U.S. multinational companies: operations in 2001

Survey of Current Business, Nov, 2003 by J. Raymond Mataloni, Jr.

VALUE added in production, or the "gross product, of both U.S. parent companies and their majority-owned foreign affiliates (MOFAs) declined in 2001, according to preliminary estimates from the annum survey of U.S. direct investment abroad conducted by the Bureau of Economic Analysis (BEA). The total gross product of U.S. multinational companies (MNCs)--U.S. parent companies and their MOFAs combined--declined 7.7 percent (table 1). The decline was the first since at least 1994, when the annual series on MNC gross product begins. The decline in the gross product of U.S. parents, at 8.8 percent, was considerably steeper than the decline in the gross product of MOFAs, at 3.8 percent. Employment by MNCs declined 1.3 percent, and the decline was more than accounted for by the U.S. parent companies, whose employment declined 1.8 percent; employment by MOFAs increased 0.3 percent. Despite these declines in gross product and employment, MNCs continued to increase their capital spending in 2001. Capital spending by MNCs increased 4.3 percent; the growth in spending by U.S. parents, at 5.2 percent, outpaced growth in spending by MOFAs, at 0.7 percent.

The changes in MNC gross product reflected both generally weak economic conditions worldwide and particular circumstances in a number of industries in which MNCs have a significant presence, including cyclically sensitive durable-goods manufacturing industries, telecommunications, and finance and insurance. The major developments described in this article were largely attributable to changes in the ongoing operations of firms that existed in both 2000 and 2001 because only a small number of parents and affiliates exited the MNC universe in 2001.

By industry, the decrease in MNC gross product was mainly accounted for by durable-goods manufacturing, such as motor vehicles and computers. Falling production in these industries mainly reflected weak demand by businesses and consumers. Worldwide unit sales of motor vehicles decreased slightly in 2001 after increasing 3 percent in 2000. (1) Worldwide unit sales of personal computers fell 5 percent in 2001 after increasing 15 percent in 2000. (2) The cyclical sensitivity of demand for durable goods has been widely noted and reflects a tendency for businesses and consumers to postpone purchases of durable goods during periods of economic weakness and uncertainty. (3) In some industries, the decrease in MNC gross product was partly attributable to reductions in the market share of some U.S. parents. For example, in the United States, the largest U.S. vehicle manufacturers that are U.S. parent companies lost significant market share to manufacturers that are not U.S. parents or that are parents who obtain more of their inputs from outside the firm.

MNC gross product in the United States and in every other major geographic area decreased (chart 1). The gross product of U.S. parents, which continued to account for more than three-fourths of U.S.-MNCs gross product, decreased about twice as fast as that of MOFAs. The sharper decreases in parent gross product coincided with relatively weak economic growth in the United States: In 2001, real economic growth in the United States was only 0.3 percent, compared with 1.5 percent, on average, in MOFA host countries. (4) In percentage terms, decreases abroad were most pronounced in Africa and in Latin America and Other Western Hemisphere. In Africa, the gross product of

MOFAs decreased 11 percent, reflecting the concentration of MOFA production in oil and gas extraction combined with a fall in oil prices and weak demand for petroleum products. In Latin America, decreases were concentrated in South America--particularly Brazil and Argentina--and generally reflected weak business conditions.

The following are additional highlights of MNC operations in 2001:

* Worldwide production, capital expenditures, and employment of U.S. MNCs remained concentrated in the United States: U.S. parents accounted for about three-fourths, and MOFAs for about one-fourth, of their combined gross product of $2,535.6 billion, employment of 31.6 million, and capital expenditures of $528.6 billion.

* U.S. MNCs continued to account for a large share of U.S. trade in goods. U.S. exports of goods that involved U.S. parents or their foreign affiliates were $425.4 billion, or 58 percent of total U.S. exports of goods. U.S. imports of goods that were associated with U.S. MNCs were $432.9 billion, or 38 percent of total U.S. imports of goods.

* Newly acquired or established MOFAs continued to be concentrated in large and affluent markets, such as the European Union, and in most cases, the sales by these new affiliates continued to be directed primarily toward the local market. This tendency suggests that access to markets continues to be a more significant factor in investment decisions than access to low-cost labor and other productive resources.

* Despite the falling total gross product of MOFAs, the gross product of MOFAs in Eastern Europe increased at a double-digit rate as it has, almost unabated, since 1989, when the Berlin Wall fell and the region began to reopen to investments from Western countries. Some of the region's features that are conducive to foreign direct investment are an abundance of skilled labor and natural resources and the proximity to large, affluent European markets.