The Balance or Payments

A Metropolitan country typically runs a balance of payments surplus on commodity trade, as well as a surplus on account of current services, with the countries in which it holds large direct investment.

Thus in 1964, United States commodity exports exceeded commodity imports by $6.7 billion and the net surplus on current services was $1.9 billion, creating a current account surplus of $8.5 billion. This was covered by private long term lending of $4.2 billion, private short term lending of $2.1 billion, a net outflow government capital account of $1.7 billion and a large unaccountable transfer item named “errors and commissions.” There is evidently a considerable transfer of resources abroad. If we were to deduct from the total surplus on current account the $4.0 billion of property income earned on all private investments on the grounds that the “rest of the world” is financing the United States capital !endings to the extent of their payments on previous borrowings, there still remains an undisputable transfer of resources of $4.5 billion. This excludes the growth in the over­seas assets of American corporations financed by the re-investment of profits.

It is instructive to note that the operations of the international corporations are so profitable that their remittances to the U.S. in the form of dividends, royalties, licences, fees, rentals and other similar charges over recent years were twice as great as the amount of new capital which they invested oversea. In 1964 for instance, they earned $3.7 billion in property incomes and an additional $0.7 billion in royalties, license fees, rentals, etc. In the same year they sent out $2.4 billion in new capital These ratios are typical. For the United States and its balance of payments, incomes from direct investments have exceeded the out­ flow of new capital for direct investments in every single year since 1900, with the sole exception of the depression years 1928-1031, when American corporation used their superior financial strength to buy up bankrupt business in foreign countries. The situation is described in the following table.


U.S. Direct Investment Outflows, Incomes and Net Balance

(Millions of U.S. Dollars)

Period+ Net Outflow of Direct Capital including retained subsidiary profits. Dividends, Interest Royalties, etc. BALANCE
1900- 1929 -3,109


+4,798 +1,689
1930-1939 -435 +2,893 +2,458
1945-1964 -22,813 +41,688 +18,875
The Sixties
1960 -1,694 +2,699 +1,005
1961 -1,598 +3,120 +1,522
1962 -1,557 +3,598 +2,041
1963 -1,976 +3,794 +1,818
1964 -2,376 +4,495 +2,119

If we break down these “capital account” balances according to geographical regions and industries, (Table 10), we observe that manufacturing investment have yielded an excess of incomes over capital outflows in every area. The most dramatic case is that of Canada which contributed $1,832 million or two-third of the American favourable balance on “capital account” in manufacturing. It is to be noted that this outflow of dividends and other incomes from Canada to U.S. parent companies has occurred in spite of the relatively “low” profit margins discussed previously, and does not take into account either the additional profits, or the additional favourable balance of payments effects accruing to the United States from these manufacturing subsidiaries.

The second striking fact is the enormous inflow of income to the United States from direct investments in the petroleum and mining industries of Latin America and the Middle East.



Western Europe Canada America All other countries Total
Outflow U.S. Capital -2,474 – 2,401 – 1,272 – 1,818 -7,965
Income to U.S. + 971 + 595 + 5,951 + 9,758 + 17,275
Balance -1,503 – 1,806 + 4,679 + 7,940 + 9,310
Outflow U.S. Capital -2,915 – 1,429 – 1,114 – 616 – 6 104
Income to U.S. + 3,687 + 3,261 + 1,221 + 1,110 + 9,294
Balance +742 + 1,832 + 113 + 503 +3,190
Outflow U.S. Capital -1,093 – 972 – 631 – 356 – 3,052
Income to U.S. +1,413 +1,385 +2,220 +1,1001 +6,019
Balance + 320 + 413 + 1,589 +645 + 2,967
Mining and Smelting
Outflow U.S. Capital – 1,105 -610 -261
Income to U.S. + 673 + 1,610 +521 -I 2.804
Balance – 432 -1-1,000 +260 + 828
All Industries
Outflow U.S. Capital -6,512 – 5,907 – 3,627 – 3,051 – 19,097
Income to U.S. +6,071 + 5,914 11,008 12,399 + 35,392
Balance – 441 +7 +, 7 381 + 9,348 16,295

Next we must draw attention to the fact that new capital outflows represent a very minor source of finance for U.S. direct investment companies overseas.

