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DIRECT FOREIGN INVESTMENTS IN AMERICAN

INDUSTRY, 1937

INTRODUCTORY

Cartels, such as are common in Europe, are not a feature of industrial organization in the United States. The antitrust laws have prevented that. However, there has been nothing to prevent cartels from obtaining a share of the American market by establishing branches or subsidiaries in this country. The study, the results of which are here presented, has shown that the foreign cartels as such have rarely established branches or subsidiaries in the United States. Several of the larger members of such cartels have entered this market by those means and do exert an influence in that manner. The extent of that influence, as shown by the value and character of foreign investments in this country, is analyzed in this report.

Foreign investments in the United States at the end of 1937 aggregated $7,398,000,000, as shown in table I. The short-term investments, which totaled $1,920,000,000, took the form largely of deposits in United States banks. Direct investments amounted to $1,883,000,000 followed closely in size by investments in common stocks at $1,850,000,000. Foreign holdings of United States preferred stocks and bonds and other investments were much smaller.

Deposits of foreign funds in United States banks are extremely volatile, flowing freely and rapidly into and out of the country as influenced by political and economic rumors and developments in this and in foreign countries. Investments in United States common and preferred stocks and bonds, particularly the first, are also subject to considerable fluctuations in value. These fluctuations arise from the volume of purchases and sales, which are affected by political and economic conditions, like deposits of foreign short-term funds, although to a somewhat lesser degree. In addition, fluctuations arise from the considerable changes in the average market prices of American common stocks that frequently occur. The so-called "other investments" are composed of estates, trust funds, holdings of real estate and real-estate mortgages, and other miscellaneous items. These are not highly liquid and show relatively little change from year to year. The same is true of "direct investments."

TABLE I.-Estimate of Foreign Investments in the United States, End of 1937 Type of investment

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1 Revised.

Estimated Value $1, 883, 000, 000 1, 850, 000, 000 430, 000, 000 565, 000, 000750, 000, 000

5, 478, 000, 000 1,920, 000, 000

7, 398, 000, 000

2 The Finance Division, Bureau of Foreign and Domestic Commerce, is making an intensive study of these investments; the results of this study should be available during the summer of 1940.

257769-40-No. 6-8

FOREIGN DIRECT INVESTMENTS IN THE UNITED

STATES AND THEIR SIGNIFICANCE

At the end of 1937 foreign companies and individuals domiciled abroad controlled a total of 1,172 companies and branches located in the United States. The total investment interest of the foreign owners of these companies and branches amounted to $1,882,603,000. Foreign direct investments in the United States are all foreign investments in those United States corporations or enterprises which are controlled by persons or small groups of persons (corporate or natural) domiciled in foreign countries, or in the management of which such persons or groups have an important voice.1 It is through this type of investment that foreigners most directly influence production and distribution in the United States and for that reason it is this type of foreign investment that is discussed here in detail. These investments had no common cause, unless it was a desire to participate more fully in the great American market. Some date their beginning before the Civil War while others were only recently started. Some have grown to considerable size, as any prosperous well-managed business may, while others are the result of the merger of several units, some of which may have been domestically owned. Many of the manufacturing enterprises are based even now on patent control. Frequently patent controls were important in the beginning of the enterprise but now the reputation for a good product and good service is more vital to it. The United States tariff was undoubtedly a factor in causing some factories to be established to manufacture products in this country that could not be imported and meet the competition of domestically produced goods. Other factors, such as the costs of transportation, or the availability of a raw material, were influential in individual cases. TABLE II.-Foreign direct investments in the United States, by Industries, 1937 [In thousands of dollars]

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1 The basis of the classification of an investment as "direct" has been the ownership of the common stock of the enterprise. No arbitrary percentage of ownership of the common stock has been adopted because a concentrated holding of 30 percent of the stock may give control of policies as effectively as a more widely distributed holding of 50 or 60 percent.

Rubber

Leather

Textiles
Foodstuffs

TABLE II.—Foreign direct investments in the United States, by Industries, 1937—

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Foreign direct investments in United States enterprises in 1937 were distributed over the whole range of business activity in this country. (See table II.) Every major industry was represented from manufacturing to agriculture and from retail distribution to railroad systems. The distribution by industries was not even, however, nor did it conform to the relative importance of the various industries in the United States. Controlling investments in United States public utility enterprises, for example, were the smallest in any group. Undoubtedly one reason for this was the fact that the period of greatest development in the public utility field occurred after the United States became a lender rather than a borrower. Another reason, however, was the attainment by electric and gas utilities in this country of a position of financial strength and technical efficiency before they did in foreign countries.

