Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1986.

Lowe, Jeffrey H.

Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1986

MAJORITY-OWNED foreign affiliates of U.S. companies plan to increase capital expenditures 9 percent in 1986, to $39.8 billion, following a planned 5-percent increase in 1985 (table 1 and chart 6).1

1. Capital expenditures estimates are for majority-owned nonbank foreign affiliates of nonbank U.S. parents. (An affiliate is majority owned when the combined ownership of all U.S. parents exceeds 50 percent.) For affiliates other than those engaged in natural resource exploration and development, capital expenditures include all expenditures that are charged to capital accounts and that are made to acquire, add to, or improve property, plant, and equipment. For affiliates engaged in natural resource exploration and development, capital expenditures also include the full amount of exploration and development expenditures, whether capitalized or expensed. Capital expenditures are on a gross basis; sales and other dispositions of fixed assets are not netted against them. They are reported to BEA in current dollars; they are not adjusted for price changes in host countries or for changes in the value of foreign currencies, because the necessary data are unavailable.

The latest spending estimate for 1985, based on the BEA survey taken in December 1985, is significantly lower than the estimate based on the survey taken 6 months earlier, which indicated spending would rise 15 percent (table 2). For 1986, the latest estimate is slightly lower than the earlier estimate, which indicated spending would rise 2 percent. However, the latest estimate of the year-to-year percent increase for 1986 is larger, because it is calculated from the lower 1985 base. The downward adjustment for 1985 continues a recent pattern in which spending estimates made near the end of the year are much lower than those made 6 months earlier. The pattern, established during a period of prolonged sluggish growth abroad, largely results from the cancellation of some projects and the deferral of others into the following year. Although planned 1985 spending was adjusted downward in most industries, nearly one-half of the total adjustment was in petroleum, probably attributable to the continuing oil glut.

The increases currently planned for both 1985 and 1986 probably reflect expectations of continued slow economic growth abroad. Depreciation of the dollar vis-a-vis many foreign currencies, which began early last year, may account for much of the increases. In general, dollar depreciation raises estimates expressed in dollars of a given amount of foreign currency expenditures. However, the precise effect of dollar depreciation on spending estimates cannot be measured because, among other things, the amount of spending actually transacted in dollars, as opposed to the amount transacted in foreign currencies, is not reported to BEA.

By area, affiliates in developed countries plan a 12-percent increase in 1986, to $29.9 billion, following a 5-percent increase in 1985. In contrast, affiliates in developing countries plan a smaller increase in 1986-2 percent, to $9.7 billion--than in 1985. Affiliates in "international'--those that have operations spanning more than one country and that are engaged in petroleum shipping, other water transportation, or operating oil and gas drilling equipment that is moved from country to country during the year--plan a steep 40-percent drop in spending, to $0.3 billion, following a 21-percent increase.

Petroleum

Petroleum affiliates plan to increase spending 5 percent, to $15.7 billion, following a similar increase in 1985. Weak petroleum markets, restricted cash flow, and the heavy debt assumed by several U.S. parent companies involved in mergers have dampened spending, particularly for exploration and development. Because the data were collected in a survey conducted in December, they do not reflect the sharp drop in oil prices that occurred in January and February; when the lower prices are fully factored into affiliates' spending plans, 1986 spending may be revised down substantially.

In developed countries, affiliates plan to increase spending 10 percent, to $10.6 billion, following a 4-percent increase in 1985 (tables 3-5). Canadian affiliates plan an 8-percent increase, to $3.4 billion, after an 18-percent increase. New tax, royalty, and pricing policies of the Canadian Government may be encouraging spending. The 1986 increase would have been larger except for the sale of a major affiliate's assets to local purchasers late last year. In the North Sea area, British affiliates plan to step up spending 13 percent, to $3.6 billion, following a 4-percent increase; the 1986 increase may reflect oilfield and gasfield development deferred from last year. Norwegian affiliates plan a 19-percent increase, to $1.3 billion, following a sharp drop in 1985, when major pipeline and gas compression facilities were completed. A sharp decline in 1986 spending in the Netherlands reflects completion of a refinery expansion.

