By Raymond J. Mataloni, Jr.
US Bureau of Economic
Analysis
From the April 1997 SURVEY OF CURRENT BUSINESS
This article benefited significantly from comments by two reviewers from outside BEA—Peter Hooper and Robert E. Lipsey.
In an initial attempt to remove valuation effects from its measures of the foreign manufacturing activities of U.S. multinational companies (MNC's), the Bureau of Economic Analysis (BEA) has developed experimental estimates of the real gross product of majority-owned foreign affiliates (MOFA's) in manufacturing for 1982–94./1/ Gross product—a measure of value added—is used as a summary measure of economic activity because it is free of double counting, unlike sales or receipts data, which reflect not only value added within the firm, but also the value of intermediate inputs purchased from outside the firm. BEA has long provided current-dollar estimates of gross product for MOFA's and for their U.S. parent companies, but the usefulness of these estimates for comparisons over time or across countries has been limited by the fact that they do not allow changes in real value added to be distinguished from changes in value arising from movements in prices or exchange rates./2/
As might be expected, removing the effects of changes in prices and exchange rates produces a gross product series that is generally both slower growing and less volatile than the current-dollar series. In real terms, the gross product of MOFA's in manufacturing grew at an average annual rate of 2.5 percent from 1982 to 1994, a rate similar to the rate of growth in host-country industrial production./3/ Year to year, the changes ranged from -4.4 percent in 1991 to 8.4 percent in 1994 (table 1 ). In terms of current dollars, the product of MOFA's grew at a 5.9-percent rate, and the year-to-year changes ranged from -4.8 percent in 1983 to 18.8 percent in 1987.
Two procedures were used to prepare the estimates of real gross product—a preferred procedure for 19 major host countries that account for over three-quarters of the total gross product of MOFA's in manufacturing and a cruder procedure for other host countries. The preferred procedure consisted of two steps: Estimates for a base year (1993) were first constructed using "purchasing power parity" (PPP) exchange rates rather than the market exchange rates (MER's) that are the basis of the current-dollar estimates; then estimates for other years were constructed by extrapolating the base-year estimates with chain-weighted Fisher quantity indexes similar to those used by BEA to estimate changes in U.S. gross domestic product.
Unlike MER's, the PPP exchange rates used to establish the base-year levels under the preferred procedure approximate the number of foreign currency units required to purchase goods and services—whether or not traded internationally—equivalent to those that can be purchased in the United States with 1 U.S. dollar./4/ MER's, on the other hand, reflect a variety of factors, such as international capital movements and expectations of financial market conditions, that are not directly related to the prices of goods and services. As an example of how MER's may move counter to purchasing power parity, from 1980 to 1985, the U.S. dollar price of German marks fell by nearly 40 percent even though the average rate of inflation, measured in consumer prices, was more than 2 percentage points higher in the United States than in Germany./5/ MER-based translation of a given volume of production by MOFA's under these conditions would have shown a dramatic decrease, even though in fact none had occurred.
For other host countries, the data needed for the preferred procedure were unavailable, and real dollar-denominated estimates were derived simply by deflating the current-dollar estimates (which had been translated at MER's) by the implicit price deflator for U.S. gross domestic product originating in nonpetroleum manufacturing industries. The estimates constructed using this procedure, though crude, appear to provide reasonable approximations of the true values of real gross product for the group even if not for each country. (See the section "Methodology" for further discussion of both procedures.)
The remainder of the article comprises two parts and an appendix. The first part examines trends in the real gross product estimates and their relationship to the current-dollar estimates. The second part provides a detailed description of the methodology used to prepare the estimates. The appendix provides a brief introduction to PPP exchange rates.
This section examines trends in the real gross product estimates for MOFA's in manufacturing. The trends in the estimates of real gross product are then compared with those in the current-dollar estimates of gross product.
The real gross product of MOFA's in manufacturing grew at an average annual rate of 2.5 percent in 1982–94—below the 3.1-percent growth rate in real gross product originating in manufacturing industries in the United States but above the about 2-percent growth rate in the real gross product of U.S. parents in manufacturing./6/
The patterns of growth in the real gross product of MOFA's in manufacturing differed throughout 1982–94, but these patterns can be roughly divided into three parts: An average annual growth of 3.8 percent from 1982 to 1989, an average annual decline of 2.6 percent from 1989 to 1992, and an average annual growth of 5.9 percent from 1992 to 1994.
Changes in MOFA gross product are the net result of several factors—changes in the capacity utilization of existing MOFA facilities, changes in productive capacity that result from expansion or contraction of existing affiliates, establishment of new affiliates (or "greenfield investments"), acquisitions of existing foreign firms, and sell-offs. Because the direction of the changes in MOFA gross product corresponds with the direction of the changes in economic conditions in several major host-country locations (including Europe, Canada, and Australia), growth in MOFA gross product during 1982–94 probably was mostly accounted for by growth in existing operations, which would be expected to mirror host-country economic conditions. However, greenfield investments and acquisitions also appear to have contributed significantly to the growth in the gross product of MOFA's in some countries.
