U.S. multinational companies: operations in 1986.

Whichard, Obie G.

U.S. Multinational Companies: Operations in 1986

MEASURES of the operations of U.S. multinational companies (MNC's) diverged in 1986: Assets increased, sales were virtually unchanged, and employment and U.S. merchandise exports and imports associated with U.S. MNC's declined. Measures that were denominated in monetary units tended to be boosted by the depreciation of the U.S. dollar against foreign currencies, but both the monetary and employment measures were depressed by the effects of a sharp drop in petroleum prices and by the sale of a large minority-owned affiliate. The net effect of these developments on the various measures of MNC operations was mixed.

The first part of this article presents these and other highlights of U.S. MNC operations in 1986.(1) The second part presents a detailed discussion of sales of services by MNC's, updating a series introduced last year.

(1) The estimates presented in this article cover nonbank U.S. parent companies and their nonbank foreign affiliates. A U.S. parent is a U.S. person that owns or controls, directly or indirectly, 10 percent or more of the voting securities of an incorporated foreign business enterprise or that owns or controls an equivalent interest in an unincorporated foreign business enterprise. A foreign affiliate is a foreign business enterprise so owned or controlled. A U.S. MNC consists of a U.S. parent company and its foreign affiliates.

In the estimates, sales and total assets of MNC's are shown on an aggregated basis -- that is, parent and affiliate data have been summed. The sums contain duplication because of intercompany positions and transactions between parents and affiliates and among affiliates of the same parent. Data needed to derive consolidated sales and assets of MNC's are not available.

The estimates are on a fiscal year basis. An individual parent's or affiliate's 1986 fiscal year is its financial reporting year that had an ending date in calendar year 1986.

The estimates were obtained by expanding, to universe totals, sample data collected in BEA's annual survey of U.S. direct investment abroad. The sample data counted for a large share of the universe estimates of items covered by the survey. Based on employment, for example, sample data accounted for 89 percent of the universe estimate of U.S. parents and 81 percent of the universe estimate for foreign affiliates in 1986.

Highlights of Operations in 1986

Asset

Total worldwide assets of U.S. MNC's increased 10 percent, to $4,746 billion (table 1). Assets of the U.S. parent companies increased 10 percent, to $3,814 billion, and assets of their foreign affiliates increased 12 percent, to $932 billion. For both parents and affiliates, the largest increases were in finance (except banking), insurance, and real estate (FIRE) and in manufacturing. Decreases in petroleum were partly offsetting.

A major factor contributing to the increase in assets of affiliates was the decline in the value of the U.S. dollar against major foreign currencies. During 1986, the dollar depreciated 15 percent against a trade-weighted average of the currencies of 10 industrial countries and 5 percent against an average of the currencies of 22 OECD countries; in some individual countries with sizable U.S. direct investments, the dollar depreciation was greater than indicated by these trade-weighted averages. As a result of dollar depreciation, the dollar value of affiliate assets denominated in foreign currencies rose. Because U.S. parent assets include the value of their investment in foreign affiliates, the increase in affiliate assets also raised the value of parent assets, although by a smaller percentage.

To some extent, the geographic pattern of increases in affiliate assets followed the pattern of changes in exchange rates. The increases were concentrated in developed countries, particularly in Europe and Japan. Assets of affiliates in developing countries declined.

Assets of parents in FIRE increased 27 percent, to $1,295 billion. The increase was financed by increases in both liabilities and owners' equity. Increased net income, which resulted from a rise in securities prices and trading volumes, was largely reinvested and was coupled with borrowed funds to support expanded operations. Also, assets were boosted by a reclassification of an affiliate from petroleum wholesale trade to finance (except banking), as a result of a change in the composition of its sales.(2)

(2) Industry codes are assigned to the U.S. parent and each of its foreign affiliates separately. A parent or affiliate is first classified in the major industry group that accounts for the largest percentage of its sales and then in the two- and three-digit industries in which its sales were largest. In a benchmark year, this procedure is uniformly applied. Between benchmark surveys, an entity's classification is changed only if there is a significant or lasting change in the composition of its sales, so that the classification does not shift back and forth due to small or transient fluctuations. The reclassification of the U.S. parent company referred to here reflected an apparently lasting change in the mix of its activities. For further discussion of industry classification procedures, see U.S. Direct Investment Abroad: 1982 Benchmark Survey Data, pages 9-10.

