U.S. affiliates of foreign companies: operations in 1982 Essay

GROWTH of U.S. affiliates slowed significantly in 1982.Affiliates’ employment, one of the broadest measures of theiractivity, increased 1 percent, to 2,435,000, compared with a 19-percentincrease in 1981 (table 1). Total assets of affiliates, another broadmeasure, increased 16 percent, to $473.

0 billion, compared with a39-percent increase in 1981 (table 2). The slowdown was mainly a resultof the U.S. recession. The 1981 and 1982 estimates of the U.S. affiliates’employment, total assets, and other items presented in this article wereobtained by expanding to universe totals sample data collected inBEA’s annual survey of foreign direct investment in the UnitedStates.

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The previously published estimates for 1981 have been revised(see the technical note); the estimates for 1982 are preliminary andwill be revised next year. Because changes in employment are not directly affected byinflation, they tend to correspond more closely than changes in totalassets to growth in real economic activity. For this reason, theremainder of this article will focus on changes in affiliate employment. As a result of the U.S. recession, many U.S. affiliates laid offemployees in 1982.

The all-affiliate total increased slightly becausethe employment added due to acquisitions of U.S. companies by foreigndirect investors more than offset the decreases due to layoffs.

A largeportion of the added employment was in retail trade. Employment of U.S. affiliates in mining, petroleum, manufacturing,and real estate declined.

Except in real estate, the declines occurredmainly because layoffs were widespread and the employment added due toacquisitions was small. In real estate, the decline occurred mainlybecause a Canadian company sold its minority interest in a major U.S.real estate brokerage firm. The largest decline in affiliate employment was in manufacturing(61,000). Within manufacturing, employment declined in every majorsubindustry. Declines were particularly large in chemicals (24,000),mainly industrial chemicals, and in machinery (15,000), mainlyconstruction machinery, industrial machinery, and electronic components. Affiliate employment increased in wholesale trade, retail trade,finance, and “other” industries.

The largest increase was inretail trade (46,000); it mainly reflected the acquisition by foreigninvestors of several sizable U.S. retailers, including national jewelry store and fast food restaurant chains and two regional department storechains. By country of ultimate beneficial owner (UBO), the largestdecreases in employment were by affiliates with UBO’s in the MiddleEast, the United States, and Europe. Among individual countries,affiliates with UBO’s in France and Germany had the largestdecreases (27,000 and 26,000, respectively). For French-ownedaffiliates, recession-related layoffs–particularly by affiliates inmetals, glass, and transportation equipment manufacturing–caused muchof the decrease. Other factors, however, were also important.

One wasthe sale by French parents of their interests in several existing U.S.affiliates, the two largest of which together had over 10,000 employees.Another was a shift, from France to Liechtenstein, of the UBO of a majoraffiliate as a result of a change in the affiliate’s ownershipstructure. For German-owned affiliates, the decrease in employmentresulted partly from layoffs, particularly in chemicals and machinerymanufacturing. Also contributing was the selling or closing of a numberof unprofitable supermarkets and other facilities of a German-ownednational grocery store chain.

The largest increase in employment were by affiliates withUBO’s in Canada, the United Kingdom, and Switzerland. UBO’sin each of these countries acquired several large U.S. companies duringthe year. The slow growth in affiliate employment nationwide was mirrored inmost U.S.

regions. Affiliate employment increased 1 percent or less inevery region except the Mideast, where it declined 1 percent, and theGreat Lakes, were it increased 4 percent (table 3). Among States, the change in affiliate employment ranged from a22-percent decrease in Alaska to a 21-percent increase in South Dakota.In absolute terms, the largest decrease in employment was inPennsylvania (5,300). Widespread layoffs, particularly intransportation equipment manufacturing, and sales or closures ofsupermarkets by a large grocery store chain contributed significantly tothe decrease in that State. The largest increase in affiliateemployment was in Illinois (17,100). Acquisitions of an officeequipment manufacturer and of a Chicago-based department store chainmore than accounted for the increase. Technical Note The 1981 and 1982 universe estimates presented in this article werederived from sample data reported in BEA’s annual survey of foreigndirect investment in the United States (the BE-15).

