U.S. multinational companies operations in 1998
GROWTH in the combined domestic and foreign operations of nonbank U.S. multinational companies (MNC's) slowed in 1998, according to preliminary estimates from the annual survey of U.S. direct investment abroad conducted by the Bureau of Economic Analysis (BEA).1 Currentdollar estimates of the worldwide
The slower growth in MNC operations in 1998 was most pronounced in the petroleum industry. In that industry, MNC gross product decreased 23 percent, as steep declines in the prices of petroleum products outweighed increases in worldwide production and consumption of crude oil and petroleum products.3
IMAGE TABLE 7Table 1.
The growth patterns of the domestic (U.S.--parent) and foreign (foreign--affiliate) operations of U.S. MNC's differed partly because of differences in local economic conditions. The gross product of U.S. parents increased 2.2 percent. Excluding the gross product of parents in the petroleum industry, parent gross product increased 4.6 percent, reflecting continued robust economic growth in the United States (current--dollar gross domestic product (GDP) in the United States grew 6.2 percent in 1997 and 5.5 percent in 1998).
The gross product of MOFA's decreased 1.9 percent--the first decrease since 1993; the decrease reflected the fall in petroleum prices, a rise in the exchange value of the U.S. dollar (which lowers the dollar--denominated measures for affiliates whose books are kept in host-country currencies), and weak or negative economic growth in much of Asia and Latin America. In terms of affiliate gross product, the growth rate of real GDP in the top 5 Asian host countries averaged a negative 0.9 percent in 1998. In the top 5 Latin American host countries, real GDP increased, but the average growth rate, at 1.7 percent, was less than half that in the United States.
Additional highlights of U.S.-MNC operations in 1998 follow:
Worldwide production and the productive resources of U.S. MNC's remained concentrated in the United States: US. parents accounted for about three--fourths, and MOFA's for about one--fourth, of their combined gross product, capital expenditures, and employment. These shares have been relatively stable since 1989.4
The real gross product of both parents and MOFA's increased modestly. For U.S. parents, the growth in current--dollar gross product exceeded U.S. price inflation. For MOFA's in manufacturing, real gross product increased 3.0 percent, and evidence suggests that the real gross product in other industries also increased.
U.S. exports of goods that involve U.S. parents or their foreign affiliates decreased for the first time since 1982, the first year of this annual series. The decrease in MNC--associated exports partly reflected reduced shipments to Canadian affiliates in the transportation equipment manufacturing industry and reduced shipments to Asian affiliates.
MNC--associated U.S. imports of goods increased substantially. The increase mainly reflected shipments to U.S. parents from affiliates in the drug manufacturing industry and in the computer and office equipment manufacturing industry.
Newly acquired or established MOMs continued to be concentrated in countries with large and prosperous markets rather than in countries with low labor costs. Although low-wage countries have been attracting a rising share of the new investments, MOFA's in high-wage countries still accounted for 84 percent of the gross product of all new MOFA's.
The first part of this article analyzes the worldwide operations of U.S. MNC's, the second part analyzes their domestic operations, and the third part analyzes their foreign operations.
Revisions to the 1997 estimates.--The estimates of U.S.--MNC operations for 1997 were revised to incorporate the final results of the 1997 Annual Survey of U.S. Direct Investment Abroad.5 The year--to--year percent changes for two other key measures were revised less than 1 percentage point from the changes shown in the preliminary estimates: The increase in gross product was revised up 0.2 percentage point to 5.8 percent, and the increase in employment was revised down 0.1 percentage point to 6.0 percent. In contrast, the increase in capital expenditures was revised up 3.2 percentage points to 16.9 percent.
Worldwide Operations of U.S. MNC's
This section examines worldwide U.S.--MNC operations and compares the domestic and foreign aspects of these operations.