Assets of parents in manufacturing increased 10 percent, to $1,409 billion. Within manufacturing, increases were concentrated in transportation equipment and in electrical machinery.

Assets of parents in petroleum declined 22 percent, to $423 billion. The decline occurred for several reasons, the most important of which was the reclassification mentioned earlier. The decline also reflected selloffs of unprofitable assets or lines of business not related to petroleum. Finally, a sharp drop in petroleum prices caused companies to write down the assets to bring them into line with the lower market values.

Assets of affiliates in manufacturing increased 17 percent, to $450 billion. Within manufacturing, increases were widespread; the largest increase, 44 percent, was in electrical machinery.

Assets of affiliates in FIRE increased 15 percent, to $238 billion. Over one-third of the increase was in the United Kingdom, where assets rose in response to the deregulation of the London Stock Exchange in October 1986. The deregulation resulted in an expansion of British financial markets and increased participation in these markets by U.S.- and other foreign-owned (non-British) firms.

Assets of affiliates in services increased 24 percent, to $26 billion. The increase was centered in Europe. Over 40 percent of the increase in that area was accounted for by affiliates in computer and data processing services.

Assets of affiliates in petroleum declined 4 percent, to $175 billion. The decline, which was spread among several countries, largely reflected the previously mentioned drop in oil prices. The largest decline was in the United Kingdom and was accounted for mainly by affiliates producing crude oil in the North Sea area. In that area, the decline was partly due to a restructuring of intercompany accounts within a MNC: A parent company repaid a large loan from its affiliate; the repayment, in turn, enabled the affiliate to pay a large dividend to the parent, thus drawing down the affiliate's assets.

Sales

Worldwide sales by U.S. MNC's were virtually unchanged, at $3,475 billion. Sales by U.S. parents declined 2 percent, to $2,544 billion. Sales by foreign affiliates increased 4 percent, to $931 billion.

The decline in sales by U.S. parents was more than accounted for by parents in petroleum; their sales declined 34 percent, to $289 billion. Declines also were recorded in several other industries. Sales by parents in FIRE increased 29 percent, to $338 billion, due to strong growth in revenues of finance and insurance companies.

The increase in sales by affiliates was spread among several nonpetroleum industries and was concentrated in developed countries. Much of the increase appears attributable to the depreciation of the U.S. dollar against foreign currencies. In contrast, sales by affiliates in petroleum declined substantially as a result of the drop in oil prices.

U.S. Merchandise trade

U.S. merchandise exports and imports associated with U.S. MNC's declined in 1986 (table 2). U.S. merchandise exports associated with MNC's -- the sum of goods shipped to affiliates by all U.S. persons and goods shipped to unaffiliated foreigners by U.S. parents -- declined 1 percent, to $171 billion. U.S. merchandise imports associated with MNC's -- the sum of goods shipped by affiliates to all U.S. persons and goods shipped by unaffiliated foreigners to U.S. parents -- declined 4 percent, to $147 billion.

Exports associated with MNC's accounted for nearly 80 percent of total U.S. merchandise exports in 1986. The decline in MNC-associated exports was in exports to unaffiliated foreigners. It was more than accounted for by parents in petroleum and in wholesaling of nondurable goods.

Imports associated with MNC's accounted for 40 percent of total U.S. imports in 1986. The decline in MNC-associated imports was more than accounted for by MNC's with U.S. parents in petroleum. In that industry, U.S. merchandise imports from affiliates and from unaffiliated foreigners each declined by about 40 percent. Although trade data were not reported by product in the annual survey, the declines probably largely represented a reduction in the dollar value of imported petroleum. Total U.S. petroleum imports (including those by companies that were not U.S. parents) declined 33 percent in 1986.

Employment

Employment by U.S. MNC's declined 2 percent, to 24.1 million. Employment by U.S. parents declined 1 percent, to 17.9 million (tables 3-5). In contrast, total private employment in the United States rose in 1986. Employment by foreign affiliates declined 2 percent, to 6.3 million (tables 6-9).

