expanded between 1970 and 1971 in both Canada and the rest of the world. As a result the stock of these three short-term assets for all AFNs in the FDI-105 sample of 440 direct investors amounted to $53,379 mil- lion as of the end of 1971. Of this amount 17.0 percent was held as cash, 44.3 percent as current receivables and 38.7 percent as inven- tories. This pattern is almost identical both in Canada and in the rest of the world. These asset data must be combined with short-term liabilities data to permit one to gain an impression of devaluation effects on AFNs. Also, since OFDI data are not disaggregated by currency, it is necessary to observe shifts over a period longer than two years. As a result some of the benefits of the disaggregated short-term asset data which are available for only 1970 and 1971 are lost. Table 4-19 on page 70 shows shifts in short-term interest-bearing liabilities over the 1968-71 period which suggest that some posi- tioning was taking place. These year-end data indicate that a build-up of these liabilities began Table 2-8 AFN Current Assets, 1970 and 1971 (thousands of dollars) Schedule A, B, C Countries 1970 1971 % Change Total Inventories 14,832,540 16,667,668 +12.37 Total Current Receivables 17,374,091 19,355,357 +11.40 Total Cash and Other Current Assets.. 6,761,369 7,418,976 +9.73 Total Current Assets 38,968,000 43,442,001 +11.48 Source: Office of Foreign Direct Investments. Canada 1970 1971 % Change 3,827,026 4,026,526 + 5.21 3,819,671 4,278,525 + 12.01 1,301,303 1,631,950 +25.41 8,948,000 9,937,001 + 11.05 20 in 1969 and accelerated in 1970. In 1971 the growth decreased dramatically. Short-term (current) assets followed a somewhat similar though less noticeable pattern. Substantial in- creases in 1968, 1969 and 1970 were followed by a slower rate of growth in 1971. Obviously important adjustments were under way. To attribute them to positioning in antici- pation of revaluation is only one explanation, but in view of the data reported in Table 2-9 this seems a reasonable explanation. In this con- text two general explanations may be con- sidered. First, firms could afford to increase foreign currency liabilities as long as short-term assets denominated in the same currency in- creased proportionately, thereby maintaining a relatively constant currency exposure position. If revaluation were anticipated, foreign cur- rency loans may be undertaken for several rea- sons. For example, an enterprise with a projected use of borrowed funds and with the uncertainty of the effects of a revaluation may be prompted to borrow while interest rates, loan terms, etc. are more predictable. In addi- tion to minimizing uncertainty, as long as the proceeds of these liabilities can be held as assets denominated in the same currency as the liabil- ity, the exchange exposure problem is elimi- nated. Firms with a normal operating position in which short-term liabilities were relatively more important compared to short-term assets might wish to borrow dollars if a dollar de- valuation were anticipated (most likely short- term assets would also be held in dollars). Thus, whether dealing in foreign currency or in dol- lars, the AFNs' shifting position on short-term assets and liabilities over the 1969-71 period can be explained in terms of anticipated ex- change rate adjustments. Finally, if these movements are indicative, positioning for revaluation seems to have begun in 1968, and to have accelerated somewhat in 1970. Similarly timed movements are not ob- served for Canada (Table 4-28 on page 74). One reason may be that Canada began floating its exchange rate early in 1970. Thus the pres- sures which continued to build elsewhere were dissipated early. In summary, it seems as though DIs anticipated revaluations as much as two and a half years before they occurred, and posi- tioned themselves to prevent exchange rate losses. If this line of reasoning is valid, several re- sults could be anticipated: (1) as indicated above, attempts would be made to denominate both assets and liabilities in the same currency ; and (2) if successful, gains from the revalua- tion would be minor relative to the extent of the revaluation. In contrast, (3) if the U.S. multi- national enterprises had not anticipated the revaluation, some loss might be expected to have occurred. Alternatively, if they were engaging in speculative activity (and were successful), one would expect gains similar to the percent- age adjustments in the exchange rates. Table 2-9 summarizes the effects of revalua- tions on the value of the direct investment included in this sample. For the 287 DIs an- swering the relevant questions on the FDI-105 form, the aggregate net effect was an increase in working capital (current assets minus cur- rent liabilities) of more than $300 million. Emphasis is not placed on the long-term liabil- ity data because data are not available on the change in value of fixed assets, which are neces- Table 2-9 AFN Gains or Losses from 1971 Currency Revaluations 1 , 287 Firms (thousands of dollars and percent) Net Effect, All Firms Firms in Sample with Assets Firms in Sample with Assets in Sample and Liabilities Denominated and Liabilities Denominated Primarily in Foreign Currency 2 Primarily in U.S. Dollars 2 Short-term Assets: $ % 3 $ % 3 $ % 3 Cash and other short-term assets 115,451 1.8 170,689 3.2 -55,238 -5.6 Inventories 283,764 2.1 271,018 2.4 12,746 0.6 Current Receivables 247,235 1.6 316,189 2.4 -68,954 -3.3 Total Short-term Assets 646,450 1.8 757,896 2.6 -111,446 -2.1 Current Liabilities -330,824 1.5 -596,565 -3.1 265,741 8.5 Short-term assets and Short-term liabilities, net 315,626 2.3 161,331 1.6 154,295 7.1 Long-term Liabilities -343,483 3.6 -362,618 4.6 19,135 -1.2 Source: Office cf Foreign Investments. 1. Revaluation which resulted in the diminished exchange value of the dollar would have the following results when viewed from a dollar perspective: (1) assets denominated in the foreign currency would increase in value; (2) liabilities denominated in the foreign currency will cost more to repay and therefore are considered to result in an exchange loss (— ) ; when liquidated dollar-denominated assets will return dollars of lesser value as a result of revaluation and there- fore yield an exchange loss (— ). Dollar liabilities are eventually repaid in devalued dollars resulting in a gain for the borrower. In the table no sign indicates a positive gain and a minus sign signifies a loss from a dollar perspective. 2. Following footnote 1 to this table, firms which reported increases in the value of assets and liabilities as a result of the revaluation were deemed to have utilized primarily foreign currency assets and liabilities; firms reporting decreases in the values of both were deemed to be utilizing dollars. 3. Percentage of the specific asset or liability position as of the end of 1970. For example, the gain or loss on cash is recorded as a percentage of cash on hand at the end of 1970. 21 sary if long-term liabilities are to be considered. dollar-denominated accounts and those which However, it is reasonable to assume that the used foreign-currency denominated accounts, increase in value of fixed assets exceeded that One conclusion which is rather obvious is that of long-term liabilities. Table 2-9 shows that multinational corporations need not be ad- working capital gains were about equally dis- versely affected by changes in the exchange tributed between firms which seem to have used rate. 22 CHAPTER 3 AFN FINANCIAL STRUCTURE: AN ECONOMETRIC INQUIRY In the previous chapter it was suggested that by themselves the data in the tables of the Appendix of Basic Data provide few insights into the determinants of direct investment; they show the financial structure of the foreign affiliates of U.S. multinational enterprises after the direct investment has been made. Thus, it was asserted that the financial decisions are secondary, with the decision to invest or not to invest being primary. The determinants of di- rect investment, including the effect of the FDIP, must be understood, if balance of pay- ments policy is to be optimized. This section is divided into two parts; the determinants of investment are analyzed, and some estimates are made of the uses of funds by source for the years 1967-71. The Determinants of Direct Investment There have been a number of studies ana- lyzing the determinants of investment. Many of the domestic investment studies in the Bibliog- raphy of Related Literature focus on the de- terminants of U.S. domestic investment, while many of the entries in the foreign investment section of the bibliography focus on the determi- nants of foreign direct investment. The first part of this chapter is, like many of these previ- ous studies, an empirical investigation into the determinants of foreign direct investment. Thus, many limitations found in previous works are also found here. For example, the present data set does not permit an evaluation of the role of national endowments of produc- tive factors in determining the pattern of direct investment. It is thus not possible to identify the extent to which direct investment may be undertaken to take advantage of lower wages abroad. Nor is it possible to estimate the role of different levels of technology among coun- tries in determining direct investment. Such analyses must wait a while longer. Despite these limitations, the OFDI data col- lected on Form FDI-105 do have advantages not heretofore available. The consolidated bal- ance sheet data of the foreign affiliates of the large U.S. direct investors sampled for the years 1966-71 are especially useful both be- cause they consist of a matched sample of 440 DIs for these six years and because the data are internally consistent. In addition to the balance sheet data, matching data such as AFN divi- dends are available from OFDFs Form FDI- 102 data. 1 This form makes it possible to disaggregate direct investment into its com- ponents — reinvested earnings and capital trans- fers. As noted later in this section, this division provides interesting insights into the determi- nants of direct investment. The basic model used to identify the determi- nants of direct investment is a flexible accel- erator model which can be specified as : (1) I = A + AiRt.i + A 2 aR + AsDIm where the capital-output ratio used to adjust total revenues was assumed to be unchanged in period t and in period t-1. 2 (For a listing of 1 Data for dividends, earnings, capital transfers, re- invested earnings, specific authorization value, use of proceeds value and the value of foreign withholding taxes on AFN dividends are from Form FDI-102F. All other data are from Form FDI-105. 2 The flexible accelerator model has been used pri- marily in connection with plant and equipment invest- ment. In this study it is used in connection with what is technically a financial dependent variable, direct invest- ment, which is instantaneously transformed into real assets. As long as direct investment (I) remains a stable source of financing new assets, and plant and equipment (PE) remains a stable proportion of total assets, the model should perform adequately for I if it does so for PE. Studies have generally found the I-PE relationship to be rather strong. In this study these earlier findings are supported by the extractive industry estimates. For that industry, the I-PE mean simple correlation for the 1967-71 period was .930. For manu- facturing, the mean simple correlation was .563. (For 23 symbols used, see the glossary at the end of this chapter.) A priori, R tl and AR are expected to be positively signed. The DI t i coefficient is the estimated rate at which investment is re- placed minus the speed of adjustment of actual revenues to expected revenues/ 5 Thus its sign is a function of the relative importance of these two forces. For example, if it is positive, the implication is that replacement influences are greater than the speed of adjustment influence. Other factors may influence the pattern of direct investment. For example, tariff and non- tariff obstacles may distort investment pat- terns. Unfortunately, the present data set does not permit estimates of the importance of these influences. Data do exist to permit the estima- tion of the extent to which the FDIP has been permissive of direct investment. There is no way to identify direct investment which may have been avoided because of the Program. However, it is possible to identify direct invest- ment which might have been prevented if spe- cial licenses to undertake such investment without borrowing abroad had not been granted through the specific authorization (SA) proc- ess. 4 As implied a positive sign for SA is expected. all industries, it was .757.) Given these relationships, one would expect the basic flexible accelerator model (model 1) to yield the strongest results when used in conjunction with extractive industry data. The per- formance of the model for other industries is less certain since a priori the reasons for the I-PE di- vergence are unknown. a The rate at which the stock of investment is re- placed should bear a close relationship to the rate of depreciation. Therefore, if initially DIt-i carried a posi- tive sign when estimated in model (1), the addition of an explicit independent variable to identify the role of depreciation in the decision-making process should re- sult in a decrease in the size of the DI t -i coefficient. If the addition of a specific depreciation independent variable leaves the coefficient of DIti positive, either the specification is less than perfectly precise, or other positive influences related to the current use of the stock of direct investment are also being identified. In general, such a positive influence might be described as an internal cash flow (to which depreciation would reflect the contribution of fixed assets). Because the dependent variable in most of the work done here theoretically reflects both fixed and short-term assets, the cash flow independent variable used is of the more general specification. Earnings, it is thought, serves as a proxy for internal cash flow. Some of the potential statistical problems which arise with the introduction of this variable are examined in footnote 8. 