Rise in U.S. Private Investment Abroad - Tripling of the Value of Direct
Investments – Interest among American manufacturers in market
potentialities for their products in foreign countries has been growing
steadily since World War II. More and more companies have expanded exports
from their plants at home; licensed patents and processes to foreign
producers in exchange for royalties or a share of
profits; or established subsidiary companies or branch factories abroad.
The last-named of the three main ways of penetrating foreign markets has
attained special importance in the past decade.
The huge dollar investment poured into foreign production facilities by
American business has forged strong private economic ties with many
countries.
Ten years ago, (1959) exports of
non-military goods and foreign sales of goods produced abroad by American
companies each amounted to about $12 billion. By 1958, U.S. exports had
risen to $16.3 billion, while American companies producing in foreign
countries rang up sales estimated at $30 billion. Net earnings of American
business from operations abroad exceeded $3.3 billion in 1957, latest year
for which the figures are available.
These earnings were derived from
direct private investments valued by the Department of Commerce at $25.3
billion. Actually, direct private investments abroad—as distinct from
indirect or portfolio investments, i.e. investments in foreign securities are
worth much more. Department of Commerce figures are based on book value, or
original cost of plant and equipment, rather than current market value, and
the totals do not include those American holdings abroad which represent
less than 25 per cent ownership in a foreign enterprise. Business Week recently
hazarded the statement that total direct private investment “in foreign
branches, subsidiaries, and affiliates may be worth $50 billion.”
The Commerce Department total for
direct American investment in foreign countries has tripled since 1945,
when it neared $8.3 billion, and more than doubled since 1950, when it
stood at $11,8 billion. Most of the huge dollar investment abroad in the
past decade has gone into (1) facilities for production of basic industrial
materials (chiefly petroleum, but also iron, copper, and other materials in
demand here and abroad) and (2) manufacturing plants whose products have
been sold mainly in foreign markets. More than 3,000 U.S. companies are now
engaged in foreign production; they include 99 of the nation's 100 largest
industrial corporations. Working alongside American companies producing
abroad are a growing number of American management and consulting firms,
engineering and contracting outfits, and foreign branches of U.S. banks
and insurance companies. Business Week reported on Jan. 3:
“Many executives now predict a doubling in sales from foreign operations in
the next ten years. At the same time, they doubt that exports will increase
by as much as 50 per cent in the next decade.”
Shake
of Manufacturing in Investment Growth - A substantial share
of the increase in direct investment abroad will go into manufacturing.
Many forces are at work to make it attractive for American manufacturers to
build or expand facilities in other lands. One is the rising cost of
manufacturing at home for export. Another is the existence of trade
barriers whose effect is to make it more profitable for American business
to operate within a foreign market than to try to penetrate it from the
outside. Most important is the rise of income in many countries of the free
world; markets are expanding for everything from toasters to
Pharmaceuticals, from bulldozers to modern business machines.
Direct investment in manufacturing
today constitutes about one-third of all American private investment
abroad. In 1957, $7.9 billion of the $25.3 billion directly invested in
other countries was in manufacturing facilities; it has been estimated
unofficially that the dollar totals rose in 1958 to around $8.5 billion and
$28 billion, respectively. The total for manufacturing would be much
higher—perhaps up to $11.5 billion—if the Commerce Department included in
that category the part of petroleum investment of American companies that
is devoted to refining and marketing.
Manufacturing investment has grown,
since World War II, at approximately the same rapid rate as total direct
investment abroad. The sums put into manufacturing facilities since 1950
have at least doubled in each of the traditional strongholds of American
foreign investment—Canada, Latin America, Western Europe. In 1957, 92 per
cent of the capital of American industry invested in manufacturing abroad
was in these regions—44.4 per cent in Canada, 21.3 per cent in Latin
America, 25.3 per cent in Western Europe. Of the $1.7 billion laid out by
American manufacturers to build and equip plants in Latin America, more
than one-third was invested in Brazil, another third in Argentina and
Mexico. Well over one-half of the $2.1 billion directly invested by U.S.
manufacturers in Western Europe in 1957 was expended in the United Kingdom;
one-fourth in France and West Germany.