From 1982 to 1994, real gross product of MOFA's in manufacturing in 19 member countries of the Organisation for Economic Co-Operation and Development (OECD) grew at an average annual rate of 2.2 percent—the same as the (weighted) average annual rate of growth in total industrial production in these countries (chart 2 and table 2)./7/ Even on a year-to-year basis, the movements in the gross product estimates generally tracked the industrial production in the host countries.
From 1982 to 1989, the estimates of real gross product for MOFA's in the 19 countries grew at an average annual rate of 4.3 percent, compared with a 3.1-percent growth rate for host-country industrial production. The growth in gross product was widespread, reflecting an extended period of economic growth in most of the OECD countries. Greenfield investments and acquisitions may have also contributed to the growth in several host countries—such as Ireland, Japan, the Netherlands, and Spain—where MOFA gross product grew much faster than the worldwide average.
| Billions of current dollars | Average annual rate of growth | ||||||||||||||||
| 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1982-89 | 1989-92 | 1992-94 | 1982-94 | |
| All countries | 99.8 | 94.9 | 97.5 | 99.0 | 115.6 | 137.4 | 159.7 | 172.0 | 187.6 | 182.1 | 181.9 | 177.7 | 197.5 | 8.1 | 1.9 | 4.2 | 5.9 |
 19 OECD countries |
76.9 | 75.5 | 78.3 | 79.9 | 95.7 | 115.0 | 133.2 | 141.4 | 155.0 | 149.4 | 143.9 | 135.7 | 152.7 | 9.1 | .6 | 3.0 | 5.9 |
| Australia |
4.3 | 3.8 | 4.0 | 3.4 | 3.1 | 3.7 | 5.0 | 6.9 | 6.3 | 5.3 | 5.1 | 5.0 | 5.7 | 6.9 | -9.2 | 5.8 | 2.4 |
| Austria |
.2 | .4 | .4 | .4 | .5 | .4 | .5 | .7 | .7 | .8 | .9 | .9 | 1.3 | 16.0 | 9.3 | 18.8 | 14.7 |
| Belgium |
2.4 | 2.7 | 2.8 | 2.9 | 3.8 | 4.2 | 4.8 | 5.0 | 5.5 | 5.4 | 5.9 | 5.6 | 6.8 | 11.0 | 5.9 | 7.4 | 9.1 |
| Canada |
16.4 | 18.0 | 20.2 | 20.1 | 20.7 | 21.9 | 25.8 | 28.9 | 27.4 | 23.8 | 21.6 | 22.0 | 25.0 | 8.4 | -9.1 | 7.6 | 3.6 |
| Denmark |
.2 | .2 | .2 | .2 | .3 | .4 | .4 | .4 | .4 | .5 | .5 | .5 | .6 | 6.7 | 7.9 | 12.7 | 8.0 |
| Finland |
(*) | (*) | (*) | (*) | (*) | (*) | (*) | .1 | .1 | .1 | .1 | .1 | .3 | 18.3 | 24.2 | 39.2 | 23.1 |
| France |
7.4 | 6.5 | 6.5 | 6.6 | 8.1 | 10.5 | 11.0 | 11.8 | 14.0 | 13.8 | 14.2 | 14.1 | 16.3 | 6.8 | 6.3 | 7.0 | 6.7 |
| Germany |
15.3 | 15.3 | 14.0 | 14.8 | 19.5 | 23.5 | 25.0 | 25.8 | 33.6 | 34.5 | 35.6 | 32.8 | 32.0 | 7.8 | 11.2 | -5.1 | 6.4 |
| Greece |
.1 | .1 | .1 | .1 | .1 | .1 | .2 | .2 | .2 | .2 | .3 | .3 | .3 | 5.3 | 10.5 | 9.1 | 7.2 |
| Ireland |
1.3 | 1.5 | 1.8 | 1.8 | 1.7 | 3.0 | 3.5 | 3.5 | 4.3 | 4.2 | 4.6 | 3.9 | 4.6 | 14.8 | 9.1 | .3 | 10.8 |
| Italy |
3.9 | 3.8 | 4.2 | 4.3 | 5.7 | 7.0 | 7.5 | 7.8 | 9.2 | 9.3 | 8.9 | 7.1 | 8.2 | 10.2 | 4.6 | -4.0 | 6.3 |
| Japan |
2.2 | 2.5 | 3.0 | 3.2 | 4.5 | 5.9 | 7.4 | 7.7 | 7.3 | 8.0 | 7.9 | 8.5 | 10.8 | 19.7 | .9 | 17.1 | 14.3 |
| Luxembourg |
.2 | .2 | .2 | .2 | .4 | .5 | .5 | .5 | .6 | .6 | .7 | .6 | .7 | 14.8 | 8.3 | 3.7 | 11.3 |
