US DIRECT INVESTMENT IN THE LESS DEVELOPED COUNTRIES
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11-c-031
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
US Direct Investment in the Less Developed Countries
ON FILE DEPT OF COMMERCE RELEASE
INSTRUCTIONS APPLY
Confidential
ER IM 71-231
December 1971
Copy No.
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of 'title
18, sections 793 anti 79-1. of the US Cjdv. as amended.
Its transmission or revelation of its runtrnts to or re-
ceipt by an unauthorized poison is prohibited by Lm.
r.c(JUV i
d..^~.rJ "rI r..l
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1971
US DIRECT INVESTMENT
IN THE LESS DEVELOPED COUNTRIES
Introduction
1. Both the United States and the less developed countries (LDCs)
benefit substantially from their investment relations.(t) Investment income
from the LDCs is an important element in the US balance of payments,
while US private capital plays a crucial economic development role and
contributes to raising living standards in the host countries. Nevertheless,
US investors increasingly are a key target of nationalists who to some degree
influence the governments of virtually all of the LDCs. US investors in
those areas affected by intense nationalist pressures, such as parts of Latin
America,(2) have been subject to a variety of punitive actions, including
expropriation without compensation.
2. Although radical economic nationalism has not yet become
pandemic, pressures for greater domestic control over national resources
have risen throughout the world. In many cases, restrictive policies could
lead to serious financial an d political losses to the United States and slower
economic development for the LDCs if new rul.s acceptable and profitable
to both sides cannot be worked out. This memorandum provides a statistical
I. This memorandum discusses only direct investment, defined as the equity in, and
direct parent company loans (plus some nonaffiliated loans but excluding bank and
government agency loans) to, a foreign enterprise in which a US resident, organization,
or affiliated group owns at least 10% of the voting stock or its equivalent in a
non?ncorporated enterprise. It does not consider other important forms of private
investment such as long-term commercial and bank loans, suppliers' credits, arid portfolio
investments.
2. Throughout this memorandum, the term Latin America is used interchangeably
with less developed countries of the Western Hemisphere.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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view of US direct investment abroad, including its geographic and industrial
distribution and relative rates of return, and briefly describes the investment
policies of both the LDCs and the United States. It also assesses the
economic impact on the LDCs and the gains and losses accruing to the
United States from these investments.
Summary
3. US direct investment in the LDCs has grown rapidly in the last
decade despite rising nationalist pressures that have adversely affected US
investment earnings in some areas. This growth has been stimulated by the
widening search for raw materials, continuing attractive profit opportunities,
and the desire by US-based multinational firms to gain access to new, often
highly protected markets. It has also been influenced by the continued
receptiveness to foreign capital, management skills, and technology on the
part of many LDCs and by US Government encouragement through its
investment insurance program of private investor participation in the task
of economic development in the LDCs.
4. The book value of US direct investment in the LDCs totaled some
$21.4 billion at the end of 1970, almost double the 1960 level. Reflecting
an even greater expansion in the developed countries during the period,
however, the LDCs' share of total US direct investment abroad slipped from
35% to 27%. Extractive industries account for about half the LDC total -
39% for petroleum alone - but manufacturing, which registered the most
rapid growth in the decade, now makes up about one-fourth of the total.
Despite its relatively poor performance in attracting foreign investors during
the 1960s, the Western Hemisphere sti!1 accounts for 69% of US investment
in the LDCs -- and an 83% share if petroleum investments are excluded.
5. Contrary to charges by many LDC nationalists, the rate of return
on US investments abroad, outside the petroleum field, has averaged only
slightly higher in less developed areas than in the more politically stable
developed countries. While mining and smelting operations generally have
been more profitable in the LDCs, manufacturing returns are about the
same in both areas, and returns on trade, banking, and other services are
lower in the LDCs. To a large extent, the much higher yields on US
petroleum investments in the LDCs reflect company pricing policies that
result in higher profits on crude production than in refining and distribution.
6. Over the last decade or so, the climate for US direct investment
in the LDCs has become less hospitable, and in some areas - particularly
in Latin America - this trend has intensified in the last couple of years.
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In numerous instances, the properties of US firms have been expropriated,
sometimes without compensation. In August 1971, for example, 45
expropriation cases and 26 negotiated purchases of US properties were
pending in the LDCs. The widespread increase in restrictions and controls
on foreign firms is perhaps even more indicative of the changing climate
for foreign investment in the LDCs. In general, these controls seek to
maximize benefits from foreign capital, management skills, and technology
while limiting foreign profits, control, and sectors of operation.
7. Although it is generally conceded that US direct investment has
contributed substantially to economic growth and development in the LDCs,
it is virtually impossible to quantify this contribution. Statistics available
on US investment in Latin America in 1966 do indicate, however, that
US wholly- or majority-owned firms accounted for an estimated 15% of
the region's aggregate gross domestic product, 60%-80% of its mineral export
earnings, and 40% of its exports of manufactured goods. Despite frequent
Latin American claims to the contrary, US firms also made an estimated
minimum net contribution to the region's foreign exchange receipts of $1.7
billion in 1966 - not including that share of import savings that would
not have occurred in the absence of domestic sales by these companies.