Examples
of Expansion of Overseas Operations -
Hardly a week passes without new
announcements by American corporations of plans to commence or expand
manufacturing in foreign countries. In the chemical and allied products
industry, for example, the Du Pont Company has jumped its foreign business
to a point where 8c of each sales dollar is earned outside the United
States. Du Pont recently completed a new orlon plant in the Netherlands; it
is building neoprene and polyethylene plants in Canada and Northern
Ireland; a paint plant under construction in Belgium will serve the growing
European automobile industry. Monsanto Chemical is establishing a European
Common Market base in Italy in partnership with an Italian firm. Dow
Chemical formed subsidiaries in Switzerland and Venezuela last year. Union
Carbide spent $29 million in 1958 setting up or enlarging facilities in
Austria, Belgium, Brazil, England, India, Italy, Mexico, and Scotland.
The Ford Motor Company is preparing,
via Ford of Canada, to produce an
all-Australian car to compete with the Holden, turned out by General Motors
down under. Chrysler acquired an interest in the French Simca last year and
announced in April of this year that Simca cars would be assembled in a
Mexico City plant to meet the rising demand for automobiles in Latin
America.
The Underwood Corporation recently
set up Underwood Italiana to manufacture office machines; Smith-Corona
completed acquisition of a calculating machine company in West Germany;
Burroughs is getting ready to meet increased demand in the Common Market
area by expanding productive facilities in France. Ex-Cell-O recently took
over a German machine tool concern. Timken is constructing a $10 million
roller-bearing plant in France and is considering an additional plant in
Brazil. Container Corporation has acquired a majority interest in a large
German paper-making firm.
Reynolds Aluminum, in partnership
with a British company, captured control of British Aluminium, Ltd.,
earlier this year. Kaiser Engineering recently joined an Indian company in
plans to build an aluminum plant in India. Goodyear has announced plans to
build a $7 million tire factory in France. Firestone soon will complete a
tire plant in Portugal and plans to enlarge operations in India and in
Argentina, Brazil, and Venezuela. L. C. Boos, vice president of U.S. Rubber
Co.'s international division, said in May that “Future competition for
foreign tire and tube markets will be on the basis of local manufacturing, not
domestic exports.”
Attractions in Foreign Manufacturing -
Underlying every decision by an
American company to produce abroad has been the desire to expand its
markets and thus add to its profits. Henry Kearns, Assistant Secretary of
Commerce for International Affairs, told a House subcommittee last Dec. 1:
“American business will, of course, support our national foreign policy.
But, in the strictly economic sense, American companies invest abroad for
just one reason—to make money by doing an efficient production job.” Kearns
pointed out that “There are other considerations, of course, but each is
directly related to the profit motive.” It is obvious that increasing
numbers of American concerns are finding it more profitable to supply
foreign markets with goods produced abroad instead of exporting goods
produced in the United States.
Particular
Inducements in The Case of Canada -
The case of Canada is in many ways
unique. What makes it so is that American corporations have built plants
and facilities in the dominion almost as if it were another state of the
American Union. The proximity of Canada, plus fundamental likenesses in
political climate, economic traditions, tax laws, corporate and financial
structure, and popular tastes have put direct U.S. investments in that
country in a special category.
For many years, but particularly
since the end of World War II, American industry has been attracted by
Canada's great natural wealth and potentialities for growth. At the present
time, four-fifths of all foreign capital invested in Canada is owned in the
United States. This contrasts with the position at the end of World War I
when the greater part was supplied by the United Kingdom.
U.S. corporations now control about
half of Canada's manufacturing industries and a little more than half of
Canadian industry as a whole. Attaining a dominant position was facilitated
by the fact that American companies moved in on the ground floor after
World War II. 0. J. Firestone, economic adviser to Canada's Department of
Trade and Commerce, cited figures on May 21 to demonstrate that “a
comparatively small amount of capital will suffice to establish control of
an enterprise in its early state.” Fifty-five per cent of Canada's industry
was controlled by American corporations in 1957, he said, although only 31
per cent of all investment funds came from the United States and 67 per
cent from Canadian sources.
Canada's rates of economic growth
and population increase since the war have been among the highest in the
free world. Huge mineral, forest and power resources still wait to be
tapped. Canadian markets for both basic materials and consumer goods are
expanding rapidly. Canadian resentment over the practices of some American
corporations has become a problem in recent years, but Canada is eager for
capital and large-scale investment north of the border is expected to
continue.