4 If a direct investor's request for a specific authoriza- tion is denied, it is likely that new foreign borrowing would be undertaken to offset the direct investment involved. The direct investment would be prevented by an SA denial only if the direct investor refuses to make foreign borrowings to provide an offset to direct invest- ment. Thus an SA could be considered a license to exceed allowables without borrowing. Another relationship which can be tested using OFDI data is the role of foreign withhold- ing taxes (WT) on dividends (D) in determin- ing direct investment. If foreign withholding taxes retard dividend payments, one might logically expect an inverse relationship between their level and the level of dividends. Thus a positive relationship between WT and rein- vested earnings (RE) would be anticipated. If foreign withholding taxes do not deter divi- dend payments, a positive relationship between the two would be expected and the relationship between reinvested earnings and WT would be negative. That is, as dividends increase (and reinvested earnings decrease) , withholding taxes increase. For the capital transfer equa- tions, the sign which WT might be expected to take is less predictable. If capital transfers complement RE, the two would be expected to have the same sign vis-a-vis WT. If they func- tion as substitutes, the signs would be unlike. In extractive industries, evidence (not re- ported) suggests that CT is more a substitute for RE than is the case in manufacturing. This is probably the result of a larger proportion of the extractive AFNs being organized as branches rather than subsidiaries. Thus, if WT discourages D in extractive industries, WT and RE would have a positive relationship. And since CT and RE have an inverse relationship in these industries, an inverse relationship be- tween WT and CT can be anticipated. In the aggregate, if capital transfers in the extractive industries and reinvested earnings in manu- facturing are important enough, a negative re- lationship can be expected between WT and I. Some empirical work of this sort has suc- cessfully incorporated an explicit cash flow independent variable. In the present formula- tion the positive aspect of DI t .i in Model (1) represents the traditional investment replace- ment concept, which one would expect to be closely related to such internal cash flows as depreciation. As a variant of the Model (1) treatment, an internal cash flow proxy in the form of earnings (E) can be added to the equation in an experiment to identify its effect. If its coefficient's sign is positive, if it is statis- tically significant, and if its addition to the equation reduces the size of the coefficient of DIm, then E might well be considered a partial proxy for cash flow's influence on direct invest- ment. This experiment also may yield indications of better model specifications, especially for rein- vested earnings. It might be argued that an expanded flexible accelerator model is not a proper specification of the determinants of re- invested earnings (RE) in all cases, and that a model such as is traditionally used to explain 24 dividend behavior would be more appropriate. If the explanatory power of equations incor- porating E is substantially greater than those which do not, a dividend-type model can be used as an alternative formulation. Finally, a second Program variable can be introduced. As indicated in Chapter 1, a direct investor is required to borrow abroad if direct investment exceeds allowables and an SA is not available. When foreign borrowings are used to offset extra-allowable direct investment, in the parlance of OFDI it is said that proceeds (of foreign borrowings) are used (UP). Since theoretically UP permits direct investment which in the absence of an SA might otherwise be prevented, the coefficient of the UP variable should have a positive sign. Also, the addition of UP to the equation should reduce the size of the SA coefficient. This is because SA alone can be expected to capture some of the UP-type Program effect. 5 5 The introduction and specification of SA and UP suggest that investment made within the FDIP allow- ables respond to normal market forces as identified by the other independent variables. The investment for which SA and UP seem responsible also responds to these market forces. However, investment in excess of program allowables can respond to market forces only if the sum of SA and UP is positive. Therefore, the SA and UP coefficients should be viewed as measures of the extent to which direct investment in excess of allowables was permitted to respond to market forces rather than viewed as determinants of investment. In no way should SA or UP findings be construed as measures of invest- ment foregone because of the FDIP. No clear measures of such negative aspects of the Program exist. It was noted in Chapter 2 that both direct investment and fixed assets have expanded less rapidly than might otherwise have been expected since the Program's beginning. How- ever, it was also noted that total assets have continued to expand at a vigorous pace. Given the last phenome- non, one can tentatively conclude that OFDI has not had a negative impact on foreign asset formation. This conclusion is supported by the suggestions that the in- creased preference for debt relative to direct invest- ment can be explained by exchange rate uncertainties, the emergence of Euro-currency markets, evolving atti- tudes toward handling trade credit, and possibly simi- lar domestic trends. The slow growth of fixed assets is harder to explain, but from the rapid growth of non- cash short-term assets one might suspect that we are observing different phases of a fixed assets cycle and an inventory cycle. As explanations for the inventory cycle one can identify two forces, possibly comple- mentary in the aggregate. First, day to day aspects of doing business abroad may be decentralizing somewhat. Second, one aspect of this may be that AFN inventories and receivables have been expanded either in response to decentralization or in response to expansion into new product lines and new countries, or both. "Judging by the simple correlation coefficients (not reproduced here), multicollinearity generally did not in- fluence the findings reproduced hereafter. With the additions of SA, WT, E, and UP, model ( 1 ) becomes : 6 (2) I = A + AiRt.x + AoAR + AsDIt.x + A 4 SA t- A,WT + A C E f A 7 UP Estimates with 1971 specified as period t were made of both model (1) and model (2) as well as three intermediate formulations using the least-squares multiple regression technique. In addition to aggregate estimates, the data set was disaggregated into manufacturing and ex- tractive categories and into the reinvested earnings and capital transfers components of direct investment. In addition to the 1971 esti- mates in Tables 3-1 to 3-9, the estimated coefficients for model (2) are presented subse- quently in Tables 3-13 to 3-21 for the years 1968-71 to evaluate year to year changes in the observed cross-sectional relationships. Tables 3-1 to 3-3 present estimates of the determinants of aggregate direct investment in Schedules A, B, and C. 7 In the equations for all industries in Table 3-1, the signs and signifi- cance of coefficients are stable over the array of alternative specifications. The coefficients for WT in 3-1.3, 1.4, and 1.5 and for R tl in equations 3-1.2, 1.3, and 1.5 are exceptions. The 7 Some empirical studies have used plant and equip- ment expenditures as a dependent variable instead of direct investment. Below are three plant and equipment equations which correspond to the direct investment equations 3-1.5, 3-2.5, 3-3.5 respectively. FAm (the stock of fixed assets in period t-1) was substituted for DIt-i and DE (depreciation) for E. The PE equations (1971 = t) are as follows: PEa - +1.7197 - .0179 R,., + .0504AR + .0329FA.-a (7.17)** (7.65)** (4.54)** -1.2107SA + 1.8059WT + .5251DE + .3279UP (9.45)** (3.57)** (10.13)** (3.80)** R 2 = .836; See = 16.10 PEm = +2.4299 - .0243 R,-, + .0304AR + .0390FA t -i (7.27)** (1.82) (2.80)** -1.1001SA + 1.5893WT + .6448DE + .0251UP (9.00)** (2.36)* (11.67)** (0.27) R 2 = .823; See = 13.20 PEe = + 3.6858 - .0252R,-i + .1414AR - .0078FA,-i (2.09)* (3.41)** (0.27) + 1.6659SA + 1.3233WT + .8742DE + .1953UP (2.27)* (0.87) (2.51)* (0.68) R 2 = .949; See 18.20 The Rti coefficients have the wrong sign in the PE models. Similarly the R t -i coefficient did not behave as expected in the I equations. Concentrating on the PE m equation, the signs of SA and WT are reversed from those found in the I m equations. The negative SA coefficient may be but a manifestation of the fact that PE has not been increasing at the same rate as total assets. In extractive industries, the SA coefficient is positive and significant. UP is significant only in the aggregate equation. 25 Table 3-1 Regression Results for Aggregate U.S. Direct Foreign Investment (la) in Schedule A, B, and C Countries, UUO firms (1971 = t) No. Constant Term R/. i AR DI,_, SA WT E UP R 2 See 1.1 + 1.4441 + .0087 (2.75)** + .0274 (3.02)** + .0946 (20.98)** — — — — .798 22.50 1.2 + .8138 + .0042 (1.78) + .0295 (4.32)** + .0935 (27.51)** + 1.9145 (18.24)** — — — .885 16.90 1.3 + . 7885 + .0031 (1.23) + .0309 (4.47)** + .0933 (27.42)** + 1.8334 (14.93)** + .4823 (1.27) — — .885 16.90 1.4 + .9229 + .0076 (3.55)** + .0125 (2.11)** + .0523 (12.78)** + 1.1788 (10.47)** -2.8472 (7.17)** + .6021 (13.89)** — .920 14.10 1.5 + . 3545 + . 0022 (1.35) + .0164 (3.65)** + .0140 (3.72)** + . 5689 (6.18)** -2.4795 (8.21)** + .5065 (15.20)** + 1.0128 (17.89)** .954 10.70 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively Table 3-2 Regression Results for Manufacturing U.S. Direct Foreign Investment (I m ) in Schedule A, B, and C Countries, 296 firms (1971 = t) No. Constant Term Ri- 1 AR DI,_, SA WT E UP R 2 See 2.1 -1.1612 -.0105 (2.43)* + .1550 (6.69)** + . 1427 (13.21)** — — — — .678 19.60 2.2 + 1.1296 + .0022 (0.76) + .0432 (2.62)** + .0913 (11.87)** + 1.8941 (19.13)** — — — .857 13.10 2.3 +1.1265 + .0023 (0.75) + .0432 (2.61)** + .0936 (9.60)** + 1.8948 (17.67)** -.0075 (0.02) — — .856 13.10 2.4 -.0995 + .0119 (4.25)** + .0321 (2.22)** + .0662 (7.61)** +1.3575 (12.47)** -3.4544 (6.43)** + .4732 (9.64)** — .891 11.30 2.5 -.3670 + .0048 (2.23)* + .0208 (1.91) + .0432 (6.43)** + .9425 (10.91)** -3.3136 (8.20)** + .3761 (10.04)** + .8723 (14.95)** .938 8.59 - The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-3 Regression Results for Extractive U.S. Direct Foreign Investment (Ie) in Schedule A, B, C Countries, 55 firms (1971 = t) No. Constant Term Ri- i AR DI,_ , SA WT E UP R 2 See 3.1 +5.5457 + .0096 (1.18) + .1180 (5.51)** + .0626 (8.76)** — — — .976 17.40 3.2 +3.9365 + .0055 (0.75) + . 1264 (6.47)** + .0658 (10.07)** +2.1060 (3.51)** — — .980 15.80 3.3 +3.9206 + .0033 (0.49) + . 1549 (7.69)** + .0658 (10.93)** +2.0482 (3.70)** -2.7583 (3.14)** .983 14.50 3.4 +4.8831 -.0288 (3.00)** + . 1579 (9.10)** + .0516 (8.39)** + 1.8683 (3.91)** -5.3613 (5.52)** + .7681 (4.26)** .987 12.50 3.5 +3.0105 -.0286 (4.02)** + .1212 (8.60)** + .0133 (1.76) + 1.1719 (3.16)** -3.0306 (3.75)** + .7524 (5.64)** + .8988 (6.37)** .993 9.26 The numbers In parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. 26 basic model in 3-1.1 performs adequately using correctness of sign, statistical significance of the independent variables and R 2 as criteria. Using these criteria, it would seem that the FDIP, as manifested in the UP and SA proxies, has been significant not as a determinant but rather in not impeding the growth of direct investment. The influence of foreign withholding taxes on dividends is more ambiguous. When AFN earn- ings (E) are introduced as in equation 3-1.5, the coefficient of WT is statistically significant and negatively signed. An evaluation of the im- plications of the negative sign is undertaken below after the behavior of the capital transfer (CT) and reinvested earnings (RE) equations are explored. The behavior of the coefficient for E in equations 3-1.4 and 1.5 suggests that in- ternal cash flow is an important determinant of direct investment. When E is added to the equation, the coefficient for WT becomes sig- nificant and the size of the DI tl coefficient is decreased. 8 To summarize the estimates presented in Table 3-1, one can say that change in market size is a statistically significant determinant of aggregate direct investment. Internal cash flow (E) also seems to fall into this classification as do foreign withholding taxes and DI t -i. From the viewpoint of the FDIP, equation 3-1.5 indi- cates that the Program proxies, SA and UP, have been significant in not impeding direct in- vestment. The results for R t .i are less ambigu- ous. Considering the predominance of manufactur- ing DIs in the sample, it is not surprising that the pattern of results found in the equations for the manufacturing sector closely parallels the pattern for all industries. Possibly the most interesting difference is that Rm does not have the anticipated sign in equation 3-2.1. Only when the internal cash flow proxy (E) is intro- duced in equation 3-2.4 is the coefficient of R t .i 8 The variables WT and E are proxies for foreign tax pressures and cash flow influences on direct investment determination. It is possible that their specification introduces statistical problems. It was indicated earlier that multicollinearity is generally not a problem. How- ever, it should be noted that in manufacturing, the simple correlation coefficient between earnings and foreign withholding taxes was .88, and between E and re-invested earnings .92 in 1971. In the extractive in- dustries the E-capital transfers simple correlation co- efficient was .97. As is pointed out below, the coefficients of E and WT seem to be affected by these relationships in the manufacturing industries. No other coefficient seems to be affected. The extractive industry relation- ship does not seem to affect the results as can be seen in Table 3-6. Aside from these instances, WT and E do not seem to interfere with the equations perform- ances. both correctly signed and statistically signifi- cant. Thus E seems to be an important inde- pendent variable, as do the FDIP proxies. Using R 2 as the criterion, the model fits less well for the manufacturing sector than for the aggre- gate of all industries. Not only does the model provide a better fit for the extractive sector, but, in addition, equa- tion 3-3.1 has much more explanatory power (again using R 2 as the criterion) than did 3-2.1 for manufacturing. In other words, although SA, WT, E, and UP are all found to be statisti- cally significant in subsequent equations, and with signs identical to those found in the manu- facturing equations, the R 2 obtained in 3-3.1 leaves little room for improvement. In no equa- tion in Table 3-3 is R t .i both correctly signed and statistically significant. All things consid- ered, equation 3-3.4 would probably be con- sidered an optimum statement of the determinants of direct investment in extractive industries. Not only are the coefficients of AR and DI t .! similar in size, sign and significance in equations 3-3.1 and 3-3.4, but the coefficients of SA, WT, and E are all significant in 3-3.4, and with signs similar to those found in the manufacturing equations. When UP is intro- duced in equation 3-3.5, the significance of the DIt.i variable is lost. In summary, the general impression one gets from Tables 3-1 to 3-3 is that, although the flexible accelerator model performs adequately in explaining the determinants of annual direct investment flows, the addition of other, usually specifically international, variables either pro- vides added detail (as in the case of the ex- tractive industries) or substantially improves the model's fit (as in the case of manufacturing and aggregate equations). 9 The Program prox- ies, use of proceeds (UP) and specific authoriza- tions (SA), and the proxy for the AFNs' internal cash flow (E) performed as expected in a statistically significant manner. The co- efficient of the foreign withholding taxes (WT) variable was consistently significant. A judg- ment of the correctness of that coefficient's sign was postponed until direct investment was dis- aggregated into capital transfers and reinvested earnings. Tables 3-4 and 3-6 present estimates of the determinants of capital transfers of all, manu- facturing, and extractive DIs respectively. The model used is the same as for aggregate direct The use of cross section data often provides results somewhat different than those based on time series data. For a survey of domestic studies, see: Jorgenson (1971). 27 Table 3-4 Regression Results for Capital Transfers of All Industries (CT a ) in Schedule A, B, and C Countries, UUO firms (1971 = t) No. Constant Term R<- , AR DI,. , SA WT E UP R 2 See 4.1 -2.0141 + .0152 (5.84)** + .0039 (0.52) + .0842 (22.61)** — — — — .836 18.50 4.2 -2.2255 + .0137 (5.44)** + .0046 (0.64) + .0838 (23.33)** + .6421 (5.79)** — — — .847 17.90 4.3 -2.1046 + .0190 (7.35)** -.0017 (0.24) + .0849 (24.52)** + 1.0284 (8.23)** -2.2989 (5.95)** — — .858 17.20 4.4 -2.0454 + .0210 (8.25)** -.0098 (1.40) + .0668 (13.75)** + .7401 (5.53)** -3.7651 (7.99)** + .2651 (5.15)**- — .866 16.70 4.5 -2.5128 + .0166 (7.17)** -.0066 (1.66) + .0354 (6.71)** + .2385 (1.86) -.3463 (8.21)** + . 1865 (4.00)** + .8328 (10.52)** .893 14.90 The numbers in parentheses are t-statistics; * and "* Indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-5 Regression Results for Capital Transfers of Manufacturing Industries (CT m ) in Schedule A, B, and C Countries, 296 firms (1971 = t) No. Constant Term R<- 1 AR DI,., SA WT E UP R 2 See 5.1 -1.4499 + .0108 (3.54)** + .0732 (4.50)** + .0586 (7.70)** — — — — .653 13.80 5.2 -.4024 + .0166 (6.07)** + .0221 (1.45) + .0350 (4.93)** + .8861 (9.47)** — — — .734 12.10 5.3 -1.0397 + .0180 (6.65)** + .0210 (1.40) + .0534 (6.21)** + 1.0000 (10.32)** -1.5096 (3.63)** — — .745 11.80 5.4 -.4877 + .0136 (4.85)** + .0260 (1.78) + .0647 (7.39)** +1.2419 (11.33)** + .0422 (0.08) -.2131 (4.31)** — .759 11.50 5.5 -.7255 + .0073 (3.13)** + .0159 (1.34) + .0443 (6.05)** + .8730 (9.27)** + . 