Employment by parents in petroleum, manufacturing, wholesale trade, and "other industries" declined. These declines were partly offset by increases in employment by parents in FIRE and services. The decline in U.S. parent employment partly reflected a concentration in industries, such as manufacturing and petroleum, in which total U.S. employment declined.

The decline in employment by foreign affiliates were more than, accounted for by a U.S. automaker's sale of its minority interest in a large French automaker. In the absence of this sale, employment by affiliates would have increased slightly.

By industry, employment declined in petroleum, manufacturing, and "other industries" and increased in wholesale trade, FIRE, and services.

The largest increases in employment were recorded for affiliates in Australia, Germany, the United Kingdom, Japan, and Brazil. The largest declines were in France, Mexico, South Africa, and Saudi Arabia.

Employment by majority-owned foreign affiliates (MOFA's) -- those in which U.S. parents held more than a 50-percent interest -- declined 2 percent, to 4.7 million (tables 10-12). The pattern of changes in employment by MOFA's by industry and by country was similar to that of all affiliates (discussed earlier), except that it was not affected by the disinvestment in the minority-owned French automaker.

In 1986, MOFA's accounted for 75 percent of the employment by all affiliates. Among countries in which affiliate employment was sizable, the MOFA shares were higher than average in Canada (93 percent), Brazil (92 percent), Germany (84 percent), and the United Kingdom (83 percent). The MOFA shares were lower than average in Japan (31 percent), South Korea (34 percent), and India (35 percent). The countries with lower-than-average shares restricted, or had previously restricted, majority ownership by foreigners. In addition, in some cases, factors other than government policy may have influenced the decision to have only a minority interest. For example, interests in several large minority-owned automotive affiliates may have been acquired more to transfer technology and facilitate trade than to gain control.

Sales of Services

Beginning with 1982, BEA's benchmark and annual surveys of U.S. direct investment abroad have requested a disaggregation of sales (or gross operating revenues) of U.S. parents and MOFA's into goods and services. Results for 1982-84 were presented in the SURVEY OF CURRENT BUSINESS early last year.(3) This part of the article brings the services up to date with the revision of estimates for 1984 and the addition of estimates for 1985 and 1986.

(3) See "U.S. Sales of Services to Foreigners," SURVEY 67 (January 1987): 22-41. That article contains a more detailed discussion of methodology, definitions, and results than is provided here.

For purposes of distributing sales between goods and services, "services" are defined as the activities characteristic of a particular group of industries, consisting of the "services" division of the Standard Industrial Classification; petroleum services; FIRE; agricultural services; metal mining services; and transportation, communication, and public utilities. A parent or affiliate need not be classified in one of these industries in order to have sales of services; in fact, a significant portion of sales of services was accounted for by entities in manufacturing and other goods-producing industries that sold services as a secondary activity.

The remainder of this part discusses the composition of, and the growth in, sales of services by U.S. MNC's in 1986.

Composition of sales

Of total sales of U.S. parents in 1986 of $2,544 billion, $1,834 billion, or 72 percent, were goods, and $710 billion, or 28 percent, were services (table 13).(4,5) Of total sales by MOFA's of $720 billion, $638 billion, or 89 percent, were goods, and $83 billion, or 11 percent, were services.

(4) Most of the sales categories shown in table 13 are disaggregated by industry of parent or affiliate, or by country of affiliate, in the publications mentioned in the accompanying box.

(5) In examining U.S. parent sales of goods in table 13, it should be noted that parent sales of goods to foreign persons (which are not separately available) and U.S. parent merchandise exports (shown in table 2) are related, but not conceptually identical. The major difference between them is that, whereas sales are recorded on the basis of the location of the person to whom the sales are charged, merchandise exports are recorded on the basis of the location of the person to whom the goods are shipped. Although the two locations usually are the same, goods are sometimes charged to a person in one country but shipped to a person in another. The time of recording a transaction may also differ between the two measures, because goods may not be charged in the same period as they are shipped. Further differences may arise because of differences in the sources companies use to compile the data: sales usually are compiled on the basis of accounting records, whereas merchandise exports usually are compiled on the basis of export declarations or other shipping documents.

