U.S. affiliates of foreign companies: operations in 1984.

Shea, Michael A.

U.S. Affiliates of Foreign Companies: Operations in 1984

THIS article presents estimates of the operations of nonbank U.S. affiliates of foreign companies in 1984.1 The estimates were obtained by expanding, to universe totals, sample data collected in BEA's annual survey of foreign direct investment in the United States.

1. A U.S. affiliate is a U.S. business enterprise in which a single foreign person owns or controls, directly or indirectly, 10 percent or more of the voting securities if an incorporated business enterprise or an equivalent interest if an unincorporated business enterprise. Estimates presented in this article cover nonbank U.S. affiliates; data for bank affiliates are published by the Federal Reserve System in the Federal Reserve Bulletin.

The estimates in this article are on a fiscal-year basis. Thus, for 1984, an individual affiliate's fiscal year is its financial reporting year that ended in calendar year 1984.

Highlights of the estimates for 1984 include:

U.S. affiliates had total assets of $596 billion, up 12 percent from 1983. Since 1980, total assets have grown at an average annual rate of 20 percent, thus nearly doubling. By industry of affiliate, assets were largest, at $153 billion, in manufacturing; by country of ultimate beneficial owner (UBO), they were largest, at $105 billion, for affiliates with Canadian UBO's.2

2. 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 i the affiliate's ownership chain. Unlike the foreign parent, the UBO of an affiliate may be located in the United States.

Sales by U.S. affiliates were $596 billion, up 11 percent from 1983. By industry of affiliate, they were largest, at $239 billion, in wholesale trade. They were higher in 1984 than in 1983 in every major industry, except petroleum and finance (except banking). By country of UBO, sales were largest, at $103 billion, for affiliates with British UBO's.

The net income of U.S. affiliates increased 68 percent, to $9 billion. The increase, which was particularly sharp for manufacturing affiliates, mostly reflected much stronger U.S. economic growth in 1984 than in 1983.

U.S. affiliates employed 2,715,000 workers, up 7 percent from 1983. Employee compensation increased 9 percent, to $73 billion.

U.S. affiliates owned 13 million acres of U.S. land, and the gross book value of their property, plant, and equipment was $268 billion. U.S. exports shipped by affiliates were $56 billion, and U.S. imports shipped to affiliates were $100 billion.

Employment

The remainder of this article focuses on changes in affiliate employment, because employment is not directly affected by inflation and thus tends to correspond more closely than other available measures to changes in real economic activity. The accompanying tables, however, present other key items on U.S. affiliates' operations as well.

U.S. affiliates employed 2,715,000 workers in 1984, and the changes in affiliate employment from 1983 to 1984 mirrored changes in general U.S. economic conditions. In 1984, affiliate employment grew 7 percent, or by 169,000, after increasing 4 percent in 1983 (table 1). All-U.S. employment grew 6 percent in 1984, after increasing 1 percent. Although real U.S. GNP growth was stronger in 1984 than in 1983, several sectors, such as petroleum and agriculture, did not participate fully in the recovery. Similarly, affiliate employment did not increase in every industry.

By source of change

The sharper increase in affiliate employment in 1984 than in 1983 was largely attributable to a decline in the number of employees laid off because of cutbacks in existing operations and to an increase in the number of employees added as a result of new investments (table 2).(3)

3. For many affiliates, it was impossible to disaggregate the change in an individual affiliate's employment by source of change; therefore, in table 2, all of the change for an individual affiliate is shown on a single line, even if the change was caused by more than one of the factors shown. See the note to table 2 for a more detailed description of the procedures used to derive the estimates.

New investments are (1) acquisitions of a 10-percent-or-more ownership interest in existing U.S. business enterprises, either directly by foreign direct investors or indirectly through the investors' existing U.S. affiliates, or (2) the establishment of new U.S. affiliates by foreign direct investors.

Data on increases in employment associated with new investments are also available from another BEA survey covering U.S. business enterprises newly acquired or established by foreign direct investors. Data from that survey were not used in table 2 because of differences in methodology, timing, and coverage. Revised results of the 1984 survey of new acquisitions and establishments were published in Michael A. Shea, "U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1985,' SURVEY 66 (May 1986): 47-54.