1673 (0.38) -.2994 (7.33)** + .7754 (12.19)** .841 9.36 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-6 Regression Results for Capital Transfers of Extractive Industries (CT t ) in Schedule A, B, and C Countries, 55 firms (1971 - t) No. Constant Term R<- 1 AR DI,., SA WT E UP R 2 See 6.1 +3.2735 + .1019 (12.68)** - . 1325 (6.24)** + .0065 (0.92) — — — — .977 17.30 6.2 + 1.5316 + .0975 (13.59)** - . 1234 (6.54)** + .0099 (1.57) +2.2798 (3.93)** — — — .982 15.20 6.3 + 1.5203 + .0960 (13.80)** - . 1032 (5.06)** + .0099 (1.63) +2.2389 (4.00)** -1.9512 (2.20)* — — .983 14.70 6.4 +2.4313 + .0656 (6.61)** - . 1004 (5.59)** -.0035 (0.55) +2.0685 (4.18)** -4.4152 (4.39)** + . 7270 (3.90)** — .987 12.90 6.5 + .8158 + .0658 (7.97)** -.1321 (8.06)** -.0366 (4.17)** +1.4677 (3.41)** -2.4044 (2.56)* + .7135 (4.60)** + .7754 (4.73)** .991 10.80 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. 28 investment. In general, the capital transfer equations parallel those of aggregate direct investment. The model fits better for extractive industries than for manufacturing. However, model (2) as found in manufacturing equations 3-2.5 and 3-5.5 fits less well for capital trans- fers than for aggregate investment, primarily because of shifts in the performance of aR, WT, and E. Focusing first on the determinants of capital transfers in all industries, one finds that, re- gardless of the model specification, the co- efficients of R t -i and DI t .i are always significant. In no case is AR significant. Use of proceeds have also been important in permitting capital transfers. The SA coefficient is significant only at the ten percent level when UP is included. Comparing equation 3-4.5 with 3-1.5, 82.2% of UP's impact and 41.9% of SA's impact was in permitting capital transfers to exceed those which would have been permitted had the FDIP been administered without flexibility. WT and E are also statistically significant. For manufacturing DIs' capital transfers to AFNs (Table 3-5), aR is statistically signifi- cant only in equation 3-5.1. The sign of E's coefficient is negative and the introduction of the variable unexpectedly increased the size of the DI t -i coefficient in equation 3-5.4. Further, E's introduction reversed the sign of WT and eliminated the significance of that variable's coefficient. Considering the simple correlation coefficient of .88 between E and WT, it is likely that these are spurious results. As was the case with aggregate direct in- vestment, the model fits best for the extractive industries. Model (1) (Equation 3-6.1) fits so well that there is little room for increasing the R 2 by introducing additional variables. Despite the good fit of equation 3-6.1, the nega- tive sign on aR's coefficient was not expected, and the coefficient of DI t .! is not significant. The pattern of these two unexpected results is stable throughout the set of equations. Further SA, WT, E, and UP are statistically significant as they appear in subsequent equations. And the pattern of the signs of these variables' co- efficients is consistent with the signs previously observed. Considering the very high R 2 and the general stability of the results of the estimates in the set of equations, it is prudent to explore the meaning of the negative sign of aR either to confirm that the AR evidence should be ignored, or to find evidence supporting theoretical modi- fication. For the extractive industry equations, AR might be taken as representing financial rather than real phenomena. That is, instead of expressing a relationship in which the capital transfer is a function of changes in the size of market in which the investment's output is to be sold, a purely financial situation may account for the negative relationship. For example, in 1971 a large proportion of earnings in extrac- tive industries were repatriated as dividends. Thus, new investment had to be financed almost entirely by either capital transfers or foreign borrowing. In such a situation, the financial connection between CT and R through RE could be inverse. If so, aR could have a negative sign. The reinvested earnings equations presented in Tables 3-7 to 3-9 also yield unexpected re- sults. Beginning with the equations for all in- dustries (Table 3-7), one immediately finds that model (1) does not fit very well. Comparing equations 3-7.1 and 3-7.5, the importance of WT, E, and the Program proxies can be seen in the increased size of the R 2 . E, SA, and UP have the expected signs, but WT has a positive sign rather than the usual negative one. Table 3-7 is a summation of two sub-samples. The largest of these sub-samples is manufac- turing (Table 3-8) . There one gets a clear idea of the improvement in model specification re- sulting from the addition of variables. In equation 3-8.5, the improvement in R 2 gives substantial emphasis to the desirability of in- cluding E in the equation. This, plus the un- usually large diminution in size and significance of the DI t . x coefficient, suggests that E should be given a more prominent place in the model. The sign on the WT coefficient may be spurious considering the simple E-WT correlation co- efficient of .88. The expected E-RE m relationship seems to exist. In this case the simple correla- tion coefficient is .92. Another way of making the same point is to estimate a dividend-type model for the determinants of RE in manufac- turing. Equation 3-8.5 suggests that such an alternative might be quite productive. The estimates for the extractive industries found in Table 3-9 present almost the opposite conclusion. Here one sees that equation 3-9.1 provides as good a fit as the other four alterna- tives. Additional variables do not alter the size, signs or significance of R t .i, AR, and DI t .i. One would suspect that an alternative formulation of a model along dividend-type lines would be of no use. To shed further light on the determinants of RE, estimates can be made using a dividend- type model which can be specified for dividends as: (3) D = Ao + Ai E + A 2 E/DI + A 3 D„ + A 4 WT and for reinvested earnings as: (4) RE = A + Ax E + A 2 E/DI, + A 3 RE t -i + A 4 WT + A 5 CT 29 Table 3-7 Regression Results for Reinvested Earnings of All Industries (RE a ) in Schedule A, B, and C Countries, UhO firms (1971 = t) No. Constant Term Ri- 1 AR DI,_ , SA WT E UP R2 See 7.1 +3.4583 -.0065 (2.61)** + . 0235 (3.27)** + .0104 (2.92)** — — — — .041 17.80 7.2 +3.0394 -.0095 (4.52)** + .0249 (4.16)** + . 0097 (3.26)** + 1.2724 (13.80)** — — — .332 14.90 7.3 +2.8931 -.0159 (7.75)** + .0326 (5.85)** + .0084 (3.06)** + .8051 (8.13)** +2.7813 (9.08)** — — .437 13.60 7.4 +2.9684 -.0134 (6.99)** + . 0223 (4.22)** -.0146 (3.98)** + .4387 (4.36)** + .9181 (2.59)** + .3369 (8.69)** — .520 12.60 7.5 +2.8674 -.0143 (7.41)** + .0330 (4.38)** -.0214 (4.84)** + .3303 (3.07)** + . 9834 (2.78)** + .3199 (8.20)** + . 1800 (2.72)** .526 12.50 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-8 Regression Results for Reinvested Earnings of Manufacturing Indtistries (RE m ) in Schedule A, B, and C Countries, 296 firms (1971 = t) No. Constant Term Ri- 1 AR DI ( . , SA WT E UP R 2 See 8.1 + . 2886 -.0213 (7.51)** + .0817 (5.39)** + .0841 (11.89)** — — — — .431 12.90 8.2 + 1.5319 -.0143 (6.27)** + .0211 (1.65) + .0562 (9.46)** + 1.0280 (13.43)** — — — .647 10.10 8.3 +2.1661 -.0157 (7.01)** + .0222 (1-79) + .0380 (5.33)** + . 8948 (11.14)** + 1.5023 (4.36)** — — . .668 9.82 8.4 + .3881 -.0018 (2.47)* + .0061 (1.66) + .0014 (0.64) + .1155 (4.15)** -3.4967 (25.46)** + . 6863 (54.68)** — .971 2.92 8.5 + . 3584 -.0026 (3.63)** + .0049 (1.37) -.0011 (0.51) + .0694 (2.46)* -3.4810 (26.41)** + .6756 (55.24)** + .0969 (5.09)** .973 2.80 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-9 Regression Results for Reinvested Earnings of Extractive Industries (REe) in Schedule A, B, and C Countries, 55 firms (1971 = t) No. Constant Term Ri- 1 AR DI,. i SA WT E UP R 2 See 9.1 +2.2725 -.0923 (22.35)** + .2505 (22.96)** + .0561 (15.41)** — — — — .911 8.87 9.2 +2.4053 -.0920 (21.85)** + .2498 (22.56)** + .0558 (15.08)** - . 1738 (0.51) — — — .910 8.94 9.3 +2.4006 -.0926 (22.17)** + .2581 (21.07)** + .0558 (15.27)** - . 1907 (0.57) -.8065 (1.51) — — .912 8.83 9.4 +2.4520 -.0943 (13.81)** + .2583 (20.87)** + .0551 (12.56)** -.2003 (0.59) -.9454 (1.37) + .0410 (0.32) — .910 8.91 9.5 +2.1947 - . 0943 (13.78)** + . 2533 (18.64)** + .0498 (6.84)** -.2960 (0.83) -.6252 (0.80) + . 0388 (0.30) + .1235 (0.91) .910 8.92 The numbers in parentheses are t-statisics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. 30 A priori one expects D and RE to be positively related to both A a and A 3 . That is, following- John Lintner's work with domestic dividend data, dividends are postulated to be a function of current earnings and past dividends. Given the E-RE relationship, the same logic also holds for RE. A 2 should be positively related to RE and negatively related to D. If withholding taxes on dividends discourage the payment of dividends, a negative relationship should exist between D and WT and a positive one between RE and WT. If WT has no discouraging influ- ence on D, the pattern of signs which would be expected would be reversed. In the RE (model 4) estimates (Tables 3-11 and 3-12), capital transfers are introduced as an inde- pendent variable to test whether RE and CT are substitutes. If so, a negative sign would be anticipated ; if not a positive one. Turning to the dividend equations in Table 3-10, one finds that regardless of the specific data set, the signs of the coefficients of E, E/DI, and D t .i are as expected. In no case is the E/DI coefficient significantly different from zero. The coefficients of E and D t _i are in every case significant at the one percent level. Thus, cur- rent earnings and the dividends paid last year are, as expected, significant determinants of AFN dividends. The findings on withholding taxes are mixed. For the manufacturing sector (where the model fits best judging by the R 2 ), withholding taxes do not seem to deter dividend payments. There- fore D and WT are positively related. In con- trast, withholding taxes do seem to deter the payment of dividends in the extractive sector. However, one must be cautious about accepting this result. The negative sign could result from extractive investment being predominantly in countries which do not levy a withholding tax on dividends. The coefficients for both industries are statistically significant. Turning to similar models for reinvested earnings, one finds that model (4) did not ex- plain the determinants of reinvested earnings in extractive industries. Model (2) (equation results reported in Table 3-9) would seem to be the proper model for estimating the determi- nants of reinvested earnings in this sector. In contrast, model (4) explains determinants of AFN reinvestment in manufacturing better than model (2). In no case is the coefficient of E/DI statistically significant, although it car- ries the correct sign. In all equations in Table 3-12, E and RE t .i are correctly signed and statistically significant. WT has the anticipated sign (given the findings in equation 3-10.4) and is significant at the one percent level. The coefficient of CT in equation 3-12.3 is small and not statistically significant. No basic change in the model's estimates derived from including CT. Model (4) estimates for all AFNs are pre-, sented in Table 3-11. The model does not fit well, reflecting its inappropriateness for ex- tractive industries. In summary, the flexible accelerator model [model (1)] performed adequately in identify- ing the determinants of direct investment in 1971. However, the model fit was improved by introducing variables identifying the role of the OFDI Program (UP and SA), the effect on reinvested earnings of foreign withholding of taxes on AFN dividends (WT), and a specific proxy for internal cash flow (E). [Model (1) plus these variables was identified as Model (2).] All four of the additional variables were found to be statistically significant. UP and SA have been important in not impeding direct investment and E likewise has the expected positive effect. Foreign withholding taxes were found to be inversely related to direct invest- ment flows. Model (1) proved effective in explaining the determinants of RE in the extractive industries. Although not statistically significant, WT was found to have a negative sign within the frame- work of Model (2). Both Models (1) and (2) fit well for the capital transfer equations. Gen- erally WT had a negative sign and was signifi- cant. AR was found not to be statistically significant in any version of Model (2) for capital transfers in the manufacturing indus- tries. And DI M was never significant in de- termining CTs in the extractive industries. Determinants of reinvested earnings in the manufacturing sector were explained well by Model (4). In summary, Models (1) and (2) provide good fits of 1971 data for aggregate investment, capital transfers and reinvested earnings in extractive industries. Model (4) provided a good fit for RE in manufacturing. Synthesizing these findings, aggregate invest- ment in all industries is attracted by the size of the recipient country's market (Rt-i) and the growth of that market (AR), AFNs' internal cash flows (E), and the replacement of the DI stock (DI t -i). Foreign withholding taxes on dividends do not seem to discourage dividend payment in manufacturing industries. The OFDI data permit an evaluation of the stability of these cross section estimates over the period 1968-71. Table 3-13 reproduces the equivalent of equation 5 as found in the regres- sion results above for aggregate direct invest- ment for these years. The 1971 relationships seem also to have ex- isted in 1970. However, for 1968 and 1969 when the OFDI program was much more restrictive, one can observe that the sign of the coefficient for AR is the reverse of that which is both expected and found in later years. The co- efficient of WT exhibits similar changes. The 31 Table 3-10 Regression Results for Dividends, Schedule A, B, and C Countries (1971 = t) Equation Number Dependent Variable Constant Term E E/DI D,., WT R 2 See All Industries , 440 firms 10.1 Da -1.3901 + .3943 (14.43)** -.2254 (0.35) + .7818 (16.40)** — .896 12.00 10.2 Da -1.2206 + .4877 (16.21)** -.2146 (0.35) + .7839 (17.16)** -1.7563 (6.31)** .904 11.50 Manufacturing Industries, 296 firms 10.3 Dm -.9422 + .3111 (21.96)** -1.7435 (1.47) + .6789 (21.23)** — .964 4.21 10.4 Dm -.2910 + .2576 (25.44)** -.8072 (0.99) + . 1934 (5.62)** +3.0040 (18.25)** .983 2.88 Extractive Industries, 55 firms 10.5 De -1.5797 + .7561 (7.39)** -18.9324 (0.41) + .4268 (2.94)** — .919 25.70 10.6 De -1.9340 + .8730 (7.85)** -11.6007 (0.26) + .3779 (2.68)** -3.1577 (2.26)* .925 24.70 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-11 Regression Results for Reinvested Earnings from All Industries (REa) In Schedule A, B, and C Countries, UUO firms, Model (U) (1971 = t) Equation Number Dependent Variable Constant Term E E/DI RE«_ i WT CT R 2 See 11.1 REa + 1.1312 + . 0773 (2.91)** + .3026 (0.38) + .4559 (6.69)** — — .326 14.90 11.2 REa + 1.0761 + .0370 (1.23) + .2950 (0.37) + .4025 (5.73)** + 1.0512 (2.81)** — .337 14.80 11.3 REa + 1.9504 + . 5355 (14.58)** -.0870 (0.14) + . 1220 (2.17)* -.6892 (2.27)* -.3810 (17.42)** .609 11.40 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-12 Regression Results for Reinvested Earnings of Manufacturing Industries (REm) In Schedule A, B, and C Countries, 296 firms, Model (U) (1971 = t) Equation Number Dependent Variable Constant Term E E/DI RE|. i WT CT R 2 See 12.1 REm + .2514 + .3459 (10.31)** + . 1545 (0.82) + .1751 (2.47)* — — .848 6.65 12.2 REm + . 2353 + .6270 (39.24)** + .2109 (0.27) + .2237 (7.52)** -3.7489 (37.04)** — .973 2.79 12.3 REm + . 