8. US income from direct investment in the LDCs provided about
$3.1 billion in foreign exchange in 1970 -- slightly more than the $2.9
billion from similar investments in developed countries. Moreover,
investment income from the LDCs in the I 960s was much greater than
new capital outflows to them, and the gap has been growing. The surplus
for LDCs was $2.2 billion in 1970, compared with a $0.5 billion deficit
for deveioped countries. The petroleum sector provided about 80% of this
surplus. Because of the complexity of the trade effects of US foreign direct
investment, an accurate netting out of total US balance-of-payments gains
is not possible, but the adverse effects on the US trade balance probably
has not significantly offset investment income gains from the LDCs.
9. Despite a less than hospitable climate in many LDCs, growing
US dependence on foreign sources of raw material supplies and attractive
profit opportunities still available in some areas will generate continued
growth in US direct investment in the area as a whole over the next several
years. Those more advanced L DCs promising stability in investor rules and
some isolated countries not yet greatly affected by economic nationalism
will attract the largest share of this capital. Manufacturing may continue
to increase its share of US investment in the LDCs, but equally profitable
ol,portunities in the developed countries will make such investment highly
sensitive: to hostile policies. Although mining firms will continue to shift
investments to developed areas of lower risk, there is a limit to their ability
to dL, so, given the distribution of known world resources. Because of the
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expected continuing decline in petroleum's share of total US direct
investment in the LDCs and further squeezes on company earnings by
members of the Organization of Petroleum Exporting Countries (OPEC),(-3)
overall investment rates of return should continue to decline in the 1970s.
This adverse trend probably will be reinforced by unfavorable host-country
policies in other sectors as well as by stiffer competition from Western
Europe and Japan for manufacturing investment opportunities.
Discussion
The Statistical ..ting
10. At the end cf 1970 the book vaiue(4) of US direct investment
abroad totaled some $78 billion, almost two and one-half times its 1960
level. During the decade, US investment in the LDCs rose from $11.1
billion(5) to $21.4 billion, but the LDCs' share of US investment declined
from 35% to little more than 27%. Although most of this slippage is
attributable to the relatively low rate of investment in the less developed
countries in the Western Hemisphere, this area still accounts for 691n of
total US investment in the LDCs (see Table I and Figure 1).
11. Direct investment in extractive industries continues to represent
the lion's shale of US holdings in the LDCs. Despite declines in their shares
in the past decade, in 1970 the petroleum sector still accounted for about
39% of total book value and mining and smelting operations for an
additional 12%. These investments - mainly in Latin American and African
minerals and Venezuelan and Middle East oil -- reflect the worldwide search.
for raw materials required by the more developed countries. Manufacturing
activities, however, showed the greatest power to attract new US capital
during the 1960s, and now account for more than oite-fourth of US direct
investment in these areas. Manufacturing investments serve mainly to
develop import-substitution industries in Latin America and in the larger
Asian countries, but in Hong Kong, Taiwan, and South Korea, and in
Mexican border industries they are intended primarily to expand output
fo the US and other export markets. Important shifts also have occurred
3. The member countries of OPEC are Abu-Dhabi, Algeria, Indonesia, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and Venezuela.
4. Book values are the cumulative values of investments (including reinvestments) made
at. various times, less depreciation and losses; they usually understate, often substantially,
the current value of these investments.
5. Excluding the $956 million investment in Cuba still carried in US statistics at that
time.
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Distribution of US Foreign Direct Investment
in the Less Developed Countries
Million US $
1960 -
1966
1969 1970
Total
31J865
541 711
71j016 78, 090
Developed countries
19,319
36,633
47,886
53,111
Less developed countries,
by area
11,128
16,062
20,045
211417
Latin America
8,365
.1',448
13,841
14,683
Africa
639
1,474
2,227
2,612
Middle East
1,163
1,669
1,805
1,645
Asia and Pacific
961
1,471
2,172
2,477
International-unallocated
1,418
2;016
3,085
3,563
Less developed countries,
by sector
11,128
16,062
20,045
21,417
Mining and smelting
1,544
1,849
2,339
2,481
Petroleum
5,034
6,911
7,845
8,377
Manufacturing
1,727
3,841
5,159
5,482
Other
2,823
3,462
4,700
5,078
a. The date in this table are book va ues. Because of
rounding, components may not add to the totals shown.
among other sectors which supply mainly services for the local market.
Trade and financial institutions gained new capital while investment in
public utilities and transportation declined sharply as a result of continued
nationalizations during the 1960s.
12. The Western Hemisphere holds a predom. 1ant share of US direct
investment in the LDCs in all sectors except petroleum, and even in that
industry it more than matches the Middle East and Africa combined.
