Foreign direct investment in the United States : an update : review and analysis of current developments : a report submitted to the Committee on Energy and Commerce, the Committee on Ways and Means, and the Committee on Foreign Affairs of the House of Re

268 Pages·1993·17.3 MB·English

by  United States. Dept. of Commerce. Office of the Chief Economist

9^A^
Foreign Direct Investment
in the United States:
An
Update
Review and Analysis of
Current Developments
A
Report to the U.S. Congress in Response\to Section 3(a)
ofthe Foreign Direct Investment and International
Financial Data Improvements Act of 1990. '
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.
U.S. Department of Commerce
Economics and StatisticsAdministration
Office ofthe ChiefEconomist
June 1993
V
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Foreign Direct Investment
in the United States
An
Update
STATL
PENNSYLVANIA
UNlVc-RSlTY
AUG 1 1 159^
Review and Analysis of
Current Developments
A
Report Submitted to the Committee on Energy and
Commerce, the Committee on Ways and Means, and the
Committee on Foreign Affairs ofthe House of Representa-
tives, to the Committee on Finance, the Committee on
Commerce, Science and Transportation, and the Commit-
tee on Foreign Relations ofthe Senate, and to the Joint
Economic Committee ofthe Congress in Response to Sec-
tion 3(a) ofthe Foreign Direct Investment and Interna-
tional Financial Data Improvements Act of 1990.
U.S. Department of Commerce
Economics and Statistics Administration
Office ofthe ChiefEconomist
June 1993
ACKNOWLEDGEMENTS
Foreign DirectInvestment in the United States: An UpdatewasissuedunderthedirectionofJeffreyL.
Mayer,ActingUnderSecretaryforEconomicAffairsoftheEconomicsandStatisticsAdministration,U.S.Department
ofCommerce.
ProjectdirectorofthisreportwasSimiiyeOkuboMcGuire,DirectoroftheOfficeofMacroeconomicAnalysis. Review
and editing ofthe report wasprovidedmainlyby Simiiye Okubo McGuireand LesterA. Davis; assistancewas also
providedbyJohnR.Farra. ThemassiveamountofBureauofEconomicAnalysisdatarequiredfortablesinthetextand
AppendixDwaspreparedbythe staffofBEA's InternationalInvestmentDivision,imderthe supervisionofBettyL.
Barker,andcoordinatedbyStevenD.Bezirganian. ConversionofAppendixDdatafromcomputerfilestoprintcopy
waslargelyaccomplishedbyDavidG. BaileyandBradleyDekoning.
Authorsofthe individualchaptersare indicatedonthosepages.
Thecooperationofseveralothergovernmentagenciesinprovidingdataandotherassistanceisgratefullyacknowledged,
especiallytheDepartment'sBureauofEconomicAnalysis,aswellastheBureauoftheCensusandtheInternationalTrade
Administration, andthe FederalReserve Board,theBureauofLaborStatistics, andthe DepartmentofTreasury.
QuestionsconcerningthecontentofthisreportshouldbedirectedtotheOfficeofMacroeconomicAnalysis,Room4868,
U.S. DepartmentofCommerce,Washington, D.C. 20230. Phone [phone].