Table 11 shows sources of funds of U.S. direct foreign investments by geographic areas and industries in 1964 . Direct outflow of funds shown here are smaller than the figures in the previous table, because the exclude retained branch profit and funds used to buy out minority interests. We may note that only 12 per cent of total funds used to finance investment in U.S. subsidiaries in 1961 came from the U.S. In the case of Canada only $126 million of the total funds of $2,557 million came in as new direct capital




(Millions of dollars)

Area and Industry Total Sources Net Income Fund From US Fund from Abroad Depreciation
All Areas, Total 11,852 4,772 1 ,456 2 ,677 2,947
Mining & Smelting l ,044 679 41 149 257
Petroleum 1,452 1,980 735 598 1,139
Manufacturing 6,356 2,113 762 1,930 1,551
Canada, Total 2,557 1,244 12-6 423 764
Mining & Smelting -199 318 14 51 116
Petroleum 6 l8 259 38 119 202
Manufacturing 1,440 667 7-1 25:3 -146
Latin America, Total 2,241 1,123 20 -490 -608
Mining & Smelting 337 278 72 33 98
Petroleum 858 559 63 32 330
Manufacturing 1,046 289 155 –152 180
Europe, Total 3,803 881 i65 1,167 990
Mining & Smelting 10 3 2 5
Petroleum 9 13 8 380 305 250
Manufacturing 2,850 870 383 662 735
Other Areas, Total 3,251 1,524 545 5-97 -585
Mining & Smelting 198 60 15 65 38
Petroleum 2,033 1,15-1 380 142 357
Manufacturing 1,020 290 150 390 190

The total favourable effect on the U.S. balance of payments of direct investments greatly exceeds the surplus on capital account because it stimulates rather than retards, American exports. Further. the initial outflow of the average direct investment has a “pay-out” period of only two years, according to Professor J. Behrman. Within about two years, capital outflows have been paid for in a balance of payments sense, when we take into account service and royalty fees. the portion of direct investment, which is incurred in the form of equipment, materials and personnel without transfer of dollars, and the additional exports that result from overseas expansion. After the two-year pay-out period, there is a perpetual net in8ow of funds to the U.S.

A Department of Commerce Study published in 1963 reported that export sales by parent companies to overseas subsidiaries were $5.3 billion in 1964 one third of total non-agricultural exports from the United States.  Further, the rate of growth of the parent-to-affiliate exports greatly exceeds the rate of growth of total U.S. exports. Between 1963 and 1964, the former grew at the rate of 18 per cent. Of parent-to-affiliate exports more than $5.4 billion went to overseas manufacturing and distribution subsidiaries. These sales represented 35.3 per cent of U.S. exports of all manufactured and semi-manufactured goods (except civilian aircraft, and certain crude mineral and animal materials). Significantly parent-to-affiliate export sales of manufactured goods were highest for Canada, both in terms of their absolute dollar value and their percentage of similar U.S. commodity exports.



Exports of U.S. Parents to their Manufacturing Subsidiaries, 1964

(in Billions of U.S. Dollars)


Area Parent-to-affiliate Exports Other U.S. Mfrg. Exports % of Mfrg. Exports generated by parent-to-afflilate sales
Canada 2.1 1.4 61.2%
Latin America l.l 2.0 35.9%
Western Europe 1.5 3.3 32.0%
Other Areas 0.7 3.4 16.7%
Total 5.4 10.0 35.5%

If we add the $6.3 billion U.S. exports directly sold by parents to their affiliates to the $4.5 billion of incomes from dividends, interest and royalties, the contribution of the international companies to the American balance of payments is seen to be $10.8 billion, or 30 per cent of the total of non-military exports of goods and services which was $36.3 billion in 1964.