For the second consecutive year, employees laid off because of cutbacks in the operations of existing U.S. affiliates decreased sharply--by 27,000--to 57,000 in 1984 (table 2, line 5). The decrease largely reflected the continued improvement of economic conditions. For individual affiliates, declines in employment usually reflected slowdowns in operations because of slack markets in their particular industries or productivity gains from shifts to more capital-intensive methods of production.4

4. Line 5 of table 2 includes declines in employment that occurred because an affiliate discontinued a line of business, if the affiliate did not sell that business to someone else. Declines in employment that occurred because an affiliate sold a line of business to someone, or because the affiliate itself was sold or liquidated, are included in line 4.

Employees added as a result of new investments increased 25,000, to 182,000 (table 2, line 2).5 Although 1983 was the first full year of recovery from the 1981-82 recession in the United States, initial uncertainty about the strength of the recovery may have caused some investors to delay their new investments until 1984. New investment activity also picked up in 1984 because the recovery had spread to other countries, providing foreign investors with funds for acquisitions and establishments in the United States.

5. The numbers added in both 1983 and 1984 were probably significantly smaller than in any year from 1979 to 1981, the first years for which data on new investments are available. Although not strictly comparable with estimates drawn from the annual survey of affiliate operations (see footnote 3), data drawn from BEA's survey of U.S. business enterprises newly acquired or established by foreign direct investors indicate that, during 1979-81, at least 290,000 employees a year were added as a result of acquisitions and establishments.

Employment added through expansions in the operations of existing affiliates occurred more quickly, resulting in significant employment growth in 1983. The number of employees added through expansion of existing operations in 1984 increased by only 8,000, to 84,000 (table 2, line 3).

The number of employees lost because of sales or liquidations of businesses declined 6,000, to 65,000 (table 2, line 4). Several of the affiliates sold or liquidated were in industries, such as petroleum and insurance, in which affiliates' operations continued to be unprofitable.

By industry

Nearly all of the 1984 increase in employment was accounted for by affiliates in four industries: Manufacturing (up 56,000), "other industries' (up 52,000), retail trade (up 35,000), and wholesale trade (up 23,000). Employment in insurance and real estate declined.

Within manufacturing, employment increased in every major subindustry. Increases were particularly large-- 18,000 and 17,000, respectively--in metals and machinery. A joint venture involving U.S. and Japanese steel companies account for two-thirds of the increase in metals. Expansion of existing operations and acquisitions of new affiliates by several electric and electronic equipment affiliates accounted for most of the increase in machinery. About one-third of the increase in machinery was due to the acquisition of another U.S. business by an affiliate of a Canadian electrical machinery company.

Nearly all of the increase in "other industries' was accounted for by a 34-percent increase in services. The increase reflected the growing importance of services in the U.S. economy and in direct investment. Business services (up 25,000) accounted for more than one-half of the increase, and "other services' (up 18,000) accounted for a large share of the remainder.6 Smaller increases occurred in engineering, architectural, and surveying services; hotels; and motion pictures. One-half of the increase in business services was accounted for by a Swiss-owned employment agency that expanded its existing operations. In "other services,' acquisition of building services companies by a foreign direct investor in Bermuda and of a health services company by a foreign direct investor in Germany more than accounted for the increase.

6. The data at the level of detail cited are published in Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies, Preliminary 1984 Estimates (see box). "Other services' includes accounting, automotive leasing, health, legal, and educational services.

Three acquisitions of U.S. companies by existing U.S. affiliates accounted for nearly all of the increase in retail trade. The acquisition by a German-owned grocery store chain of two other grocery chains accounted for one-third of the increase. Another one-third was accounted for by a Canadian-owned grocery store chain's acquisition of a U.S. drugstore chain. The acquisition by a Netherlands-owned department store chain of another department store chain accounted for one-fourth of the increase.

In 1984, employment was largest in manufacturing, which had 51 percent of the total. Retail trade accounted for 17 percent, and "other industries' and wholesale trade for 11 percent each.

By country

Nearly two-thirds of the increase in employment in 1984 was accounted for by affiliates with UBO's in four countries: Canada (up 32,000), Germany (up 25,000), Japan (up 24,000), and the Netherlands (up 22,000). One-third of the increase in employment of affiliates with Canadian UBO's was due to the above-mentioned acquisition of a drugstore chain. Most of the rest of the increase was by manufacturing affiliates. Within manufacturing, large increases in metals and machinery more than offset declines in chemicals and transportation equipment.

Most of the increase in employment of affiliates with German UBO's was accounted for by acquisitions in retail trade and services. One-half of the increase by affiliates with Japanese UBO's was accounted for by the above-mentioned joint venture in steel. Increases were also large in wholesale trade and transportation.

