Foreign Investment in U.S. Firms Declines 22%

Spending by foreign investors on U.S. business enterprises dropped 22% to $30.5 billion in 1987, the first dip since 1983 in the rush by overseas investors to acquire American assets, the government said Tuesday.

However, analysts said foreign investment was still high--nearly four times the 1983 level of $8.1 billion. And they cautioned that last year’s total would likely be revised upward and that the difference between 1986 and 1987 may have been distorted by tax law changes.

The Commerce Department said foreigners spent $39.2 billion to acquire or establish businesses in the United States in 1986, compared to $23.1 billion in 1985 and $15.2 billion in 1984.

However, more than half of the 1986 spending occurred in the final three months of that year as businesses rushed to complete deals before the capital gains tax rate increased on Jan. 1, 1987.

Likely to Be Revised

“Everybody was trying to close deals in 1986 because of tax considerations, so it’s quite possible that 1986 just borrowed some sales from 1987,” said David Wyss, an economist with Data Resources Inc., a Lexington, Mass., forecasting firm.

Ellen M. Herr, a Commerce Department analyst, said that if past years are any guide, the 1987 total will be revised upward by 10% or more as additional deals are reported to the government. The 1986 figure had originally been reported at $31.5 billion, nearly 20% less than the revised figure released Tuesday.

The major driving force behind the big jump in foreign investment in the United States has been this country’s huge trade deficit, which hit a record $171.2 billion last year.

Foreigners have looked for ways to invest their dollars, earned through sales of foreign cars and other imports popular with Americans. As a consequence, the United States has moved from the world’s largest creditor to the world’s largest debtor, meaning that foreigners now hold more in U.S. investments than Americans hold in overseas investments.

Wyss said foreign investment would likely increase this year because of the continued decline of the dollar, which has lost about half of its value since 1985 when measured against the Japanese yen.

“The U.S. right now looks like a very competitive place to produce. U.S. companies, especially when you look at them in yen terms, look very cheap and you’re going to see continued strong buying,” he said.

Foreigners have also been buying corporate bonds, Treasury notes, stocks and other investments that do not show up in the report released Tuesday. It tallies money spent to establish new businesses or purchase a 10% or greater stake in existing companies.

U.S. businesses acquired or established in 1987 employed 346,000 workers and owned 316,000 acres of land.

Manufacturing Leads

The report showed that Great Britain was the largest purchaser at $11.5 billion, up from $8.6 billion in 1986. It was followed by Japan with $5.3 billion, down from $5.4 billion a year earlier, and West Germany, $4.1 billion, up from $1.4 billion. Investment by all European nations dropped to $19.5 billion from $21.1 billion.

Canadian investment, which was $6.5 billion in 1986, was reported at $849 million last year.

Wyss cautioned that the figures for individual countries can swing widely from year to year based on a single large deal or on difficulties in collecting information.

The largest investment, by industry, was in manufacturing--particularly chemical and food firms--at $16.3 billion, down 6% from 1986.

Overseas investment in banking and finance dipped to $1.9 billion from $2.1 billion. In retail trade, purchases by foreigners totaled $682 million, a big drop from $5.2 billion in 1986.

Real estate investment was $2.9 billion in 1987, down from $5.2 billion.

According to the report, much of the Japanese investment was concentrated in real estate, particularly New York City office buildings and hotels in Hawaii and the Southwest.