Excluding petroleum, 80% to 85% of US investment in the LDCs has been
channeled into Latin America (see Figure 2). In the manufacturing sector,
three countries - Brazil, Mexico, and Argentina - alone account for
three-fifths of US investment outside developed areas of the world. Although
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Geographic Distribution of US Foreign Direct Investment Figure 1
Sectoral Distribution of US Direct Investment in Less Developed Countries
'Estimated Breakdown: Transportation and Utilities 4%
Trade 9%
Other 11%
"Estimatua Breakdown: Transportation and Utilities 10%
Trade 7 %
Other 8%
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Western Hemisphere Share of US Direct Investment
;n the Less Developed Countries, by Sector, 1970
Figure 2
100%
100%
100%
100%
100%
Billion US $ $21.4
$2.5
$8.4
$5.5
$5.0
V.nh:usi.
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Mining and Petroleum
Smelting
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the share of the smaller Asian countries in US direct investment in thn
LDCs is still minuscule, the rapid growth of US manufacturing investment
and of competition by US subsidiaries in areas like Taiwan and Hong Kong
has generated the greatest concern in the United States. Latin America also
holds 82% of the US capital that is in LDC mining and smelting operations -
and, indeed, it holds two-thirds of worldwide US investment outside of
Canada, despite expropriations in such countries as Chile and Bolivia and
ownership restrictions elsewhere in the region. Because of large-scale
involvement in Latin American trade, finance, and tourism, this area
accounts for more than four-fifths of US investment in the LDCs in all
other sectors as well.
13. Contrary to nationalist allegations of excessive profit-taking by
US firms operating in their countries, the rate of return on US foreign
direct investment in all fields except petroleum generally averages only
slightly higher in the LDCs than in developed countries. During the 1960s,
the rate of return on total US direct investment (excluding petroleum) was
never more than about 2 percentage points higher in the LDCs than that
derived from US operations in the developed countries, and in 1970 the
rate for LDCs averaged slightly lower (see Figure 3). Comparative rates of
return vary widely among sectors. Mining and smelting operations in the
LDCs generally have been far more profitable, with rates of return averaging
19% during the 1960s, compared with 11% in the developed countries. In
1970, however, plunging profits in Chile and Peru brought the LDC average
return on US mining investment down to 14% -- only 2 rercentage points
above the average rate in lower-risk countries in the developed area.
Manufacturing investments in the LDCs and developed countries, on the
other hand, yielded the same average return of I % during 1961-70. Returns
on investment in other sectors (not shown in Figure 3) have been
consistently lower in the LDCs throughout the period, averaging almost
2 percentage points below the 11% earned in developed countries.
Policies of the Less Developed Countries
Toward US Direct Investment
14. With some notable exceptions, the LDCs until recently welcomed
US direct investment with relatively few restrictions. Although many LDCs
nationalized foreign-owned railroads and some other public utilities during
the first half of the century and have continued to restrict foreign entry
into these fields, they generally encouraged foreign investment in extractive
industries, manufacturing, and services such as trade, banking, and insurance.
This was especially true in postwar Latin American manufacturing where
many governments, seekir,, to accelerate economic development and
increase economic self-sufficiency, provided substantial tariff and fiscal
incentives to US investors on more or less the same footing as domestic
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Rates of Return* on US Foreign Direct Investment in Figure 3
Developed Countries and Less Developed Countries
26
Total Direct Investment Less Petroleum
DCs
'.DCs
Mining and Smelting
^~^' DCs
- - - LDCs
Manufacturing
DCs
- - - LDCs
0 1 I I I I I I I I I
1961 62 63 64 65 66 67 68 69 70
'Earnings as a percent of book value of direct investment at beginning of year
512474 11-71
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firms. Partly reflecting their more recent colonial status and continued ties
with former metropoles, larger Asian countries and most of the newly
independent countries in Africa in the past tended to accept US direct
investment somewhat less enthusiastically than those in the Western
Hemisphere.
15. Over the last decade or so, however, the climate for US direct
investment in the LDCs has become less hospitable, and in some areas this
trend has intensified markedly in the last couple of years. At least ostensibly
motivated by fears that foreign investors are plundering their natural
resources, contributing too little to their well-being, and exercising undue
local political influence, the LDCs have sought to curb the role of foreign
business. While the more extreme actions have occurred mainly in Latin
America and Africa, few LDCs (except for some of the smaller East Asian
L ountries such as Taiwan, Hong Kong, South Korea, and Malaysia) remain
havens for relatively unrestricted US direct investment. Much of this rising
nv tionalism is based on popular stereotypes of predatory foreign capitalists
from an earlier era and, perhaps more important, on a growing
disillusionment with economic development as a means of achieving rapid
social progress. Nevertheless, it reflects deep-seated socio-political trends that
the United States can do little to deter, either through generous aid or
threat of economic reprisal.(6)
16. Recent takeovers of US business properties are the most
conspicuous illustration of rising economic nationalism in the LDCs. As
of August 1971, some 45 expropriation cases and 26 negotiated purchases
of wholly or partly US-owned properties were pending.(7) All but ten of
these actions have been initiated since 1969. Of the total, about 40% are
in extractive or extractive-related industries and 35% in banking and
insurance. They are divided geographically as follows: 26 each in Latin
America and Africa, eight in the Middle East, and 11 in Asia. In addition,
numerous serious disputes between US-owned firms and LDC governments,
involving concessions and other contracts, tax claims, and labor difficulties,
remained unresolved. Although in most of these cases some progress is being
made toward settlements acceptable to the US owners, these and similar
nationalist-inspired actions continue to pose potential threats to US
investment in the LDCs.