Changes in gross product
Current--dollar gross product of U.S. MNC's grew 1.2 percent in 1998, to $2,119 billion; the U.S.--parent component of U.S.--MNC gross product increased 2.2 percent, and the MOFA component decreased 1.9 percent. Available evidence suggests that after accounting for price and exchange--rate changes, the real gross product of both parents and MOFA's increased modestly. For U.S. parents, the 2.2--percent increase in current-dollar gross product exceeded the 0.6--percent rate of U.S. price inflation (as measured by the GDP implicit price deflator for all private U.S. businesses). For MOFA's, the 1.9--percent decrease in current--dollar gross product and a 3.2-percent average inflation rate in host countries suggests an inflation--adjusted decrease of about 5 percent; however, because the exchange value of the U.S. dollar increased more than 5 percent, it is likely that the real gross product of MOFA's actually increased at a modest rate.6 A more formal calculation of the changes in real gross product of MOFA's in manufacturing also suggests a modest increase (see the section "Real gross product of MOFA's in manufacturing").
U.S. --MNC--associated trade in goods
In 1998, U.S.--MNC--associated trade--U.S. trade involving U.S. parents or their foreign affiliates-- accounted for 64 percent of total U.S. exports of goods and for 39 percent of total U.S. imports of goods (table 2 and chart 1).7 These large shares reflect the significant presence of U.S. MNC's in the U.S. economy and the global orientation of U.S. parents.8
IMAGE TABLE 37Table 2.
U.S.--MNC--associated exports decreased $3 billion, to $438 billion, the first decrease since this annual data series began in 1982. Both intra--MNC exports and MNC exports to others decreased. The decrease in intra-MNC exports was concentrated in exports to Canada and Asia. The decrease in exports to Canada was mainly in transportation equipment manufacturing and reflected a temporary decrease in auto production by Canadian affiliates that was related to a labor strike. The decrease in exports to Asia was widespread by country and reflected a decrease in total U.S. exports to the region; affiliates that produced or distributed durable goods accounted for most of the decrease.
IMAGE GRAPH 44CHART 1
U.S.--MNC--associated imports of goods increased $5 billion, to $356 billion. The increase was more than accounted for by a $10 billion increase in intra--MNC imports. The increase in intra--MNC imports was concentrated in imports from affiliates in Ireland, Eastern Europe, and Thailand. The increase in imports from Ireland was mainly in drug manufacturing. The increases from Eastern Europe and Thailand were mainly in computer and office equipment manufacturing.
U.S. Parents' Operations
This section examines the changes in U.S.--parent gross product by industry and the U.S.--parent share of private U.S. GDP in 1989 and 1998.9
Changes in gross product
The gross product of all U.S. parents increased 2.2 percent in 1998, to $1,609 billion, compared with an average annual increase of 5.3 percent in 1989--97 (table 3).
In 1998, U.S.--parent gross product increased most rapidly in transportation equipment manufacturing (9.9 percent), in "other" industries (8.3 percent), in wholesale trade (8.2 percent), and in ufacturing partly reflected the industry reclassification of U.S.--parent companies.
IMAGE TABLE 56Table 3
Table 4.
U.S.--parent shares of Private GDP
U.S. parents accounted for 24 percent of the gross product of all private U.S. businesses in 1998, down slightly from 25 percent in 1989 and in 1997 (table 4).12 The decrease was more than accounted for by U.S. parents in manufacturing.13 In that industry, the U.S.--parent share fell to 58 percent in 1998 from 60 percent in 1997 and from 62 percent in 1989. The 1997--98 decrease mainly reflects the concentration of U.S.--parent companies in petroleum manufacturing--the major manufacturing industry in which current--dollar U.S. GDP had the largest percentage decrease (down 5 percent) in 1998. The decrease since 1989 reflects both the concentration of U.S. parents in slower growing industries, such as petroleum manufacturing, and the reclassfication of some U.S. parents from manufacturing to other industries.