1992 + .6242 (38.54)** + . 2676 (0.34) + .2292 (7.58)** -3.7920 (34.62)** + .0097 (1.03) .973 2.78 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 6 % and 1 % levels, respectively. 32 Table 3-13 Regression Results for Aggregate U.S. Direct Foreign Investment (la) In Schedule A, B, and C Countries, HO firms, 1968-71 Base Constant R<- 1 AR DI,. , SA WT E UP — Year Term R2 See 1971 + . 3545 + . 0022 + .0164 + .0140 + . 5689 -2.4795 + . 5065 + 1.0128 .954 10.70 (1.35) (3.65)** (3.72)** (6.18)** (8.21)** (15.20)** (17.89)** 1970 + .0671 -.0021 + . 0201 + .0320 + .6682 -1.6685 + .3045 + 1.2233 .943 10.40 (1.54) (6.43)** (7.43)** (7.33)** (4.59)** (6.70)** (24.49)** 1969 + .0031 -.0017 -.0034 + .0267 + . 1457 - . 3383 + . 1967 + 1.0469 .917 8.21 (1.74) (0.77) (9.40)** (1.26) (0.64) (5.66)** (38.41)** 1968 - . 2624 - . 0009 -.0445 + .0110 + 1.2336 + . 7351 + .1511 + 1.0648 .909 9.42 (0.81) (4.41)** (2.31)* (15.21)** (1.33) (2.47)* (29.67)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-14 Regression Results for Manufacturing Direct Foreign Investment (Im) In Schedule A, B, and C Countries, 296 firms, 1968-71 Base Constant Ri- i AR DI,. , SA WT E UP Year Term R 2 See 1971 -.3670 + . 0048 + .0208 + . 0432 + .9425 -3.3136 + .3761 + .8723 .938 8.59 (2.23)* (1.91) (6.43)** (10.91)** (8.20)** (10.04)** (14.95)** 1970 + .6801 -.0051 + . 0097 + . 0270 + . 8398 -2.0278 + . 3430 + 1.0607 .920 7.62 (3.04)** (3.19)** (4.29)** (11.05)** (4.76)** (7.10)** (20.45)** 1969 + . 6083 -.0025 + .0077 -.0058 -.0177 - . 5882 + . 3532 + 1.1268 .870 8.07 (0.94) (0.53) (0.69) (0.15) (0.93) (7.68)** (29.90)** 1968.... -.4103 + .00005 -.0219 + .0031 + 1.2887 -.8988 + . 3303 + .9616 .816 8.08 (0.02) (1.18) (0.33) (10.35)** (1.38) (4.62)** (24.04)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-15 Regression Results for Extractive U.S. Direct Foreign Investment (Ie) In Schedule A, B, and C Countries, 55 firms, 1968-71 Base Constant Ri- 1 AR DI,., SA WT E UP mmm Year Term R 2 See 1971... . +3.0105 -.0286 + .1212 + .0133 + 1.1719 -3.0306 + . 7524 + .8988 .993 9.26 (4.02)** (8.60)** (1.76) (3.16)** (3.75)** (5.64)** (6.37)** 1970.... + .2962 + .0020 + . 0532 + .0125 +2.2544 -.2734 + .2875 + 1.3574 .992 9.08 (0.23) (3.55)** (1.16) (3.30)** (0.18) (1.73) (11.39)** 1969-... -1.0137 + .0063 + . 2283 + .0230 +2.3380 -.1126 - . 5024 + 1.1456 .992 5.34 (2.02)* (5.91)** (3.38)** (3.51)** (0.02) (3.96)** (19.66)** 1968-..- - . 2946 -.0029 -.0955 + .0682 + . 5866 -.0024 + .3680 + . 8949 .995 4.69 (0.54) (4.10)** (7.31)** (3.72)** (3.49)** (2.40)* (17.68)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. size of the coefficient of SA in 1968 also mani- fests the restrictiveness of the Program, al- though the similar coefficient for 1969 is unexplainably low. Further, one suspects that the increase in the size of the consistently sig- nificant coefficient of E may reflect the liber- alization of the OFDI Program. This last observation does not seem to apply to manufacturing direct investment, the equa- tions for which are portrayed in Table 3-14. Otherwise the effect of the Program is striking. In 1968 and 1969 only the coefficients of Pro- gram proxies, SA and UP, plus E are statisti- cally significant. The manufacturing industry evidence also suggests that the surprising 1969 SA coefficient for aggregate investment is de- pendent upon the situation in the manufactur- ing sector. The 1970 and 1971 equations show relationships which are in keeping with theo- retical expectations, given FDIP liberalization. In contrast, the equations for direct invest- ment in the extractive industries (found in Table 3-15) demonstrate rather consistent re- lationships during both more restrictive and more liberal Program years. Only the sign of 33 the coefficient of aR in 1968 and the increase in the size of the WT coefficient over the 1968-71 period suggest fundamental changes. The capital transfer equations found in Tables 3-16, 3-17 and 3-18 and the reinvested earnings (model 2) equations in Tables 3-19, 3-20 and 3-21 again manifest what seem to have been Program effects. As a general pattern the coefficients of the independent variables are more likely to be statistically significant in the 1970 and 1971 equations than in the two earlier years when the FDIP was more restrictive. Also the signs of the coefficients, on occasion, differ between the 1968 and 1969 equations and those for 1970 and 1971. While there are some changes which do not seem explicable by the variations of the FDIP, the general pattern seems to indicate that the Office was relatively successful in its effort to liberalize the Program. From a different perspective, model 4 equa- tions for reinvested earnings in manufacturing corroborate these impressions. As Table 3-22 indicates, reinvested earnings were more strongly influenced by current earnings in 1968 than in other years. At the same time, RE tl has the wrong sign and is not statistically sig- nificant in that year. The latter is the reverse of the findings for all other years. These results are not suprising when one recognizes that in 1968 FDIP allowables could be used in schedule Table 3-16 Regression Results for Capital Transfers of All Industries (CTa) In Schedule A, B, and C Countries, UUO firms, 1968-71 Base Constant Ri- i AR DI,., SA WT E UP Year Term R 2 See 1971 -2.5128 + .0166 -.0066 + .0354 + .2385 -3.4628 + . 1855 + . 8328 .893 14.90 (7.17)** (1.06) (6.71)** (1.86) (8.21)** (4.00)** (10.52)** 1970..-. -1.1243 + .0031 + .0092 + .0547 + . 6465 -1.5871 -.2947 + 1.1856 .872 13.10 (1.83) (2.34)* (10.10)** (5.63)** (3.47)** (5.15)** (18.86)** 1969.._ -1.1318 + .0006 -.0021 + .0662 -.0436 + .2863 -.3944 + .8399 .861 10.80 (0.45) (0.35) (17.71)** (0.29) (0.41) (8.62)** (23.40)** 1968.... - . 9097 + .0003 -.0031 + .0352 + 1.4944 +2.8912 -.6918 + 1.0159 .919 8.72 (0.25) (0.33) (7.96)** (19.89)** (5.66)** (12.20)** (30.57)** The numbers in parentheses are t-statisties; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-17 Regression Results for Capital Transfers of Manufacturing Industries (CTm) In Schedule A, B, and C Countries, 296 firms, 1968-71 Base Constant R<- i AR DI,., SA WT E UP Year Term R 2 See 1971 - . 7255 + .0073 + .0159 + .0443 + . 8730 + .1673 -.2994 + . 7754 .841 9.36 (3.13)** (1.34) (6.05)** (9.27)** (0.38) (7.33)** (12.19)** 1970 + . 6962 -.0004 + .0140 + .0391 + .7971 -1.5571 -.2653 + . 9308 .732 8.04 (0.25) (4.35)** (5.90)** (9.94)** (3.46)** (5.21)** (17.00)** 1969 + . 5583 -.0014 + .0066 - . 0042 -.1596 + .7757 - . 1389 + 1.0264 .749 8.07 (0.52) (0.45) (0.49) (1.35) (1.23) (3.02)** (27.25)** 1968..._ -.1134 + . 0054 -.0218 -.0019 + 1.2129 +3.0783 - . 5062 + . 9574 .716 8.32 (1.56) (1.14) (0.21) (9.46)** (4.59)** (6.87)** (23.24)** The numbers in parentheses are t-statistics; ♦ and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-18 Regression Results for Capital Transfers of Extractive Industries (CTe) In Schedule A, B, and C Countries, 55 firms, 1968-71 Base Constant Ri- i AR DI,., SA Year Term 1971-.. + .8158 + .0658 -.1321 -.0366 + 1.4677 (7.97)** (8.06)** (4.17)** (3.41)** 1970—. -.1152 + .0240 - . 0499 -.0494 +2.3944 (2.03)* (2.45)* (3.37)** (2.58)* 1969 -4.5542 + .0098 + . 2603 + .0693 +2.0695 (1.06) (2.29)* (3.47)** (1.06) 1968---. - 1 . 2208 -.0045 -.0461 + .0727 + 1.3164 (0.84) (2.02)* (7.95)** (8.53)** WT E UP R : See -2.4044 (2.56)* +8.4993 (4.00)** +22.5791 (1.66) -26.5442 (3.99)** + .7135 (4.60)** - . 1888 (0.84) -1.6819 (4.51)** - . 1448 (0.97) + . 7754 (4.73)** + 1.9198 (11.84)** + .6399 (3.74)** + .8827 (17.80)** .991 10.80 .982 12.40 .949 15.70 .996 4.60 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. 34 Table 3-19 Regression Results for Reinvested Earnings of All Industries (REa) In Schedule A, B, and C Countries, UhO firms (Model 2), 1968-71 Base Constant R<- i AR DI,., SA WT E UP Year Term R 2 See 1971 +2.8674 -.0143 + . 0230 -.0214 + . 3303 + .9834 + .3199 + . 1800 .526 12.50 (7.41)** (4.38)** (4.84)** (3.07)** (2.78)** (8.20)** (2.72)** 1970 + 1.1910 -.0052 + .0109 -.0227 + .0218 -.0814 + . 5992 + .0377 .790 7.69 (5.19)** (4.71)** (7.13)** (0.32) i (0.30) (17.79)** (1.02) 1969 + 1.1345 - . 0023 -.0014 -.0395 + . 1893 -.6243 + .5910 + .2070 .560 9.63 (1.98)* (0.26) (11.87)** (1.39) (1.01) (14.50)** (6.48)** 1968.. _ _ + . 6469 -.0012 -.0414 -.0242 - . 2609 -2.1567 + . 8430 + .0489 .750 5.01 (1.96)* (7.71)** (9.51)** (6.04)** (7.35)** (25.85)** (2.56)* The numbers in parentheses are t-statisics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-20 Regression Results for Reinvested Earnings of Manufacturing Industries (REm) In Schedule A, B, and C Countries, 296 firms (Model 2), 1968-71 UP Base Constant Ri. i AR DI,-, SA WT E Year Term 1971 + .3584 -.0026 + .0049 -.0011 + .0694 -3.4810 + .6756 (3.63)** (1.37) (0.51) (2.46)* (26.41)** (55.24)** 1970 -.0162 - . 0047 - . 0043 -.0121 + .0428 -.4706 + . 6083 (5.69)** (2.88)** (3.96)** (1.16) (2.26)* (25.82)** 1969 + .0499 -.0011 + .0011 -.0016 + .1419 -1.3634 + .4921 (0.44) (0.08) (0.20) (1.24) (2.24)* (11.07)** 1968-.. - . 2976 -.0053 -.0001 + . 0050 -.0758 -3.9775 + .8366 (5.28)** (0.02) (1.81) (2.02)* (20.23)** (38.78)** R ; See + .0969 (5.09)** + .1299 (5.14)** + . 1004 (2.76)** + .0042 (0.35) .973 .954 .713 .951 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1% levels, respectively. Table 3-21 Regression Results for Reinvested Earnings of Extractive Industries (REe) In Schedule A, B, and C Countries, 55 firms (Model 2), 1968-71 The numbers in parentheses are t-statistics; * and ** Indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-22 Regression Results for Reinvested Earning of Manufacturing Industries (REm) In Schedule A, B, and C Countries, 296 firms (Model U), 1967-71 2.80 3.72 7.80 2.44 Base Constant Ri- i AR DI,-, SA WT E UP Year Term R 2 See 1971 +2.1947 -.0943 + . 2533 + .0498 - . 2960 - . 6252 + .0388 + .1235 .910 8.92 (13.78)** (18.64)** (6.84)** (0.83) (0.80) (0.30) (0.91) 1970___- + .4109 -.0220 + .1031 + .0619 - . 1399 -8.7720 + . 4763 - . 5625 .938 5.81 (3.96)** (10.75)** (8.97)** (0.32) (8.78)** (4.49)** (7.38)** 1969...- +3.5393 -.0035 -.0320 -.0463 + .2685 -22.6954 + 1.1794 + . 5056 .652 13.10 (0.45) (0.34) (2.77)** (0.16) (1.99) (3.78)** (3.53)** 1968__._ + . 9258 + .0015 - . 0494 -.0045 - . 7299 +2.8478 + .5130 + .0121 . 958 2.22 (0.60) (4.49)** (1.01) (9.81)** (0.89) (7.10)** (0.51) Base Year Constant Term E E/ DI RE,. WT CT R 2 See 1971. 1970. 1969. 1968. 1967. + . 1992 -.3347 + . 4360 .3853 - . 4285 + . 6242 + .2672 + .2292 -3.7920 + .0097 .973 2.78 (38.54)** (0.34) (7.58)** (34.62)** (1.03) + .7085 -2.4325 -.1104 -1.6708 -.2085 .932 4.52 (27.99)** (1.64) (3.42)** (7.25)** (1.10) + . 1964 -.0100 + . 5878 + .8652 -.0701 .729 7.58 (2.90)** (0.03) (5.00)** (1.31) (2.44)* + .8709 + .0111 -.0239 - . 4569 -.0145 .943 2.63 (43.14)** (0.29) (0.81) (23.81)** (1.48) + .6973 + .1913 + .0660 -3.1312 -.0135 .838 3.29 (26.48)** (0.43) (1.63) (11.25)** (0.96) The numbers In parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. 35 C countries only to permit reinvested earnings. Capital transfers had to be offset 100% by use of proceeds. In such circumstances one would expect the relationship between reinvested earnings and earnings to be stronger than usual. 10 Finally, the dividend equations found in Tables 3-23, 3-24 and 3-25 lend additional sup- port to the above conclusions. For aggregate dividends, the D-E relationship, although not statistically significant, was actually negative in 1968. Not only is this finding in keeping with what would be an expected result of the FDIP but the pattern of E coefficients likewise fits these expectations. That is, the Program has aimed at encouraging the repatriation of earn- ings to the U.S. and the increase in the size of the E coefficient over the 1968-71 period sug- gests that this goal is being accomplished. 11 Assuming the D-E relationship has the sug- gested Program-intensity implications, these estimates also suggest that for manufacturing industries the last year of the voluntary con- trols program (1967) had an effect similar to that of the first year of the mandatory program. Uses of Funds by Source, 1967-71 In general, the equations presented in this section purport to identify the relationship be- tween sources of funds and the uses to which the funds are put. Two fundamental sources are identified — direct investment and borrowed funds or total liabilities. In addition, liabilities are disaggregated into short- and long-term liabilities, and each of these in turn is divided into interest-bearing and non-interest-bearing liabilities. Considering the extensiveness of the estimates presented here, as in the earlier sec- tion of this chapter, every aspect of the relation- ships cannot be explored. The aim here is to identify selected patterns of relationships which seem important and serve as examples of how the results can be used. Otherwise the data are presented so that individuals interested in other specific relationships can observe them among the results. About the only preconception which exists is that short-term liabilities should be relatively closely related to short-term assets and long-term liabilities to fixed assets and long-term receivables. 10 The reader will note by comparing Tables 3-13, 3- 16, and 3-19 that both specific authorizations (SA) and the use of proceeds identified by UP were used almost exclusively to permit capital transfers in 1968. 11 If one calculates what has traditionally been identi- fied as the payout ratio, they would reach the same conclusion. The payout ratio was small or negative (un- expected theoretically) through 1969 (except for manu- facturing in 1969). Subsequently the ratios have been positive and in some years larger than theoretically pre- dicted. Examining first the uses to which direct in- vestment is put, we can generally observe the expected positive and statistically significant relationship between increments in direct in- vestment and increments in fixed assets, short- term assets, other assets, and long-term re- ceivables (Tables 3-26, 3-27, and 3-28). For the lagged specifications of these various assets the sign may be positive or negative depending on the relative importance of various influences. If the source of funds is being used in an im- portant way to finance the replacement of the stock of a given type of asset, the sign should be positive. If not, a negative sign would prob- ably prevail. For all industries a positive sign on these lagged variables is generally found, with statistical significance of the coefficients (regardless of sign) less frequent. For all equa- tions, the R 2 is high for cross section estimates. The R 2 for the extractive industries is especially high. The relationships between fixed and short- term asset variables and total liabilities for all industries (Table 3-29) are stable as to sign and consistently significant over the 1967-71 period. For other assets and long-term receiv- ables, the relationships as to sign and as to statistical significance are varied. Disaggre- gating into estimates for manufacturing and extractive industries (Tables 3-30 and 3-31), one finds that the stability of signs observed for all industries no longer holds. In all instances the R 2 s are high. Table 3-32, contains estimates for all indus- tries of the uses to which short-term liabilities are put. The relationship of these liabilities to both fixed and short-term asset variables show a consistent pattern of signs, and in most in- stances the coefficients are statistically signifi- cant at the one per cent level. Suprisingly, the size of the AFA coefficient, although smaller in all but one year, often resembled the ASTA co- efficient in size. However, as would be expected, the STAt-i coefficient was often considerably larger than the FA t .i coefficient. As Tables 3-33 and 3-34 indicate, use of short-term liabilities to finance increments in fixed assets is im- portantly influenced by extractive industries' data. For manufacturing industries short-term assets take clear precedence as the use to which short-term liabilities are put. Although the statistical importance of such changes is not estimated, fixed assets seem to have been a rela- tively more important use of short-term liabili- ties in manufacturing during the last year of the voluntary program and the first year of the FDIP (when the Program was strictest). In manufacturing there was an important increase in the use of short-term liabilities to finance fixed assets (and also other assets) in 36 Table 3-23 Regression Results for Dividends of All Industries (Da) In Schedule A, B, and C Countries, UUO firms, 1967-71 Base Year Term DI R 2 See 1971 -1.2206 +.4877 -.2146 +.7839 -1.7563 .904 11.50 (16.21)** (0.35) (17.16)** (6.31)** 1970 . -.1987 +.3393 -.5586 +.6099 -.9874 .929 6.58 (14.62)** (0.38) (21.60)** (4.97)** 1969 -.2384 +.2722 -.0405 +1.0407 -2.2044 .921 6.64 (10.45)** (0.15) (34.69)** (5.54)** 1968 -.0903 -.0171 +.0064 +1.2194 +.2214 .947 4.12 (0.60) (0.11) (32.25)** (1.07) 1967 -.0739 +.0192 +.0273 +.7211 +.0318 .972 2.40 (0.94) (0.09) (38.95)** (20.60) The numbers in parentheses are t-statlstics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-24 Regression Results for Dividends of Manufacturing Industries (Dm) In Schedule A, B, and C Countries, 296 firms, 1967-71 Constant E E/ D«_i WT _ - Base Year Term DI R2 See 1971 1970 1969 1968 1967 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. -.2910 + .2576 -.8072 + . 