Manufacturing, with its wide range of nonstandardized highly competitive products, was the field of investment in 1937 of $729,000,000, or approximately 40 percent of the total foreign direct investments in the United States. Although the range of product is extremely wide, in some branches entrepreneurs in this country developed advanced techniques and superior products earlier than foreign companies and the conditions have not been favorable for investments by the latter. Other branches of manufacturing revealed the existence of competitive conditions which induced foreign investments. Under this latter head mention needs to be made particularly of chemical, textile, and beverage manufacturing. Among the branches of manufacturing that were affected least by the entrance of foreign affiliates into this market were iron and steel, transportation equipment, and rubber.

Just before the United States entered the World War, the domestic chemical industry was dominated by a few large German concerns. The seizure of the United States assets and patents of those concerns, and their sale to domestic interests, served to break that domination. This is an industry, however, in which patents play a prominent role. As a result foreign investments in the chemical industry, including toilet goods and cosmetics, amounted to $220,000,000 at the end of 1937. As large as this investment seems, it was only about 5 or 6 percent of the total capital invested in the United States chem

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ical industry. Furthermore, the geographic distribution of that foreign investment was much wider in 1937 than in 1914, with England, France, Netherlands, and Switzerland, as well as Germany, in important roles.

Textile manufacturing presented yet another picture. Cotton, wool, and silk textile production have not for years, if ever, been dominated by foreign capital. There were, nevertheless, several old companies of more than average size that were controlled abroad, particularly in England and France. Rayon manufacturing concerns, on the other hand, were largely foreign in their origin and control, and in 1937 several of the largest companies were wholly or partially owned by British, Dutch, and German companies. The textile group as a whole, in which $217,000,000 of foreign capital was invested, showed about the same degree of foreign control as did the chemical industry.

Approximately 6 percent of the capital invested in the manufacturing of beverages (alcoholic and nonalcoholic) was owned abroad in 1937. Foreign ownership, however, was confined largely to the manufacture of alcoholic beverages and in that branch comprised a much larger part of the total investments. The latter was, of course, a development of the years after 1933. Almost all of the $65,000,000 of foreign investments in United States beer and whisky manufacturing companies were held by a few large Canadian companies.

The investment in financial institutions was next in size to the manufacturing industry, although only about 60 percent as large. Of the $412,000,000 of foreign capital invested in this type of enterprise, the net worth 3 of 134 foreign-owned insurance branches and subsidiaries amounted to $351,000,000. Seventy percent of the net worth of these insurance investments was in fire and marine insurance branches and companies and only 4 percent in life insurance companies although the admitted assets of life insurance companies were nearly as large as those of the fire and marine companies. The difference was the result of the varying statutory reserve requirements applying to these types of companies. Three-fourths of the direct investments by foreign insurance companies were British. (See table II.) No other country comprised as much as 10 percent of the total. Direct investments in banks, trust companies, and investment companies amounted to $61,000,000.

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Foreign direct investments in the petroleum industry, which amounted in 1937 to $283,000,000, covered the entire range of production, pipe-line transportation, refining, and distribution. Some of these investments had their origin before 1914. Their principal expansion, following the trend of the industry took place after the close of the war. England, Canada, and Netherlands all figured prominently in the total.

* Based roughly on the total assets of chemical companies as reported in Bureau of Internal Revenue, Press Service No. 19-13, showing the assets and liabilities as of December 31, 1937, of corporations submitting balance sheets.

The net worth of these branches and affiliates of foreign companies, rather than the total admitted assets or total investments, has been adopted as the correct method of valuing insurance investments because a large part of the assets of insurance companies are required by law to be deposited against policy liabilities with State insurance commissioners as statutory reserves.

For more detailed data regarding foreign insurance investments in the United States see the following publications of U. S. Department of Commerce: Trade Information Bulletin No. 834, Insurance Transactions in the Balance of International Payments of the United States, 1919-35, by Dr. August Maffry, published in 1936: The Balance of International Payments of the United States (published annually), and Foreign Investments in the United States, pp. 38 and 43, published in 1937.

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