However, the U.S.--parent share in manufacturing was still higher (58 percent) than that in the services industry (8 percent) or in all other industries (18 percent) in 1998. The high share in manufacturing partly reflects the firm-specific intangible assets (such as patents or brand images) that allow these firms to earn profits that are sufficient to overcome the additional costs of producing in foreign markets. The low share in the services industry partly reflects the impediments to investing in some host countries; for example, U.S. direct investment in health care services, one of the largest service industries in the United States, is constrained or precluded in countries where the government plays a prominent role in the delivery of health care. In addition, some service industries that are characterized by small-scale production (such as dry cleaners and hair stylists) may lack the financial resources and the firm--specific advantages that often provide the basis for direct investment in other industries.
Operations of Majority--Owned Foreign Affiliates
This section examines selected aspects of the operations of majority-owned foreign affiliates (MOFA's) of U.S. MNC's: The 1997--98 change in gross product, the country and industry distributions of newly acquired or established MOFA's, the MOFA shares of host country GDP, and the 1997--98 changes in the real gross product of MOFA's in manufacturing.
Changes in gross product
The gross product of MOFA's decreased 1.9 percent in 1998, to $510.7 billion, compared with an average annual increase of 7.2 percent in 1989--97 (table 5). The gross product of MOFA's in Europe increased, but this increase was more than offset by decreases in all the other geographic areas. The decreases mainly reflected the aforementioned changes in host--country economic conditions, in the exchange value of the U.S. dollar, and in petroleum prices.
In percentage terms, the gross product of MOFA's in Africa decreased the most, 21 percent, but the gross product of MOFA's in Asia and Pacific decreased 13 percent and that of MOFA's in the Middle East, 12 percent. The decreases in Africa and the Middle East were concentrated in the petroleum--extraction industry and reflected the drop in crude oil prices. In Asia and Pacific, the decreases were widespread by country and by industry and reflected either economic recession or weak economic growth in most host countries.
In Europe, MOFA gross product increased 2.0 percent; the increases were largest in Ireland, the United Kingdom, Switzerland, and the Netherlands. In Ireland, the increase was mainly in the drug industry and partly reflected the introduction of new pharmaceutical products by existing affiliates; the increase also reflected the acquisition or establishment of new affiliates. In the United Kingdom, the increases were widespread by industry and partly reflected increased economic growth in goods--producing industries (as measured by hostcountry industrial production) and the acquisition or establishment of new affiliates in various industries. In Switzerland and the Netherlands, the increases were concentrated in wholesale trade and reflected increased sales to customers throughout Europe.
IMAGE TABLE 65Table 5.
By industry, the decreases in MOFA gross product were largest in the petroleum industry and in electronics manufacturing. The decrease in the petroleum industry mainly reflected falling petroleum prices and depressed demand for petroleum products (especially in Asia), and the decrease in electronics manufacturing primarily reflected weak economic conditions and financial--market instability in Asia and Latin America. These decreases were partly offset by increases in "other" industries (mainly communication and retail trade) and services.
Newly acquired or established MOFA's.--Despite the weakness in ongoing MOFA operations, U.S. parents continued to acquire or establish new MOFA's at a rapid pace. In 1998, the gross product of newly acquired or established MOFA's was $7.3 billion, down from $7.8 billion in 1997, but up significantly from $5.0 billion in 1996 and $4.8 billion in 1995 (tables 6 and 7). The rapid increases in new investments partly reflected opportunities created by the deregulation and privatization of some industries in host countries and the availability of funds for investment as a result of rising equity markets and strong economic growth in the United States.
In 1998, new MOFA's continued to be acquired or established primarily in high-wage countries.14 These MOFA's accounted for 84 percent of the gross product of all new MOFA's. This tendency suggests that U.S. direct investment abroad is more attracted by access to large and prosperous markets than by access to low--wage labor. Among the high--wage countries, the United Kingdom accounted for the largest share (44 percent) of the gross product of all new MOFA's. The United Kingdom is a favored location for MOFA operations partly because of its language and its cultural similarities with the United States, its relatively low level of market regulation (compared with most other countries in the region), and its duty--free access to customers in other member countries of the European Union.
