Where America's Bottom Line May Be Squeezed Overseas

Everyone knows that U.S. corporations have become increasingly global in their operations--a development that has increased the sensitivity of their bottom lines to currency shifts and foreign economic trends. But the fastest growth of American direct investment abroad hasn't necessarily been in areas one might suspect.

"To a surprising degree," says economist Rosanne M. Cahn of First Boston Corp., "U.S. corporations seem to prefer to form direct-investment ties in the more stable, developed countries and to avoid heavy investment in the fast-growing developing world."

Cahn draws this conclusion from Commerce Dept. reports on foreign profits of U.S. companies from 1982 to 1991, the last year for which detailed numbers are available. The data indicate that such profits--which reflect acquisitions as well as expanded subsidiary operations--rose at a compound annual rate of 10.8% in that nine-year period. That's almost twice as fast as domestic profits of the same U.S. multinationals.

Foreign profits earned in Europe were particularly strong, rising at a 16.6% annual rate in dollars (and a 14.5% pace in European currency terms). But foreign profits earned outside of Europe, Canada, and Japan grew at only half the rate of total overseas profits.

Such data, says Cahn, suggest that "as recently as a year or so ago, U.S. companies were still not expanding direct investment outside of industrialized countries with any conviction." Apparently, their primary strategy to take advantage of low labor costs in the developing world is still focused on importing cheap goods made by local companies.

The upshot is that developed countries now account for more than two-thirds of the foreign profits of U.S. companies. And Europe, whose share has risen from 43% of all foreign profits in 1982 to just over 60% in 1991, is by far the area of deepest concentration. Scanning various industries, one finds that U.S. multinationals in oil, drugs, soaps, computers, electronic components, motor vehicles, tobacco, advertising, and data processing each derived at least a third of their total sales from foreign markets in 1991.

All this implies that the multinationals could take a sizable hit this year. Whereas their foreign operations normally contribute perhaps 30% of their total profits, the foreign share jumped to over 70% in 1991, as the U.S. recession and huge write-offs ravaged domestic earnings. In 1993, however, the deepening recession in much of Europe combined with weakening European currencies against the dollar suggest that overseas profits will be unusually slim.

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