Postwar
Dollar Shortage and Other Influences -
The postwar dollar shortage was not
among the considerations that triggered the great flow of American capital to
Canada, but in other countries the so-called dollar gap offered direct
encouragement to location of American plants abroad. The demand for dollars
with which to buy American goods was enormous in Europe, Latin America, and
most other parts of the free world after World War II, but the dollar
resources of these countries, gained through exports or through assistance
from Washington, were far from adequate to satisfy demand. As a result,
most countries used dollars mainly to meet imperative import needs and to
build up reserves.
Scores of American manufacturers
found established or potential export markets cut off by inability of
overseas customers to get dollars. They concluded that the way to sell
abroad was to produce abroad. Governments in Western Europe and Latin
America welcomed the new enterprises; in addition to reducing dollar needs,
they would help to create jobs, boost living standards, and increase the
country's ability to export. In the United Kingdom, for example, American
subsidiaries or Anglo-American companies now provide more than 375,000 jobs
for Britishers and account for more than 10 per cent of all exports from
Britain. More than 30 per cent of Latin America's exports are produced by
American-controlled corporations, and the proportion is even higher for
Canada.
Although the world-wide dollar gap
is no longer a problem, most leading countries of Europe and Latin
America continue to follow certain policies which make it tempting for
American producers seeking foreign sales to locate within their borders. On
the one hand, direct investment has been encouraged by positive
measures—tax incentives and investment guarantees. Among the tax incentives
used to attract foreign capital have been high depreciation allowances,
rates on corporation income that are lower than in the United States,
arrangements for deferral of payments, and liberal deduction provisions.
Antoine Pinay, French finance minister, said in New York on May 26 what
holds true for many countries in addition to his own: “We offer every
desirable guarantee to foreign investors. The transfer of profits is
guaranteed, as is the repatriation of investments in the event of
liquidation.”
Import quotas, tariff barriers, and
exchange restrictions have been on the decline in Western Europe, but
American manufacturers still find some obstacles of this kind along the
path to foreign markets. The preferential tariff system which is part and
parcel of the European Common Market represents a new hurdle in the way of
American exports to the Continent.
Opportunities
in New European Common Market - The
European Economic Community or Common Market, instituted on Jan. 1, 1958,
is expected to boost direct American investment in Western Europe
substantially. The Common Market is intended to promote coalescence of the
economies of Belgium, France, Italy, Luxembourg, the Netherlands and West
Germany over a period of 12 to 15 years. The plan provides for
reduction and ultimate elimination of tariffs and quotas on trade among the
six member countries and for a common tariff on imports from the outside.
First tangible steps toward the
ultimate goal were taken on Jan. 1, 1959, when an over-all 10 per cent
reduction of tariff duties and an over-all 20 per cent enlargement of
import quotas were put into effect with respect to trade within the
community. A British proposal to create a free trade area which would
embrace all 17 European countries in the Organization for European Economic
Cooperation, including the Common Market countries, bogged down last
year, But a stopgap plan limited to Austria, Denmark, Great Britain,
Norway, Portugal, Sweden and Switzerland —the so-called “outer seven”—is
currently under consideration. Further action on it is expected at a
meeting in Stockholm around the middle of July.
Such radical developments are bound
to concern American firms interested in selling in the affected markets. In
the first place, it is much tougher for U.S. exports to penetrate a
preferential tariff area than an individual country, at least in the short
run, because of competition from producers within the whole area. Many
enterprises in Common Market countries already are drawing up merger plans,
and more efficient use of Western Europe's labor and capital is expected to
bring sharp pick-ups in productivity and output. But the Common Market
offers attractions to American companies which establish manufacturing
facilities within its borders. The community has 165 million inhabitants,
representing a market potential nearly as great as that of the United
States, and eventually it will be similarly unencumbered by internal trade
restrictions. Free movement of goods, labor, and capital across national
borders within the area will enable American companies to reach the entire
market if they manufacture in a single country.
The impact on American industry of
the Common Market is graphically demonstrated by what has happened recently
in the Netherlands. In the three-year period 1955–57, 21 American branch
plants were established in that country; in 1958, after the Common Market
had come into existence, 23 additional American companies set up shop
there. Comparable figures are not yet available for the other countries in
the community, but a Department of Commerce official wrote recently: “It
may be assumed that a similar situation prevails in most other Common
Market countries and that the influx of U.S. investment there has also been
considerable.”