1934 +3.0040 .983 2.88 (25.44)** (0.99) (5.62)** (18.25)** + .6241 + .3282 + .8159 + . 1202 + 1.1429 .924 4.50 (15.40)** (0.56) (3.68)** (4.37)** -.2956 + .3144 -.0237 + .9629 -2.2226 .833 7.05 (9.20)** (0.08) (8.33)** (3.43)** + .4158 + .0687 -.0126 + .2171 +4.1933 .947 2.55 (3.06)** (0.43) (4.48)** (20.63)** + .2243 -.0410 + . 1475 + .5139 +4.2571 .966 1.80 (2.20)* (0.62) (26.27)** (29.68)** Table 3-25 Regression Results for Dividends of Extractive Industries (De) In Schedule A, B, and C Countries, 55 firms, 1967-71 Constant E E/ D«. i WT - Base Year Term DI R 2 See 1971 -1.9340 1970 -.1550 1969 +.1572 1968 +.2230 1967 +.3339 + .8730 -11.6007 + .3779 -3.1577 .925 24.70 (7.85)** (0.26) (2.68)** (2.26)* + .0383 -2.3382 + . 9986 + 1.4692 .998 2.41 (2.31)** (1.09) (53.07)** (10.03)** - . 1064 +5.4359 + 1.4721 -6.8380 .998 2.25 (2.91)** (1.66) (49.60)** (4.18)** + .1021 -21.5491 + 1.4343 -10.0020 .998 2.03 (1.83) (4.81)** (36.67)** (4.75)** + .0294 +4.0388 .8429 + .0595 .996 2.02 (0.52) (1.36) (15.83)** (0.05) The numbers in parentheses are t-statistios; • and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. 37 Table 3-26 Uses of Increments in Direct Investment (la), Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA,.! ASTA STA ,. , AOA OA,.i ALTR LTR«. i __ Year Term R 2 See 1971-... - . 2573 + . 3668 + .0759 + . 4324 + .0031 - . 3463 + . 0962 + . 1427 - . 0484 .893 16.40 (8.95)** (5.55)** (12.13)** (0.29) (2.59)** (1.90) (1.84) (1.74) 1970..-. +2.7221 + . 3304 + .0536 + . 0835 -.0104 + .3084 + . 1523 + .1249 + .1147 .876 15.30 (12.80)** (4.30)** (3.65)** (1.10) (4.32)** (3.85)** (2.88)** (2.77)** 1969-.- + .9106 + . 1343 + . 0042 + .3031 + .0185 + .2160 + . 1622 + . 5559 + .0097 .771 13.60 (4.86)** (0.43) (10.60)** (1.68) (2.75)** (4.35)** (4.73)** (0.26) 1968—. + .1623 + .4777 + . 0287 + .4617 -.0539 + .3221 + . 0674 - . 3327 + .0570 .888 10.50 (12.70)** (3.71)** (18.53)** (6.11)** (3.20)** (2.49)* (3.70)** (1.77) 1967..-- + . 0343 - . 0077 + .1145 + .0777 - . 0359 + . 2053 + .0135 + .3994 + .0775 .835 12.10 (0.23) (10.43)** (3.74)** (3.36)** (2.96)** (0.28) (6.46)** (1.39) The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-27 Uses of Increments in Direct Investment (Im) Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Year Constant Term 1971 -.3496 1970 +2.8603 1969 + .2236 1968—- + . 7636 1967-_-_ +3.1725 AFA FA,. ASTA STA ,_ AOA OA, ALTR LTR,_ R 2 See + .1651 (3.01)** + . 2936 (9.49)** + . 1248 (3.79)** + .3847 (5.19)** + .0767 (1.96) + .1170 (6.29)** + . 0753 (4.46)** -.0051 (0.35) + . 0361 (3.52)** + .1741 (13.99)** + .1153 (2.12)* + .1295 (3.67)** + . 2666 (6.36)** + . 4365 (14.35)** + .0249 (1.18) - . 0046 (0.34) -.0127 (1.04) + . 0054 (0.37) - . 0483 (4.10)** - . 1372 (10.42)** + . (2. + • (3. + . (1. + . (0. + . (3. 5950 79)** 3734 72)** 1772 73) 0953 82) 2372 18)** + . 2980 (4.48)** + . 1067 (1.76) + .4834 (6.76)** + .0563 (0.92) + .8062 (9.56)** + .2477 (1.92) + .1014 (2.22)* + .4996 (2.76)** + .6611 (2.69)** + . 5742 (4.68)** - . 0264 (0.62) -.3814 (3.15)** + .3021 (2.62)** - . 1655 (1-77) + . 3595 (4.21)** .779 16.30 .728 14.00 .663 13.00 .721 9.95 .662 10.80 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-28 Uses of Increments in Direct Investment (Ie) Regression Results for Extractive Industries, Structural Equations, 1967-71 Base Constant AFA FA,. Year Term ASTA STA,. AOA OA,. ALTR LTR,. R 2 See 1971 1970 1969.... 1968..-. 1967... _ +2.6343 + 1.2818 - . 7600 + . 5973 +2.2698 + .3616 (3.58)** + . 2624 (2.21)* + .6171 (5.23)** + .4583 (6.80)** -.0032 (0.07) - . 0057 (0.17) + .1141 (2.78)** + .0688 (4.09)** -.0018 (0.07) + . 1442 (5.56)** + . 6468 (3.87)** - . 0060 (0.11) + . 5836 (8.16)** + . 2793 (2.56)* -.2337 (2.31)* + .1168 (1.95) -.1561 (2.18)* + .0440 (1.18) -.0490 (1.13) + .0028 (0.09) (0. + . (4. + . (4. + . (2. + . (1. 1512 51) 9700 62)** 5488 03)** 6767 14)* 1828 46) + (0 + (4 + (0 + (3 (3 .0138 .15) .3894 .27)** .0292 .91) .2467 .23)** .3053 .05)** - . 1376 (1.46) + .3413 (1.63) + .5084 (3.41)** -.4931 (4.48)** + .5131 (5.66)** -.0651 (1.09) + .2757 (2.81)** - . 7004 (7.65)** + . 1933 (2.99)** + .1138 (1.24) .990 11.00 .986 12.10 .983 7.60 .990 7.00 .991 6.79 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. 38 Table 3-29 Uses of Increments in Total Liabilities (TLa) Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_, AOA ()A,_ , ALTR LTR ( . , _ Year Term R 2 See 1971-.. +.1363 +.4472 -.0443 +.6260 +.0119 -.1104 +.2090 +.6054 -.0290 .846 14.50 (12.34)** (3.66)** (19.87)** (1.26) (0.93) (4.66)** (8.81)** (1.18) 1970..-. -.2643 +.7809 -.0843 +.3048 +.0795 +.3781 +.0417 +.3022 +.0029 .883 17.80 (24.77)** (5.82)** (11.47)** (7.20)** (4.55)** (0.91) (6.00)** (0.06) 1969..-. -1.3410 +.4254 -.0933 +.5317 +.1021 -.1463 +.4313 -.0109 -.2050 .808 15.30 (13.69)** (8.53)** (16.54)** (8.25)** (1.65) (10.29)** (0.08) (4.80)** 1968 -.4650 +.7463 -.0366 +.3299 +.1064 -.3686 -.2409 +.7396 -.1159 .886 9.03 (22.98)** (5.46)** (15.33)** (13.95)** (4.23)** (10.30)** (9.51)** (4.17)** 1967 -1.1357 +.4627 -.0682 +.4760 +.0174 +.4418 +.3399 -.1306 +.1277 .882 11.60 (14.28)** (6.49)** (23.93)** (1.70) (6.65)** (7.39)** (2.21)* (2.39)* The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-30 Uses of Increments in Total Liabilities (TLm), Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA,,, ASTA STA,., AOA OA«_ , ALTR LTR ; _! _ Year Term R 2 See 1971 +.2745 +.2947 +.0184 +.0928 -.0308 +.3750 -.2431 +.5173 +.0690 .830 12.10 (7.24)** (1.33) (22.97)** (3.02)** (2.36)* (4.92)** (5.40)** (2.20)* 1970 -3.3838 +.6749 +.0074 +.7152 -.0032 +.0513 +.1745 +.1805 +.0942 .931 13.60 (22.57)** (0.45) (20.98)** (0.27) (0.53) (2.98)** (4.09)** (0.81) 1969 -1.1368 +.2563 -.0437 +.6701 -.0051 +.2908 +.4814 +.6601 +.9311 .889 12.10 (8.39)** (3.28)** (17.20)** (0.38) (3.05)** (7.24)** (3.92)** (8.69)** 1968 -.8735 +.5854 -.0225 +.4150 +.0458 +.0716 +.2253 -.3321 +.0610 .935 5.81 (13.53)** (3.77)** (23.38)** (6.65)** (1.06) (6.33)** (2.32)* (1.12) 1967--.- -.4681 +.6128 -.0385 +.5104 +.0197 +.2988 -.3674 -.4849 +.0976 .926 .878 (19.17)** (3.79)** (29.73)** (1.83) (4.91)** (5.34)** (4.84)** (1.40) The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-31 Uses of Increments in Total Liabilities (TLe), Regression Results for Extractive Industries, Structural Equations, 1967-71 Base Constant AFA FA«. , ASTA STA,., AOA OA,_, ALTR LTR,_ , _ Year Term R 2 See 1971..-. -.5387 +.5023 -.0858 +.2163 +.0936 -1.5229 +.9166 +.4646 -.1074 .982 10.00 (5.44)** (2.73)** (1.42) (1.71) (5.65)** (10.82)** (5.40)** (1.97) 1970 -.1264 +.2530 +.1423 +.0878 -.1252 +1.0413 +.0848 +.4757 -.0123 .969 14.40 (1.80) (2.93)** (1.40) (1.47) (4.18)** (0.79) (1.92) (0.11) 1969 +1.8402 +.2174 -.0734 +.4058 -.0987 -1.3786 +.5763 -.5136 +.6202 .960 8.72 (1.61) (3.80)** (4.95)** (2.31)* (8.82)** (15.64)** (3.01)** (5.90)** 1968 -1.4772 +.4260 +.0291 +.4359 +.1330 +1.1371 -.4945 +1.0343 -.2220 .980 6.85 (6.46)** (1.08) (4.09)** (3.14)** (3.68)** (6.62)** (9.61)** (3.51)** 1967 +1.3173 +.2303 -.1258 +.2096 +.0883 +1.0633 +.6125 +.4757 -.0580 .987 6.61 (5.04)** (4.99)** (2.13)* (2.97)** (8.69)** (6.29)** (5.39)** (0.65) The numbers In parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. 39 Table 3-32 Uses of Increments in Short-Term Liabilities (STLa), Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA.., ASTA STA,_ , AOA OA,_ , ALTR LTR,_ , Year Term R 2 See 1971 + .4118 + .2480 -.0151 + .6758 -.0481 -.2525 + . 1550 + .4013 + .0068 .786 11.90 (8.31)** (1.51) (26.04)** (6.18)** (2.59)* (4.20)** (7.09)** (0.34) 1970...- - . 7286 + .4832 -.0194 + .2836 + .0441 + .2796 + .0158 + .2433 - . 1008 .865 5.30 (17.79)** (1.56) (12.39)** (4.63)** (3.91)** (0.40) (5.61)** (2.43)* 1969-.-- - 1 . 4368 + . 2227 -.0438 + .3819 + .0864 -.3490 + .2707 -.2231 - . 1465 .739 14.60 (7.50)** (4.19)** (12.44)** (7.31)** (4.13)** (6.76)** (1.77) (3.59)** 1968 -.4801 + .2257 + .0115 + .2907 + .0648 + . 1793 - . 1633 + .3907 - . 1469 .868 7.00 (8.97)** (2.21)* (17.44)** (10.98)** (2.66)** (9.02)** (6.49)** (6.82)** 1967-.-- - . 7634 + .3506 -.0675 + .4193 -.0113 + . 2270 + .2389 -.3869 + .3118 .854 10.00 (12.49)** (7.43)** (24.33)** (1.28) (3.94)** (6.02)** (7.55)** (6.74)** The numbers in parentheses are t-statistics; • and •* indicate significantly different from zero at 6% and 1% levels, respectively. Table 3-33 Uses of Increments in Short-Term Liabilities (STLm), Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA,.., ASTA STA._ , AOA OA,-, ALTR LTR,. , Year Term R 2 See 1971 + 1.1339 + . 1442 -.0051 + . 7463 -.0522 + .0157 -.0866 + .4169 + .0741 .713 10.20 (4.18)** (0.44) (21.78)** (6.03)** (0.12) (2.07)* (5.14)** (2.79)** 1970 -2.4765 + .4036 + .0434 + .5805 -.0069 + . 1327 + . 1293 + . 1667 -.3673 .876 13.80 (13.28)** (2.62)** (16.76)** (0.58) (1.34) (2.17)* (3.71)** (3.09)** 1969 -.5469 + .0407 -.0107 + . 5420 + .0029 -.0641 + .0927 + .5085 + .8991 .838 11.70 (1.38) (0.83) (14.36)** (0.23) (0.69) (1.44) (3.12)** (8.66)** 1968 - . 4056 + .2381 + .0310 + .2649 + .0544 + .0697 -.0992 -.6892 -.3391 .869 6.14 (5.21)** (4.90)** (14.12)** (7.47)** (0.98) (2.64)** (4.55)** (5.88)** 1967...- + . 0690 + .3762 -.0821 + .4683 + .0284 + .0950 -.4175 -.5168 + . 2469 .890 8.65 (11.94)** (8.21)** (27.70)** (2.68)** (1.58) (6.16)** (5.24)** (3.59)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1% levels, respectively. Table 3 -34 Uses of Increments in Short-Term Liabilities (STLe), Regression Results for Extractive Industries, Structural Equations, 1967-71 Base Constant AFA FA,_, ASTA STA,., AOA OA,. , ALTR LTR,. , Year Term R 2 See 1971 -1.3500 + . 1709 -.5728 + .0178 + .2451 -2.1059 .5983 + . 2252 -.3803 .953 11.50 1970 -1.9122 (1.62) + .1152 (1.60) + .0981 (0.10) + . 1722 (3.92)** -.0251 (6.84)** + .6156 (6.18)** + .0536 (2.29)* + .0607 (6.11)** -.1019 .983 9.62 1969 + .8036 (1.22) + .0010 (3.02)** -.0684 (4.09)** + .1182 (0.44) -.0353 (3.70)** -1.0746 (0.74) + .4585 (0.37) - . 1060 (131) + .5678 .972 6.44 1968.._. + .0813 (0.01) -.0048 (4.80)** + .0240 (1.95) - . 1564 (1.12) + .0878 (9.32)** + 1.5393 (16.84)** -.0068 (0.84) + .6401 (7.32)** -.0494 .928 8.75 1967..-_ + .5189 (0.06) + .2277 (0.70) -.0824 (115) + .2488 (1.62) + . 1028 (3.90)** + .6704 (0.07) + . 4532 (4.66)** + .0733 (0.61) -.2857 .985 5.15 (6.40)** (4.19)** (3.25)** (4.44)** (7.03)** (5.97)** (1.07) (4.09)** The numbers in parentheses are t-statistics; * and *• indicate significantly different from zero at 6% and 1 % levels, respectively 40 1970. If the liabilities were denominated in dol- lars and the assets in the currency of the host country, this pattern may be explained as an adjustment in anticipation of the dollar de- valuations which ultimately took place in 1971. This shift in 1970 seems to have been at the expense of using short-term liabilities to finance long-term receivables. Again, one might be able to rationalize this in terms of anticipated de- valuation if the receivables were denominated in the local currency. That is, given the choice of financing fixed assets (which might be pur- chased with pre-revaluation dollars) or long- term receivables (which were denominated in pre-revaluation local currency), one might use short-term dollar liabilities to finance dollar purchases of assets while the value of the dollar is still high. If one anticipated the devaluation correctly, long-term receivables denominated in the local currency could not decrease in local currency value, and fixed assets purchased for dollars could only increase in local currency value. It should be recognized that these rela- tionships involve only one interpretation of the estimates, and other interpretations may be possible. Such a pattern is not so readily ap- parent in the extractive industry estimates. The long-term liability estimates in Tables 3-35, 3-36 and 3-37, show, as expected, a stronger relationship between LTL and fixed assets than between LTL and short-term assets. Further, as could be anticipated, there is no pattern that can easily be interpreted in terms of anticipation of devaluation. Some FDIP ef- fects seem to be manifested in the extractive industry estimates. In the previous section, less FDIP effect was found in these industries than in manufacturing. Table 3-37 may provide an indication as to why. Therein one can note the substantial increase in importance which both fixed and short-term assets had in 1968 as a use of long-term liabilities. Although at about half the 1968 intensity, the 1969 use of long-term liabilities continued above what seems to be the normal pattern. These changes seem to be in- creases which were compensated for by decreas- ing the use of long-term liabilities to finance other assets and long-term receivables. If this interpretation of the movements among co- efficients is correct, one might conclude that the primary effect of the FDIP on the extractive industries was to shift the pattern of the firms' internal use of long-term liabilities. Upon disaggregating short- and long-term liabilities into interest-bearing and non-inter- est-bearing liabilities, one introduces a fair amount of variation in the explanatory power of the equation in some years (using R 2 as the criterion) . Nonetheless, some effects which seem to be Program-related are discernible. For ex- ample, turning to the short-term interest-bear- ing liability equations found in Tables 3-38, 3-39 and 3-40, one can note that in 1968 this type of liability was used by the manufacturing industries to a lesser extent than normal to finance increments in short-term assets (and also, it seems, long-term receivables). Instead, this type of liability was used to a greater ex- tent in 1968 than in either 1967 or 1969 to finance changes in fixed assets and other assets. Regarding the 1970 and 1971 equations, which may provide some insights into the way the affiliates of U.S. direct investors handled the 1971 devaluation, one can make several observations. First, one might note the changes which have taken place in the coefficients of other assets and short-term assets in the manu- facturing industries for the 1969-71 period. Also in 1971 the change in the short-term assets coefficient increased dramatically as the aOA coefficient was sharply declining in size. While these changes prove nothing, and the R 2 differs from year to year, the sharp shifts in size and sign of statistically significant coefficients do indicate an important restructuring of the uses to which short-term interest-bearing liabilities were put in the manufacturing sector. Fur- ther, the timing suggests that the devaluation may have been influential in causing these shifts. The use of short-term non-interest-bearing liabilities to finance increments in short-term assets appears to be more stable for manufac- turing industries than for extractive industries (Tables 3-41, 3-42, and 3-43). During periods of stress such as the initial restrictive imple- mentation of OFDI and the exchange rate un- certainty of the 1970-71 period, the most notable shifts in either size or sign of significant coefficients were for aLTR, aOA (1971) and aFA. For the extractive industries the relation- ships existing at the end of 1971 and 1969 exhibit an interesting parallel dissimilarity to the 1970 and 1968 relationships respectively. An interesting aspect of the long-term inter- est-bearing liability equations found in Tables 3-44, 3-45, 3-46 is that the positive relation- ship between these liabilities and increments in long-term receivables and increments in fixed assets was by far strongest in 1968 for all industries, emphasizing the restrictiveness of the FDIP. On a disaggregated plane, this ad- justment is most noticeable for AFA in the manufacturing industries and aLTR in the ex- tractive industries. Finally, long-term non-interest-bearing lia- bilities (Tables 3-47, 3-48, and 3-49) seem to have been used to finance increments in fixed assets in 1968 and in short-term assets and long-term receivables in 1969 as the extractive 41 Table 3-35 Uses of Increments in Long-Term Liabilities (LTLa), Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_, AOA OA,-, ALTR LTR,_ , _ Year Term R 2 See 1971 - . 