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17. The widespread increase in restrictions and controls on foreign
firms is perhaps even more indicative of the changing climate for fo: eign
investment in the LDCs. Although some LDCs long have closely regulated
foreign investors, the number of countries imposing regulations has grown
markedly since the mid-1960s, especially in Latin America, and the
restrictiveness of the controls has tended to intensify. As indicated by such
cases as Mexico, Brazil, and Indonesia, restrictive policies in themselves do
not necessarly discourage entry of new investor capital, provided market
incentives are adequate and political stability reasonably assured.
Restrictions, however, have a pronounced impact in countries with relatively
weak investor appeal and in areas where rules are subject to frequent change.
18. In general, the investment policies now being adopted by many
LDCs seek to maximize benefits from foreign capital, management skills,
and technology while limiting foreign profits, control, and sectors of
operation. In a number of cases, profits are restricted by discriminatory
tax and labor legislation, and limits on profit remittances have become more
common. Foreign firms are under increasing t.re-s:::e to use local supplies,
employ local construction firms, hire and train local citizens for responsible
positions, and so forth. Such pressures exist mainly in areas like Africa
but also in those more advanced LDCs where backward and forward linkages
with the domestic economies already are significant. Many LDCs now insist
that new foreign operations in particular sectors be joint ventures with the
local government or local private i:westors. In some countries, even minority
foreign ownership is not permitted in such fields as banking and insurance
(which allegedly absorb local credit resources) and exploitation of natural
resources regarded as national patrimony. In some of the more advanced
Latin American LDCs, pre3sure is also growing for closer controls on
mal,afacturing investors on the grounds that their access to advanced
technology and abundant capital gives them an "unfair" competitive edge
over domestic manufacturers.
19. The rules governing foreign investors adopted in June 1971 by
the Andean Common Market -- Chile, Colombia, Peru, Bolivia, and
Ecuador - are perhaps typical of the recent intensification of restrictions
in a number of countries. Under these rules, each country may decide to
reserve certain economic sectors for local ownership exclusively. If new
foreign investments in mining, petroleum, and gas are permitted, they will
be limited to concessions with a 20-year maximum life. All other new
foreign firms except those exporting 80% or more of their output must
have at least 5117c local ownership within 15 years. Existing foreign firms
must convert to a minimum of 15% local ownership, or 511 if they wish
to obtain the common market benefits. Annual profit remittances are
limited to a maximum c .,f 14% of invested capital, and, with few exceptions,
foreign firms are precluded from obtaining local credit or purchasing shares
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of existing local firms. Foreign firms are not permitted to hold more than
a 20% equity in public utilities, banking, insurance, inland transport, and
communications media. Because the rules provide the member governments
several escape clauses, their restrictiveness in application probably will vary
considerably among the five countries.
Economic Impact of US Direct Investment
in the Less Developed Countries
20. US direct investment in the LDCs as a group far exceeds that
of the other developed countries and accounts for about half the total,
compared with the one-fifth accounted for by the Y. nited Kingdom, its
closest comitor.(8) US direct investment, however, predominates only
in Latin America and the Middle East, being overshadowed by British
investments in Asia and by both British and French in Africa. At the end
of 1967, US direct investmei.t accounted for two-thirds of total investment
by developed countries in Latin America and 50%-60% in the Middle East
but in Asia and Africa made up only one-third and one-fifth of the totals,
respectively.
21. It is generally conceded that, by providing capital, management
skills, and technology, US direct investment has contributed to economic
growth and development in the LDCs. Without it, mineral resources in many
less developed areas would have been difficult or impossible to tap. And,
in Latin America particularly, it has helped to spark manufacturing
expansion and to develop relatively advanced communications and electrical
services as well as a sophisticated trade and financial network. Nevertheless,
because relevant statistical data simply are not available, quantification of
the contribution of US direct investment to the LDC economies is virtually
impossible.
22. Statistics available on US investment in Latin America in 1966
do permit some useful, although tentative, measures of its economic impact
in that area.(9) At that time. US wholly- or majority-owned enterprises
accounted for an estimated 157, of aggregate Latin American gross domestic
product; and about the same share of total government tax revenues. Their
foreign sales made up an estimated one-third of tha region's total export
8. Largely because of basic definitional differences, intercountry comparisons of direct
foreign investment are among the least satisfactory statistics and at best serve only as
indicative approximations.
9. These statistics, which were compiled by the US Department of Commerce and
released to the Council for Latin America, Inc., were obtained from the Council's report,
The Effects of United States and Other Foreign Investment in Latin America, January
1971. Part of the statistics recently have been published in US Direct Investments Abroad
1966, Part 1: Balance of Payments, by Frederick Cutler, US Department of Commerce.
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earnings and some 6- 80% of the region's mineral export c Wings.
US-owned enterprises contributed roughly 10% of Latin America's
manufacturing output in 1966 but 40% of manufactured goods exports,
despite the fact that these enterprises produced mainly for domestic
markets. Exports by US-owned manufacturing subsidiaries - about half of
which was shipped to the United States and consisted mainly of food
products, textiles, and chemicals - accounted for only 10% of their total
sales in 1966.