IMAGE TABLE 70Table 6.
New investments have been concentrated in high--wage countries, but low--wage countries have been attracting a rising proportion of these investments. Their share of the gross product of all new MOFA's grew from 4 percent in 1995 to 17 percent in 1998. Among these countries, Brazil accounted for the largest share (16 percent) of the gross product of all new MOFA's in 1998; although its economy was in recession, Brazil remained a favored location for MOFA operations, partly because its economy is by far the largest in Latin America.
Manufacturing continued to be the largest industry for new investments. In 1998, it accounted for 43 percent of the gross product of all new MOFA's.
MOFA share of host--country GDP
In 1998, the share of host--country gross domestic product (GDP) accounted for by the gross product of MOFA's ranged from 16.1 percent in Ireland to 0.1 percent in India (table 8). The wide range in the MOFA shares reflected differences in the attractiveness, and in the openness to foreign direct investment, of host economies.
Since 1989, the MOFA share in Ireland has been the largest and the fastest growing (up 3.7 percentage points) of the selected host countries shown in table 8. About two-thirds of the increase was accounted for by affiliates in manufacturing (particularly drug manufacturing). A variety of factors attracted manufacturing affiliates, including language and cultural similarities with the United States, an educated workforce, wages and corporate income taxes that are relatively low for the region, and duty--free access to other markets in the European Union.
IMAGE TABLE 78Table 7.
IMAGE TABLE 79Table 8.
Real gross product of MOFA's in manufacturing
Estimates of real gross product of MOFA's are prepared because changes in the current--dollar measures of MOFA operations can be strongly influenced by changes in prices and exchange rates.15 These estimates of real gross product provide more meaningful comparisons across countries because they are based on purchasing--power-- parity exchange rates rather than on market exchange rates, and they provide more meaningful comparisons across time because they are in chained (1993) dollars.16
The real gross product of MOFA's in manufacturing grew slower in 1998 (1.4 percent) than in 1997 (7.3 percent) and in 1989--95 percent) (table 9).17 The slower growth was more than accounted for by Asian and Latin American affiliates and reflected unfavorable economic conditions, including the Asian financial crisis and the economic recession in Brazil.
In contrast, in the 19 member countries of the Organisation for Economic Co-Operation and Development (OECD) shown in table 9, the real gross product of manufacturing MOFA's grew faster in 1998 (3.6 percent) than in 1989--97 (1.6 percent).18 The rapid growth mirrored the growth in total host--country output; in 1998, industrial production in these countries grew 3.5 percent, compared with 1.7 percent in 1989-97 (chart 2).19
IMAGE TABLE 87Table 9.
The real gross product of MOFA's in manufacturing increased $3.0 billion in 1998. This increase was concentrated in the United Kingdom (up $1.3 billion), Canada (up $1.0 billion), Spain (up $0.8 billion), and Ireland (up $0.7 billion). The increase in the United Kingdom was widespread by industry and reflected increases both in total manufacturing output in the United Kingdom and in the acquisition and establishment of new affiliates. The increases in Canada and Ireland were concentrated in the chemicals industry and mainly reflected the introduction of new pharmaceutical products. The increase in Spain was concentrated in the primary and fabricated metals industry and mainly reflected the acquisition and establishment of new affiliates.
IMAGE CHART 92CHART 2
IMAGE TABLE 101Table 10.1.
IMAGE TABLE 104Table 10.2.
IMAGE TABLE 106Table 11.
IMAGE TABLE 111Table 12.1
IMAGE TABLE 114Table 12.2
IMAGE TABLE 116Table 13.1.
IMAGE TABLE 120Table 13.2.