More than one-half of the increase by affiliates with Netherlands UBO's was in retail trade. Increases were also large in electric and electronic equipment, construction, and chemicals.

Of total affiliate employment in 1984, affiliates with UBO's in the United Kingdom had the largest share--21 percent. Canadian-owned affiliates accounted for 19 percent, German-owned affiliates for 14 percent, and Netherlands-owned affiliates for 9 percent. Japanese-owned affiliates accounted for only 7 percent, despite the fact that they had the largest percentage increases in affiliate employment of any country in 1983 and 1984.

By region and State

By U.S. region, growth in affiliate employment was particularly strong in the Plains (10 percent) and in the Far West and the Great Lakes (9 percent each) (table 3). Growth was also strong in the Southeast (7 percent and the Mideast (6 percent). The Rocky Mountains were the only region to have a decline in affiliate employment (2 percent).

By State, the strongest growth occurred in the District of Columbia (29 percent); the sharpest decline occurred in South Dakota (21 percent). Sizable increases also occurred in Nevada (26 percent) and in Nebraska and Arizona (20 percent each).

Two-thirds of the increase in the District of Columbia was accounted for by the above-mentioned acquisition of a drugstore chain. The drop in South Dakota largely reflected cutbacks in the operations of a Canadian-owned baking company and a British-owned retail trading company. About one-half of the increases in Nevada and Arizona were accounted for by the above-mentioned acquisition of a department store chain. Most of the increase in Nebraska was accounted for by a British-owned glassmaker's acquisition of an industrial machinery company.

In terms of the number of employees added, increases were largest in California (up 23,000) and Pennsylvania (up 18,000). Nearly one-half of the increase in California was accounted for by two affiliates. A Swiss-owned employment agency significantly expanded its California-based operations. A German-owned chemical company increased its employment in California by acquiring four businesses in different industries. Nearly one-fourth of the increase in Pennsylvania was accounted for by the abovementioned acquisitions of two grocery store chains. Sizable increases also occurred in auto manufacturing, business services, and wholesale trade.

In 1984, affiliate employment was largest--10 percent of the total--in California. New York had 8 percent of the employees; Texas, 7 percent; and Pennsylvania, 6 percent.

Technical Note

The estimates were obtained by expanding, to universe totals, sample data collected in BEA's annual survey of foreign direct investment in the United States. Table 4 shows, for employment, the percentage of the 1983 and 1984 universe estimates accounted for by the sample. Some of the difference in coverage occurred because a few affiliates' 1984 annual survey reports were not received by BEA in time to be included in the sample for the preliminary 1984 estimates. When the revised 1984 estimates are published next year, these reports will be included and the percentage of the universe accounted for by the sample will be slightly higher.

Table: 1.--Employment of Nonbank U.S. Affiliates, 1982-84, by Industry of Affiliate and Country of Ultimate Beneficial Owner

Table: 2.--Sources of Change in Affiliate Employment

Table: 3.--Employment of Nonbank U.S. Affiliates, 1982-84, by State

Table: 4.--Employment of Nonbank U.S. Affiliates, 1983-84: Percent of Universe Estimate Accounted for by the Sample, by Industry of Affiliate and Country of Ultimate Beneficial Owner

Table: 5.--Selected Data of Nonbank U.S. Affiliates, 1983, by Industry of Affiliate

Table: 6.--Selected Data of Nonbank U.S. Affiliates, 1984, by Industry of Affiliate

Table: 7.--Selected Data of Nonbank U.S. Affiliates, 1983, by Country and Industry of Ultimate Beneficial Owner

Table: 8.--Selected Data of Nonbank U.S. Affiliates, 1984, by Country and Industry of Ultimate Beneficial Owner

Table: 9.--Employment of Nonbank U.S. Affiliates, 1983, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 10.--Employment of Nonbank U.S. Affiliates, 1984, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 11.--Total Assets of Nonbank U.S. Affiliates, 1983, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 12.--Total Assets of Nonbank U.S. Affiliates, 1984, Industry of Affiliate by Country of Ultimate Beneficial Owner

Table: 13.--Employment and Property, Plant, and Equipment of Nonbank U.S. Affiliates, 1983-84, by State

Table: 14.--Employment of Nonbank U.S. Affiliates, 1983, State by County of Ultimate Beneficial Owner

Table: 15.--Employment of Nonbank U.S. Affiliates, 1984, State by Country of Ultimate Beneficial Owner