2756 + . 1992 -.0292 -.0498 + . 0600 + . 1422 + .0540 + .2041 -.0359 .620 11.60 (6.83)** (3.00)** (1.97)* (7.88)** (1.50) (1.50) (3.69)** (1.81) 1970 + .4643 + . 2977 -.0649 + .0212 + .0354 + .0951 + .0259 + .0588 + . 1037 .554 10.50 (16.00)** (7.59)** (1.35) (5.44)** (2.01)* (0.95) (1.98)* (3.65)** 1969 + .0958 + . 2027 -.0495 + . 1498 + .0157 + .2027 + . 1606 .2123 -.0585 .618 7.56 (13.19)** (9.15)** (9.42)** (2.57)* (4.64)** (7.75)** (3.25)** (2.77)** 1968.-.._ + .0151 + . 5207 -.0480 + .0392 + .0416 - . 5479 -.0776 + .3489 -.0310 .618 8.00 (18.11)** (8.10)** (2.06)* (6.16)** (7.11)** (3.75)** (5.07)** (1.26) 1967.--- -.3721 + .1121 -.0006 + .0567 + .0287 + .2148 + . 1002 + .2563 - . 1841 .627 7.60 (5.28)** (0.09) (4.35)** (4.29)** (4.93)** (3.32)** (6.62)** (5.26)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-36 tVses of Increments in Long-Term Liabilities (LTLm), Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA,_, ASTA STA,-, AOA OA,., ALTR LTR,_ , _ Year Term R 2 See 1971..-- -.8597 + . 1505 + .0235 + .1818 + .0214 + .3594 - . 1565 + . 1004 -.0051 .661 10.10 (4.44)** (2.05)* (5.40)** (2.52)* (2.72)** (3.80)** (1.26) (0.20) 1970..-- -.9074 + .2112 -.0360 + .1347 + .0037 -.0815 + .0452 + .0138 + .4616 .646 10.30 (11.90)** (2.90)** (5.18)** (0.42) (1.1Q) (1.01) (0.41) (5.17)** 1969...- - . 5901 + .2156 - . 0330 + . 1280 -.0080 + . 3550 + .3887 + .1515 + . 0320 .666 7.61 (11.20)** (3.93)** (5.22)** (0.95) (5.91)** (9.28)** (1.43) (0.47) 1968.. _ _ -.4676 + . 3473 -.0535 + .1501 -.0086 + .0019 + .3245 + .3570 + .4002 .767 5.83 (7.99)** (8.90)** (8.42)** (1.25) (0.03) (9.07)** (2.48)* (7.30)** 1967-.- - . 5374 + .2366 + .0436 + .0421 -.0087 + . 2039 + .0501 + .0319 - . 1493 .726 6.60 (9.84)** (5.71)** (3.26)** (1.08) (4.45)** (0.97) (0.42) (2.85)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3 -37 Uses of Increments in Long-Term Liabilities (LTLe), Regression Results for Extractive Industries, Structural Equa tions, 1967 -71 Base Constant AFA FA,., ASTA STA,., AOA OA,. , ALTR LTR,_ , Year Term R 2 See 1971 + .8111 + .3314 -.2848 + . 1986 -.1515 + .5832 + .3183 .2394 + .2730 .943 7.86 (4.58)** (1.16) (1.66) (3.53)** (2.76)** (4.79)** (3.55)** (6.39)** 1970..-- + 1.7866 + .1377 + .0441 -.0844 - . 1001 + .4257 + .0312 + .4148 + .0897 .656 8.21 (1.71) (1.59) (2.35)* (2.06)* (2.99)** (0.51) (2.93)** (1.35) 1969.. ._ +1.0367 + .2165 - . 0050 + . 2877 -.0634 -.3039 + .1178 -.4076 + .0525 .843 5.80 (2.40)* (0.39) (5.27)** (2.23)* (2.92)** (4.81)** (3.59)** (0.75) 1968 -1.5587 + .4308 + . 0051 + . 5924 + .0452 -.4027 -.4877 + .3942 - . 1726 .938 5.68 (7.88)** (0.23) (6.70)** (1.29) (1.57) (7.88)** (4.42) (3.29)** 1967. .__ + .7991 + .0025 -.0434 -.0392 -.0145 + . 3930 + . 1593 + .4024 + .2277 .980 2.70 (0.13) (4.21)** (0.98) (1.20) (7.86)** (4.00)** (11.16)** (6.22)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. 42 Table 3-38 Uses of Increments in Short-Term Interest-Bearing Liabilities (STLib-a), Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA ( . , ASTA STA«.i AOA OA,., ALTR LTR,. , _ Year Term R 2 See 1971 +1.2120 +.2025 -.0428 +.2965 -.0267 -.4055 +.1990 -.1802 -.0525 .450 13.50 (5.98)** (3.79)** (10.08)** (3.03)** (3.67)** (4.75)** (2.81)** (2.28)* 1970 -.7781 +.2097 -.0364 +.1744 +.0228 +.3308 +.1854 +.1459 -.0367 .645 14.80 (8.02)** (3.03)** (7.92)** (2.49)* (4.80)** (4.86)** (3.49)** (0.92) 19 69 -.4946 -.0519 -.0259 +.1783 +.0316 -.0215 +.1137 +.0826 -.0121 .350 11.40 (2.25)* (3.18)** (7.45)** (3.43)** (0.33) (3.64)** (0.84) (0.38) 1968 +.0215 +.0832 -.0151 +.0056 +.0346 +.4083 +.0329 -.0242 -.0820 .270 5.78 (4.00)** (3.53)** (0.41) (7.10)** (7.33)** (2.20)* (0.49) (4.61)** 1967 -.8723 +.1249 -.0526 +.3106 -.0003 +.0217 +.3304 -.3226 +.1743 .742 9.46 (4.72)** (6.15)** (19.14)** (0.04) (0.40) (8.81)** (6.69)** (4.00)** The numbers in parentheses are t-statisties; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-39 Uses of Increments in Short-Term Interest-Bearing Liabilities (STLib^m), Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA ( _i ASTA STA,_ , AOA OA,_, ALTR LTR,., _ Year Term R 2 See 1971 +.6057 +.2934 -.0454 +.4707 -.0382 -.7274 +.0627 +.0997 +.0870 .346 13.60 (6.38)** (2.91)** (10.32)** (3.32)** (4.06)** (1.12) (0.92) (2.46)* 1970. .__ -1.1979 +.2048 -.0171 +.2983 -.0072 +.3267 +.2705 +.1121 +.0152 .613 14.90 (6.23)** (0.95) (7.96)** (0.56) (3.06)** (4.20)** (2.31)* (0.12) 1969 -.5109 -.0990 -.0323 +.2622 +.0090 -.1036 -.0015 +.6604 +.5928 .516 9.98 (3.92)** (2.94)** (8.14)** (0.81) (1.31) (0.21) (4.53)** (6.69)** 1968..-. -.0619 +.2466 -.0045 -.0331 +.0399 +.3602 -.0433 -.4898 -.2622 .318 6.14 (5.39)** (0.71) (1.76) (5.47)** (5.04)** (1.15) (3.23)** (4.54)** 1967..__ -.2169 +.0378 -.0677 +.3811 +.0310 -.0200 -.0223 -.0763 +.1497 .752 9.06 (1.15) (6.46)** (21.52)** (2.80)** (0.32) (0.31) (0.74) (2.08)* The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-40 Uses of Increments in Short-Term Interest Bearing Liabilities (STLib-e), Regression Results for Extractive Industries, Structural Equations, 1967-71 Base Constant AFA FA«. i ASTA STA,_! AOA OA,. i ALTR LTR,. , _ Year Term R 2 See 1971—. +.5942 +.0862 .0356 -.2747 +.0246 -1.3231 +.2774 +.0135 -.2674 .878 10.50 (0.90) (1.09) (1.72) (0.43) (4.71)** (3.14)** (0.15) (4.70)** 1970 -2.1010 -.0298 -.1219 +.1806 +.3411 -.0169 +.1805 -.4944 -.4610 .945 9.10 (0.33) (3.96)** (4.53)** (6.34)** (0.11) (2.64)** (3.15)** (6.26)** 1969 +1.8904 +.1219 +.0356 -.3227 -.2239 -.1009 +.0766 +.2892 +.7674 .696 9.91 (0.79) (1.62) (3.46)** (4.60)** (0.57) (1.83) (1.49) (6.42)** 1968 -.1763 -.0197 -.0002 -.0696 +.0048 +1.0558 +.0580 +.1709 +.0101 .319 5.13 (0.40) (0.01) (0.87) (0.15) (4.56)** (1.04) (2.12)* (0.21) 1967 -.1896 +.1976 -.0356 +.0606 +.0607 +.1512 +.2924 -.1323 -.1778 .987 3.39 (8.44)** (2.75)** (1.20) (3.98)** (2.41)* (5.85)** (2.92)** (3. 87)' The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. v ** 43 Table 3-41 Uses of Increments in Short-Term Non-Interest-Bearing Liabilities (STLnib-a), Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_ , AOA OA,. , ALTR LTR,_ , Year Term R2 See 1971--. -.8004 + .0455 + .0277 + .3793 -.0214 + . 1529 -.0440 + .5815 + .0593 .819 11.40 (1.60) (2.92)** (15.32)** (2.88)** (1.65) (1.25) (10.77)** (3.06)** 1970.--. + 0500 + . 2736 + .0170 + . 1092 + .0213 -.0512 - . 1696 + .0975 -.0640 .621 15.30 (10.09)** (1.36) (4.78)** (2.24)* (0.72) (4.29)** (2.25)* (1.55) 1969..-- -.9419 + . 2747 -.0179 + . 2037 + .0548 - . 3275 + .1571 - . 3058 - . 1344 .621 13.20 (10.21)** (1.89) (7.31)** (5.11)** (4.28)** (4.33)** (2.67)** (3.63)** 1968---. - . 5020 + . 1425 + .0265 + .2850 + .0302 - . 2290 - . 1962 + .4148 -.0649 .903 5.21 (7.62)** (6.88)** (22.98)** (6.88)** (4.56)** (14.56)** (9.26)** (4.05)** 1967--. + . 1087 + . 2257 -.0149 + . 1087 -.0110 + .2053 - . 0906 - . 0642 + . 1375 .617 7.51 (10.75)** (2.19)* (8.44)** (1.66) (4.77)** (3.04)** (1.68) (3.97)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Table 3-42 Uses of Increments in Short-Term Non-Interest-Bearing Liabilities (STLnib-wi) , Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_ , AOA OA,. , ALTR LTR,. , Year Term R2 See 1971—. + . 5281 - . 1492 + . 0402 -.2756 -.0139 -.7430 + . 1493 + .3172 -.0130 .561 8.82 (5.02)** (3.99)** (9.34)** (1.87) (6.41)** (4.14)** (4.54)** (0.57) 1970— -1.2780 + . 1988 + . 0605 + . 2822 + .0003 - . 1940 -.1412 + .0546 - . 3825 .642 14.30 (6.29)** (3.51)** (7.83)** (0.02) (1.89) (2.28)* (1.17) (3.09)** 1969..-. -.0357 + . 1397 + .0216 + .2798 -.0061 + .0394 + . 1042 -.1217 + .3063 .683 11.60 (4.76)** (1.69) (7.48)** (0.47) (0.43) (1.63) (0.75) (2.98)** 1968.... - . 3342 -.0085 + .0354 + .2979 + .0145 - . 2905 - . 0559 - . 1994 -.0770 .893 4.61 (0.25) (7.46)** (21.15)** (2.66)** (5.41)** (1.98) (1.75) (1.78) 1967.-. + . 2857 + . 3383 -.0144 + .0872 -.0026 + .1149 - . 3952 -.4404 + .0972 .703 6.87 (13.53)** (1.81) (6.49)** (0.31) (2.41)* (7.34)** (5.62)** (1.78) The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-43 Uses of Increments In Short-Term Non-Interest Bearing Liabilities (STLnib-e), Regression Results for Extractive Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_ , AOA OA,. , ALTR LTR,., Year Term R2 See 1971.-- -1.9440 + .0847 -.0929 + .2926 + . 2205 -.7827 + .3209 + .2117 -.1129 .981 9.11 (1.01) (3.26)** (2.11)* (4.43)** (3.20)** (4.17)** (2.71)** (2.28)* 1970...- + . 1893 + . 1450 + . 2200 - . 0084 - . 3662 + .6324 - . 1269 + . 5552 + .3591 .918 11.20 (1.32) (5.81)** (0.17) (5.53)** (3.26)** (1.51) (2.88)** (3.96)** 1969.... -1.0866 - . 1209 - . 1040 + .4409 + . 1886 - . 9739 + .3819 -.3951 - . 1996 .877 9.84 (0.79) (4.77)** (4.76)** (3.90)** (5.52)** (9.18)** (2.05)* (1.68) 1968—. + . 2577 + .0149 + .0242 -.0868 + .0831 + .4834 -.0648 + .4691 -.0596 .973 4.95 (0.31) (1.24) (1.13) (2.71)** (2.16)* (1.20) (6.03)** (1.30) 1967— + .7087 + .0302 -.0468 + .1882 + .0421 + .5192 + .1608 + .2056 - . 1079 .888 5.26 (0.83) (2.33)* (2.41)* (1.78) (5.34)** (2.08)* (2.93)* (1-51) The numbers in parentheses are t-statistics; * and •• indicate significantly different from zero at 5% and 1 % levels, respectively. 44 Table 3-44 Uses of Increments in Long-Term Interest Bearing Liabilities (LTLib-a), Regression Results for All Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_ , AOA OA,., ALTR LTR«_ , _ Year Term R 2 See 2971 -.1493 +.1260 -.0192 -.0470 +.0531 +.0599 -.0095 +.2421 -.0415 .433 12.40 (4.06)** (1.85) (1.74) (6.55)** (0.59) (0.25) (4.11)** (2.04)* 1970 .. +.4618 +.2025 -.0397 +.0392 +.0196 +.1526 +.0124 -.0035 -.0393 .441 9.99 (11.46)** (4.89)** (2.63)** (3.16)** (3.28)** (0.48) (0.13) (1.45) 1969... -2.3526 +.1341 -.0285 -.6916 -.9610 +.3619 +.6067 +.0868 -.2797 .997 10.70 (6.17)** (3.72)** (30.72)** (110.97)** (5.84**) (20.67)** (0.94) (9.36)** 1968...- +.1139 +.4003 -.0683 +.0465 +.0486 -.3815 -.1782 +.9172 +.3171 .632 8.92 (12.49)** (10.33)** (2.19)* (6.45)** (4.44)** (7.71)** (11.95)** (11.56)** 1967... -.1314 +.1403 +.0078 +.0476 +.0051 +.0960 +.1393 +.1995 -.1766 .587 7.53 (6.66)** (1.14) (3.69)** (0.77) (2.22)** (4.66)** (5.19)** (5.09)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-45 Uses of Increments in Long-Term Interest-Bearing Liabilities (LTLib^m), Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA,_, ASTA STA,.i AOA OA,. , ALTR LTR,. , Year Term R 2 See 1971 - . 6684 + .0400 + .0415 + .1676 + .0147 + . 3625 -.2610 + . 2320 + .0077 .551 11.20 (1.07) (3.26)** (4.49)** (1.56) (2.48)* (5.72)** (2.63)** (0.27) 1970..._ - . 7408 + . 1970 -.0331 + .0886 + .0076 - . 0952 + .0217 -.0004 + .3418 .521 9.23 (9.68)** (2.99)** (3.82)** (0.95) (1.44) (0.55) (0.01) (4.29)** 1969...- -3.2564 + .1321 -.0091 - . 6753 - . 9996 + . 3694 + . 7363 + .6757 + . 2258 .996 10.30 (5.05)** (0.79) (20.24)** (86.62)** (4.53)** (12.94)** (4.69)** (2.46)* 1968—. - . 1499 + .3305 -.0573 + .1114 - . 0056 + .1012 + . 2506 + .2367 + .3865 .735 5.39 (8.24)** (10.34)** (6.77)** (0.88) (1.62) (7.59)** (1.78) (7.63)** 1967..-. - . 2207 + .2140 + .0361 + .0453 -.0188 + .1251 + .1169 + .0536 - . 1592 .570 7.72 (7.61)** (4.03)** (3.00)** (1.99)* (2.34)* (1.93) (0.61) (2.60)** The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-46 Uses of Increments in Long-Term Interest Bearing Liabilities (LTLib-e), Regression Results for Extractive Industries, Structural Equations, 1967-71 Base Constant AFA FA,., ASTA STA,_, AOA OA,. , ALTR LTR,. , Year Term R2 See 1971 + .7377 + . 3594 + . 0003 + . 0472 - . 1586 + .2610 + . 2509 + . 2269 + . 2336 .893 7.82 (4.99)** (0.01) (0.40) (3.71)** (1.24) (3.80)** (3.38)** (5.50)** 1970 +2.3447 + .2141 + .1386 -.1316 - . 2875 + . 5935 -.0255 + .4901 + .1541 .558 11.90 (1.83) (3.43)** (2.52)* (4.07)** (2.87)** (0.28) (2.38)* (1.60) 1969 +2.0528 + .0871 + .0122 - . 9554 -1.1562 + .2777 + . 5209 - . 7429 + . 4665 1.000 6.78 (0.83) (0.81) (14.97)** (34.73)** (2.28)* (18.17)** (5.59)** (5.71)** 1968.... -2.3512 + .0798 - . 0573 + .8061 + .1918 -.0801 - . 6398 + .6428 -.0184 .94i 7.99 (1.04) (1.82) (6.48)** (3.88)** (0.22) (7.34)** (5.12)** (0.25) 1967... . + . 3991 + . 0623 -.0141 + .0273 -.0609 -.0113 + .2097 + .2171 + . 2228 .986 2.16 (4.18)** (1.71) (0.85) (6.27)** (0.28) (6.60)** (7.53)** (7.62)** The numbers In parentheses are t-statistics; * and ** Indicate significantly different from zero at 5% and 1% levels, respectively. 45 Table 3-47 Uses of Increments in Long-Term Non-Interest-Bearing Liabilities (LTLnib-a), Regression Results for All Industries, Structural Equations, 1967-71 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Table 3-49 Uses of Increments in Long-Term Non-Interest-Bearing Liabilities (LTLnib-e), Regression Results for Extractive Industries, Structural Equations, 1967-71 The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5% and 1 % levels, respectively. Base Constant AFA FA,.. ASTA STA ,. , AOA OA,.! ALTR LTR,_ , Year Term R 2 See 1971 - . 1262 .0732 -.0100 - . 0028 + .0069 + .0823 + .0635 -.0381 + .0073 .582 3.86 (7.57)** (3.10)** (0.34) (2.75)** (2.61)** (5.31)** (2.08)* (1-11) 1970 + .0026 + .0951 -.0252 -.0180 + .0158 -.0541 + .0135 + .0624 + . 1430 .654 4.93 (10.89)** (6.28)** (2.45)* (5.18)** (2.35)* (1.06) (4.47)** (10.71)** 1969 +2.4486 + .0686 -.0210 + .8413 + .9767 -.1591 -.4461 + .1255 + .2213 .998 8.29 (4.07)** (3.54)** (48.26)** (145.64)** (3.32)** (19.63)** (1.75) (9.56)** 1968.... - . 0987 + . 1203 + .0203 -.0072 -.0070 - . 1664 + . 1006 -.5683 -.2862 .636 4.18 (8.01)** (6.55)** (0.73) (1.99)* (4.13)** (9.30)** (15.81)** (22.27)** 1967. ... - . 2405 -.0282 -.0084 + .0091 + .0236 + .1189 -.0391 + .0568 -.0075 .309 3.20 (3.15)** (2.89)** (1.66) (8.35)** (6.47)** (3.08)** (3.48)** (0.51) Table 3-48 Uses of Increments in Long-Term N on-Interest-Bearing Liabilities (LTLnib-m), Regression Results for Manufacturing Industries, Structural Equations, 1967-71 Base Constant AFA FA,_, ASTA STA,. , AOA OA,. , ALTR LTR,_ , _ Year Term R 2 See 1971 -.1914 +.1105 -.0180 +.0143 +.0067 -.0031 +.1045 -.1316 -.0128 .392 3.81 (8.62)** (4.13)** (1.12) (2.07)* (0.06) (6.70)** (4.36)** (1.30) 1970. .__ -.1666 +.0742 -.0029 +.0461 -.0039 +.0137 +.0235 +.0142 +.1198 .543 3.99 (8.43)** (0.61) (4.60)** (1.12) (0.48) (1.36) (1.09) (3.47)** 1969..-_ +2.6665 +.0835 -.0239 +.8033 +.9916 -.0144 -.3477 -.5243 -.1939 .998 7.67 (4.30)** (2.82)** (32.43)** (115.75)** (0.24) (8.23)** (4.90)** (2.85)** 1968_-._ -.3173 +.0168 +.0039 +.0387 -.0030 -.0993 +.0739 +.1204 +.0136 .670 1.82 (1.24) (2.06)* (6.96)** (1.40) (4.69)** (6.62)** (2.68)** (0.80) 1967- - . -.3164 +.0226 +.0076 -.0032 +.0100 +.0789 -.0667 -.0218 +.0099 .489 2.48 (2.49)* (2.65)* (0.66) (3.31)** (4.58)** (3.43)** (0.77) (0.50) The numbers in parentheses are t-statistics; * and ** indicate significantly different from zero at 5 % and 1 % levels, respectively. Base Constant AFA FA,.. ASTA STA,., AOA OA,., ALTR LTR,. , Year Term R 2 See 1971 + .0741 -.0280 -.0288 + .1513 + .0070 + .3221 + . 