IMAGE TABLE 124Table 14.1
IMAGE TABLE 126Table 14.2
SIDEBARKey Terms
The following key terms are used to describe U.S. multinational companies (MNC's) and their operations. For a comprehensive discussion of the terms and the concepts used, see Raymond J. Mataloni, Jr., A Guide to BEA Statistics on U.S. Multinational Companies," SURVEY OF CURRENT BusiNEss 75 (March 1995): 38--55.
U.S. MNC's
U.S. multinational company (MNC). The U.S. parent and its foreign affiliates. (In most of this article, an MNC is defined as the U.S. parent and its majority-owned foreign affiliates.)
U.S. parent. A person, resident in the United States, who owns or controls 10 percent or more of the voting securities, or the equivalent, of a foreign business enterprise. "Person" is broadly defined to include any individual, branch, partnership, associated group, association, estate, trust, corporation, or other organization (whether organized or not under the laws of any State), or any government entity. If incorporated, the U.S. parent is the fully consolidated U.S. enterprise consisting of (1) the U.S. corporation whose voting securities are not owned more than 50 percent by another U.S. corporation and (2) proceeding down each ownership chain from that U.S. corporation, any U.S. corporation whose voting securities are more than 50 percent owned by the U.S. corporation above it. A U.S. parent comprises the domestic operations of a U.S. MNC, covering operations in the 50 States, the District of Colombia, the Commonwealth of Puerto Rico, and all other U.S. areas.
U.S. direct investment abroad (USDIA). The ownership or control, directly or indirectly, by one U.S. person of 10 percent or more of the voting securities of an incorporated foreign business enterprise or the equivalent interest in an unincorporated business enterprise.
Foreign affiliate. A foreign business enterprise in which there is U.S. direct investment, that is, in which a U.S. person owns or controls (directly or indirectly) 10 percent or more of the voting securities or the equivalent. Foreign affiliates comprise the foreign operations of a U.S. MNC over which the parent is presumed to have a degree of managerial influence.
Majority--owned foreign affiliate (MOFA). A foreign affiliate in which the combined ownership of all U.S. parents exceeds 50 percent. MOFA's comprise the foreign operations of U.S. MNC's that are controlled by the U.S. parent or parents. In 1998, MOFA's accounted for 82 percent of the employment of all foreign affiliates of U.S. MNC's, up from 77 percent in 1989 (table 1).
Operations of U.S. MNCs
Gross product. The contribution to the gross domestic product of the country of operations, which is the goods and services produced by labor and property located in that country. Gross product, often referred to as "value added," can be measured as gross output (sales or receipts and other operating income plus inventory change) minus intermediate inputs (purchased goods and services). Alternatively, it can be measured as the sum of the costs incurred (except for intermediate inputs) and the profits earned in production. The gross product estimates presented here were prepared by summing cost and profit data collected in the annual and benchmark surveys of USDIA. For the derivation of the current--dollar estimates of gross product, see Raymond J. Mataloni, Jr., and Lee Goldberg, "Gross Product of U.S. Multinational Companies, 1977--91," SURVEY 74 (February 1994): 57.
Capital expenditures. Expenditures made to acquire, add to, or improve property, plant, and equipment (PP&E). PP&E includes land, timber, mineral and like--rights owned, structures, machinery, equipment, special tools, and other depreciable property; construction in progress; and tangible and intangible exploration and development costs. Changes in PP&E due to changes in entity--such as mergers, acquisitions, and divestitures--or to changes in accounting principles are excluded. Capital expenditures are measured on a gross basis; sales and other dispositions of fixed assets are not netted against them.
Employment. The number of full--time and part--time employees on the payroll at yearend. If the employment of a parent or an affiliate was unusually high or low because of temporary factors (for example, a strike) or large seasonal variations, the number that reflected normal operations or an average for the year was requested.