| Netherlands |
2.6 | 2.7 | 2.8 | 2.8 | 3.9 | 5.2 | 5.9 | 7.8 | 6.9 | 6.7 | 7.0 | 6.4 | 7.5 | 17.2 | -3.4 | 3.7 | 9.4 |
| New Zealand |
.3 | .2 | .3 | .2 | .3 | .4 | .3 | .3 | .2 | .2 | .2 | .2 | .4 | 1.0 | -13.7 | 37.1 | 2.2 |
| Norway |
.3 | .2 | .2 | .2 | .1 | .1 | .1 | .1 | .2 | .1 | .1 | .2 | .3 | -10.3 | .3 | 68.6 | 2.5 |
| Spain |
1.9 | 1.8 | 2.0 | 2.3 | 3.3 | 4.3 | 5.3 | 5.7 | 6.4 | 6.4 | 5.8 | 4.8 | 5.4 | 17.5 | .3 | -3.4 | 9.3 |
| Sweden |
.6 | .6 | .6 | .7 | .8 | .8 | .9 | 1.0 | 1.0 | 1.1 | .9 | .8 | .8 | 7.0 | -4.2 | -5.0 | 2.1 |
| United Kingdom |
17.3 | 14.9 | 15.1 | 15.8 | 19.1 | 23.0 | 29.0 | 27.4 | 30.5 | 28.4 | 23.7 | 21.8 | 25.7 | 6.8 | -4.7 | 4.3 | 3.4 |
| All other countries |
22.8 | 19.5 | 19.2 | 19.0 | 19.9 | 22.4 | 26.5 | 30.6 | 32.6 | 32.7 | 38.1 | 42.0 | 44.8 | 4.3 | 7.5 | 8.5 | 5.8 |
| Billions of chained (1993) dollars | |||||||||||||||||
| All countries | 123.6 | 120.9 | 127.6 | 130.7 | 131.3 | 138.2 | 148.8 | 160.1 | 158.5 | 151.5 | 148.0 | 153.2 | 166.1 | 3.8 | -2.6 | 5.9 | 2.5 |
| 19 OECD countries |
94.0 | 96.1 | 103.8 | 107.0 | 107.6 | 111.5 | 117.8 | 126.1 | 123.2 | 117.4 | 109.3 | 111.2 | 121.6 | 4.3 | -4.6 | 5.5 | 2.2 |
| Australia |
5.3 | 4.8 | 4.9 | 4.9 | 4.4 | 4.6 | 5.1 | 6.5 | 5.8 | 4.7 | 4.7 | 4.9 | 5.2 | 2.9 | -10.0 | 4.2 | -.3 |
| Austria |
.3 | .4 | .4 | .5 | .4 | .3 | .4 | .6 | .5 | .5 | .6 | .6 | .9 | 11.5 | 1.4 | 21.6 | 10.5 |
| Belgium |
3.2 | 3.9 | 4.2 | 4.3 | 4.4 | 4.1 | 4.5 | 4.7 | 4.4 | 4.4 | 4.5 | 4.6 | 5.3 | 5.6 | -1.6 | 8.6 | 4.3 |
| Canada |
20.2 | 21.3 | 24.0 | 24.3 | 24.8 | 24.6 | 25.8 | 27.4 | 25.7 | 21.8 | 20.6 | 21.7 | 24.8 | 4.5 | -9.0 | 9.6 | 1.7 |
| Denmark |
.2 | .2 | .2 | .2 | .3 | .3 | .3 | .3 | .3 | .3 | .3 | .3 | .3 | 1.7 | (*) | 15.2 | 3.4 |
| Finland |
(*) | (*) | (*) | (*) | (*) | (*) | (*) | (*) | .1 | .1 | .1 | .1 | .2 | 12.4 | 23.2 | 47.4 | 20.3 |
| France |
8.4 | 7.8 | 8.3 | 8.2 | 7.8 | 8.7 | 8.6 | 9.5 | 9.6 | 9.9 | 9.7 | 10.5 | 11.7 | 1.7 | .7 | 10.1 | 2.8 |
| Germany |
20.1 | 20.8 | 20.6 | 22.0 | 21.4 | 21.1 | 21.7 | 23.3 | 25.5 | 26.3 | 24.9 | 24.1 | 23.0 | 2.1 | 2.3 | -3.9 | 1.1 |
| Greece |
.2 | .2 | .2 | .2 | .2 | .2 | .2 | .3 | .2 | .3 | .3 | .3 | .3 | 2.3 | .9 | 9.5 | 3.1 |
| Ireland |
1.6 | 2.0 | 2.4 | 2.5 | 1.9 | 3.0 | 3.4 | 3.4 | 3.7 | 3.7 | 3.8 | 3.6 | 4.1 | 11.4 | 2.9 | 3.9 | 8.0 |
| Italy |
5.2 | 5.1 | 5.9 | 6.2 | 6.2 | 6.3 | 6.5 | 6.7 | 6.7 | 6.8 | 6.4 | 6.3 | 7.0 | 3.6 | -1.5 | 4.7 | 2.5 |
| Japan |
2.4 | 2.6 | 3.2 | 3.4 | 3.5 | 4.1 | 4.6 | 5.0 | 4.9 | 4.9 | 4.6 | 4.4 | 5.2 | 10.9 | -2.3 | 6.2 | 6.7 |
| Luxembourg |
.2 | .3 | .3 | .3 | .4 | .4 | .4 | .4 | .5 | .5 | .5 | .5 | .5 | 9.8 | 3.2 | 6.1 | 7.5 |
| Netherlands |
2.9 | 3.1 | 3.6 | 3.6 | 3.9 | 4.5 | 4.8 | 6.5 | 5.1 | 5.1 | 5.1 | 5.0 | 5.7 | 12.6 | -8.1 | 5.9 | 5.9 |
| New Zealand |
.4 | .3 | .4 | .4 | .4 | .4 | .3 | .3 | .2 | .2 | .2 | .3 | .4 | -1.9 | -12.6 | 31.1 | (*) |
| Norway |
.2 | .2 | .2 | .2 | .1 | .1 | .1 | .1 | .1 | .1 | .1 | .1 | .2 | -12.8 | -5.1 | 77.8 | .3 |
