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

MAJORITY-OWNED foreign affiliates of U.S. companies plan toincrease capital expenditures 13 percent in 1985, to $42.5 billion,following a planned 4-percent increase in 1984 (table 1 and chart 2). Spending grew at an annual compound rate of 21 percent in 1977-80,leveled off in 1981-82, and declined sharply in 1983. The leveling-offof spending in 1981-82 resulted from sluggish economic conditions abroadand high interest rates. The decline in 1983–the sharpest since atleast 1957, when this expenditure series began–reflected the samefactors that depressed spending in 1981-82, as well as the cumulativeeffects of appreciation of the U.

S. dollar. If the increases nowplanned for 1984 and 1985 are realized, 1985 spending would be aboutequal to 1980 spending.

The latest estimate of spending for 1981, based on a survey takenlast December, is significantly lower than the estimate based on thesurvey taken 6 months earlier, which indicated expenditures wouldincrease 12 percent (table 2). The latest estimate for 1985 is alsolower than the earlier one; however, the 1985 percentage increase islarger, because the downward revision for 1984 was proportionally largerthan for 1985. In each year, petroleum affiliates account for most ofthe revision. Estimates of 1984 and 1985 spending levels have been reviseddownward in each successive semiannual survey of spending intentions.The revisions suggest that the business recovery suggest that thebusiness recovery abroad may be more gradual than previously expected.

By area, affiliates in developed countries plan a 12-percentspending increase in 1985, to $30.5 billion, following an 8-percentincrease in 1984 (tables 3-5). In developing countries, a 17-percentincrease, to $11.5 billion, is planned, following a 2-percent decline.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 toincrease spending 22 percent, to $0.

5 billion, following a 37-percentdecline. Petroleum Petroleum affiliates plan to increase spending 7 percent, to $17.3billion, following a 4-percent increase in 1984. Spending had declined21 percent in 1983.

The recovery of spending in 1984 and 1985 may be restrained by thereduction in worldwide demand for oil. Despite the availability ofrelatively low-cost crude oil, some refining and marketing affiliatesare sustaining losses. These losses, which have led to the closing orsale of some affiliates, are largely due to low rates of capacityutilization–a condition exacerbated by heightened competition fromnewly established downstream operations of some oil-producing countries. The small increases in petroleum spending now planned for 1984 and1985 would result in spending remaining below the 1982 level. Indeveloped countries, spending is expected to increase 2 percent, to$10.9 billion, after a 20-percent increase in 1984. Spending haddeclined 21 percent in 1983. The 1985 increase is concentrated inCanada and the Netherlands.

In the former, the new administration isseen as being more receptive to investment by foreign-owned companies;in the latter, the increased spending is largely for refinery expansion.Partly offsetting these increases is a decline in Norway, where anaffiliate is planning sizable expenditures in 1984, but not in 1985, forpipelines and gas compression facilities. In developing countries, affiliates plan a 16-percent spendingincrease, to $6.0 billion, following a 16-percent decline in 1984. Muchof the increase is in Indonesia, largely for crude oil extraction andfor development of alternative energy sources, such as coal andgeothermal energy. Affiliates in “international” plan a 26-percent increasein spending in 1985, following a 38-percent decline in 1984. In bothyears, the changes are concentrated in spending on mobile offshoredrilling rigs. Manufacturing Manufacturing affiliates plan to increase spending 22 percent, to$17.

7 billion, in 1985, following a 6-percent increase. In 1985, thelargest increase is in transportation equipment, although affiliates inevery industry within manufacturing, except primary and fabricated metals, also plan increases. In developed countries, a 21-percent increase, to $14.3 billion, isplanned, after a 4-percent increase. Canadian affiliates plan a31-percent increase, to $3.

6 billion, after a 6-percent increase. Aboutone-half of the 1985 increase is in transportation equipment, mostly forproduction of a new automobile model; increases are also expected inmost other manufaturing industries. In Europe, German affiliates plan a 24-percent increase, to $2.

7billion, after a 1-percent increase. The 1985 increase is centered intransportation equipment, for production of a new automobile model, andin chemicals, for plant modernization. In developing countries, affiliates plan a 28-percent increase, to$3.5 billion, after a 16-percent increase in 1984. In each year, thelargest increase is in Mexico. Spending by Mexican affiliates hadfallen sharply in 1982 and 1983 because of adverse economic conditions,including exchange controls and devaluation of the peso.

If theincreases now planned for 1984 and 1985 are realized, spending in 1985will still be below the 1981 level. Other industries Affiliates in all other industries combined plan to increasespending 10 percent, to $7.5 billion, after almost no change in 1984.Affiliates in trade account for much of the increase; their expendituresare to increase 12 percent, to $3.9 billion, after no change. Theincrease is spread across many areas, and reflects expectations that theeconomic recovery will continue. Mining affiliates plan a 33-percent spending increase, to $0.

8billion, from a relatively low base. The increase is centered inAustralia, where a bauxite-mining affiliate is planning to resumesmelter construction. In finance (except banking), insurance, and realestate, affiliates plan to increase spending 12 percent, to $0.4billion, after an 18-percent reduction. Affiliates in “otherindustries”–agriculture, construction, public utilities, and otherservices–plan small reductions in spending in both years.

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