SIDEBARData on U.S. Direct Investment Abroad
BEA collects two broad sets of data on U.S. direct investment abroad (USDIA): (1) Financial and operating data of U.S. parent companies and their foreign affiliates, and (2) international transactions and direct investment position data.1 This article presents the first set of data; the international transactions and direct investment position data appear in the following articles in this issue of the SURVEY OF CURRENT BUSINESS: Russell B. Scholl, "The International Investment Position of the United States at Yearend 1999"; Douglas B. Weinberg, "U.S. International Transactions, First Quarter 2000"; and Sylvia E. Bargas, "Direct Investment Positions for 1999: Country and Industry Detail."
The data on USDIA in this article are classified by International Surveys Industry (ISI) groups that were adapted from the Standard Industrial Classification (SIC) Manual, 1987--the classification system used until recently as the standard for industry classification in Federal economic statistics. The SIC system has been superceded by the 1997 North American Industry Classification System (NAILS). BEA has developed new ISI codes that are based on NAILS; these codes will be used for the data collected in the 1999 benchmark survey of USDIA.
Financial and operating data.--The data on the overall operations of U.S. parent companies and their foreign affilfates are collected in BEA's annual and benchmark surveys of USDIA. The data include balance sheets and income statements, employment and compensation of employees, research and development expenditures, sources of finance, trade in goods, and sales of goods and services. In addition, the gross product of U.S. parent companies and their majority--owned foreign affiliates is estimated from the data reported in these surveys.
Except in benchmark survey years, these data cover only nonbank U.S. multinational companies (MNC's); U.S. MNC's in banking (1987 Standard Industrial Classifications 6011, 602, 606, 6712, and 608) are exempt from reporting. AN the financial and operating data are on a fiscal--year basis. The data cover the entire operations of U.S. parent companies and their foreign affiliates, irrespective of the percentage of U.S.--parent ownership.
International transactions and direct investment position data.--These data, covering bank and nonbank U.S. MNC's, are collected in quarterly surveys of USDIA. The data cover the cross--border transactions and positions between U.S. parents and their foreign affiliates, so they focus on the parent's share, or interest, in the affiliate rather than on the affiliate's size or scale of operations. The major items that are included in the U.S. international transactions accounts are direct investment capital flows, direct investment income, royalties and license fees, and other services transactions between U.S. parents and their foreign affiliates.
1. For a comprehensive discussion of these two sets of data, see Raymond J. Mataloni, Jr., "A Guide to BEA Statistics on U.S. Multinational Companies," SURVEY 75 (March 1995): 38--55. This guide is available on BEA's Web site; go to <www.bea.doc.gov> and click on "International, Articles."
SIDEBARAcknowledgments
The estimates presented in this article were derived from BE?is Annual Survey of U.S. Direct Investment Abroad. The survey was conducted under the supervision of James Y. Shin with contributions by Joan 0. Adams, Margo R. Collier, Jeanne Hicks, Barbara S. Huang, Barbara K. Hubbard, Christine J. Lee, Nefertari I. Lee, Shu-Fen Lee, Marcia S. Miller, Juanita L. Mortimer, Pearl Rivers, Nancy F. Steffen, Rubena I. Thomas, and Dwayne Torney.
Computer programming for data estimation and the generation of data tables was provided by Fritz Mayhew and Carole Henry.
SIDEBARData Availability
This article presents a summary of the preliminary estimates of the worldwide operations of U.S. multinational companies (MNC's) from the 1998 Annual Survey of U.S. Direct Investment Abroad and the final estimates from the 1997 Annual Survey of U.S. Direct Investment Abroad. More detailed estimates, including the gross product estimates, will be available later this year on BEA's Web site, on diskettes, and in publications; the availability of these estimates will be announced on the inside back cover of the SURVEY OF CURRENT BUSINESS.
The results of the 1994 benchmark survey are available on BEA's Web site, on diskette, and in US. Direct Investment Abroad: 1994 Benchmark Survey, Final Results.