11
FOREIGN DIRECT INVESTMENT IN THE UNITED STATES: AN UPDATE
—
Review andAnalysis ofCurrent Developments
CONTENTS
1. Introduction and Key Findings 1
2. WorldTrends in Foreign Direct Investment 7
3. Developments and Trends in Foreign Direct Investment in the United States .... 18
4. Operations ofForeign-Owned Firms in the United States 27
A. Business Activity ofNonbank Foreign-Owned Firms 28
B. Foreign Banking in the United States 40
5. Foreign Direct Investment in the United States: The Data Link Project and
Establishment Data for 1987 51
6. Influence ofForeign Direct Investment on the Development and Transfer of
Technology 62
7. U.S. Foreign Trade In Merchandise and Servicesby Foreign-Owned Firms 77
8. Taxes and Foreign Controlled Companies in the United States 90
9. Federal Government Data on Foreign Direct Investment in the United States ... 99
APPENDIX:
A. Glossary ofForeign Direct InvestmentTerms 107
B. Literature Survey on Economic Issues Relating to Foreign Direct Investment in
the United States 110
Statistical Appendix:
C. ChapterTables 126
D. Selected Tables Specially Preparedby the Bureau ofEconomic Analysis 176
y
Introduction and Key Findings
by Sumiye Okubo McGuire"^
Therapidpaceandmagnitudeofforeigndirectinvestment publicly raised about FDIUS. The study first reviews
in the United States (FDIUS) during the 1980s raised recentdevelopmentsindirect investment inmajorworld
publicconcernsabouttheimpact,positiveornegative, of economies. It examines recent trends in the flows of
this investment on the U.S. economy. Flows ofFDIUS foreign direct investment into the United States through
slowedinthe 1990s,asdidthewidepublicitypreviously 1991, and recent operations ofnonbank and bank U.S.
devoted to FDIUS. Nonetheless, questions about the affiliates of foreign firms. The study analyzes newly
significance and effect ofFDIUS on the U.S. economy available data ft'om the BEA-Census data link and the
remain. BEA-BLS link project ' that provides the basis for more
This second Department of Commerce report on in-depthanalysesofaffiliates'activitiesinspecificindus-
foreigndirectinvestmentintheUnitedStatesrespondsto tries. Thereportaddressesquestionsaboutthe impactof
theForeignDirectInvestmentandInternationalFinancial U.S. affiliates on U.S. trade performance and on U.S.
Data Improvements Act of 1990. That law seeks to technologicaldevelopmentsandtransfer. The studyalso
improvetheinformationprovidedbythe federal govern- examinesthe extent towhich foreign-controlled compa-
ment onthe significance offoreign direct investment in nies shift their income away fi"om the United States
the United States. The law also requires the Bureau of throughtransferpricingpractices. Also included in this
EconomicAnalysis(BEA)toexchangeconfidential data reportare abriefsurvey ofrecent non-government, ana-
onforeigndirectinvestmentintheUnitedStateswiththe lytical literatureonthissubject,andalarge collection of
Bureauofthe Census andthe BureauofLabor Statistics statisticaltablesonforeigndirectinvestmentintheUnited
(BLS), and the Bureau ofCensus to share its data with States.
BEA,inordertoimproveU.S.governmentdataonforeign
directinvestment. What is Foreign Direct Investment?
ThefirstreportinthisserieswaspublishedinAugust
1991. Itrevieweddefinitionsandmeasurementissues,the Therearetwotypesofprivate foreigninvestment-
macroeconomic and microeconomic theory of interna-
tional investment — both portfolio and direct — and the dSitraetcets ainsdclpaosrstiffoileido.asFofroeriegingnidnivreescttmeinntveisntmtehentUnwihteend
planningoftheBEA,Census,andBLSdatalinkprojects.
ownership, directly or indirectly, by a foreign person or
The report analyzed the trends and patterns of foreign business amounts to 10 percent or more of the voting
directinvestment(FDI)intheUnitedStatescomparedto
securitiesofan incorporated U.S. business enterprise, or
thatinothercountries,andFDI'sroleinandimpactonthe
anequivalent interestinanunincorporatedU.S. business
U.S.economy. Itprovidedanoverviewofthe character- enterprise. A lOpercentormoreequityinterestisconsid-
iisntgicesnearnadl,pearnfdoirnmfainvceekoefyUs.eSc.toarfsfi~liaetleesctorfonfiocrse,iganutfiormmos-, eirnefldueevnicdeeonvceer,otfhaelmoannga-tgeenmneinntteorfesttheinc,oamnpdaanym.eaSsuucrheaonf
biles, steel, chemicals, and banking — in which foreign enterprise is a U.S. affiliate ofa foreign firm (hereafter
ownershipwas significantly large. referredtoasU.S.affiliate). Theinternationaltransferof
capital is not necessary for direct investment. For ex-
Objectives of the Study ample, a foreign corporation may acquire a partial or
whole interest in a U.S. firm in exchange for technology
Thissecondreportupdatesinformationprovided ormanagerialknow-how, and provide no financial capi-
inthefirstreportonFDIUS,andexaminesthreekeyissues
~trade,technology,andtaxes—thathavebeenwidelyand 'TheBEA-CensusdatalinkprojectlinksBEA'senterprise,orcompany,
dataforforeign-ownedU.S.firmswiththeCensusBureau'se<;Lablishment.