The total impact of manufacturing investments on the balance of payments of the U.S. for 1964 is shown below:


Effects of Manufacturing Branch plants on U.S. Balance of Payments, 1964


  All Areas Western Europe Canada Latin America Other Areas
1 U.S. Receipts from Foreign Mfrg. Subsidiaries 6.8 2.1 2.5






a) Merchandise Exports 5.4 1.5 0.3 0.1 0.1
b) Dividends, Interest and Retained Brach Profits 0.9 0.4
c) Royalties, etc. 0.5 0.2 0.1 0.1
2. U.S. Payments to Foreign Mfrg. Subsidiaries 2.6 0.8 1.4 0.1 0.1
a) Merchandise Imports 1.6 0.2 1.2 0.1
b) Net Capital Outflows 1.0 0.6 0.1 0.2
3. Merchandise Trade Effects (1a-2a) 3.8 1.3 0.9 1.0 0.6-
4. Capital Effect (1b + 1c -2b) 0.3 0.3
5. Overall Direct Balance of payments effects 4.1 1.3 1.2 1.0 0.6


Canada’s position here is interesting. It is the only branch plant economy which exports manufactured goods on a significant scale to parent companies. This is in a large part the result of special agreements, including the automobile deal and the defence contract sharing arrangements. In spite of these exports by Canadian subsidiaries to parent companies, U.S. investments in Canadian manufacturing yield a favourable commodity trade balance, which is almost as large as that resulting from the operations of U.S. manufacturing subsidiaries in Europe. The reason is that American branch plants located in Canada import a far higher percentage of their total purchases from parent companies than do U.S. branch plants in Europe. When we add the “capital account” effect to the “merchandise trade” effect, Canada’s contribution to the U.S. balance of payments arising from the presence of U.S. manufacturing subsidiaries almost equals that of all of Europe.

In their Appraisal of U.S. Economic Strategy, the International Economic Organization sums up the matter in the following words:

“It is quite clear that direct investment abroad is essential to the growth of U.S. exports. This 1s particularly important in the manufacturing field where investments and exports can be promoted imply by aggressive selling from the United States independently of investment. The facts suggest that it would be a serious error in US economic policy to assume that corporations in the United States can sell their goods in foreign markets without entrepreneurial presence there without branches, marketing or distribution organizations or without’ establishment of factories embodying equipment and technology from the United States.”

The, evidence suggests that local production, organized by direct investment does not necessarily reduce a country’s imports, but rather changes their composition and origin and may even increase the total. When a branch-plant is established, it imports equipment parts and materials through its parent company. Its presence also effects a general orientation of demand towards metropolitan supplies.

The National Industrial Conference Board Study noted the importance of these so-called “indirect exports”:

“Less obvious and even more difficult to quantify were receipts from so-called indirect exports, i.e. export,; which were the result of the U.S. “presence” abroad though not associated with actual production abroad. Typical of these would be exports of products or equipment by other companies in response to a more U.S. oriented foreign demand and additional exports (the full line) by the U.S. parent that could be traced to the development of more efficiently organised foreign marketing facilities. Given the formidable selling establishment created in the course of productive activities on the large scale achieved by the U.S. investors the concept of indirect exports, if pressed far enough, might include the majority of exports through private channels.”

Direct investment is often undertaken by corporations with an eye to gains from exports; 38 per cent of the respondents to the U.S. Department of Commerce 1963 Survey reported that the desire to increase exports was a major determinant of the decision to invest abroad. Over 80% stated that foreign production stimulated sales of United States produced merchandise.

The export sales which subsidiaries generate for the metropolitan economy spring from both the technological and the organizational dependence of the hinterland economy. It is therefore not easy to estimate what part of exports induced by direct investment is die to branch-plant status as such. The distinction, however, may be less important than it seems, if it is accepted that the branch-plant is the major instrument of technological domination.

The same Department of Commerce Survey reported that in 1957, close to a quarter of all exports of capital goods were sold to subsidiaries and that 75 per cent of the capital equipment imported by all United States affiliates were U.S produced. What is more, the National Conference Board study found that subsidiaries in Japan and Canada were more dependent on capital imports from the United States than those in Europe and that subsidiaries in Latin American and other less industrialized areas were still more dependent.