For both parents and MOFA's, most sales and services were to customers in the country of the entity making the sale (that is, local), reflecting the need, in many instances, to deliver services through an entity located near the customer. Of U.S. parent sales, 98 percent were to U.S. persons. Of MOFA sales, nearly 75 percent were local, 14 percent were to persons in other foreign countries, and 12 percent were to U.S. persons.

Most sales of services by MNC's to foreign (non-U.S. persons were to unaffiliated persons. For U.S. parents, sales to unaffiliated foreigners -- that is, to foreign persons other than a parent's own affiliates -- accounted for three-fourths of sales of services to all foreigners. For MOFA's, the share of sales to foreigners that were to unaffiliated persons -- that is, to foreign persons besides other affiliates of the same parent -- was over 85 percent. Even though total sales of services by parents were several times larger than those by affiliates, affiliates had much larger sales to unaffiliated foreigners -- $63 billion, compared to $13 billion.

Sales by U.S. parents to unaffiliated foreigners were concentrated in a few industries in which cross-border transactions are a common means of delivering services to foreign customers. About one-third of the sales were by parents in transportation, communication, and public utilities. In that industry group, the sales largely consisted of two types of transactions: U.S. telecommunications carriers' receipts from foreign carriers for their share of revenues from transmitting messages originating abroad to U.S. destinations, and U.S. airlines' ticket sales to foreigners. (The ticket sales, although attributable to U.S. parents, may have been made largely through foreign ticket offices of the parents. In BEA's surveys, such an office is treated as an extension of the parent, rather than as a foreign affiliate, if it services only the parent's own operations.)

Growth in sales

U.S. parents. -- The previously mentioned 2-percent decline in sales by U.S. parents in 1986 was the net result of 7-percent decline in sales of goods and a 14-percent increase in sales and services. The share of services in total sales rose from 24 percent to 28 percent. It was 23 percent in 1982 and 1983, and 22 percent in 1984. The decline in the services share in 1984 occurred because major U.S. telephone company divested several regional operating companies that, at that time, did not have direct investment abroad (and thus were not included in the 1984 estimates). Some of these companies, although not major direct investors, have since established or acquired foreign affiliates.

The increase in sales of services was more than accounted for by sales to U.S. persons, which increased 14 percent. Sales of services by U.S. parents to foreign persons declined 5 percent, reflecting a decline in sales to unaffiliated foreigners.

The increase in sales by U.S. parents to U.S. persons were concentrated in FIRE, which accounted for over 70 percent of the total increase. Some of the increase probably was in the form of investment income.(6) In transportation, communication, and public utilities, there was a sizable increase in sales to U.S. persons, but sales to unaffiliated foreigners declined substantially.

(6) In the annual survey, investment income is treated as a service if it is included in sales or gross operating revenues. In finance and insurance, this income is included in gross operating revenues because it is generated by a primary activity of the company. In most other industries, however, investment income is considered an incidental revenue source and is included in the income statement in a separate "other income" category. In order to reflect more accurately services performed, BEA plans to introduce a three-way breakdown of revenues of parents and MOFA's -- into goods, services, and investment income -- beginning with the next benchmark survey of U.S. direct investment abroad, which will cover 1989. (Such a breakdown was introduced in surveys of foreign direct investment in the United States beginning with the benchmark survey that covers 1987.)

MOFA's. -- Sales by MOFA's increased 2 percent, to $720 billion. As in previous years, sales of services increased faster than sales of goods -- 19 percent, to $83 billion, compared to 1 percent, to $638 billion, for goods. Thus, the share of total sales accounted for by services increased -- to 11 percent, compared with 10 percent in 1985 and 9 percent in each of the years 1982-84.

The increase in MOFA sales of services was almost entirely in sales to foreign persons, which increased 22 percent, to $73 billion. Sales to other foreign affiliates (of the same U.S. parent) increased 15 percent, and sales to unaffiliated foreigners increased 23 percent. Sales to U.S. persons increased 1 percent, to $10 billion.

The increase in sales to foreign persons was spread among affiliates in a number of industries. MOFA's classified in office and computing machine manufacturing and in computer and data processing services had particularly large increases. Most of the services sold by MOFA's in both industries were probably computer and data processing services. Sizable increases were also recorded for MOFA's in wholesale trade, insurance, and finance (except banking).

