The Multinational Monitor


T H E   Y E A R   I N   R E V I E W


Profits Climb; Foreign Investment Falls

by Tim Shorrock

Despite the troubled state of the world economy last year, multinational corporations still managed to do quite well. According to the McGraw-Hill research firm Data Resources, Inc., overall profits in 1983 will be over $130 billion, an 18 percent increase from 1982-and the first growth in profits since 1979.

The increase will not be due to foreign operations, however. The U.S. Department of Commerce has predicted that profits generated overseas will fall for the second year in a row, to an estimated $20 billion. Capital spending and investments overseas are down as well: the Department reported in September that U.S. holdings abroad declined in 1982 for the first time since World War II. And despite the fact that the rate of return is higher overseas, direct investment in developing countries dropped 5.4 percent. Analysts attribute the decline to a variety of causes, including the worldwide recession, the overvalued dollar, and high interest rates. At the end of 1982, total direct foreign investment stood at $221.3 billion, with the highest rates of return coming from the Middle East (44.1 percent), followed by Asia (22.5), Africa (14.7), Europe (9.2), and Latin America (8.6).

Within the U.S., capital spending was up last year, with the major commitments coming, from high technology, military, and service industries. In the older, more labor-intensive industries that have generated much of the nation's unemployment, some companies were increasing their capital spending as well - but primarily in labor-saving machinery designed to increase production rather than employment. For workers in these industries, the future looked as bleak as ever.

Despite the recent focus on their home markets, corporate managers were still very concerned about developments on the international scene. At the top of the list were problems associated with Third World debt - falling markets and political instability. Since American companies are the primary investors and marketers in Latin America, the severity of the debt problem in the region has meant a drastic cut in U.S. exports. Much of this decline was due to cutbacks in imports forced by IMF austerity measures, and the global recession. The Federal Reserve Bank of New York estimates that 1983 exports to Latin America were down 40 percent from 1981, and puts the cost in American jobs alone at more than 250,000. Losses have been heaviest in the traditional manufacturing sectors, such as machinery and transport equipment.

Subsidiaries of multinationals in these countries were also hard hit. Limited access to foreign exchange has caused difficulties in importing equipment and components, and many are behind in their debt payments to banks and parent companies. Multinationals' earnings in Argentina, Brazil, and Venezuela plunged drastically.

The continuing recession in basic industry in the U.S. brought demands for protectionism from some companies, particularly from those that sell primarily to the U.S. market. In November, U.S. Steel Corporation filed unfair trade complaints against Mexico, Brazil, and Argentina for allegedly selling subsidized steel in the U.S. market - a complaint that brought bitter retorts from these countries, who argue that exports are necessary to pay back their debts. U.S. electronic, machine tool, computer, construction equipment, auto, and food companies also asked for protection against imports, especially from Japan and Western Europe. �

Meanwhile, Japanese multinationals continued their investment push in the U.S. In the spring, an agreement between GM and Toyota Motor Company to produce small cars in Fremont, California was announced; the Federal Trade Commission is expected to approve the plan with some qualifications shortly. In June, Nissan Corporation began production at its Smyrna, Tennessee truck plant. At year's end, two more Japanese auto companies - Mitsubishi and Toyo Kogyo - were considering U.S. investments as well, while Honda said it might build another auto plant next to its current facilities in Marysville, Ohio.

Foreign multinationals in the U.S. were faced with a problem, however, when the U.S. Supreme Court upheld a law allowing states to tax companies on the proportion of their worldwide earnings generated within that state. Known as "unitary taxation," the law has brought strong protests from business groups in Western Europe and Japan.

For the banks, 1983 was a frantic year. The large lenders were busy putting together financial rescue packages, and some suffered drops in earnings when Latin American borrowers stopped interest payments. Many smaller banks refused to go along with new overseas loans, leaving the big banks to deal with the problems alone.

But the banks were also operating in their own interest: some major institutions are so overextended that a major country bankruptcy could bring destruction. According to American Banker, the nation's ten largest banks' exposure in Argentina, Brazil, Chile, Mexico, and Venezuela averaged 143 percent of their equity - the value of their net worth. The highest ratio was held by Manufactures Hanover Trust, which had an exposure equal to 261 percent of its equity. The ratio for Citicorp, the largest overseas lender, was 179 percent.

Banks drew some criticism for making money off the crisis. According to Albert Fishlow, a University of California at Berkeley economist, the nine largest banks have earned between $70 and $130 million extra this year because of the expensive fees and higher interest rates demanded as a price for debt restructuring. Earnings from loans to the seven big Latin American debtors will make up between 14 and 26 percent of their total profits of $500 million, Fishlow told the Wall Street Journal.

But all in all, for most multinationals and banks, 1983 was not a bad year. With the labor movement on the defensive and the economy consolidating around services, defense, and the essential - and most profitable - manufacturing sectors, American capitalists are looking forward to a pleasant 1984.

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