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From the June 1999 SURVEY OF CURRENT BUSINESS |
The survey, from which the data presented in this article were drawn, was conducted under the supervision of Joseph F. Cherry III and Dorrett E. Williams, with contributions by Nicole L. Donegan, Erik A. Kasari, Edward J. Kozerka, and Ronald McNeil. Karen Poffel programmed the tables.
NOTE.—In recent years, the annual article on foreign direct investment in the United States (FDIUS) has covered both new investment and the operations of nonbank U.S. affiliates of foreign companies. The data on new investment are collected in BEA's survey of new FDIUS, and the data on the overall operations of U.S. affiliates are collected in BEA's annual and benchmark surveys of FDIUS. This year, the data on the operations of nonbank U.S. affiliates in 1997 will be published in an article in a later issue, so that the results of the most recent benchmark survey of FDIUS can be incorporated.
Last year,outlays by foreign direct investors to acquire or establish businesses in the United States surged to $201.0 billion, 2 1/2 times the previous record of $79.9 billion set in 1996 and almost triple the 1997 level of $69.7 billion (table 1 and chart 1)./1/ The 1998 outlays were boosted by two exceptionally large acquisitions, each of which significantly exceeded the size of any previous single investment. However, even without these two investments, outlays were still about 40 percent higher than those in 1996.
The surge in outlays by foreign direct investors coincides with a sharp increase in overall merger and acquisition activity in the United States to a level that substantially exceeds the 1997 record./2/ Both these increases are a part of a global increase in mergers and acquisitions. The record outlays reflected the continuing strength and stability of the U.S. economy that provided foreign investors with strong incentives to invest in the United States. In addition, a desire to gain access to the advanced and growing technological capability and large markets in the United States may have led a number of foreign companies to acquire information-related businesses in manufacturing and services.
The two large investments were acquisitions of a petroleum company and a motor vehicle manufacturing company./3/ They were accomplished by exchanging stock; the shareholders in the acquired U.S. companies received stock in the new foreign firms that were created when the U.S. companies were combined with the foreign companies that made the acquisitions. Some of the other large investments were also structured as exchanges of stock, a technique that is increasingly used for financing mergers and acquisitions both in the United States and abroad. Taken together, these exchanges resulted in large, but almost entirely offsetting, capital flows in the U.S. balance of payments: The large inflows that resulted from the foreign direct investors' acquisitions of stock in the acquired U.S. companies were offset by the outflows that resulted from the distributions to U.S. stockholders of the stock in the newly established foreign parent companies.
The large investment in the petroleum industry illustrates a trend toward greater consolidation within the industry that was also reflected by a number of other substantial petroleum-related investments, particularly in oil refining, distribution, oilfield machinery manufacturing, and oil and gas field services. In response to weak growth in the demand for fuels, excess capacity, and low oil prices, companies have been more aggressive in seeking out opportunities to reduce per unit costs in areas such as administration, refining, and marketing. A longer term factor behind the consolidations is the intensification of the worldwide competition to secure large, new oil reserves. In the United States, oil production, though declining since 1970, continues to exceed new discoveries. Generally, excluding production in the OPEC countries, production is leveling off, if not already declining. Large, new oilfields are becoming increasingly hard to find, and oil companies must explore more remote regions, often under inhospitable conditions, and deal with political, as well as geological, uncertainties. Given these circumstances, only companies with the size and financial strength to assume high costs and risks will remain profitable.
Although cost cutting and overcapacity have spurred consolidations in the motor vehicle industry worldwide, the main impetus for the large foreign investment in the United States in this industry was the complementary strengths—mainly in terms of product lines—of the two manufacturers of motor vehicles. The merger also presented opportunities to take advantage of economies of scale in engineering, purchasing, manufacturing, and distribution.
Factors that are specific to particular industries also motivated a number of other large new investments. In manufacturing (particularly machinery) and in services (particularly computer and data processing services), a desire to gain access to the advanced and growing technological capability in the United States, to integrate operations vertically, and to enter new markets led a number of foreign companies to acquire telecommunication- and information-related businesses. In "other industries" (particularly communication and electric, gas, and sanitary services), investments were spurred by global deregulation and by a need to seek strength through size.
As in the past, outlays to acquire existing U.S. companies rather than to establish new U.S. companies accounted for most of total outlays. In 1998, they accounted for 90 percent of total outlays (table 2).