orplant,dataforallU.S.firmstoobtain Census'detailed estahlishnicnt
*Director,OfficeofMacroeconomicAnalysis,OfficeoftheChiefEcono- datafortheenterprisesthatreporttoBEA. Thedatapublishedsofarunder
mist,EconomicsandStatisticsAdministration,U.S.DepartmentofCom- thisprojectcoverthenumber,employment,payroll,andshipmentsorsales
merce. oftheestablishmentsofU.S.affiliatesofforeigncompaniesin 1987.
tal. Also, theaffiliate'sfinancialcapitalmaybeprovided surge in outflows during the 1980s was from the EC
bydomestic orforeign financial institutions. ^ coimtries and Japan. Total global FDI flows peaked in
1989-90 and droppedsharply in 1991. AggregateEuro-
Key Findings peanoutflowsandmflowscontinuedtorisethrough 1990
andthendeclmedin1991. Japaneseoutflowsalsopeaked
The study provides several important conclusions in 1990, and then fell off sharply. U.S. inflows fell
abouttheimpactofforeigndirectmvestmentontheU.S. significanfly in 1990, and by 1992, became negative,
economyandits competitiveness. resultinginnetdisinvestment. Incontrast,U.S.outflows
rose stronglybetween 1990 and 1992.
• Foreigndirectinvestmentsloweddownconsider- The major reasons for expansion and subsequent
ablyinthe 1990-92period. The foreign-owned declineininvestmentflowsincludemacroeconomiccon-
firms' shareoftheU.S. economyhasstabilized ditions,advancesintelecommunicationstechnology,lib-
afterrapidincreasesinthe 1980s. eralizationofcapitalmarketsworldwide,andthedesireto
retain or gain access to markets. But, the absolute or
• U.S. affiliatespaidslightlyhigherwages(corrected relative importance of these factors as past or future
determinants of FDI flows cannot be measured with
forindustrycomposition),and,partlybecauseof
certainty.
theirrisingnumbers,increasedtheirtotalemploy-
mentofU.S. workersslightlyfasterthanU.S.-
ownedfirms. Macroeconomic Conditions. Sustainedtrade im-
balances during the 1980s, driven in part by savings
• U.S. affiliates' shareoftheU.S.tradeimbalance imbalances, led to exchange rate changes that lowered
U.S.assetvaluesintermsofforeigncurrencies,andraised
rose sharplyinthe 1980s. m
theattractivenessofinvestment theUnitedStates. The
• Theirshare ofU.S.high-technologyindustriesis relativelyrapideconomicgrowthintheUnitedStatesalso
smallthoughrising,andtheyare slightlymore attracted large foreign direct investment inflows. As a
concentratedinhigh-technologyindustriesthanare result,internationalinvestmentflows~bothportfolioand
U.S.-ownedfums. Theyhave contributedtoU.S. direct— surgedintotheUnited States.
technologicalcapabilityanddevelopment. ThecircumstancesthatledtosizableinflowsofFDI
totheUnitedStatesandworldwidebegantochangeinthe
• Foreign-ownedcorporations,asagroup,hadlower late 1980s. These changeswerereflectedinthedeclines
taxable incomesrelativetorevenuesandassets inflowsofworldwidedirectinvestment,especiallytothe
thancorporateU.S. firms. Atleasthalfofthe dif- UnitedStates. By1989,macroeconomicconditionsbegan
ference canbeattributedtosevenfactorsother tochange inGermany,astheunificationprocesssharply
thanincomeshiftingandtransferpricing. But raisedthedomesticGermandemandforinvestmentftmds,
othernon-taxavoidanceactions,notevaluatedin andinJapan,asthemajordeclineinthe valuesofstocks
the study,mayalsoplayarole. andrealestateledtosignificantreductionsintheJapanese
banks'capitalbaseandthereforetheirlendingability. The
Assessmentsoftheseissuesaresummarizedinthis growth ofthe U.S. economy, too, was slowing down in
section, and discussedmore fiilly inthe followingchap- 1989 and turned negative in 1990, and attractive U.S.
investmentopportunitiesrapidlydiminished.
ters.