23. The percentage contribution of US-owned enterprises to Latin
America's manufacturing output and to its export earnings from
manufactured goods almost certain!,, has increased since 1966. US direct
manufacturing investments in Mexico, Brazil, and Argentina - the major
regional mamuactured goods exporters - have grown substantially, and the
three countries' foreign sales of manufactured goods have increased
considerably under government export drives. Among these, the major
impetus to manufactured goods export expansion has come from the
Mexican border industry program initiated in 1965. Under the prr:gram,
some 250 US-owned electronics, textile, and other enterprises have been
established in enclaves along the US-Mexican border to import raw materials
and component parts from the United States (tinder bond and duty-free)
for inclusion in finished products which in turn are sold mainly in the
US market. Exports to the United States by these enterprises are expected
to amount to sonic $350 million in 1971.
24. The data on Latin America also indicate that, contrary to frequent
claims by the LDCs, US direct investment does contribute significantly to
their net foreign exchange receipts. It is estimated that US wholly- and
majority-owned firms made a minimum net contribution to Latin America's
foreign exchange receipts of $1.7 billion in 1966. This figure consists of
estimated export earnings of $4.5 billion less estimated total materials
imports by all US subsidiaries of $1.3 billion and profit remittances of
$1.5 billion. If import savings accruing from domestic sales by these US
firms of manufactured goods (estimated at $3.9 billion) and processed
minerals and other goods (estimated at $2.2 billion) also are included, the
total net contribution by US firms to regional foreign exchange availabilities
amounts to $7.8 billion.t t 0) It is probable, however, that a significant
portion of this import substitution, at least in the manufacturing sector,
would have been achieved by domestic entrepreneurs in the absence of US
direct investment.
10. The sales figures have been adjusted to exclude goods and services that do not
enter into foreign trade. They also include a downward adjustment to reflect the fact
tt,at the prices of maay goods produced in Latin America are much higher than the
prices of similar imported goods, even after allowing for import duties.
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25. In the Middle East and Africa, US direct, investment is limited
primarily to the mineral extraction and processing industries, but in Asia
it has been instrumental in developing manufacturing, trade, and other
activities. U, S direct manufacturing investments have been partss:;:ariy
important in the Philippines, India, and in the smaller economies of South
Korea, Taiwan, Malaysia, Singapore, and Hong Kong, where they have
obtained, the highest average earnings rates for manufacturing among the
LDCs. In, the. Philippines as well as India and some otbpr large Asian
countries, US. direct; manufacturing investments have been, oriented mainly
We dpn;Qstip markets, but in the smaller economies thpy, have been
undertaken, primarily to take advantage of low labor; costs, in, producing
for the US; market. Nevertheless, in most of the sinalipr, economies except
the Philippines, South Korea, and Taiwan, US: direct manufacturing
investments; are equaled, if not substantially surpassed; by tbpse of Japan
anda tfte, United Kingdom.
US, Government and Company Policies Toward
Investment in the Less Developed Countries
26. Encouragement of private capital participation ;n the task of
foreign economic development is a longstanding US Government policy.
Private investment capital never has been considered a substitute for official
bilateral and multilateral financial assistance, which evidently is almost the
sole source of foreign funds for infrastructural and, other basic
developmental projects. Nevertheless., it has become increasingly clear over
the past decade that the widening gap. between external financing
requ;rements for LDCs and probable foreign aid appropriations for
developed, countries, will be filled largely by private investment or not at
all. US officials also. have considered private investment to be the most
efficient purveyor of advanced technology, managerial lnow-how, skilled
labor training, and other essentials in the development process. LDCs have
been given favored treatment in US foreign investment p,P.lkcy -- in particular
they were exempted from most of the mandatory restrictions on investment
outflows imposed by the United States in 1968.
27. The political risk investment insurance program -- formerly
administered by the Agency for International Development (AID) but since
January 1971 the province of the Overseas Private Investment Corporation
(OPIC) - is the US Government's most important current means of
implementing its policy of encouraging direct investment in less developed
areas. The investment insurance program minimizes risks of currency
inconvertibility, expropriation, and damage from war, insurrection, or
revolution that might otherwise discourage private investor entry into less
politically stable LDCs. A_: stated in OPIC's legislative charter, the program
pursues two broad objectives: (a) to assist those financially sound
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investments that are welcome in the host countries and that evidently
contribute to their socio-economic development and (b) to follow
risk-man,,igement principles that will permit the Corporation to be financially
self-sustaining,
28. In practice, it is sometimes difficult to fulfill simultaneously both
iojectives of the investment insurance program. Decisions affecting
insurance coverage of large-scale US investment in LDC extractive industries
provide the most obvious example of the difficulties involved. The large
amounts of capital, long lead times, and high technology required for these
projects effectively prohibit the LDCs from making such investments on
their own, and in many countries -- Bolivia and Peru now and Chile at
an earlier time -- mineral resource exploitation provides the oily hope for
significant economic advancement These slime project characteristics
(large-scale capital requirements and delayed pay-off;, however, substantially
increase the risks involved, particularly in LDCs where the investment
climate is subject to sudden shifts and foreign involvement in natural
resource exploitation is the bete noir of radical nationalists.