Outlays in 1998 were dominated by large investments. There were 12 investments of $2 billion or more, and these investments accounted for almost two-thirds of total outlays (table 3). The number of such investments was up from three in 1997 and eight in 1996. To some extent, the increase in the number of large investments in 1998 reflects the sharp increases in U.S. stock prices in recent years; these increases have raised the size of the outlays needed to acquire individual U.S. companies. The size of an investment can also be measured by the number of employees in the acquired company: In 1998, there were seven acquisitions of U.S. companies with more than 10,000 employees, the same as in 1996.
By industry, outlays increased sharply in the manufacturing and petroleum industries (table 4). Within manufacturing, the largest increases were in "other manufacturing" (particularly in motor vehicles and in printing and publishing) and in machinery (particularly industrial machinery and equipment). Outlays also increased in retail trade and in real estate. Outlays decreased in all other industries; the decreases were largest in the insurance industry.
By country of ultimate beneficial owner (UBO), the United Kingdom and Germany had the largest increase in outlays in 1998 (table 4)./4/ Investments from France, Canada, and the Netherlands also increased substantially. Outlays by Japanese investors, at $2.9 billion, remained flat and were only a fraction of the peak—$19.9 billion—in 1990 (chart 2).
The portion of outlays financed by foreign parents (including those by exchanging stock), rather than by existing U.S. affiliates, increased from 54 percent to a record 77 percent. The unusually high share mainly resulted from the two exceptionally large investments. Excluding these investments, the share would have been 59 percent.
In dollars, outlays financed by the foreign parents increased to $155.3 billion in 1998 from $37.4 billion in 1997. The increase contributed to the sharp overall increase in net capital inflows for foreign direct investment in the United States (FDIUS) that are recorded in the U.S. balance of payments accounts for 1998./5/ Outlays financed by existing U.S. affiliates with funds from other foreign sources or from U.S. sources increased $13.4 billion, to $45.7 billion.
The total assets of newly acquired or established affiliates were $249.4 billion in 1998, up from $170.6 billion in 1997 (table 5). The assets of the businesses that were acquired were $212.3 billion.
U.S. businesses that were newly acquired or established employed 597,000 persons in 1998, up from 289,000 in 1997. The largest shares of employment were accounted for by manufacturing (44 percent) and services (23 percent).
Footnotes:
1. The estimates of outlays for 1998 are preliminary. The 1997 estimate of total outlays has been revised down 2 percent from the preliminary estimate published last year. For the preliminary 1997 estimates, see Mahnaz Fahim-Nader and William J. Zeile, "Foreign Direct Investment in the United States: New Investment in 1997 and Affiliate Operations in 1996," SURVEY OF CURRENT BUSINESS 78 (June 1998): 39–67.
2. The data on overall merger and acquisition activity in the United States in 1998 were reported by the Securities Data Company in a news release on January 6, 1999.
3. The International Investment and Trade in Services Survey Act prohibits BEA from disclosing information from its direct investment surveys in a manner that allows the data supplied by an individual respondent to be identified. The act also provides that with the prior written consent of the respondent, information supplied by the respondent may be disclosed. For these two large investments, BEA obtained consent for limited disclosure in order to present useful results from the survey.
4. The UBO is that person, proceeding up a U.S. affiliate's ownership chain, beginning with and including the foreign parent, that is not owned more than 50 percent by another person. The foreign parent is the first foreign person in the affiliate's ownership chain. Unlike the foreign parent, the UBO of an affiliate may be located in the United States. The UBO of each U.S. affiliate is identified to ascertain the person that ultimately owns or controls the U.S. affiliate and that therefore ultimately derives the benefits from ownership or control.
5. In addition to outlays from foreign parents to acquire or establish U.S. affiliates, net capital inflows for FDIUS include foreign parents' financing of their existing U.S. affiliates. In 1998, net inflows increased $102.8 billion, to $196.2 billion. Of the components of total capital inflows—equity capital, reinvested earnings, and intercompany debt—changes in equity capital inflows tend to most closely reflect the changes in new foreign investment, and in 1998, these inflows, net, increased $110.3 billion, to $156.8 billion. Because some of the largest investments in 1998 were structured as exchanges of stock, the net inflows for FDIUS were—as discussed earlier—largely offset in the U.S. balance of payments by capital outflows that reflected the increase in U.S. ownership of foreign securities. These preliminary estimates of inflows were published in Christopher L. Bach, "U.S. International Transactions, Fourth Quarter and Year 1998," SURVEY 79 (April 1999): 47 and 54. Revised estimates will be published in the July issue of the SURVEY.