Sales of services to foreigners by MOFA's in petroleum declined significantly. Part of the decline was due to the drop in oil prices, which led to cutbacks in exploration and development activity and reduced the demand for oil and gas field services.

TABLE: Table 1. -- Total Assets, Sales, and Employment of Nonbank U.S. MNC's. U.S. Parents, and Foreign Affiliates, 1977 and 1982-86

 TABLE: MNC's
 TABLE: worldwide Parents Affiliates

TABLE: Table 2. -- U.S. Merchandise Exports and Imports Associated With Nonbank U.S. MNC's, 1985 and 1986 (Millions of dollars)

TABLE: 1985 1986

TABLE: Table 3. -- Employment of Nonbank U.S. MNC's, U.S. Parents, and Foreign Affiliates, by Industry of U.S. Parent, 1984-86

 TABLE: Number of employees (thousands)
 TABLE: MNC's worldwide Parents Affiliates
 TABLE: 1984 1985 1986 1984 1985 1986 1984 1985 1986
 TABLE: Percent change Affiliates
 TABLE: as a
 TABLE: MNC's Parents Affiliates percent- TABLE: wo
rldwide age of
 TABLE: 1985 1986 1985 1986 1985 1986 MNC's
 TABLE: world-
 TABLE: wide
 TABLE: 1986

TABLE: Table 4. -- Selected Data for Nonbank U.S. Parents, by Industry of U.S. Parent, 1985

 TABLE: Millions of dollars
 TABLE: Sales Expendi-
 TABLE: tures for
 TABLE: Total Total Owners' Net property,
 TABLE: assets liabilities equity Total Goods income plant, and
 TABLE: equipment
 TABLE: Number of
 TABLE: Employee employeess
 TABLE: compen- (thousands)
 TABLE: sation

TABLE: Table 5. -- Selected Data for Nonbank U.S. Parents, by Industry of U.S. Parent, 1986

 TABLE: Millions of dollars
 TABLE: Sales
 TABLE: Total Total Owners Net
 TABLE: assets liabilities equity Total Goods Service income
 TABLE: Number
 TABLE: Expendi- of
 TABLE: tures for Employee employ-
 TABLE: property, compen- ees
 TABLE: plant, and sation (thou-
 TABLE: equipment sands

TABLE: Table 6. -- Distribution of Employment of Nonbank Foreign Affiliates, by Industry of U.S. Parent and by Industry of Affiliate, 1986

(Percent)

 TABLE: By By
 TABLE: industry of industry of
 TABLE: parent affiliate

TABLE: Table 7. -- Selected Data for Nonbank Foreign Affiliates, Major Industry and Area of Affiliate, 1985 and 1986

 TABLE: 1985
 TABLE: Million of dollars
 TABLE: U.S. U.S. Number of
 TABLE: Total Net exports imports Employee employees
 TABLE: assets Sales in shipped shipped compen- (thousands)
 TABLE: come to by sation
 TABLE: affiliates affiliates
 TABLE: 1986
 TABLE: Millions of dollars
 TABLE: U.S. U.S.
 TABLE: Total Net exports imports Employee
 TABLE: assets Sales in shipped shipped compen-
 TABLE: come to by sation
 TABLE: affiliates affiliates
 TABLE: 1985-86
 TABLE: percent
 TABLE: change
 TABLE: Number of in
 TABLE: Employee employees number
 TABLE: compen- (thousands) of
 TABLE: sation employ-
 TABLE: ees

TABLE: Table 8. -- Employment of Nonbank Foreign Affiliates, Country by Industry of Affiliate, 1985 (Thousands)

 TABLE: Manufacturing
 TABLE: All Petro Food Chemi- Primary TABLE: in
dustries leum Total and cals and and
 TABLE: kindred allied fabri-
 TABLE: products products cated
 TABLE: metals
 TABLE: Manufacturing
 TABLE: Electric
 TABLE: Machin- and Trans-
 TABLE: ery, elec- portation Other
 TABLE: except tronic equip- manufac-
 TABLE: Finance
 TABLE: Whole- (except
 TABLE: sale banking), Other
 TABLE: trade insur- Services indus-
 TABLE: ance, and tries
 TABLE: real
 TABLE: estate

TABLE: Table 9. -- Employment of Nonbank Foreign Affiliates, Country by Industry of Affiliate, 1986

