TABLE 7.-U.S. Exports and Production Abroad of Manufacturing Affiliates of U.S.

Source: U.S. Department of Commerce. Note: "Production" represents the value of sales at the foreign plant; exports are valued FOB the U.S. Since the latter value excludes shipping and other costs of delivery at foreign locations, the ratio of "production" to exports is somewhat overstated."

REGULATION OF FOREIGN DIRECT INVESTMENT

Prepared by the Office of Foreign Investment,

Department of Commerce

1. INTRODUCTION. II. MAGNITUDE OF FOREIGN BUSINESS OPERA-
TIONS. III. STRUCTURE OF THE PROGRAM. IV. RELATIONSHIP
OF THE FDIP TO OTHER BALANCE OF PAYMENT PROGRAMS. V.
DIRECT INVESTOR EXPERIENCE. VI. DIRECT INVESTMENT AND
U. S. EXPORTS. VII. BALANCE OF PAYMENTS EFFECTS OF THE
PROGRAM. VIII. PROGRAM ALTERNATIVES. IX. OVERALL COM-
MENTARY. X. APPENDIX A: OFDI EXPORT CREDIT POLICY. XI.
APPENDIX B: TABLES. XII. APPENDIX C: OFDI AND OBE STATISTICS.
XIII. SUMMARY.

I. INTRODUCTION

The Office of Foreign Direct Investments (OFDI) welcomes this opportunity to report to the Commission on International Trade and Investment Policy on the effect of and outlook for the Foreign Direct Investment Program (FDIP or the Program).

The operations of American companies abroad play a significant role in the economy of the free world. The decision to regulate such direct investment represented a major policy shift for the United States.

The FDIP was instituted on January 1, 1968, by Executive Order 11387, after three years of a voluntary program administered by the Department of Commerce. It was part of a comprehensive, detailed program announced by the President that day, which included six other steps:

(1) A tightening of the Voluntary Foreign Credit Restraint Program administered by the Federal Reserve Board for banks and other financial institutions;

(2) An appeal for a two-year voluntary limitation on nonessential travel and a proposal that legislation to this end be considered (after hearings, nothing came of the legislative proposal);

(3) A campaign to reduce the balance-of-payments impact of U.S. foreign commitments by stimulating additional purchases of U.S. securities and military materiel by our allies, reducing the number of government employees abroad, and other measures;

(4) A long-term export expansion effort;

(5) An attack on nontariff barriers to U.S. exports; and

(6) The encouragement of foreign investment and travel in the U.S.

These steps were proposed in response to deteriorating confidence in the dollar and strong demand for gold following the British devaluation in November 1967. The Program was originally intended as a temporary measure to ease pressures on the balance of payments and strengthen foreign confidence in the dollar while longer-run measures were implemented.

The initial specific objective of the Program was to keep U.S.-source funds used to finance direct investment in 1968 about $1 billion below the 1967 level. Gross investment activities abroad should not be curtailed as long as foreign-source funds were used to make these investments.

It is essential to keep this design concept for the Program in mind because of the continuing misunderstanding that the Program inhibits gross foreign direct investment as such. Such expenditures will not be restricted if outlays in excess of allowables are covered by foreign financing.

This paper will outline the evolution of the Program, discuss Program statistics, describe the Program's relationship to other balance-of-payment programs, discuss the results in broad terms, and summarize the alternatives for the future.

II. MAGNITUDE OF FOREIGN BUSINESS OPERATIONS

Production abroad by U.S. affiliates is substantial. At the end of 1968, the book value of the U.S. ownership interest in all foreign production facilities was about $65 billion, based on OBE1 data. From a recent OFDI survey of foreign affiliates' financial structure and conventional asset ratios, the book value of total assets employed abroad by U.S. affiliates is estimated to exceed $130 billion and annual sales to approximate $145 billion.

The importance of foreign operations to U.S. parents and to the U.S. economy as a whole is also evidenced by the fact that foreign affiliates' sales in 1968 were roughly equivalent to 25 percent of the domestic sales of U.S. corporations. Furthermore, earnings on foreign direct investments (profits plus interest, fees, and royalties paid or accruing to the U.S. direct investor) exceeded $8 billion, which is over 20 percent of the after-tax earnings of all U.S. manufacturing corporations. These percentages are useful for illustrative purposes although the data being compared are not fully consistent.

The immediate Program objective was to improve the U.S. payments position through a reduction in net capital outflows and an increase in repatriated earnings. The official statement released shortly after the President's message noted that earnings flows back to the U.S. based on existing U.S. investment would continue and should even rise with further investment and economic recovery in Europe. The imposition of the Program signified no adverse judgment concerning the merits of 1 Office of Business Economics, U.S. Department of Commerce. See Appendix C for a brief discussion of the differences between OBE and OFDI data.