Walter Hallstein, chief executive of
the Common Market, pointed out on a visit to New York, June 16, that
American investment in the community still amounted to only about 1 per
cent of the total capital investment. He said the opportunities for U.S.
private investors were “practically unlimited.” Hallstein told reporters:
“We need new capital and ‘know-how’ from all sources. American industrial
capital is particularly welcome.” He added that American branch plants, and
partnerships with enterprises in the community, would be of special help in
developing mass production and marketing in Western Europe.
Success of the European Common
Market may strengthen the hand of persons who want to set up regional
common markets in Latin America. Although supporters of that idea admit
that its realization may be some years away, they have been working
diligently to overcome opposition in business and industrial circles and
opposition on the part of leaders preoccupied with the difficult economic
problems of their separate countries. A move toward economic integration
below the Rio Grande came on May 19, when the trade committee of the United
Nations Economic Commission for Latin America unanimously approved a
resolution setting forth common market principles and establishing a group
of experts to frame a draft agreement.
Production Cost Advantages in Western Europe -
Much has been said about lower labor
costs abroad in tariff debates extending back more than a century. Ernest
R. Breech, board chairman of the Ford Motor Company, said earlier this
year: “Traditionally, American industry has been able to meet and beat wage
competition because of its greater capital investment, its superior plant,
equipment, management methods, and economies of scale.” Breech added,
however, that in Europe, “we have now largely lost this advantage,
particularly in industrial production.”
The National Industrial Conference
Board recently published a study on the comparative costs of producing in
the United States and abroad. The study disclosed that, on the whole, labor
costs were lower in foreign countries and overhead costs slightly lower;
material costs, on the other hand, were considerably higher. Balancing out
the labor, overhead and material costs, it was found that only in Great
Britain and Western Europe was there a pattern of lower production costs
than those that prevail in the United States. In Canada, Latin America, and
Australia production costs were usually higher than in the United States.
The N.I.C.B. study noted “the
absence of correlation between countries in which production costs are low
and those in which American capital investment is high.” It said the
decision to manufacture in a country to which exports have been limited by
transportation costs, trade barriers, or currency restrictions may be quite
divorced from production cost considerations. “There are other motives
besides low production costs that lead firms to locate abroad. One is the promise
of increased sales in local and adjacent markets.”
In big American manufacturing
industries, where competition is keen, each company puts great stress on
holding or enlarging its share of the market. Thus when one industrial
giant has made a sizable direct investment in a foreign country, its chief
competitors usually have felt compelled to do likewise. Although it is
impossible to assess the prominence of this factor in company decisions, it
is generally taken as a matter of course that a company risks impairment of
profits if it fails to cultivate a developing market. A company's foreign
operations are not necessarily more profitable than its domestic
operations; for manufacturing as a whole, in fact, the annual profit yield
on direct American investment abroad has generally run a little lower than
the yield at home. But, as pointed out by Business Week last Jan. 3, “a 5 per
cent addition to consolidated gross sales that comes from [a company's]
overseas operations often builds up the over-all profit margin by a much
larger percentage.”
Aspects of American Production Abroad - Factors Influencing the Location of
Factories -Examination of some of the characteristics of direct U.S.
investment abroad suggests that American manufacturers are in good position
to retain or expand their foreign operations. In the first place,
corporations eager to tap foreign markets have, in the main, steered clear
of less developed countries. Although this has been due primarily to profit
considerations, it has been caused also by political instability; American
manufacturers have been inclined to keep out of countries where they
considered confiscation or harassment a threat. Statistics for 1957 show
that only about $130 million, or less than 2 per cent of total private
American investment in manufacturing abroad, is found in the underdeveloped
(and in many cases unstable) countries of Southeast Asia, Africa, and the
Middle East.
In the second place, the favorable
position of American corporations operating abroad is attested by the fact
that the billions of dollars they have put into manufacturing facilities in
foreign countries since World War II have gone mostly for production of
goods in high demand. Capital of U.S. companies is not invested in
“depressed industries.” In Western Europe, for example, the postwar
investment has been concentrated where U.S. manufacturers had a development
lead, either in the product itself or in production methods. Examples are
business machines, automobiles, and oil refining equipment. More recently,
the big push has been in electronics and chemicals and allied products, J.
H. Dunning, a British expert on direct investment, wrote recently of
American industrial operations in the United Kingdom: “At present … the
United States representation is almost entirely confined to industries
supplying those products which, if they were not actually discovered in the
United States, were first exploited on any scale in that country.”
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