(Thousands)

 TABLE: Manufacturing
 TABLE: Primary
 TABLE: All Petro Food Chemi and
 TABLE: industries leum Total and cals and fabr-
 TABLE: kindred allied cated
 TABLE: products products metals
 TABLE: Electric Finance
 TABLE: Machin- and Trans- Whole (except
 TABLE: ery, elec- portation Other sale banking),
 TABLE: except tronic equip- manufac- trade Insur-
 TABLE: elec- equip- ment turing ance, and
 TABLE: trical ment real
 TABLE: estate
 TABLE: Other
 TABLE: Services indus
 TABLE: tries

TABLE: Table 10. -- Employment of All, Majority-Owned, and Minority-Owned Nonbank Foreign Affiliates, by Area, 1986

 TABLE: Number of Employees Percent
 TABLE: (thousands) ac-
 TABLE: counted
 TABLE: Major- Mi- for by
 TABLE: All ity- nority majori-
 TABLE: affili- owned owned ty-
 TABLE: ates affili- affili- owned
 TABLE: ates ates affili-
 TABLE: ates

TABLE: Table 11. -- Selected Data for Majority-Owned Nonbank Foreign Affiliates, Major Industry and Area of Affiliate 1985

 TABLE: Million of dollars
 TABLE: Sales
 TABLE: Total Total Owners'
 TABLE: assets liabilities equity Total Good Services
 TABLE: Millions of dollars
 TABLE: Number
 TABLE: Net U.S. U.S. of
 TABLE: income exports exports Employee employee
 TABLE: shipped shipped compen- (thou-
 TABLE: to by sation sands)
 TABLE: MOFA's MOFA's

TABLE: Table 12. -- Selected Data for Majority-Owned Nonbank Foreign Affiliates, Major Industry and Area of Affiliate, 1986

 TABLE: Millions of dollars
 TABLE: Sales
 TABLE: Total Total Owners'
 TABLE: assets liabilities equity Total Good Services
 TABLE: Millions of dollars
 TABLE: Number
 TABLE: U.S. U.S. of
 TABLE: Net exports exports Employee employees
 TABLE: income shipped shipped compen- (thou-
 TABLE: to by sation sands)
 TABLE: MOFA's MOFA's

TABLE: Table 13. -- Sales of Goods and Services by Nonbank U.S. Parents and Foreign Affiliates, 1984-86

 TABLE: Millions of dollars
 TABLE: 1984 1985
 TABLE: Total Goods Services Total Goods Services
 TABLE: Millions of dollars Services as a
 TABLE: 1986 percentage of total
 TABLE: Total Goods Services 1984 1985 1986

TABLE: Table 1. -- Manufacturing and Trade Inventories in Constant Dollars, Seasonally Adjusted, End of Period

(Billions of 1982 dollars)

 TABLE: 1987 1988 1987 1988
 TABLE: IV I Nov. Dec. Jan.(r) Feb.(r) Mar.(r) Apr.(p)

TABLE: Table 2. -- Manufacturing and Trade Sales in Constant Dollars, Seasonally Adjusted Total at Monthly Rate

(Billions of 1982 dollars)

 TABLE: 1987 1988 1987 1988
 TABLE: IV I Nov. Dec. Jan.(r) Feb.(r) Mar.(r) Apr.(p) TABLE 3.
-- Constant-Dollar Inventory-Sales Ratios for

Manufacturing and Trade, Seasonally Adjusted

(Ratio, based on 1982 dollars)

 TABLE: 1987 1988 1987 1988
 TABLE: IV I Nov. Dec. Jan.(r) Feb.(r) Mar.(r) Apr.(p)

TABLE: Table 4. -- Fixed-Weighted Constant-Dollar Inventory-Sales Ratios for Manufacturing and Trade, Seasonally Adjusted

(Ratio, based on 1982 dollars)

 TABLE: 1986 1987 1988
 TABLE: IV I II III IV I

TABLE: Table 5. -- Manufacturing Inventories by Stage of Fabrication in Constant Dollars, Seasonally Adjusted, End of Period

(Billions of 1982 dollars)

 TABLE: 1987 1988 1987 1988
 TABLE: IV I Nov. Dec. Jan. Feb. Mar. Apr.