Much the same pattern emerges from a study of the shipments of raw materials and semi-finished manufacture to United State, affiliates abroad. A 155 Company Study cited by the National Conference Board shows that 11bout 20 per cent of materials used by foreign manufacturing affiliates comes from the United States. In Latin American subsidiaries the proportion of raw materials used of U.S. origin was five times as great as the corresponding proportion observed for European subsidiaries.

The opportunities for expanding exports from American plants which arc created by direct investment have been evaluated by the corporations themselves. An executive of the Joy Manufacturing Company explained how direct investment overseas increases commodity exports:

“The surprising volume of ports to our foreign subsidiaries results first from the sale from parent factories of critical components of machines made abroad and second from Joy International’ constant pressure on each subsidiary to import new Joy products brought out by the parent company.”

“I must emphasize that without these foreign subsidiaries operating as they do, our exports would be only a fraction of what we see here. “Joy International’s sales promotion and servicemen also call on all our foreign distributors, assist in training their sales and servicemen, call with them on their customers, and foster the sale of Joy equipment in every way possible. . .”

Over the decade 1951 to 1961, this company invested $7.1 million in foreign subsidiaries, including expenditures on foreign license and royalty fees. It received $5.4 million in fees and royalties, 1.3 million in dividends, and exported $161 million worth of goods from the United States. A little over $10 million of the pro6ts of the subsidiaries were retained abroad. building up a net worth of $17.5 million in assets of overseas subsidiaries.

From the same source comes the following testimony by the President of Abbott Laboratories International Company, speaking on behalf of the Chicago Association of Commerce and Industry. He explained that his company’s operations had yielded a net favourable balance of S57.l million to the United States in the five years, 1955-1960:

“I should like to add that, even though we manufacture only pharmaceutical products in our company, our investments abroad have resulted not only in exports of chemical or pharmaceutical raw materials from the United States but also of American machinery and other capital equipment to equip our manufacturing facilities In foreign nations.”

It is significant that Abbott Laboratories International Co.’s employment in Chicago, as a result of its Increased capital investment abroad rose 50 per cent in the last 6 years.

“In addition, a large number of scientists, engineers, technicians, researchers, manufacturing and other personnel are now employed by our parent company, as a result of our expansion in foreign markets made possible by our increased investment abroad.”

Our own experience is in conformity to the fact that, as American investment in industry abroad tends to raise the level of United States exports, such investments are a positive factor in maintaining and augmenting employment in the United States.

In this five year period Abbott Laboratories thus earned $50 million from sales of goods exported from their United State. plants after deducting the cost of imported supplies used in production. In addition, they received $93 million in dividends, loan repayments and other transfers from their overseas affiliates. During these five years Abbott’s foreign investment in the form of loans and investments from the United States amounted to only $2.2 million.

The experience of this pharmaceutical company seems not to be exceptional.

According to their testimony it is typical:

“This story of the balance of payments of our company, which is typical of that of many other Chicago manufacturers with investments and productive facilities abroad shows that this type of investment creates a substantial surplus, not a deficit, in the balance of payments of our country.”

The Willys. Motors Company Inc provides an example from yet another industry. According to Thomas N. Torleau, Tax Lawyer representing the Company:

“During the period from 1955 to the end of 1960 that Company invested a total of $2,453,711 In cash in foreign manufacturing enterprises. It also invested American-made machines having a value of $7,928,503 in such enterprises, thereby making a total investment of $10,382,216. During this 5 year period, Willys Motors received from foreign corporations in which it had investments and which were acting as its licensees, dividend and royalty payments aggregating $12,604,000 and sold to such companies component parts manufactured in the United States for use in the manufacturing of the products of these company at a price of Sl51,226,000. These exports would not have been possible if Willys had not created foreign customers by making the foreign investments mentioned above. Thus the total cash outgo was $2,543,711 and the gross income from foreign sources was $163,880,000. During this same period its export of built-up vehicles and spare part remained practically constant.”

Consequently at least in this particular case it would appear that foreign investment and licencing activities tended to improve the balance of inter­ national payments of the United States.”