Detailed estimates of U.S.--MNC operations for 1983--93 and for 1995--96 and preliminary estimates for 1997 are also available on BEA's Web site at <www.bea.doc.gov>; click on Catalog of Products, and look under "International Accounts Products," "U.S. Direct Investment Abroad."
For information on the diskettes, see the Catalog of Products, or for a copy of the catalog, call 1-800-704-0415 (outside the United States, call 202-606-9666).
For information on publications, see the Product Guide of the International Investment Division on the Web site, or write to the International Investment Division, BE-50, Bureau of Economic Analysis, Washington, DC 20230. Among the recent publications is a collection of BEA studies on international direct investment; see the inside back cover of the SURVEY.
Tables 10 through 14 follow.
FOOTNOTE1. This article presents highlights from the 1997 and 1998 annual surveys. More detailed estimates will be available later this year (see the box "Data Availability" on page 36).
FOOTNOTE2. An MNC comprises a U.S. parent company and its foreign affiliates. The examination of the foreign operations of U.S. MNC's primarily uses the data for MOFA's rather than for all foreign affiliates, because parents and MOFA's are usually under U.S. managerial control (whereas other foreign affiliates are usually under the control of foreign owners) and because the necessary data items for this analysis are collected only for MOFA's.
FOOTNOTE3. Crude oil prices fell 34 percent in 1998 on the basis of 12-month averages of the refiners' acquisition cost of domestic and imported crude oil from the Energy Information Administration of the U.S. Department of Energy. In contrast, worldwide production of crude oil increased only 2 percent.
FOOTNOTE4. In addition to examining changes from 1997, changes from 1989 are sometimes used to provide historical perspective; the year 1989 is a benchmark survey year for U.S. direct investment abroad, and until 1994, the estimates of gross product for U.S. parents (the basis for much of the analysis in this article) were available only for benchmark survey years.
FOOTNOTE5. The preliminary 1997 estimates were published in Raymond J. Mataloni, Jr., "U.S. Multinational Companies: Operations in 1997," SURVEY OF CURRENT BUSINESS 79 (July 1999): 8-35.
FOOTNOTE6. In 1998, the weighted average (in terms of MOFA gross product) U.S.-dollar price of the currencies of 7 euro-area countries and of 16 other major host countries fell 8.0 percent. (Collectively, these countries accounted for 86 percent of total MOFA gross product in 1998.) This decrease lowered the dollar value of MOFA gross product by a similar amount when the data reported to BEA in dollars were translated from foreign currencies, as is believed to generally be the case.
The average rate of price inflation in these host countries was derived as a weighted average (in terms of MOFA gross product), using, in most cases, the GDP implicit price deflators for the countries.
FOOTNOTE7. MNC-associated trade consists of intra-MNC trade (trade between U.S.parent companies and their own foreign affiliates) and MNC trade with "others" (trade between U.S.-parent companies and foreigners other than their own affiliates and trade between foreign affiliates and U.S. residents other than their own parents). The MNC-associated shares of total U.S. trade are overstated to the extent that the trade with others includes trade between U.S.-parent companies and foreign affiliates of other U.S.-parent companies. Such trade cannot be separately identified, but in most cases, it would be reported twice on the annual survey-once for the U.S. parent that exports or imports the goods and once for the foreign affiliate that is involved. However, the effect of this duplication on the shares of total trade accounted for by MNC-associated trade is relatively small; even if all MNC trade with others were accounted for by duplicated transactions, the MNC-associated shares of total U.S. trade would differ from those given in the text and in table 2 by only a few percentage points.
