26

year-to-year change (line 3), but most of the deterioration was in transactions with unaffiliated foreigners: corporate claims on unaffiliated foreigners shifted adversely by $0.8 billion (line 7), while borrowing abroad shifted adversely by $1.7 billion (line 12). A large part of the adverse shift in U.S. corporate capital accounts was offset by the record increase of $1.7 billion in direct investors' ownership benefits (line 18).

SURVEY OF CURRENT BUSINESS

been related to the international exchange crises, for both the increased direct investment capital outflow and the adverse swings in other U.S. corporate claims and liabilities were concentrated to an unusual degree in shortterm accounts. For instance, among direct investment transactions, shortterm capital outflows on intercompany accounts to incorporated foreign affiliates were $1.1 billion in 1971, compared Overall, the $1.2 billion adverse with $0.7 billion in 1970. The adverse shift from 1970 to 1971 reflected trans- shifts in U.S. corporate capital transactions with developed countries; trans- actions with unaffiliated foreigners were actions with other areas showed a also concentrated in short-term acslight improvement in net flows to the counts: short-term claims on foreigners United States. increased sharply in 1971, compared The 1971 deterioration may have with little change in 1970, and shortterm liabilities decreased, compared with large increases in 1970. Some part of these shifts no doubt reflected a positioning of claims and liabilities in anticipation of a dollar devaluation. In addition, the exchange market uncertainties in 1971 probably made it more difficult than in prior years to arrange short-term foreign loans on attractive terms.

Earnings of Foreign Affiliates

Billion $ (Ratio scale)

12

BY INDUSTRY OF AFFILIATE

10

CHART 9

Factors other than the exchange market disruptions also influenced the 1971 deterioration in the net flow shown in table 1. For one thing, conditions in U.S. financial markets eased while conditions in some of the major foreign financial centers tightened, and both these developments would encourage outflows of U.S. funds to finance direct investment. Also, the 1970 and 1971 liberalizations of Foreign Direct Investment regulations possibly moderated the need to undertake new foreign borrowing as an offset to U.S. capital outflows for direct investment purposes.

In recent years, the rate of growth in direct investments has persistently exceeded that of other U.S. claims on foreigners. (See "The International Investment Position of the United States, Developments in 1971," in the October SURVEY.) At end-1971, the U.S. direct investment position accounted for nearly 48 percent of all foreign assets held by U.S. residents, up from 41 percent at end-1965. This increasing importance of direct investments is probably related to the structure of the U.S. balance of payments improvement programs. The programs allow larger U.S.

November 1972

capital outflows for direct investment purposes than would otherwise be permitted if the larger outflows are offset by eligible foreign borrowings-and the volume of eligible foreign borrowings has been large. In contrast, many other types of U.S. capital outflows, particularly for portfolio investments, are subject to the Interest Equalization Tax and many types of U.S. bank lending to foreigners are subject to the Voluntary Credit Restraint Program. Thus, the balance of payments improvement programs have probably been less restrictive of the growth in U.S. direct investments than of the growth in other U.S. claims on foreigners.

Growth in the U.S. direct investment position

By industry, the largest addition to the direct investment position in 1971 was, as usual, in manufacturing ($3.2 billion, see table 2). Continuing the trend of recent years, most of these manufacturing investments were in developed countries. The addition to U.S. direct investment in the petroleum industry was $2.5 billion, split about equally between developed countries and the "other areas" category (which includes developing countries as well as international operations such as shipping). Additions to U.S. direct investment in other industries totaled $2.1 billion.

The $7.8 billion addition to the U.S. direct investment position in 1971 represents a rapid $1.8 billion growth from 1969. This growth was mainly in investment in petroleum-related activities-production, transportation, refining, and marketing-as the addition to direct investment in petroleum affiliates accelerated from $1 billion in 1969 to $2.5 billion in 1971. This acceleration reflected continuing strong growth in foreign energy requirements and competition to secure and open new producing areas. Some of the growth in investment was in tankers and related port facilities, spurred by increased uncertainties in the Middle East that led the companies to adjust the amounts of crude produced in different areas and to change their transportation arrange

ments.

2. Includes developing countries and the international unallocated category.

3. US domestic rate of return is the ratio of earnings from domestic operations to domestic net worth at the end of the year. These data are available for only 1966 and 1970 The rate of return of affiliates is the ratio of adjusted earnings to book value at the beginning of the year.

The U.S. domestic rate of return is calculated from a BEA sample of U.S. manufacturing firms which have foreign affiliates. The sample does not include all of the U.S. parents for which affiliate data are shown.

US Department of Commerce, Bureau of Economic Analysis

72

72-11.10

Less than $500,000 (+).

1967 1968 1969 1970 1971P

1

-1

-5

72

-1

1

18

38

-19 11

15

3

-20

The acceleration in additions to petroleum direct investment from 1969 to 1971 was split almost equally between developed countries and other areas, but the acceleration from 1969 to 1970 was almost entirely in developed countries while the acceleration from 1970 to 1971 was entirely in the "other

areas."

Components of additions to direct investment

The two main components of the 1971 addition of $7.8 billion to the direct investment position (table 2) were net capital outflows from the United States ($4.8 billion) and the U.S. share in affiliates' reinvested earnings ($3.1 billion).

Reinvested earnings were less than 25 percent of the 1971 addition to direct investment in petroleum, but more than 50 percent of the addition to direct investment in manufacturing. This difference largely reflects the fact that almost all direct investment in crude petroleum production is in branches, reflecting the U.S. tax advantage attaching to the branch form of organization for extractive activities, while most foreign manufacturing affiliates are incorporated. Because of the way branch accounts are kept by the companies, the U.S. balance of payments accounts treat branch earnings as though they were entirely remitted to

27

the United States, and all additions to the net assets of foreign branches as U.S. capital outflows. As a result, no reinvested earnings figure is calculated for branches, but some of the net capital outflows to branches serve the same function as reinvested earnings do in the case of incorporated affiliates.

From 1969 to 1971, reinvested earnings grew from $2.6 billion to $3.1 billion, a 20 percent increase. This was less than half the rate of growth in net capital outflows, which went up from $3.3 billion to $4.8 billion, or 46 percent. The growth of reinvested earnings was slowed by a sharp increase in dividends remitted to U.S. parent companies, which bolstered the profit figures of the parents in a period when profits from domestic operations had deteriorated.

On the other hand, after mid-1970 U.S. corporations were rebuilding liquidity positions that had been run down in the preceding tight money period. This improvement facilitated

Revised. Preliminary. Less than $500,000 (±). Acquisitions include partial and total purchases of voting securities of existing foreign corporations from foreign owners. Sales include partial and total sales of voting securities of foreign corporations by U.S. owners to foreign purchasers. Liquidations through the sale of assets, as distinct from sale of ownership interests, are not included. Changes in the share of ownership resulting from transactions between a parent and an affiliate-such as the purchase of treasury stock from an affiliate by a parent-are not included; only changes involving outside foreign owners or purchasers are included. Secondary foreign companies acquired or sold through primary foreign affiliates are not included.