0673 + .0125 + .0394 .921 3.33 (0.91) (2.76)** (2.98)** (0.39) (3.60)** (2.39)** (0.44) (2.18)* 1970 -.5573 -.0763 -.0945 + .0472 + . 1874 - . 1678 + .0568 - . 0752 -.0644 .899 6.04 (1.29) (4.62)** (1.79) (5.25)** (1.61) (1.25) (0.72) (1.32) 1969 -1.0161 + . 1294 -.0172 + 1.2431 + 1.0929 -.5816 -.4031 + .3353 -.4141 1.000 4.96 (1.68) (1.57) (26.65)** (44.93)** (6.55)** (19.25)** (3.45)** (6.94)** 1968..-. + .7919 + .3509 + .0624 -.2136 - . 1466 -.3226 + .1521 -.2486 - . 1543 .925 5.00 (7.29)** (3.17)** (2.74)** (4.74)** (1.43) (2.79)** (3.17)** (3.34)** 1967..-. + . 3997 -.0598 -.0293 -.0666 + .0463 + .4043 -.0506 + . 1854 + .0049 .871 2.22 (3.90)** (3.46)** (2.02)* (4.64)** (9.84)** (1.55) (6.25)** (0.16) 46 industries adapted to the FDIP. In manufactur- ing, a similar pattern is found for the STA variables for 1969. However, the increase in the size of the ALTR coefficient took place in 1968 in these industries. These comments on the changing relation- ships over time among annual regression co- efficients could be expanded upon substantially. If such were done the probability of covering the interests of all readers would be increased. Nonetheless, many questions would remain un- considered. Therefore, as mentioned at this sec- tion's beginning, the regression results are supplied so that they can be analysed by each according to his interests. In this context, the comments on the results now being concluded should be considered as but indicative of the kinds of implications to be found in the rela- tionships. It does seem that the establishment of the FDIP in 1968 affected the financial structure of foreign affiliates of U.S. direct investors, with the adjustments to the FDIP differing between manufacturing and extractive industries. In addition, the results suggest that AFNs' finan- cial structures were adjusted in anticipation of the devaluations of 1971. This is somewhat less certain, since the data do not permit AFN bal- ance sheets to be disaggregated by currency. GLOSSARY OF SYMBOLS CT = Capital Transfers D = Dividends DE = Depreciation DI = Book Value (stock) of Direct Invest- ment E = Earnings FA = Total Fixed Assets I = ADI LTL = Total Long-Term Liabilities LTLib = Long-Term Interest-Bearing Liabili- ties LTLnib = Long-Term non-interest-bearing Lia- bilities LTR = Long-Term Receivables OA = Other Assets PE = AFA R = Total Revenues ( Total Assets ^ \ Total Revenues / R is a proxy for the size of each in- vestor's market RE = Reinvested Earnings SA = Value of Utilized Specific Authoriza- tions STA STL STL lb STLnlb STR TA TL UP WT a e m t A A, R 2 A. See = Short-Term Assets Total Short-Term Liabilities Short-Term Interest-Bearing Liabili- ties Short-Term non-Interest-Bearing Lia- bilities Short-Term Receivables Total Assets Total Liabilities Use of Proceeds Foreign Withholding Taxes on Divi- dends all industries extractive industries manufacturing industries base time period t-(t-l) regression coefficients coefficient of determination adjusted for degrees of freedom standard error of the estimate ad- justed for degrees of freedom 47 / APPENDIX OF BASIC DATA (Appendix A) This appendix contains the basic data col- lected on Form FDI-105. The form, displayed on the next two pages, was filed by 440 direct investors for the years 1966-71. As the form indicates, data are collected on foreign affiliates which are majority-owned by U.S. direct inves- tors for Canada and for the rest of the world (Scheduled Areas). The data can be divided into industry groupings based on the principal endeavor of the DI so that industry-specific- factors can be identified (although it should be noted that the industry of the parent does not necessarily correspond to the industry of the AFN). Therefore, the data presentation found in the tables in this appendix emphasize the Canadian-Schedular breakdown as well as a disaggregation by industry. From a different perspective, Tables 4-1 to 4-9 and 4-10 to 4-18 contain stock data for Schedule A, B, and C countries and Canada respectively. Tables 4-19 to 4-27 contain an- nual flow data for the Scheduled Areas, and Tables 4-28 — 4-36 similar data for Canada. Tables 4-37 to 4-45 present selected ratios (presented as percentages) based on data found in Tables 4-1 to 4-18. AFN earnings are introduced in Tables 4-37 to 4-45. These data, which are from Form FDI-102F, are net of foreign taxes. They re- flect all AFN transactions except those with other majority-owned AFNs of the parent DI. In addition, the breakdown between retained earnings and the equity component of capital transfers was estimated based on Form FDI- 102F data. The revenue data in Tables 4-37 to 4-45 include sales and other income from all transactions except those with other majority- owned AFNs of the same direct investor. The analyses found in Chapters 2 and 3, which utilize these data, are not exhaustive. Thus a major purpose of presenting the data here is to provide data to researchers who may be interested in extending the analysis. In addi- tion, direct investors may wish to compare their particular experience with the relevant aggre- gate experience. 49 Form Approved; OMB No. 41-R2652 FORM FDI-105 U.S. DEPARTMENT OF COMMERCE (6-70) OFFICE OF FOREIGN DIRECT INVESTMENTS AFN FINANCIAL STRUCTURE AND RELATED DATA OFDI identification number Name and address of Reporter: 1051 Return one copy of this report to: Program Reports Branch Office of Foreign Direct Investments U.S. Department of Commerce Washington, D.C. 20230 Category (Show amounts in thousands of U.S. dollars, omitting final 000; e.g., show $1,234,532 as $1,235) Canada Schedules A, B, C 1970 (1) 1971 (2) 1970 (3) 1971 (4) AFN BALANCE SHEET DATA 01 Reporter's share in equity of majority AFNs 02 Minority interests in majority AFNs 03 Total equity of majority AFNs (Lines 01 & 02) 04 Total short-term and long-term liabilities owed to reporter 05 Total long-term liabilities owed to persons other than the reporter after elimination of all inter- majority AFN liabilities 06 Total short-term liabilities owed to persons other than the reporter after elimination of all inter- majority AFN liabilities 07 Total of Lines 03 through 06 08 Total inventories of majority AFNs after elimina- tion of inter-majority inventories 09 Total current receivables of majority AFNs after elimination of current inter-majority receivables 10 Total cash and other current assets of majority AFNs after elimination of inter-majority cash accts. 11 Total of Lines 08 through 10 12 Total long-term receivables of majority AFNs after elimination of inter-majority AFN receivables 13 Total fixed assets of majority AFNs after elimina- tion of inter-majority AFN fixed assets 14 Total other assets of majority AFNs after elimina- tion of inter-majority AFN other assets 15 Total of Lines 11 through 14 MEMORANDUM ITEMS 16 Portion of Line 05 owed to persons in the U.S. other than the reporter 17 Portion of Line 06 owed to persons in the U.S. other than the reporter 18 Portion of Line 05 owed to persons in Canada 19 Portion of Line 05 representing liabilities bearing no or virtually no interest us COMM-DC-1 8973-P72 Category Canada Schedules A, B, C (Show amounts in thousands of U.S. dollars, omitting final 000; e.g., show $1,234,532 as $1,235) 1970 (1) 1971 (2) 1970 (3) 1971 (4) 20 Portion of Line 06 representing liabilities bearing no or virtually no interest 21 Total long-term and short-term liabilities of reporter owed to majority AFNs 22 Total long-term and short-term liabilities of majority AFNs owed to other majority AFNs 23 Minimum annual rental expense by majority AFNs for leased facilities from third parties not reflected on Line 15 AFN INCOME DATA 24 Total revenues of majority AFNs excluding revenues derived from transactions with other majority AFNs 25 Depreciation and other non-cash charges to income for majority AFNs only CONSOLIDATED BALANCE SHEET DATA 1970 Worldwide 1971 Worldwide Dates of balance-sheets if fiscal years 26 Consolidated total liabilities of reporter 27 Consolidated total equity of reporter PROJECTED INFORMATION FOR 1972 1972 Schedules A.B. C 28 Anticipated 1972 revenues of non-Canadian majority AFNs EFFECTS OF EXCHANGE GAINS OR LOSSES DURING 1971 29 Increase or decrease in dollar value of cash and other short-term assets reported on Line 10, Columns 2 and 4, resulting from exchange rate changes 1971 Canada Schedules A, B r C (1) (2) 30 Increase or decrease in dollar value of inventories reported on Line 8, Column 4, resulting from exchange rate changes Schedules A, B, C (excluding Canada) 31 Increase or decrease in dollat value of current receivables reported on Line 9. Column 4, resulting from exchange rate changes 32 Increase or decrease in dollar value of short-term liabilities reported on Line 6, Column 4, resulting from exchange rate changes 33 Increase or decrease in dollar value of long-term liabilities reported on Line 5, Column 4, resulting from exchange rate changes 34 Indicate briefly the accounting methods used to determine gains or losses due to exchange rate changes. 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The Regulations assist the United States balance of payments position by imposing certain restraints on the financing of investment in "affiliated foreign nationals" by U.S. "direct investors." The following explanation is presented in broad terms to provide a general understanding of the Regulations in effect as of July 1, 1972, and should not be relied upon as a compre- hensive or exact explanation. Reference should be made to the Regulations, the General Bulle- tin, the instructions for reporting forms, and other material issued by the OFDI. An affiliated foreign national (AFN) is de- fined as a foreign corporation, partnership, or unincorporated business venture in which a 10 percent or greater interest is owned by a person (an individual, corporation, partnership, busi- ness venture, trust or estate) within the United States, i.e., a direct investor (DI). The requisite interest is measured by voting power if the AFN is a corporation, and by a right to share in profits if the AFN is unincorporated. "Direct investment" during a given period is calculated by adding (i) the "net transfer of capital" by the DI to its incorporated and un- incorporated AFNs and (ii) the DI's share of earnings of its incorporated AFNs which have been reinvested. Generally, a transfer of capital by a DI to an AFN is a transfer of funds or other property that increases the DI's aggregate equity or debt investment in the AFN. Conversely, a transfer of capital by an AFN to a DI is generally a transfer of funds or other property that reduces the DI's aggregate equity or debt in the AFN. The net transfer of capital to incorporated AFNs for a given period is the aggregate of transfers of capital by the DI less the aggregate of transfers of capital by the incorporated AFNs to the DI during the same period. Net transfer of capital to unincorporated AFNs for a given period is the DI's share of the aggregate increase or decrease in the aggregate net assets of such AFNs (whether such net increase or decrease results from transfers of capital, earn- ings or losses). In addition to regulating positive direct in- vestment, the Regulations restrict the amount of "liquid foreign balances" (e.g., money on deposit in foreign banks and negotiable or non- negotiable instruments of unaffiliated foreign nationals with a period of less than a year re- maining to maturity when acquired) that may be held by a DI. For certain purposes of the Regulations, foreign countries are divided into three sched- uled areas: Schedule A consists of the less- developed countries; Schedule B embraces a limited number of industrialized or partially industrialized countries, such as the United Kingdom, Australia, New Zealand, Ireland, Spain, Japan, and certain oil producing nations ; and Schedule C covers the rest of the world, including primarily the industrialized countries of Western Europe and South Africa. The Regulations do not restrict direct invest- ment or liquid foreign balances in Canada, al- though DIs investing in Canada are required to file with OFDI the same reports that DIs with AFNs in other countries must submit. The Regulations do not apply to banks or other financial institutions subject to the Foreign Credit Restraint Program administered by the Federal Reserve System. The basic thrust of the Program is to cause direct investors to finance from foreign sources the amount of positive direct investment that during the calendar year will exceed the "allow- ables" provided under Subpart E of the Regula- tions, as outlined in the following paragraphs. Under Subpart E a DI may choose either of two "minimum" allowables: Section 503 per- mits a worldwide positive direct investment of not more than $2,000,000 each year ; Section 507 provides an "alternative minimum and Schedule A supplemental allowable" of $2,000,000 per year worldwide plus an additional $4,000,000 a year that may be invested only in Schedule A. If a DI elects to use one of these allowables, it cannot shift to the other in the following year without OFDI authorization. Alternatively, a DI may elect either of two other allowables, the "historical" allowable or 85 the "earnings" allowable. The Section 504(a) historical allowable authorizes an annual amount of positive direct investment in each scheduled area based upon the following per- centages of the DI's average annual direct in- vestment in the respective area in the years 1965 and 1966: Schedule A, 110 percent; Sched- ule B, 65 percent; and Schedule C, 35 percent. The Section 504(b) earnings allowable permits a DI an annual amount of positive direct in- vestment in each scheduled area based upon 40 percent of its share of the previous year's earn- ings of its AFNs in the respective scheduled area. In addition to the foregoing general allow- ables, a DI may also qualify for an "incremental earnings" allowable. This allowable is available on a worldwide basis and is equal to the amount by which 40 percent of the DI's share of the increase in the earnings of its AFNs in the current year over its share of the average an- nual earnings of its AFNs in 1966 and 1967 exceeds the amount of positive direct invest- ment the DI has available to it under the mini- mum, historical or earnings allowable. This provision is designed to aid DIs having AFNs with rapidly increasing earnings. The Regulations provide that all or part of any positive direct investment authorized in Schedule C countries may be made instead in Schedule A or B, and any investment authorized in Schedule B countries may be used instead in Schedule A. To the extent that direct investors wish to exceed their allowables, they may do so through using the proceeds of "long-term foreign bor- rowing." Such proceeds may be deducted in calculating positive direct investment if "allo- cated" by the DI to such investment, and a charge against a DI's allowables is made only upon repayment of the borrowing. Short-term foreign borrowing by the DI that is successively refinanced abroad may qualify as long-term foreign borrowing if the amount of short-term borrowing refinanced is, in fact, continuously outstanding for an uninterrupted period of at least 12 months. In addition, a DI may substitute a borrowing from its overseas finance subsidiary for foreign borrowing, or vice versa, and treat the later borrowing as a continuance of the borrowing for which it was substituted. Subpart N of the Regulations provides spe- cial treatment for a DI's borrowing from its overseas finance subsidiaries. The proceeds of such borrowings may, under certain circum- stances, be treated as proceeds of long-term foreign borrowing. Although compliance with the program is measured on the basis of the calendar year, a DI may deduct from positive direct investment made during 1972 an amount equal to any avail- able proceeds of long-term foreign borrowing or of borrowing from the DI's overseas finance subsidiary made on or before February 28, 1973, that are "allocated" to such positive di- rect