In the BE-15survey, reports were required from nonbank U.S. affiliates that hadassets, sales, or net income greater than $5 million or that owned morethan 1,000 acres of U.

S. land. The universe estimates cover nonbankU.

S. affiliates that had assets, sales, or net income of $1 million ormore or that owned 200 or more acres of U.S. land; these were the sizecriteria used to determine which affiliates had to file complete reportsin the 1980 benchmark survey, which is the basis for expanding thesample data reported in the BE-15 survey to universe estimates. Data for nonsample affiliates–those in the universe but not in thecurrent-year sample–were estimated.

The nonsample affiliates consistedof affiliates (1) that were below the exemption levels for reporting inthe BE-15 survey; (2) that were required to report but for some reason,did not; or (3) that filed reports that could not be processed in timeto meet BEA’s publication schedule. For the preliminary 1981 universe estimates published a year ago, asimplified procedure was used to derive estimates of data for nonsampleaffiliates. Since then, the estimating procedure has been refined.

This refinement, together with corrections to the data reported by the1981 sample, resulted in revisions to 1981 universe estimates. The newprocedure, which like the old one, estimates data both for nonsampleaffiliates that were in the universe in the prior year (previouslyexisting affiliates) and for nonsample affiliates that entered theuniverse in the current year (new affiliates), is discussed below. Previously existing affiliates For each previously existing nonsample affiliate, each data item isestimated for the current year. The item is calculated as the productof two factors: (1) the prior-year data for the affiliate and (2) theratio of current- to prior-year data for a matched sample of affiliates(those that reported in both the prior and current year) that were inthe same industry group as the affiliate whose data are being estimatedand that had assets, sales, or net income of less than $50 million. Theimplicit assumption in this procedure is that, in a given industrygroup, data for each nonsample affiliate changes at the same rate asdata for affiliates in the matched sample. The matched sample is restricted to relatively small affiliatesbecause most of the nonsample affiliates are also small.

Ratios arecalculated for four industry groups–manufacturing; wholesale trade;agriculture, forestry, and real estate; and all other. These four broadgroups, rather than more disaggregated industries, are used because, forsome of the more disaggregated industries, the matched sample would haveconsisted of only a few affiliates and the reliability of the resultingratios would have been questionable. If the calculated ratio is biasedby the data of one or two reporters, or is unrepresentative because oflow coverage, it is adjusted before being applied. New affiliates For new nonsample affiliates, estimates are separately derived foreach affiliate based on data they reported in BEA’s survey of newforeign direct investments in the United States (BE-13).

Although theBE-15 survey covers many items not covered in the BE-13, both cover fivekeys items–total assets, sales, net income, employment, and land owned.For these items, the universe estimates include the BE-13 data, asreported, for nonsample affiliates. For items covered by the BE-15survey but not by he BE-13, estimates are computed as the product of twofactors: (1) the one of the five BE-13 items of the new affiliate thatis most closely related to the BE-15 survey item being estimated and (2)the ratio of the item being estimated to the item in (1), as reported inthe BE-15 survey by affiliates that are in the same industry group asthe new affiliate and that have total assets, sales, or net income ofless than $50 million.

Because most of the new nonsample affiliates are small, the ratiosare computed only for smaller affiliates and only for two industrygroups–agriculture, forestry, and real estate, and all other. Separateratios are computed for the former group because a large percentage ofthe new nonsample affiliates are in it and relationships among items foraffiliates in the group often differ significantly from those foraffiliates in other industries. The procedure just described is not used where other availableinformation indicates that application of a ratio would not producemeaningful estimates.

In these cases, the procedure used variesdepending on the item being estimated. For example, most new nonsampleaffiliates are small and do not engage in international trade. Thus,their exports and imports are assumed to be zero and are not estimatedusing the ratio procedure. Sample coverage Table 4 shows, for both employment and total assets, the percentageof the 1982 universe estimates accounted for by the 1982 sample data.At the all-industries, all-countries level, coverage is 91.

9 percent foremployment and 93.5 percent for total assets. Coverage fallssignificantly below these averages only in industry and country cellswhere affiliates tend to be of small average size (for example, in realestate and “other industries,” and in Latin America and”other Africa, Asia, and Pacific”).

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