Capital expenditures by majority-owned foreign affiliates of U.S. companies, 1984 and 1985 Essay

MAJORITY-OWNED foreign affilates of U.S. companies plan to increasecapital expenditures 9 percent, to $44.0 billion, in 1985, following aplanned 12-percent increase in 1984 (table 1 and chart 5). If theincreases are realized, spending in 1985 will be approximately equal tothe levels in 1980-82.

The planned 1984-85 increases follow relatively flat spending in1981-82 and a decline in 1983. Spending in 1981-82 was constrained bydepressed economic conditions worldwide and high interest rates. The1983 decline–18 percent–was the sharpest since at least 1957, whenthis expenditure series began. The decline reflected, in addition tothe factors that depressed 1981-82 spending, the cumulative effect ofappreciation of the U.S. dollar. The dollar’s sharp appreciationin recent months is not fully reflected in the current estimates for1984-82, because the estimates were prepared earlier.

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Thus, estimatesof spending for 1984-85 may be revised downward in the next survey. Although respondents to the current survey plan to increasespending in both 1984 and 1985, the rate of increase is expected to slowin 1985. The slowing, which is widespread by area and industry,probably reflects concerns about the sustainability of the economicrecovery abroad.

Actual spending for 1983 and spending as now planned for 1984 bothfall short of what was planned earlier. The latest estimate of spendingfor 1983, based on a survey taken in June, has been revised downwardfrom the estimate based on the survey taken 6 months earlier, whichshowed a 14-percent decline (table 2). The latest estimate for 1984 isalso lower than the earlier one; the year-to-year percentage increase isonly slightly smaller, however, because it is calculated from the lower1983 base. By area, affiliates in developed countries plan a 9-percentspending increase in 1985, to $31.

5 billion, compared with a 14-percentincrease in 1984 (tables 3-5). In developing countries, affiliates plana 7-percent increase, to $11.9 billion, after a 10-percent increase.Affiliates in “international”–those that have operationsspanning more than one country and that are engaged in petroleumshipping, other water transportation, or operating oil and gas drillingequipment that is moved from country to country during the year–plan asmall increase in 1985 after a decline, from a low base, in 1984.Petroleum Petroleum affiliates plan to increase spending 8 percent in 1985,to $19.2 billion, following a 15-percent increase in 1984. The 1985increase reflects expections that the business recovery now underway inthe United States and some major foreign countries will continue, but ata slower pace than in 1984.

Spending had declined sharply–21percent–from 1982 to 1983, largely as a result of the world oil glut and depressed business In developed countries, spending is expected to increase 9 percent,to $12.1 billion, after a 25-percent increase, to $4.0 billion, comparedwith a 30-percent increase in 1984. In addition to the economicrecovery, the increases in both years may reflect generally favorable changes in British taxation of offshore operations. In contrast,spending decined in 1982 and 1983, after rising strongly–from $0.5billion to $4.1 billion–during 1973-81.

Spendign in 1982-83 wasdampened by British Government policies to conserve oil reserves and,especially in 1983, by the world oil glut. Norwegian affiliates plan toincrease spending 19 percent, to $1.8 billion, in 1985, following a27-percent increase. Spending had declined since development begain inthis sector of the North Sea.

Contributing to the decline were thegeneral economic slowdown mentioned earlier and, perhaps, high taxes onpetroleum operations. The strong increases planned for 1984 and 1985,despite continuing high taxes, may partly reflect changes in NorwegianGovernment policies, including the granting of permits to foreigncompanies to explore for oil above the Arctic Circle. The rapid pace ofdevelopment in the Norwegian sector of the North Sea reflects theperception that it is the most promising area outside the Middle East inwhich to explore for and develop oil and gas fields. In contrast to affiliates in the North Sea area, Canadian affiliates plan to reduce spending 4 percent, to $3.1 billion, after a22-percent increase.

The strong increase in 1984, largely for upstream activities, follows a sharp decline in 1983. In developing countries, affiliates plan a 6-percent spendingincrease, to $6.7 billion, in 1985, after a 3-percent increase. Nextyear’s increase is concentrated in Indonesia, where spending by alarge affiliate engaged in crude oil production, is expected to climbfrom this year’s relatively low level. Affiliates in “international” plan a small spendingincrease in 1985, after a large cut in 1984. In both years, the changeis concentrated in spending on mobile offshore drilling rigs.Manufacturing Manufacturing affiliates plan to increase spending 10 percent, to$17.1 billion, in 1985, following a 14-percent increase this year.

In1984, increases are planned in every industry except nonelectricalmachinery. In 1985, the increase is concentrated in nonelectricalmachinery, mainly computers; some of the increase may be due todeferrals from 1984. In developed countries, manufacturing affiliates plan to increasespending 12 percent, to $14.1 billion, in 1985, following an 11-percentincrease.

Canadian affiliates plan a 16-percent increase, to $3.4billion, following a 14-percent increase. Next year, the largestincrease is expected in nonelectrical machinery; it is mainly accountedfor by a computer manufacturing affiliate. This year’s increase,centered in primary and fabricated metals, reflects an affiliate’splan to increase capacity. In Europe, French affiliates plan to increase spending 24 percentin 1985, to $1.4 billion, after a 12-percent reduction this year. Inboth years, the changes are centered in nonelectrical machinery and areconsequences of low spending in 1984 compared with spending in 1983 and1985 by a computer manufacturer. British affiliates expect to increasespending 12 percent next year, to $2.

7 billion, following a 16-percentincrease in 1984. Next year’s increase is centered innonelectrical machinery, whereas this year’s increase is morewidespread. In developing countries, affiliates plan a 2-percent increase, to$3.1 billion, after a 29-percent increase in 1984. Despite theseincreases, spending in 1985 is expected to remain well below the 1981and 1982 levels.

The strong 1984 increase follows declines in 1982 and1983, when spending was curtailed by adverse economic conditions and,particularly in 1983, by external debt repayment problems in severalLatin American countries. For 1985, the largest increase is in Mexico,where spending is expected to increase is expected in Brazil. In bothcenturies, the increases, which reflect general economic improvement,are spread through most industries. Other industries Affiliates in all other industries combined plan to increasespending 8 percent, to $7.

6 billion, in 1985, after a 4-percentincrease. The planned 1985 increase is largely accounted for by miningaffiliates. Their expenditures are expected to double, to $0.8 billion,after an 8-percent decline. Next year’s increase is centered inChile, where a copper mining affiliate plans a major expansion. Affiliates in finance (except banking), insurance, and real estateplan to increase spending 10 percent, to $0.5 billion, following a6-percent increase in 1984.

Trade affiliates plan a 2-percent increaseto $3.8 billion, after a 7-percent increase. In “otherindustries”–agriculture, construction, public utilities, and otherservices–affiliates plan small increases in both years.


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