29. Despite these difficulties, the US Government has not been faced
with Irrge insurance claims before the presently looming Chilean imbroglio.
The program currently is insuring some $500 million of new US investment
annually, or about two-thirds of the total US investment flow to the LDCs,
excluding that into petroleum industries. (OPIC policy precludes insurance
on oil exploration, concession agreements, and investments in suD-surface
property rights.) Political risk insurance of all types now outstanding for
LDC areas totals $8.3 billion, somewhat more than one-half of which covers
Latin American investments. As of mid-1971, gross claims paid were less
than $5 million, whereas gross fees collected exceeded $125 million.
30. OPIC reserves, however, fall far short of total payments that may
have to be made on insured US properties taken over by the Chilean
government. Because OPIC insurance contracts are backed by the full faith
and credit of the US Government, supplementary appropriations will be
required from Congress in such an event.
31. Although US companies investing in the LDCs increasingly are
taking advantage of the protection offered by government insurance, many
of' them - especially in extractive industries -- feel that the program does
not cover the risks most likely to be encountered in the politically more
sophisticated but still unstable areas. They po, it in particular to
discriminatory changes in tax, foreign exchange, and labor rules and to
forced sell-outs of' part of their equity holdings to protect their remaining
"hostage" interests. In fact, a government insurance program can assume
only a part of the responsibilities deriving from foreign investment decisions.
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The major burden - as well as the primary benefit - of investment
decision-making continues to rest with the private company. While most
can be expected to avoid undue risks, growing dependence on LDC raw
materials and the continued lure of quick, large investment returns in some
fields are sufficient to induce investors into high-risk undertakings, thus
increasing their exposure as well as that of the US Government.
32. Despite a new sensitivity to the problems and personalities of
their host countries, US foreign investors often are accused of being less
flexible than their West European and Japanese counterparts in adapting
to the new game rules emerging in many LDCs. US companies do tend
to assign more importance to retaining managerial control of an enterprise
as a means of protecting their investment. In recent years, however, a
growing number of US firms have entered into joint ventures with local
governments and even so-called fade-out ventures now are receiving more
serious consideration. Many companies nevertheless continue to view
fade-out as unrealistic, citing that "foreign investors do not invest to go
out of business," and some consider even joint ventures wherein they retain
a majority interest as a giveaway of a share of the put before the game
has started. Although a more innovative approach by US investors to various
equity schemes would substantially reduce their vulnerability to taKeover
and other punitive action in some LDCs, it is equally true that it would
not make them immune to runaway erosion of the Chilean type.
US Gains and Lo,ses from Direct Investment
in the Less Developed Countries
33. A bright spci in the US balance of payments in recent years is
income from direct investment in the less developed countries, which
provided about $3.1 billion in foreign exchange in 1970 (see Table 2) --
slightly more than the $2.9 billion from similar investments in developed
countries. Moreover, investment income from the LDCs in the 1960s has
been much greater than new capital outflows to than, and the gap has
been growing. The surplus for LDCs of $2.2 billion in 1970 (compared
with a deficit of $0.5 billion for developed countries) was substantially
greater than the $1.3 billion and $1.4 billion surpluses obtained in 1960
and 1965, respectively (see Table 3).
34. The bulk of the US surplus of direct investment income over
new capital outflows to the LDCs comes from oil investments. In 1970
the petroleum sector provided about 80% of this surplus, compared with
contributions of 10% by manufacturing, 8% by mining and smelting, and
the remainder by all other sectors. Reflecting the concentration of oil
investments in the Middle East, that area accounted for 62% of the total
surplus in 1970, fc!lov'e.d by Latin America, 24%; Africa, 13%; and Asia,
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Comparison of US Investment Income
with Net Capital Outflows, by Area a/
Billion US $
1960
1965
1970
All countries
Investment income
2.4
4.0
6.0
Net capital outflow
1.7
3.4
4.4
Surplus
0.7
0.6
1.6
Less developed countries
Investment income
1.5
2.2
3.1
Net capital outflow
0.?
0.8
1.0
Surplus
1.3
1.4
2.2
Latin America
Investment income
0.7
1.0
1.1
Net capital outflow
0.1
0.3
0.6
Surplus
0.6
0.7
0.5
Africa
Investment income
0.0
0.2
0.6
Net capital outflow
0.1
0.1
0.3
Surplus
-0.1
0.1
0.3
Middle East
Investment income
0.7
0.3
1.2
Net capital outflow
-0.1
0.2
-0.1
Surplus
0.8
0.6
1.3
Asia and Pacific
Investment income
0.1
0.2
0.2
Net capital outflow
0.0
0.2
0.2
Surplus
0.1
0.0
0.0
a. Because of rounding, components may not add to
the totals shown.
