The Case for Private Investment Abroad

DURING the last week of January 1954, two significant public documents were released in Washington which may go a long way towards setting down in specific terms the basic economic policy and program of the Eisenhower Administration. The first--the Randall Commission Report on Foreign Economic Policy--is a report to the President and the respective leaders of the two Houses of Congress by a group of private citizens and Congressional leaders, headed by Clarence Randall, Chairman of the Board of the Inland Steel Company. At this writing it is not yet possible to state on which findings the Executive Branch or the Congress concur. It is safe to say, however, that the report is consistent with the basic attitudes of the Eisenhower Administration in the field of foreign economic policy. The second document--released five days later--is the Economic Report of the President, the first such report to be issued by the new Administration. It sets forth President Eisenhower's economic policy and detailed economic program.

From these documents it is clear that there are certain fundamental axioms governing the conduct of the Administration in the field of foreign economic policy which can be related to United States private foreign investment. These axioms can be stated as follows:

1. The economic health of the free world must be built upon the resources and efforts of the citizens of each country, and not on repeated extraordinary grants of aid from the United States.

2. Economic progress in the United States is tied closely to, and has a direct impact on, the economic progress of the rest of the world.

3. A program for promoting economic progress in the United States must, therefore, provide for an extension and strengthening of economic ties with the rest of the world.

4. As one part of such a broad program, an increased flow of goods and capital across national boundaries would contribute to economic progress everywhere.

5. In particular, in furtherance of a high level of international trade, no policy is of greater importance than the encouragement of sound private United States investment in those areas of the free world where it is most needed.

As background for the case for United States private foreign investment, let me briefly outline the economic situation of the free world as it stood at the end of the first year of President Eisenhower's Administration. During 1953, agricultural production in the free world reached an all-time record level, though the rate of increase over the previous crop year was somewhat reduced. In most Western European countries the increase over prewar levels of agricultural output has exceeded the population growth. In 1953, industrial production was higher than any previous year in nearly all countries of the free world for which such information is available. Industrial production in Western Europe, for example, was at a record rate--about 5 percent higher than the previous peak in 1952. Outside of Western Europe, Japan was the principal country to show a dramatic increase in industrial production during the year.

Likewise, during 1953, gold and short-term assets of Western European countries reached a postwar high of over 11 billion dollars. With the continued growth in gold and dollar reserves, the currencies of the free world countries have been greatly strengthened. The deutschemark, the lira and the pound are now very close to the par rate. During this period, inflationary pressures have also been largely eliminated, and black markets have all but disappeared. The culmination to these significant developments was the achievement of a broadly balanced pattern of trade and payments at a high and growing level of economic activity. In 1953--for the first time in the postwar period--the United States trading account (exclusive of military end-items) with the rest of the world was in approximate balance at about 17 billion dollars. However, it must be noted that this balance was achieved in large part due to extraordinary United States military expenditures abroad, primarily expenditures by our troops overseas, and earnings from the sale of military goods to the United States under the offshore procurement program.

These broad economic advances in the free world have brought pressure to bear in favor of further trade liberalization and the restoration of free convertibility of European currencies with the dollar. At the October meeting of the O.E.E.C. in Paris, which I attended, the United Kingdom, France and Austria announced significant increases in trade liberalization. Likewise, as a result of these advances, it has been possible for Western Europe to maintain its defense expenditures for fiscal year 1954 at the high levels achieved in 1953, despite the decline in United States economic aid.

II

As the President's Economic Report states, the United States aid to the free world has effectively helped these countries bridge the difficulties of postwar restoration and readjustment. Because of the free world's increased economic and military strength, it has been possible for the President to submit in his recent Budget Message to Congress greatly reduced requests for foreign aid appropriations for the next fiscal year. The over-all request recently transmitted to Congress was 3.5 billion dollars, which represents a 1.2 billion dollar reduction over the amount actually appropriated for the current fiscal year. Of this 3.5 billion dollars, 2.5 billion is for military aid, including the United States portion of the Indo-China war financing. It has been possible to make a reduction of 33 percent in military assistance over the current year's appropriation due to the leveling off of force goals for defense forces in line with the increased reliance on new weapons and on mobility as against the traditional large decentralized land forces. The sum of $875,000,000 is being requested for technical coöperation and economic development. Various multilateral programs, such as the United States contribution to the United Nations Korean Relief Agency (UNKRA), the contribution to the Intergovernmental Committee on European Migration, account for the balance of $135,000,000. In general, economic aid to Europe has been ended, with a few specific exceptions such as the new Spanish base program, and the emphasis has shifted to technical coöperation and minor economic development programs in the underdeveloped areas of Asia, Africa and Latin America.