8. MNC-associated trade accounts for an even larger share of U.S. trade in goods if trade involving U.S. businesses owned by foreign MNC's is included. In 1997-the latest year for which data are available-U.S. affiliates of foreign MNC's accounted for 20 percent of U.S. exports of goods and for 30 percent of U.S. imports of goods. However, as noted in footnote 9, these U.S.-affiliate shares overlap the U.S.-MNC shares because some U.S. parents are also U.S. affiliates of foreign companies. In 1998, trade of these U.S. parents accounted for 17 percent of MNC-associated exports and for 31 percent of MNC-associated imports. (See the addenda to table 2.)
FOOTNOTE9. A U.S. parent may be under the control of a foreign-parent company; in 1998, US. parents that were ultimately controlled by foreign parents accounted for 9 percent of the gross product of all US. parents.
FOOTNOTE10. "Other" industries consists of agriculture, forestry, and fishing; mining; construction; transportation; communication; electric, gas, and sanitary services; and retail trade.
11. Each U.S. parent is classified in the industry that accounts for the largest portion of its sales. Many U.S. parents are involved in a variety of business activities; changes in the mix of these activities can cause a parent's industry classification to change, but a parent is reclassified only if the change in the primary activity from the prior year is significant or if the change has persisted for 2 years.
FOOTNOTE12. Generally, at the all-industries level, the estimates of U.S.-parent gross product are conceptually consistent with the estimates of gross product for all U.S. businesses in the national income and product accounts. However, for individual industries, inconsistencies may result from differences in the basis for the industrial distribution of the estimates. The industrial distributions of gross product for all U.S. businesses are based on data collected from establishments, which are classified by the principal product or service produced at each establishment, whereas the industrial distributions of U.S.-parent gross product are based on data collected from enterprises (companies), which are classified by the principal product or service produced by all of their establishments combined. Because large companies usually have establishments that are classified in several different industries, the distributions of data by industry of establishment can differ significantly from those by industry of enterprise. In this article, U.S.-parent gross product as a share of the gross product for all private U.S. businesses is computed only at the highly aggregated level shown in table 4.
13. In table 4, unlike in other tables in this article, manufacturing includes some petroleum-related industries in order to be consistent with all-U.S. data on gross product originating by industry (see the note to table 4).
FOOTNOTE14. The distinction between "high-wage" countries and "low-wage" countries is based on the estimates of average hourly wages of production workers of MOFA's in manufacturing; the estimates were derived from data collected in the 1994 benchmark survey of U.S. direct investment abroad, and the analysis is restricted to host countries in which employment by manufacturing MOFA's totaled at least 10,000 employees in 1994.
FOOTNOTE15. For a summary of the methodology used to derive the real gross product estimates and for the estimates of real gross product for 1982-93, see Raymond J. Mataloni, Jr., "Real Gross Product of U.S. Companies' Majority-Owned Foreign Affiliates in Manufacturing," SURvEY 77 (April 1997): 8-17.
FOOTNOTE16. The 1993 (reference year) estimates of real gross product are based on purchasing-power-parity (PPP) exchange rates for 1993, the latest year for which PPP exchange rates were available on a timely basis and in enough detail to compute the real gross product estimates. In early 2000, the Organisation for Economic Co-Operation and Development released detailed PPP exchange rates for 1996, and these 1996 rates will be incorporated next year into the real gross product estimates for MOFA's.
17. Real gross product grew 1.4 percent in 1998, while the current-dollar gross product decreased 1.2 percent. The decrease in the current-dollar gross product reflected the dampening effect of the appreciation of the U.S. dollar.
FOOTNOTE18. The estimates of the real gross product of MOFA's in manufacturing in individual countries are restricted to these OECD member countries because of source data limitations.
19. The changes in the estimates of the real gross product of manufacturing MOFA's tend to be more volatile than the changes in host-country industrial production, mainly because the changes in the real gross product of MOFA's are much more sensitive to the entry and exit of firms and because manufacturing MOFA's tend to be more heavily concentrated in cyclical industries (such as durable-goods manufacturing). These changes were especially volatile in 1989-94, primarily reflecting the economic recession and recovery in Europe.
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