Changes in International Direct Investment Advances in Technology. Advances in telecom-
munications technology in the mid-1980s encouraged
world direct investment flows. They greatly enhanced
World-wide foreign direct investment flows ex- firms' ability to control and manage production and
panded rapidly during the 1980s, outpacing the growth
distributionaroundtheglobe,andenabledfmancialinsti-
rateofworldtrade,andbecameamajorvehicleforworld
tutions to retain links with other lenders and borrowers
economicintegration. Mostoftheincreaseoccurredinthe
aroimdthe clock.
secondhalfofthe 1980s,andmostofthe FDIflowswere
amongdevelopedcountries. Amajorshareofthesurgein Liberalization of Capital Markets. During the
world inflows during the second halfofthe 1980s was
1980s,deregulationoffinancialmarketsanddecontrolof
accounted for by rising inflows into EC countries fi"om
capital flowsgreatlyfacilitatedcross-borderinvestment.
eachother,aswellasfromotherEuropeancountries,the
These developments occurred in industrial economies,
United States, and Japan. More than 70 percent ofthe
includingthe UnitedStates,theUnitedKingdom,Japan,
France, and Italy, and in developing nations that are
movingtowardsmarketeconomies. Therelativelymore
^Forfurtherexplanation,seetheGlossaryofForeignDirectTerms,Appen-
dixA,attheendofthisreport. open investment climate, coupled with its large market
size, contributed to the United States becoming amajor sizeofthe totaloperations offoreign-owned firms inthe
recipientofinternational direct investment flows. UnitedStatesgrew,mostlythroughacquisitionsofexist-
ingU.S. firmsandestablishmentofnewaffiliates, rather
MarketAccess. Foreigndirectinvestmentisoften thanthroughexpandedoperationsofexistingones. U.S.
usedbymultinationalcorporationstocircumventbarriers affiliates, however, remain a small share of the U.S.
tomarketentry. Forexample, foreigninvestmentswere economyasawhole, butare important inthe U.S. inter-
apparentlymadeintheU.S.autoandsteelindustriesinthe national trade sector and in certain key market niches.
1980s,partlytoavoidU.S. traderestrictionsthatlimited According to the BEA-Census data link project, U.S.
U.S. imports from Japanese fums. Similarly, between affiliatesaccountfor 4percentofthe employment inall
1989to1991,muchoftheforeigndirectinvestmentbythe U.S. nonbankbusinessesand7percentofmanufacturing
U.S.andJapanesemultinationalsinEuropeweremadeto employment.
ensure access to the large EuropeanCommunity before U.S.affiliateshaveingeneralcontributedtotheU.S.
creationoftheSingleEuropeanMarketattheendof1992. economy, providing employment to 4.7 million Ameri-
Foreign direct investment also enabled foreign firms to cansin 1990. Theyhavesubstantiallyincreasedspending
exploit special advantages, such as lower capital cost, onplantandequipmentandforresearchanddevelopment,
advanced technology, and better quality control, and to andraised their share oftotal value added and employ-
improve service toamarket. ment, albeit mostlythroughacquisitions and new estab-
DespitetheslowdowninFDIinflowsintotheUnited lishments rather than expansion of existing affiliates.
Statesin 1990-1992,itcontinuestoholdthelargestshare Their employment rose more quickly in some sectors,
oftheworld'sinwarddirectinvestmentstock. In1990,the particularly in the coal and petroleum products industry
U.S. share remained twice as large as the next largest andinthechemicalsindustry. TheyresembleU.S.-owned
recipient ~ the United Kingdom (24 percent versus 12 firms,buttendtobemoreexternallyoriented, andreport
percent). TheUnitedStatesisalsostilltheworld'slargest lowerprofitsandthus, lowertax payments.
holderofoutward foreigndirectinvestment stock.