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Less Developed Countries: Comparisons of US
Investment Income and Net Capital Outflows
by Economic Sector a/
Billion US $
1960
1965
1970
investment income
1.5
2.2
3.1
Net capital outflow
0.2
0.8
1.0
Surplus
1.3
1.4
2.2
Mining and smelting
In:%:itment income
0.3
0.3
0.3
Net ovepital outflow
0.0
0.0
0.1
Purplus
0.3
0.3
0.2
Petruleivn
Investment income
1.0
1.6
2.2
Net capital outflow
0.0
0.4
0.5
Surplus
1.0
1.2
1.7
Manufacturing
Investment income
0.1
0.1
0.3
Net capital outflow
0.1
0.3
0.1
Surplus
0.0
-0.2
0.2
Other
Investment income
0.1
0.2
0.3
Net capital outflow
0.1
0.1
0.2
Surplus
0.0
0.1
0.1
a. Because of rounding, components may not add to
the totals shown.
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35. Statistics on net capital flows alone, however, do not measure
the full impact on the US balance of payments since direct investment
also heavily affects the US trade balance. Initially it contributes to US
capital goods exports; but, later, US firms' production in the LDCs may
adversely affect the US trade balance if production by US subsidiaries,
abroad replaces US exports or otherwise competes with US domestic
production. Such investments are a main instrument for disseminating US
technology and management skills, which have raised the capabilities of
locally-owned firms in some LDCs to export relatively sophisticated
manufactures to the United States. On the other hand, US investment raises
real incomes in LDCs and consequently increase., their demand for imports,
including those from the United Sta' In general, US investments in
extractive and service industries do not adversely affect the US trade
balance. Investments in extractive industries lead to exports to the Unites
States of goods that would have to be imported in any event, poss'bly
at higher cost. US investments in service industries such as trade, public
utilities, banking, and insurance by their very nature do not substitute for
imports or generate exports. Thus, except in manufacturing, US gains from
direct investment appear to generally exceed the surplus of investment
income over the initial investment by approximately the amount of US
capital goods exports generated.
36. Because of the complexity of the trade effects, an accurate netting
out c" US balance-of-payments gains from direct manufacturing investments
in the LDCs is not possible. Only a few tentative judgments can be made.
US direct manufacturing investments in Latin America, Africa, and the larger
Asian countries allow US firms to gain entry behind protective trade barriers
to produce for local markets. So far, only a small share of their output
has been exported, mainly because they operate at relatively high costs.
Although US manufacturing investment in Latin America has to some extent
replaced imports from the United States, as in the case of automotive
vehicles, it also substitutes for domestic investment and, to a small extent,
for investments by other developed countries. In Africa and Asia, where
direct investments of other developed countries predominate, US
investments probably replace investments by other developed countries, and
US firms' output displaces imports mainly from them. Thus the negative
effects on the US trade balance of US direct investments in these areas
probably are not great.
37. In some cases, however, US direct manufacturing investments have
been effected wholly or partly to take advantage of low labor costs in
the LDCs in producing for the US market. These cases include textile and
electronics assembly industries in Hong Kong, Taiwan, South Korea, and
along the US-Mexican border, as well as some textile and machinery
investments in other Latin American countries, particularly Argentina and
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Brazil. Even here, the adverse effects of these investments on the US trade
balance probably do not significantly offset US investment inccme gains
from them. The investments in East Asia and along the US-Mexican border
were carried out to meet Japanese competition in the US market, and while
imports from these countries have boc,med, they probably displace further
increases in Japanese exports to tine United States. Moreover, the
export-generated prosperity occurring in the ,mall East Asian countries has,
in turn, triggered a rapid rise in their imports from the United States.
38. Rising economic nationalism has had and is likely to continue
to have a serious impact on US gains from direct investment in the LDCs.
For example, much of the $71 million decline in total US direct investment
earnings (i.e., before reinvestment) from LDCs in 1970 compared with 1969
is attributable to losses from nationalistic government action. L - sings drops
of $158 million in Latin America and $54 million in Libya (where
temporary government restrictions cut oil output) were not fully offset by
gains elsewhere. While part of the Latin American decline results from other
causes, nationalizations and measures to increase local shares of the profits
of US firms in Chile, Peru, and Venezuela are major factors. On the other
hand, not all nationalistic LDC actions have led to reductions in US earnings.
For example, nationalization of copper properties in Zambia in January
1970 did not significantly reduce US earnings there because equity
participation was exchanged for highly profitable service contracts.
The Special Case of Petroleum
39. Direct investments in petroleum dominate both US holdings in
the LDCs and earnings from them. In 1970 the book value of LDC
petroleum investments - predominantly in producing facilities - amounted
to $8.4 billion, about 39%% of total LDC investments, and oil earnings of
some $2.3 billion accounted for 62% of total LDC earnings. The even larger
US investment in refineries, pipelines, tankers, and marketing facilities in
developed countries - some $12 billion - is totally dependent on oil
;,applies derived from investments in the LDCs. About 47% of LDC oil
investments are in Latin America, 23% in Africa, 17%, in the Middle East,
and 13% in Asia. Partly reflecting company pricing policies that provide
for higher profits on production than on refining and distribution, oil
investment returns in LDCs are far higher than those from other direct
investments, averaging 29% in 1970 compared with 11% for all
non-petroleum investments.
