Foreign Investors' Spending to Acquire or Establish U.S. Businesses, 1998
Foreign Investors' Spending to Acquire or Establish U.S. Businesses Tops $200 Billion for First Time in 1998
Foreign investors' spending to acquire or establish U.S. businesses surged to a record $201.0 billion in 1998 from $69.7 billion in 1997, according to estimates by the Commerce Department's Bureau of Economic Analysis. This spending, which includes both outlays made directly by foreign investors and outlays made through their existing U.S. affiliates, almost tripled in 1998, following a decrease of 13 percent in 1997 and an increase of 40 percent in 1996. Estimates for 1998 are preliminary; estimates for 1997 are revised.
The 1998 outlays were boosted by two exceptionally large acquisitions. However, even without these two investments, outlays still would have been about 40 percent higher than the previous record of $79.9 billion set in 1996.
The two exceptionally large investments were in petroleum and motor vehicle manufacturing (included in "other manufacturing" in table 4) businesses and both reflect trends towards greater global consolidation in their industries. Many of the other investments were in telecommunication- and information-related businesses and reflect a desire by foreign investors to gain access to the advanced and growing technological capability in the United States, to integrate operations vertically, and to enter new markets. The surge in investments by foreign direct investors coincides with a sharp increase in overall merger and acquisition activity in the United States.
Highlights of the 1998 outlays were:
- Size of investments: The substantially higher level of outlays in 1998 partly reflects an increase in the number of very large investments. There were 12 investments of $2 billion or more, and these investments accounted for almost two-thirds of total outlays. The number of such investments was up from 3 in 1997 and 8 in 1996. To some extent, the increase in the number of large investments in 1998 reflects the sharp increases in U.S. stock prices in recent years, which have raised the size of the outlays needed to acquire individual U.S. companies.
- Type of financing: Several of the largest investments, including the two exceptionally large acquisitions mentioned above, were accomplished by exchanging stock, a technique that is commonly used for financing mergers and acquisitions both in the United States and abroad. Taken together, these exchanges resulted in large, but almost entirely offsetting, capital flows in the U.S. balance of payments: The large inflows of capital that resulted from the foreign direct investors' acquisitions of stock in the acquired U.S. companies were offset by the outflows of capital that resulted from the distributions to U.S. stockholders of the stock in the foreign parent companies.
- Sources of financing: The portion of outlays financed by foreign parents (including those by exchanging stock) increased from 54 percent in 1997 to a record 77 percent in 1998. The unusually high share in 1998 mainly resulted from the two exceptionally large investments. Excluding these investments, the share would have been 59 percent. In dollars, outlays financed by foreign parents increased to $155.3 billion in 1998 from $37.4 billion in 1997. The increase contributed to the sharp overall increase in net capital inflows for foreign direct investment in the United States (FDIUS) recorded in the U.S. balance of payments accounts for 1998. In addition to outlays from foreign parents to acquire or establish new U.S. affiliates, net capital inflows for FDIUS include foreign parents' financing of their existing U.S. affiliates. According to preliminary estimates, net capital inflows for FDIUS increased $102.8 billion, to $196.2 billion, in 1998. (Revised estimates will be released on June 17.)
As in past years, outlays to acquire existing U.S. companies rather than to establish new U.S. companies accounted for most of the outlays in 1998 -- 90 percent.
Investment outlays by industry and by country
By industry of the U.S. businesses acquired or established, outlays were mainly in manufacturing and petroleum. Manufacturing accounted for 45 percent (or $89.7 billion) of total outlays and petroleum for 36 percent (or $72.1 billion).
Within manufacturing, the largest increases were in "other manufacturing" (particularly in motor vehicles and in printing and publishing) and in machinery (particularly industrial machinery and equipment). Outlays also increased in retail trade and real estate. Outlays decreased in the remaining industries; decreases were largest in the insurance industry.
By country of ultimate beneficial owner (UBO), the largest investor countries were the United Kingdom ($76.9 billion), Germany ($39.9 billion), and Canada ($21.5 billion). Outlays by Japanese investors, at $2.9 billion, were only about one-seventh of their 1990 peak of $19.9 billion.
The five UBO countries whose investors had the largest increase in outlays in 1998 -- the United Kingdom (up $65.0 billion), Germany ($33.5 billion), France ($11.6 billion), Canada ($9.7 billion), and the Netherlands ($9.2 billion) -- accounted for almost all of the increase in total outlays. Outlays by Japanese UBO's increased slightly. Outlays by Australian UBO's declined $5.9 billion and by Swiss UBO's declined $3.1 billion.
Selected operating data
The total assets of U.S. businesses newly acquired or established were $249.4 billion in 1998, up from $170.6 billion in 1997. U.S. businesses that were newly acquired in 1998 had assets of $212.3 billion, employed 584,500 workers, and owned 138,500 hectares (342,200 acres) of U.S. land. U.S. businesses that were newly established in 1998 had assets of $37,000 billion, employed 12,000 workers, and owned 11,900 hectares (29,400 acres) of land.
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The 1997 estimate of total outlays has been revised down 2 percent from the preliminary estimate published last year.
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Estimates in this report are based upon a Bureau of Economic Analysis survey that covers (1) existing U.S. business enterprises in which foreign investors acquired, either directly or through their U.S. affiliates, at least a 10-percent ownership interest and (2) new U.S. business enterprises established by foreign investors or their U.S. affiliates. The estimates cover newly acquired or established U.S. business enterprises with total assets of over $1 million or ownership of at least 81 hectares (200 acres) of U.S. land.
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Additional details on the new investment by foreign direct investors in 1998 will appear in the June issue of the Survey of Current Business, the monthly journal of the Bureau of Economic Analysis. The preliminary estimates of net capital inflows for foreign direct investment in the United States were published in Christopher L. Bach, "U.S. International Transactions, Fourth Quarter and Year 1998," Survey 79 (April 1999): 18-65; revised estimates will be published in the July issue of the Survey.
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