• Foreign-owned firmsaccounted forsubstantial
sharesofsalesandemploymentincapital-intensive
Growing Economic Importance ofU.S.
industriesandmining.
Affiliates
• U.S. affiliates, especiallyJapanese-ownedaffili-
The recent rapid rise in FDIUS is reflected in its ates, investedmore inplantandequipmentper
rising share oftotalU.S. netnational worth. This share dollarofvalueadded.
morethandoubledfrom 1.2percentin 1980to2.7percent
in1991. However,thisshareisfarsmallerthaninallother • Risingvalueaddedofforeign-owned fumsoverthe
majorindustrial countries,exceptJapan. pastdecadehasnarrowedthe differential in value
The FDI flows into the United States have been addedperemployeebetweenU.S.-and foreign-
broadly based across most U.S. industrial sectors and ownedfirms.
acrossthemainFDIsource countries. Between 1985and
1991,however,thecompositionofFDIUSchanged. Shares • European,Canadian,andJapanese firmswerethe
inwholesaling,petroleum,andrealestatefell,andinvest- majorownersofaffiliates,producingalmost90
mentsharesroseinmanufacturing,financeandinsurance, percentoftotal value addedbyaffiliates in 1990.
andotherindustries(otherservicesandmining),suggest- European-owned fumshad 58 percentofthe total.
ingagradualevolutionfrommarketinganddistributionto Japaneseaffiliatesdoubledtheirshare ofvalue
productionofgoodsandservices. Withinmanufacturing, added, from 7percent in 1980to 14percent by
the composition ofFDIUS changed little between 1985 1990.
and 1991.
AmongthemajorinvestingcountriesintheUnited • U.S. affiliates' ratioofvalue addedto importsrose
States,between 1985and 199 JapanandFranceshowed from 18percent in 1980 to40 percent in 1990.
1,
significant increases intheir share oftotal direct invest- reflectingahigherdomestic content share of
mentstockintheUnitedStates. Japan'ssharemorethan output. Domestic content rose from 81 percent in
doubled, and France raised its share by more than 50 1987to 85 percentby 1990. This shiftwaspartly
percent. TheUnitedKingdomhadasmallincrease inits duetorisinginvestment inmanufacturing versus
share. The other major investing countries, the Nether- wholesaling.
lands, Germany, and Canada, showed declines in their
sharesoftotal FDIUS. • Theirreportedaverageprofitshave been lowerthan
The 1990-91 U.S. economic recession slowed the those ofU.S.-owned firms,peakingat $12 billion
growth ofthe operations ofboth U.S.-owned firms and in 1988,and in 1990, averaginganet loss. Sixty
foreign-ownedfirms,andreducedtheirprofitability. The percentofthislosswasthatreportedbynew
affiliatesofFrench, Swedish,andJapanese firmsin importantbutsmallsharewasattributabletothe
manufacturing,transportationservices,and foreigntradeofnewaffiliatesacquiredeachyear.
wholesaletrade.
• Amajorshareoftheimportgrowthsince 1986was
Growthofforeigndirectinvestmentinthebanking byU.S. affiliatesinwholesaling,includingthose
industryshowedapattern similarto thatinthe nonbank mainlyinthebusinessofimporting.
sector. Assetgrowthbyforeign-ownedbanks slowedin
1990-91, after registering double-digit annual growth U.S.affiliates'exportsaccountedforasmall,butnot
ratessince theearly 1970s. Businesslendingdominated insignificant,shareofthegrowthintheU.S.economyand
foreign-owned,butnotU.S.-owned,bankloanportfolios. jobs between 1986 and 1990. In 1990, U.S. affiliate
Therecentslowdowninthe increaseinbusinesslending merchandise exports accoimted for approximately one-
byboth foreign- andU.S.-owned banksoperating inthe fourth ofthe total contribution to U.S. GDP byall U.S.