40. US petroleum investments have had an enormous impact on the
economies of the supplier countries. Government oil revenues sparked
Venezuela's rise to second place in per capita gross national product among
the Latin American countries in the early postwar years. They also have
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provided almost the sole impetus to economic growth in a number of Middle
Eastern countries, such as Iran, Kuwait, and Saudi Arabia. Oil revenues
now provide 70'/%-99% of the foreign exchange earnings of all of these
countries. Most have become heavily dependent on continuing rises in oil
revenues to finance elaborate government economic development programs.
41. Although US oil properties were taken over as early as the I 930s
in Mexico, they did not become a focal point for nationalist pressures until
the I 960s, when restrictive and confiscatory policies spread to Brazil,
Argentina, Venezuela, and other Latin American countries. In the late
1960s, nationalistic pressures also arose in the newer, more important oil
producing countries in North Africa, the Middle East, and Asia. OPEC has
become a hi-! ' effective instrument for imposing uniform demands on
the foreign o.' companies. Since many of these countries are unable to
sustain oil ourput without foreign participation, their demands generally
have sought greater profit shares and increased control over production
rather than nationa;ization. The OPEC countries, however, also are now
demanding equity participation in producing facilities, and a few countries
have nationalized some relatively minor ancillary facilities such as domestic
distribution systems. Thus far, US investment earnings have not suffered
significantly from LDC successes in graining larger profit shares, mainly
because the companies have boosted oil prices to consumers.
42. Because 90% of proved Free World oil reserves are located in
the LDCs (80% in the Middle East and Africa), US companies have had
little choice but to continue their investments in these areas despite rising
nationalist pressures, but recently they have favored investments in the more
moderate countries such as Iran, Kuwait, Saudi Arabia, and Indonesia while
avoiding Algeria, Libya, and Iraq. Reflecting the importance of oil
investment income and growing US dependence on LDC oil supplies, the
US Government has placed high priority on encouraging oil investments
in the LDCs and grants the same depletion allowances to overseas investment
as it does to domestic producers. In 1970, imports supplied almost
one-fourth of US oil requirements, and some estimates indicate that by
1980 the import share may rise to almost 50'%%%. Western Europe, where
oil demand is expected to double in the 1970s, and Japan, where it may
treble, are almost totally dependent on imports from the LDCs for their
requirements. Although the largest capital outlays in the 1970s will go into
developing "high-cost" oil in Alaska, Canada, and the North Sea, an
estimated $30 billion will have to be spent in the LDCs to meet expected
? world demand. In view of the massive capital requirements involved, the
governments of both oil producing and oil consuming countries may be
obliged to assume part of the financing load, a responsibility they have
thus far avoided.
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Outlook
43. Economic nationalism probably will continue to adversely affect
US gains over the next several years. Expropriations will continue, especially
in the extractive and service industries; and the LDCs will continue to take
measures to secure greater profit and ownership shares. However, because
of the continuing need of the LDCs for imported technology, management
skills, and capital, this may not have a serious long-term impact on aggregate
investment earnings. The extent of possible US losses will depend largely
on the flexibility of both US investors and their host governments in
accepting viable forms of ownership and control and on their willingness
to enter into management and service contracts.
44, Despite this less hospitable climate, growing US dependence on
foreign sources of raw material supplies and attractive profit opportunities
still available in some areas probably will generate continued growth in US
direct investment in the LDCs as a group. Because of rapidly expanding
markets in the developing countries, manufacturing activities may continue
to attract an increasing share of US direct investment in the LDCs, but
equally profitable opportunities in the developed countries will make such
investment particularly sensitive to hostile policies. US firms involved in
mineral exploitation will continue to shift some of their investments to
lower-risk countries in the developed areas but, given the distribution of
known world resources, there are limits to their ability to do so. Among
the LDCs, the more advanced countries promising stability in investor rules
(even if they are restrictive, vs in Mexico) and some isolated countries not
yet greatly affected by economic nationalism can be expected to attract
most of the new capital. Although the willingness of US companies to
participate in joint ventures with local capital probably will increase, it is
even more likely that they will seek to reduce the risks involved in large-scale
mining projects by forming consortiums with West European and Japanese
investors, thereby internationalizing exposure to punitive action by host
governments.
45. In the case of petroleum, demands for greater profit shares in
nearly all LDC producing countries and gradual nationalization of US-owned
oil properties in many promise to cut sharply into US investment earnings
from crude oil over the next decade. Some LDCs, however, may not
nationalize at all, and most probably will hold off until they have the
necessary trained personnr;l and organizational experience, possibly several
decades in the future in some cases. Moreover, most will have continuing
need for cooperative relations with the US oil companies to help regulate
oil production and to maintain ready access to developed country markets.
Nevertheless, continuation of current trends will test the resourcefulness
of the US oil companies and the Government to maintain market influence
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and secure adequate oil supplies over the coming period. They will also
add further stimulus to the present frantic search for new reserves in such
high-cost but politically secure areas as Alaska, Canada, and the North Sea.
23
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