| Spain |
2.3 | 2.6 | 2.9 | 3.3 | 3.7 | 4.2 | 4.7 | 5.0 | 4.6 | 4.6 | 4.0 | 4.1 | 4.7 | 11.5 | -6.5 | 7.3 | 6.0 |
| Sweden |
.7 | .7 | .7 | .8 | .7 | .6 | .7 | .7 | .7 | .7 | .5 | .6 | .6 | 1.2 | -9.5 | 4.2 | -1.2 |
| United Kingdom |
21.6 | 20.5 | 22.3 | 22.6 | 23.4 | 24.1 | 26.4 | 25.7 | 24.9 | 22.4 | 18.3 | 19.2 | 21.6 | 2.5 | -10.6 | 8.5 | (*) |
| All other countries |
29.2 | 24.6 | 23.6 | 23.4 | 23.5 | 26.5 | 30.8 | 33.9 | 35.3 | 34.0 | 38.7 | 42.0 | 44.5 | 2.2 | 5.5 | 7.2 | 3.6 |
| Residual |
-1.1 | -.5 | -.9 | -.7 | (*) | -.1 | -.6 | -.2 | -.2 | .3 | .1 | 0 | (*) | ||||
* Less than $50 million or less than 0.05 percent.
NOTE.—Chained (1993) dollar series were derived by extrapolating the base-year (1993) PPP-exchange-rate-based current-dollar value of the corresponding series by a Fisher quantity index (see the text for details). Because the formula for the Fisher quantity indexes uses weights of more than one period, the corresponding chained-dollar estimates are usually not additive. The residual line is the difference between the total line and the sum of the most detailed lines.
Although the real estimates are denominated in dollars of 1993, the estimate for 1993 does not equal the current-dollar estimate for that year, because the two estimates are based on different exchange rates. As explained in the text, the current-dollar estimates are based on market exchange rates and the real estimates are based on purchasing-power-parity exchange rates.
OECD Organisation for Economic Co-Operation and Development
From 1989 to 1992, the estimates of real gross product for MOFA's decreased at an average annual rate of 4.6 percent, compared with a growth rate of 0.1 percent for host-country industrial production. The decrease reflected falling capacity utilization for MOFA's (related to slow growth or recession in host-country economies) that more than offset the modest growth in the productive capacity of MOFA's during this period. Among the larger host countries, Australia, Canada, and the United Kingdom had the largest decreases, perhaps because economic recessions began earlier in those countries than in most other OECD countries.
From 1992 to 1994, the estimates of real gross product for MOFA's increased at an average annual rate of 5.5 percent, compared with a 2.0-percent growth rate for host-country industrial production. The increases in gross product were widespread and mainly reflected renewed economic growth in the host countries.
From 1982 to 1994, real gross product of MOFA's in manufacturing in "all other countries" grew at an average annual rate of 3.6 percent. Unlike the growth in the 19 OECD countries, the growth in these countries was slowest from 1982 to 1989, partly reflecting the effects of a debt crisis in Latin America. From 1989 to 1994, growth accelerated, reflecting renewed economic growth in Latin America and new investments by U.S. MNC's in emerging markets worldwide.