In developing countries, affiliates plan a 1-percent decrease in spending, to $4.9 billion, following an 8-percent increase in 1985. The largest decrease, in Colombia, partly reflects the sale of an affiliate's oil-producing properties to a foreign company. Other sizable decreases are in the Middle East, Thailand, and China. Partly offsetting increases are planned in Indonesia and in Trinidad-Tobago; in both cases, spending is for development of offshore energy resources.

Affiliates in "international' plan to cut spending 46 percent, to $0.2 billion, after a 26-percent increase in 1985. Despite the 1985 increase, spending by these affiliates has been low in recent years, mainly reflecting an oversupply of mobile offshore drilling rigs.

Manufacturing

Manufacturing affiliates plan to increase spending 14 percent, to $17.3 billion, in 1986, following a 9-percent increase. Large increases--31 percent --are expected in transportation equipment in both years, following a slump in spending in 1982-84. The increases partly reflect intensified worldwide competition among auto manufacturers, which has led to investment in more efficient and technologically advanced equipment, in addition to capacity expansion. Strong demand for autos ans trucks in North America has also contributed to the increases. Affiliates in nonelectrical machinery and in chemicals plan large increases in 1986 as well--25 and 22 percent, respectively; however, the increases partly reflect deferrals of projects from last year. In contrast, a 21-percent decrease is planned in primary and fabricated metals, following a smaller decrease in 1985. Both decreases reflect worldwide oversupply and resulting depressed prices. Affiliates in electrical machinery plan small decreases in both years; those in food and in "other' manufacturing plan little change in spending this year after increases in 1985.

Spending plans in manufacturing industries for 1986 may be revised up if the recent steep decline in oil prices leads to better-than-expected economic growth abroad. In particular, the price decline may have a positive effect on chemical affiliates, because petroleum feedstocks represent a significant portion of their production costs.

In developed countries, where spending increases are widespread, affiliates are planning a 15-percent increase, to $14.3 billion, following a 9-percent increase in 1985. Canadian affiliates plan to increase spending 10 percent, to $3.7 billion, after a 24-percent increase. By far the largest increase is in transportation equipment, for ongoing capacity expansion and integration of parts manufacturing and assembly operations. The increase reflects strong demand for autos and trucks in the North American market. Chemical affiliates also plan a sizable increase, and affiliates in primary and fabricated metals plan a sharp decrease.

In Europe, affiliates plan an 18-percent increase, to $9.2 billion, following a much smaller increase in 1985. A strong increase--23 percent, to $2.9 billion--is planned by affiliates in Germany. The increase is concentrated in nonelectrical machinery, for production of a new generation of computer equipment, and in transportation equipment, for introduction of a new auto model. In the United Kingdom, affiliates plan to increase spending 14 percent, to $2.6 billion, doubling last year's increase. The 1986 increase is centered in nonelectrical machinery.

In developing countries, affiliates plan to increase spending 9 percent, to $3.1 billion, after a 7-percent increase. In both years, the strongest increases are in Mexico, mainly in transportation equipment, and reflect increased production for the U.S. market. A large 1986 increase is also planned by Brazilian affiliates. The increase is widespread by industry, and probably reflects a general improvement in economic conditions.

Other industries

Mining affiliates plan a 7-percent spending increase, to $0.7 billion, following virtually no change last year. Most of the increase is in Australia, for construction of a bauxite smelter, and in Chile, for copper mining operations. Partly offsetting is a decrease in Colombia, where a mining affiliate is nearing completion of a coal transportation system.

Trade affiliates plan an 8-percent increase, to $3.8 billion, following a 1-percent decline. The increase is spread among several European countries, Canada, and Japan, and probably reflects deferrals from last year.

Spending by affiliates in finance (except banking), insurance, and real estate is expected to rise 18 percent in 1986, to $0.3 billion, following a similar increase in 1985; in both years, the increase is concentrated in the United Kingdom.

Affiliates in "other industries'--agriculture, construction, public utilities, and other services--plan a small increase in spending, to $2.1 billion, following a moderate decline in 1985. Much of the increase is in Canada for modernization by a major utility.

Table: 1.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies, 1981-1986

Table: 2.--Revisions to Capital Expenditures Estimates, 1985-86

Table: CHART 6 Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies

Table: 3.--Capital Expenditures by Majority--Owned Foreign Affiliates of U.S. Companies in 1984

Table: 4.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1985

Table: 5.--Capital Expenditures by Majority-Owned Foreign Affiliates of U.S. Companies in 1986