1 Excludes depository institutions.

Source: U.S. Bureau of Economic Analysis,Survey of Current Business, April 2000.

http://www.bea.doc.gov/bea/ai1.htm

*Key Terms

Direct investment. Investment in which a resident of one countryobtains a lasting interest in, and a degree of influence over the managementof, a business enterprise in another country. In the UnitedStates, the criterion used to distinguish direct investment from othertypes of investment is ownership of at least 10 percent of the votingsecurities of an incorporated business enterprise or the equivalentinterest in an unincorporated business enterprise.

U.S. direct investment abroad (USDIA). The ownership or control,directly or indirectly, by one U.S. resident of 10 percent or moreof the voting securities of an incorporated foreign business enterpriseor the equivalent interest in an unincorporated foreign businessenterprise.

Foreign direct investment in the United States (FDIUS). The ownershipor control, directly or indirectly, by one foreign resident of10 percent or more of the voting securities of an incorporated U.S.business enterprise or the equivalent interest in an unincorporatedU.S. business enterprise.

Foreign affiliate. A foreign business enterprise in which a singleU.S. investor (that is, a U.S. parent) owns at least 10 percent of thevoting securities, or the equivalent.

U.S. affiliate. A U.S. business enterprise in which a single foreigninvestor (that is, a foreign parent) owns at least 10 percent of thevoting securities, or the equivalent.Direct investment capital flows. Fundsthat parent companiespro-videto their affiliates net of funds that affiliates provide to theirparents. For USDIA, capital flows also include the funds that U.S.direct investors pay to unaffiliated foreign parties when affiliates areacquired and the funds that U.S. investors receive from them whenaffiliates are sold. Similarly, FDIUS capital flows include the fundsthat foreign direct investors pay to unaffiliated U.S. residents whenaffiliates are acquired and the funds that foreign investors receivefrom them when affiliates are sold.

Direct investment capital flows consist of equity capital, intercompanydebt,andreinvested earnings. Equity capital flows are the netof equity capital increases and decreases. Equity capital increasesconsist of payments made by parents to third parties for the purchaseof capital stock when they acquire an existing business, aswell as funds that parents provide to their affiliates that increasetheir ownership interest in the affiliates. Equity capital decreasesare funds parents receive when they reduce their equity interest inexisting affiliates. Intercompany debt flows result from changes innet outstanding loans and trade accounts between parents and theiraffiliates; they include loans by parents to affiliates and loans by af-filiates to parents. Reinvested earnings are the parents claim on theundistributed after-tax earnings of the affiliates.

Direct investment position. The value of direct investors equityin, and net outstanding loans to, their affiliates. The position maybe viewed as the parents contributions to the total assets of theiraffiliates or as the financing provided in the form of equity (includingreinvested earnings) or debt by parents to their affiliates. Financingobtained from other sources, such as local or foreign third-partyborrowing, is excluded.

BEA provides estimates of the positions for USDIA and for FDIUSthat are valued on three baseshistorical cost, current cost, andmarket value. At historical cost, the positions are valued accordingto the values carried on the books of affiliates; thus, most investmentsreflect price levels of earlier time periods. At current cost, theportion of the position representing parents shares of their affiliatestangible assets (property, plant, and equipment and inventories) isrevalued from historical cost to replacement cost. At market value,the owners equity portion of the position is revalued to currentmarket value using indexes of stock prices.

Valuation adjustments to the historical-cost position. Adjustmentsto account for the differences between changes in the position, whichare measured at book value, and direct investment capital flows,which are measured at transactions value. (Unlike the positionson a current-cost and market-value basis, the historical-cost positionis not adjusted to account for changes in the replacement costof the tangible assets of affiliates or in the market value of parentcompanies equity in affiliates.)

Valuation adjustments to the historical-cost position consist ofcurrency translation and other adjustments. Currency-translationadjustments are made to account for changes in the exchange ratesthat are used to translate affiliates foreign-currency-denominatedassets and liabilities into U.S. dollars. The precise effects of currencyfluctuations on these adjustments depend on the value andcurrency composition of affiliates assets and liabilities. Depreciationof foreign currencies against the dollar usually results in negativetranslation adjustments because it tends to lower the dollar value offoreign-currency-denominated net assets. Similarly, appreciation offoreign currencies usually results in positive adjustments because ittends to raise the dollar value of foreign-currency-denominated netassets.

Other adjustments are made to account for differences betweenthe proceeds from the sale or liquidation of affiliates and their bookvalues, for differences between the purchase prices of affiliates andtheir book values, for writeoffs resulting from uncompensated expropriationsof affiliates, for changes in industry of affiliate or country offoreign parent, and for capital gains and losses (other than currencytranslation adjustments). These capital gains and losses representthe revaluation of the assets of ongoing affiliates for reasons otherthan exchange-rate changes, such as the partial sale of the assets foran amount different from their historical cost.

The largest component of capital flows underlyingthe changes in both positions was equitycapital, which includes the funds used to acquireand establish new affiliates and capitalcontributions to existing affiliates. Equity capitalaccounted for almost half of the total outflowsfor USDIA and over four-fifths of the total inflowsfor FDIUS.

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