investment on or before that date. In addi- tion, the repayment by an AFN to the DI during January or February, 1973, of debt or other credits outstanding on December 31, 1972, may also be treated under certain circumstances as having taken place during 1972. Because of the circumstances unique to the airlines industry, special rules for computing allowables for that industry are provided in Subpart M of the Regulations. As a result of a recent revision in the Regu- lations, the amount of "liquid foreign balances" that a DI is authorized to hold at the end of each month may not exceed the amount of available proceeds of long-term foreign borrow- ing of the DI, plus the greater of $100,000 or the average month-end amount of liquid foreign balances held by the DI in 1965 and 1966. Direct investors may seek relief from re- straints imposed by the Regulations by applying to the OFDI for specific authorizations. Through this means, for example, DIs may ob- tain specific authorization covering increases in export credits to AFNs, foreign equity financing transactions, blocked earnings relief, etc. De- tailed instructions for submitting applications for such relief are available to direct investors on request. Direct investors may also submit applications for interpretation of the Regula- tions as they may affect defined fact situations. DIs are required to complete certain reports with the OFDI. If the DI's interest in all AFNs is $100,000 or more, based on cost, book, re- placement or market value, whichever is largest, the DI is required to file a base period report on Form FDI-101 on or before the end of the month following the close of the first quarter in which its interest reaches this sum. Alterna- tively, Form FDI-101 is required to be filed if the DI's share in the earnings of AFNs is $50,000 or more during any year. Unless a DI is exempt from having to file a base period report, it is also required to file an annual report on Form FDI-102F within four months after the end of each calendar year unless it meets several conditions, including not making more than $500,000 of direct invest- ment during the year and not holding more than $95,000 of liquid foreign balances at the end of any month. If a DI did not make aggregate worldwide direct investment of more than $2,000,000 dur- ing 1971, it is exempt from filing cumulative quarterly reports, unless the DI has received a specific authorization conditioned upon the pro- vision of information in quarterly reports. 86 Otherwise, cumulative quarterly reports on Form FDI-102 must be filed commencing with the quarter during which a DI's cumulative direct investment exceeds $2,000,000. It should be noted that different tests apply to determine whether an investor is a DI and whether a DI must file a base period report, an annual report, or a quarterly report. In order to assure compliance with the Regu- lations, the Office maintains an active enforce- ment program of investigation and audit. Where it is found that violations have occurred, the Compliance Division of the Office initiates appropriate action leading to the imposition of a penalty through the Office's published settle- ment procedures. 87 BIBLIOGRAPHY OF RELATED LITERATURE Introduction This bibliography is divided into three not always mutually exclusive sections. General foreign investment studies predominate. The second section, emphasizing literature on capi- tal controls, is the shortest. The final section identifies studies dealing with domestic data which might be applicable to the analysis of foreign investment. In all cases the bibliog- raphy is selective. The literature, especially that relevant for the first and third sections is too extensive to be set forth in its entirety. The primary purpose of this bibliography is to provide a ready set of references for anyone undertaking research on foreign investment. Given this purpose, there is no attempt to an- notate the bibliography. Several references do, however, place parts of the literature in per- spective. For example, Jorgenson (1971) re- views the domestic empirical studies published up to that time. Spitaller undertook the same task for studies of long-term foreign capital movements. Stevens in the second of his 1972 works analyzes the extent to which interna- tional investment research may have altered the "general" theory of investment. Another consideration is that no attempt is made to divide the general foreign investment literature into sub-categories. Generally, the reader can identify items of interest by the title. Within sub-categories there are entries which place the related works in perspective. For example, hypotheses concerned with the effect of the creation of a customs union on the pattern of direct investment flows are reviewed in Scaperlanda and Mauer (1969). Given the nature of OFDI's work out of which this bibliography develops, it is not sur- prising that applied studies predominate. Recognizing that such studies must have a sound theoretical foundation, an attempt has been made to include a representative selection of theoretical works such as those of Kemp and Mundell. Kemp's work illustrates a method used to pare the bibliography's size. When an author has written a book or monograph which encompasses much of the other work he has published, as a general rule, only the one pub- lication is mentioned. From this, one can obtain references to the author's related works. Also, given the Office's mission, studies of direct investment are overwhelmingly empha- sized among international capital flows. INVESTMENT, FOREIGN ADLER, J.H. (ed.), Capital Movements and Economic Development, New York, 1967. AHARONI, Y., "On the Definition of a Multinational Corporation," The Quarterly Review of Economics and Business, 11 (Autumn 1971), pp. 27-37. AHARONI, Y., The Foreign Investment Decision Proc- ess, Boston, 1966. ALIBER, R.Z., "A Theory of Direct Foreign Invest- ment," in C.P. Kindleberger, ed., The International Corporation, Cambridge, Mass., 1971. BALASSA, B., "American Direct Investments in the Common Market," Banca Nazionale del Lavoro Quar- terly Review, (June 1966), pp. 121-46. BALASSA, B., Trade Liberalization Among Industrial Countries, New York, 1967. BANDERA, V.N. and WHITE, J.T., "U.S. Direct In- vestments and Domestic Markets in Europe," Econo- mia Internationale, (February 1968), pp. 117-33. BARKER, B.L., "U. S. Foreign Trade Associated with U. S. Multinational Companies," Survey of Current Business, 52 (December 1972), pp. 20-28. BARLOW, E.R. and WENDER, I.T., Foreign Invest- ment and Taxation, Englewood Cliffs, N.J., 1955. BEHRMAN, J.N., Manufacturing Investment and the Balance of Payments, New York, 1969. BEHRMAN, J.N., Some Patterns in the Rise of the Multi-national Enterprise, Chapel Hill, North Caro- lina, 1969. BEIGIE, C.E., "Foreign Investment in Canada: The Shading is Gray," Columbia Journal of World Busi- ness, 7 (November-December 1972), pp. 23-32. BELL, P.W., "Private Capital Movements and the Bal- ance of Payments Position," in U. S. Congress, Joint Economic Committee, 87th Congress, second session, Factors Affecting the U. S. Balance of Payments, 1962. BERLIN, P.D., Foreign Affiliate Financial Survey, 1966-69, Washington, D.C., July 1971. BONOMO, V., "International Capital Movements and Economic Activity: The United States Experience, 1870-1968," Explorations in Economic History, 8 (Spring 1971), pp. 321-41. BORTS, G.H., "The International Firm, the Tariff, and Long Run Capital Movements," Prepared for the Conference on the Multinational Firm and Economic Analysis, Bellagio, Italy, September 22-26, 1972. To be published in DUNNING, J.H. (ed.), Economic Analysis and the Multinational Enterprise, London, 1973. BRASH, D.T., American Investment in Australian In- dustry, Cambridge, Mass., 1966. CARLSON, S., International Financial Decisions, Stockholm, 1969. 89 CAVES, R.E., "International Corporations: The Indus- trial Economics of Foreign Investment," Economica, 38 (February 1971), pp. 1-27. COHEN, B.I., "Foreign Investment by U. S. Corpora- tions as a way of Reducing Risk," Yale University, Economic Growth Center Discussion Paper No. 151, September 1972. CORDELL, A.J., The Multinational Firm, Foreign Di- rect Investment, and Canadian Science Policy. Science Council of Canada Special Study No. 22, Ottawa, 1971. CORDEN, W.M., "Protection and Foreign Investment," Economic Record, 43 (June 1967), pp. 209-32. D'ARGE, R., "Note on Customs Unions and Direct Foreign Investment," Economic Journal, 79 (June 1969), pp. 324-33. DUNNING, J.H., American Investment in British Manufacturing Industry, London, 1958. DUNNING, J.H., "Multinational Enterprises and In- ternational Capital Formation," Prepared for the fourth international colloquium sponsored by the Societe Universitaire Europeenne de Recherches Fi- nanciers, Nottingham, England, April 10-13, 1973. DUNNING, J.H., Studies in International Investment, London, 1970. EDWARDS, A., Investment in the European Economic Community, New York, 1964. FOSTER, S.B., "Impact of Direct Investment Abroad by United States Multinational Companies on the Balance of Payments," Federal Reserve Bank of New York, Monthly Review (July 1972), pp. 166-77. FRANKEL, M., "Home Versus Foreign Investment: A Case Against Capital Exports," Kyklos, 18 (1965), pp. 411-33. GATES, T.R., and LINDEN, F. Costs and Competition: American Experience Abroad, New York, 1961. GORDON, W.C., "The Contribution of Foreign Invest- ment: A Case Study of United States Foreign In- vestment History," Inter-American Economic Affairs, 14 (Spring 1961), pp. 34-56. GORDON, W.C. Foreign Investments, University of Houston Business Review, Fall 1962. Government of Canada, Foreign Direct Investment in Canada, Ottawa 1972. GRAY, P.H. and MAKINEN, G.E., "The Balance of Payments Contributions of Multinational Corpora- tions," Journal of Business, 40 (July, 1967), pp. 339- 43. GRUBEL, H.G., "The Private and Social Rates of Re- turn from U. S. Asset Holdings Abroad," presented at the annual meetings of the Western Economic Association, 1972. GRUBER, W., MEHTA, D., and VERNON, R., "The R&D Factor in International Trade and International Investment of United States Industries," Journal of Political Economy, 75 (February, 1967), pp. 20-37. GUALTIERI, R.D., "The Development of Canadian Policy on Foreign Direct Investment." Presented at the meetings of the Society of Government Econ- omists as part of the Allied Social Science Associa- tions Annual Meeting, Toronto, December 27-30, 1972. GUISINGER, S., "The Implications of the Rise of the Multinational Corporation for United States Trade Policy," Department of Economics, Southern Method- ist University, Working Paper No. 22, November 1972. HAMADA, K., "Strategic Aspects of Taxation on Foreign Investment Income," Quarterly Journal of Economics, 80 (August 1966), pp. 361-75. HAWKINS, R.G., "Job Displacement and the Multi- national Firm: A Methodological Review," Center for Multinational Studies, Occasional Paper No. 3, June 1972. HORST, T., "Firm and Industry Determinants of the Decision to Invest Abroad: An Empirical Study," Review of Economics and Statistics, 54 (August 1972), pp. 258-66. HORST, T., "The Theory of the Multinational Firm: Optimal Behavior under Different Tariff and Tax Rates," Journal of Political Economy, 79 (September- October 1971), pp. 1059-72. HUFBAUER, G.C., "The Multinational Corporation and Direct Investment," presented at Conference on Research in International Trade and Finance, Prince- ton University, March 30-31, 1973. HUFBAUER, G.C. and ADLER, F.M., Overseas Manu- facturing Investment and the Balance of Payments, Washington, D.C., 1968. HUI, C. and HAWKINS, R.G., "Foreign Direct Invest- ment and the U.S. Balance of Payments: A Cross Section Model," 1972 Business and Economic Statis- tics Section Proceedings of the American Statistical Association, pp. 21-28. (Annual Meeting, Montreal, 1972). HYMER, S., The International Operation of National Firms: A Study in Direct Foreign Investment, Un- published doctoral dissertation, M.I.T., 1960. HYMER, S. and ROWTHORN, R., "Multinational Corporations and International Oligopoly: The Non- American Challenge," in C. Kindleberger, ed., The International Corporation, Cambridge, Mass., 1970. IVERSEN, C. Aspects of the Theory of International Capital Movements, Copenhagen, 1935. JOHNS, B.L., "Private Overseas Investment in Aus- tralia: Profitability and Motivation," Economic Record, 43 (June 1967), pp. 233-61. JONES, R.W., "International Capital Movements and the Theory of Tariffs and Trade," Quarterly Journal of Economics, 81 (February 1967), pp. 1-38. KEESING, D.B., "The Impact of R and D on U.S. Trade," Journal of Political Economy, 75 (February 1967), pp. 38-48. KEMP, M.C., The Pure Theory of International Trade and Investment, Englewood Cliffs, N.J., 1969. KINDLEBERGER, C.P., American Business Abroad, New Haven, Conn., 1969. KINDLEBERGER, C.P. (ed). The International Cor- poration, Cambridge, Mass., 1971. KLEIN, ROGER W., "A Dynamic Theory of Compara- tive Advantage." The American Economic Review, 63 (March 1973), pp. 173-84. KOO, A.T.C., "A Short-Run Measure of the Relative Economic Contribution of Direct Foreign Invest- ment," Review of Economics and Statistics, 43 (Au- gust 1961), pp. 269-276. KOPITS, G. "Dividend Remittance Behavior Within the International Firm: A Cross-Country Analysis," Review of Economics and Statistics, 54 (August 1972), pp. 339-42. KOHLER, M., The Common Market and Investment, New York 1960. 90 KRAINER, R.E., "The Valuation and Financing- of the Multinational Firm," Kyklos, 25 (1972), pp. 553-73. KRAUSE, L.B., European Economic Integration and the United States, Washington, D.C., 1968, Chapter 4. KRAUSE, W., "UNCTAD III: Implications for Multi- national Enterprise," Presented at the meetings of the Association for Education in International Busi- ness held as part of the Allied Social Sciences Associations Annual Meeting. Toronto, December 27- 30, 1972. KREININ, M.E., "Direct Foreign Investments and the American Interest," Economia Internazionale, 20 (August 1967), pp. 501-11. KREININ, M.E., "Freedom of Trade and Capital Movement — Some Empirical Evidence," Economic Journal, 75 (December 1965), pp. 748-58. KWACK, S.Y., "Interest Rates and Foreign Investment Income," Quarterly Review of Economics and Busi- ness, 12 (Spring 1972), pp. 23-30. KWACK, S.Y., "A Model of U. S. Direct Investment Abroad: A Neoclassical Approach," Western Eco- nomic Journal, 10 (December 1972), pp. 376-83. LADENSON, M.L., "A Dynamic Balance Sheet Ap- proach to American Direct Foreign Investment." In- ternational Economic Review, 13 (October 1972), pp. 531-43. LEAMER, E.E. and STERN, R.M. Quantitative Inter- national Economics, Boston, 1970, Chapter 4. LEFTWICH, R.B., "Foreign Direct Investments in the United States, 1962-71," Survey of Current Business, 53 (February 1973), pp. 29-40. LIPSEY, R.E. and WEISS, M.Y., "Analyzing Direct Investment and Trade at the Company Level," 1972 Business and Economic Statistics Section Proceedings of the American Statistical Association, pp. 11-20. (Annual Meeting, Montreal, 1972). LITVAH, I. and MAULE, C.J. (eds.), Foreign Invest- ment: The Experience of Host Countries, New York, 1970. LUBITZ, R., "A Note on United States Direct Invest- ment and Human Capital," Journal of Political Econ- omy, 79 (September-October 1971), pp. 1171-75. LUPO, L.A., "Worldwide Sales by U.S. Multinational Companies," Survey of Current Business, 53 (Jan- uary 1973), pp. 33-39. MacDOUGALL, G.D.A., "The Benefits and Costs of Private Investment from Abroad — A Theoretical Ap- proach," Economic Record, 36 (March 1960), pp. 13-35. MASON, R.H., "Level of Economic Development and Performance of United States Direct Investments Abroad," Review of Economics and Statistics, 50 (November 1968), pp. 498-502. MAUER, L.J., and SCAPERLANDA, A., "Remittances from United States Direct Investment in the European Economic Community: An Exploratory Estimate of Their Determinants," Economia Inter- nazionale, 25 (February 1972), pp. 33-43. 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