With the free world in relatively good economic health, and a consequent reduction in foreign economic aid, there is no longer a state of economic crisis. We are in the position to examine our economic problems and policies with greater deliberation than usually in the past and devote major attention--in coöperation with our partners--to forging strong and stable economic relationships among the free world countries which will endure beyond momentary crises. These relationships will provide the basis for sound economic expansion and rising standards of living for all peoples of the free world. Being in a position now to take a longer range view, we are, in accordance with President Eisenhower's policy, building the economic and defensive strength of the free nations, not on the basis of a certain year of maximum danger, but on the basis of continuing grave danger for many years. The over-all phasing of economic and military policies will be at a pace that we hope can be sustained indefinitely by other free nations as well as by ourselves.

This has already resulted, for example, in force goals being established for NATO that are not as high as those the ministers first set at the Lisbon Conference. It has resulted in an economic and military build-up at a somewhat reduced pace--but a pace that can be sustained for an indefinite period, given the will of the peoples of the free world. But it will require a follow-through in a substantial nature from this country in its great creditor position. That follow-through must come from a combination of an expanded United States interest in the rest of the free world, the alert implementation of our free world leadership position vis-à-vis the Soviet bloc, and a follow-through by our government in foreign economic affairs--particularly the encouragement of expanded investment of private funds overseas. Fundamental, of course, to this and to our whole foreign economic policy is the continuation of a high level of economic activity within the United States. By maintaining the high level of economic activity at home, by establishing through such policies as expanded private investment overseas a high level of exports and imports, and with the maintenance by the rest of the world of its present economic advance, the next step--as stated by the President in his State of the Union Message--can be taken; to wit, "the creation of a healthier and freer system of trade and payments within the free world."

In Western Europe, as we have seen, there is reason to be pleased with the progress that has been accomplished since the end of World War II. The economies of these highly industrialized countries, prostrate in 1945, have been completely restored. However, when we turn from Western Europe to the underdeveloped areas of the free world, we are impressed less by the magnitude of postwar developments than by the formidable character of the job ahead of us. On the whole, economic developments in these areas have been encouraging. But in several important countries, notably India, Pakistan and parts of the Middle East, agricultural production in the postwar period has not kept pace with the growth in population and there has been some deterioration in the already inadequate diet.

Moreover, food requirements can be expected to grow even more rapidly in the near future. In Asia, for example, death rates have been reduced by more than 40 percent from the level of the early 1930's. To accommodate the rapid growth in population that these advances will ultimately cause, agricultural production will have to grow much more rapidly than it has in recent years, or, alternatively, surplus labor must be directed into the production of export commodities with which they can buy what they need from food exporting countries.

Agricultural labor in the underdeveloped areas of the world normally accounts for 65-75 percent of the total labor force, an extremely inefficient use of labor by Western standards. But, until more food can be produced with less labor, it is obviously idle to hope for any significant increase in the standard of living. Therefore, the attack on the problem of underproduction in these areas must be along at least two lines: 1, by technical assistance to encourage a more efficient system of food production and to give guidance in finding useful employment for the surplus labor released from the agricultural population (it is obvious that, if the introduction of more efficient methods of farming results only in the collection of pools of unemployment, little has been accomplished); 2, by capital investment, to expand industry and provide more industrial employment, thus accelerating the introduction of more efficient farming methods.

III

With this background, we can turn to the specific question: What is the case for expanded United States private investment abroad? How would this help the United States achieve its objective of "peace and security of all peoples"? As we have seen, world peace and security are closely tied to world economic well-being and progress. Such economic well-being and progress are closely related to expanded international trade, and expanded international trade is related to the increased flow of investment capital across national boundaries. Because the United States is the leading economic power in the world, all of this applies with multiple emphasis to the United States itself. The economic welfare of the United States is directly advanced by increased movement abroad of sound private investment. Such investment--if done wisely--increases our national income, raises our level of employment, increases the flow to the United States of necessary primary raw materials, and raises our standard of living. At the same time it contributes markedly to improving technical skills and raising the standard of living of foreign countries.