United Statesreflected aweak domesticeconomyanda firms' exports. Between 1986 and 1990, U.S. affiliate
negative impact on bank lending ofincreasedU.S. and merchandiseexportscontributedanestimated7percentof
foreignbanking capitalrequirements. totalrealU.S. GDPgrowth(in 1987 dollars). Moreover,
New 1993 data on offshore lending by foreign- U.S. affiliate exports accoimted for an estimated 1.7
ownedbanks provide additional insightsinto theirbusi- millionofthetotal7.2millionjobssupportedbyoverall
nesslendingactivities. U.S. merchandiseexportsin 1990.
Amongthevariousinvestingcountries,Japanese-
• Europeanbanksextensivelyusedoffshorebanking owned firms accounted for the largest shares of U.S.
centerstolendtoU.S. firms,andplayedamuch affiliates'totalexportsandimports,andforwelloverone-
moreimportantpartinforeign-ownedbanks' half ofthe growth in the U.S. affiliates' overall trade
businesslendingintheUnitedStatesthanprevi- deficitinthe 1980s. MuchoftheJapanese-ownedaffili-
ouslythought. ates'tradedeficitreflectedthemajorshareofinvestment
~
primarilyinwholesaling i.e.,importingforresaleinthe
• Thenewoffshorelendingestimates,combinedwith U.S. marketratherthanmanufacturing.
datafromtheFederalFinancialInstitutions
ExaminationCouncil,showthatJapanesebanks Technology Acquisition and Transfer
didnotdominate foreign-ownedbanks' business
lendingintheUnitedStatesinthe 1980s. The scale of operations of foreign-owned, high-
technology firms grew steadily in the 1980s through
Growth ofTrade in Goods and Services acquisition and expansion ofexisting facilities, but still
remained small in terms of their shares of the total
U.S. affiliates accoimted for amajor share ofthe employment, sales, or assets in U.S. high-technology
U.S. tradedeficitingoodsandservices. Moreover,their industries. Theyareslightlymoreheavilyconcentratedin
trade patterns differed significantly from that ofU.S.- high-technology industries than U.S.-owned firms, and
owned firms. The overall U.S. trade deficit peaked in theirshares differedinspecific industries. Inaudio and
1987,andthengreatlyimprovedafterthe 1985-87depre- videoequipment,plasticsandsyntheticfibers,industrial
ciationofthedollar. However,U.S.affiliates'shareofthe inorganicchemicals,anddrugsandmedicinesindustries,
total U.S. merchandise trade deficit has been steadily foreignfirms~principallyJapanese,German,andBritish
—
rising since 1984, reaching 88 percent ofthe total U.S. firms acquired asignificant share ofthe U.S. market.
trade deficit in 1990. U.S. affiliates were the largest U.S. affiliates tended to concentrate in the same broad,
contributors to the pre-1987 growth in the U.S. trade high-technologyindustrycategoriestheirparentsoccupy
deficitandaccountedforalmostnoneoftheoveralldeficit in their home country, suggesting that they invest in
reducfionbetween 1987 and 1990. sectorsinwhichtheparentsare strongexportersorhave
Several key factors have accounted for the diver- comparative advantage. This tendency also reflects an
gence intrade performance offoreign-owned andU.S.- apparent strategy to maintain or gain market share of
ownedfirmsinthe 1980s: specifichigh-technologygoods,andtoexploitnewtech-
nologiesintheU.S. market.
• Thenumberofforeign-ownedfirmsgrewrapidly, Foreign firms have apparently used FDI to gain
andthese firmstendtodependontheirparentsfor accessto leadingU.S. technologies, suchas biotechnol-
goodstheyuseasintermediate inputsorforresale. ogyandcomputersoftware,andtoincreasetheirshareof
thelargeU.S.market-theworld'slargestsinglemarket
• Since 1986,mostofthegrowthinU.S. affiliate forhigh-technologyproducts. Acquisitionandestablish-
foreigntradewasattributabletotheexpanded mentofU.S. firms,however,were onlytwoofthemany
foreigntradeofexistingU.S. affiliates,whilean waysofachievingthesegoals. Othersincludedmarketing