A satisfactory growth in industrial production in underdeveloped areas is impossible without a large import of private capital. In the first place, consumption levels in many of these countries are so close to the minimum requirements for health and energy that any significant reduction might well cost more in terms of total production than the amount transferred from consumption to investment. Secondly, under present conditions, any large reduction in living standards would be, to say the least, politically unwise. The fact is that countries which have the greatest need for capital investment are the ones that lack the income savings to make such investment themselves.

Therefore, an important objective of our foreign economic policy in the years ahead must be to stimulate the flow of private investment into those areas of the world where the need is greatest. At the present time the United States is the only important country with surplus savings available for foreign investment, though with the continued improvement in economic conditions abroad, other countries may be expected to make their contribution to the expansion in production throughout the free world.

In theory, the capital needs of an importing country can be satisfied as well by sales abroad of private and public securities as by direct investment. In practice, individual investors are inclined to be nervous and to liquidate their foreign securities at the first sign of trouble. As many countries found out in the late twenties, this type of borrowing is a weak support for a stable expansion program. Therefore, major attention must be focused on direct investment, whereby private enterprises in the lending country set up subsidiaries in branch plants, thus retaining a degree of control, as well as ownership, over the assets in the borrowing country.

In this form of lending, the United States has accumulated considerable experience, dating back to the last century. Over this period, the most powerful influence behind the outward flow of United States capital has been this country's need for raw materials. Venezuelan oil, Chilean copper, Bolivian tin, more recently Canadian and Venezuelan iron ore and Middle East oil have offered attractive outlets for American capital. In some cases this has been because raw material was not available at home; in others, because the volume of domestic demand was forcing us into uneconomic domestic sources of supply. In all, investments in mining and oil accounted for over 6 billion dollars, or about 40 percent of the 16 billion dollars invested abroad at the end of 1953. Another 10 percent of this total represented investments in public utilities, most of which are needed to support mining and smelting operations, or the movement of their products to seaboard. Prior to World War II most of these activities were located in the Western Hemisphere, but since the war we have invested over a billion dollars in Middle East oil. Hardly less important than mining and petroleum properties has been the 5.5 billion dollars, or 33 percent, invested in foreign subsidiaries of American manufacturing corporations. The primary purpose of this type of investment has been to widen the market for the products of these manufacturing firms.

In 1914, United States private foreign investments were about 3 billion dollars; in 1919 they were about 4 billion; in 1930, 7.5 billion, and in 1943, 8 billion. In the last ten years our investments abroad have risen from about 8 billion dollars at the end of 1943 to well over 16 billion dollars at the end of 1953. Much of this, nearly 6 billion dollars, has been achieved in the four years since 1949 and reflects in part our renewed interest in assuring an uninterrupted flow of raw materials, primarily to the United States, but also to our allies in the free world. Detailed data are not yet available for 1953, but of the 4.1 billion dollars invested abroad in the years 1950-52, some 2.2 billion were devoted to increasing the free world supply of raw materials (including Canadian aluminum and European petroleum refineries). Something less than 1.5 billion dollars was invested in other manufacturing facilities, consisting largely of reinvested earnings rather than new capital. Investments in public utilities were little changed, and investments in trade were up about $300,000,000, representing reinvested earnings to a very large extent.

Certain features of the character of our foreign investment in recent years deserve particular mention as influencing the problem of capital expansion in underdeveloped countries over the next few years. First, to a large extent, private investment in recent years has been concentrated in a few large raw materials projects, some of which are now completed or nearly so. With our stockpile program now nearing completion, and the world prices for raw materials showing definite signs of weakness, the natural incentives for further expansion in this field are likely to be somewhat less than in recent years.

Second, reinvested earnings rather than new capital are becoming the predominant source of funds for the expansion of investment abroad. In 1952, for example, reinvested earnings amounted to $876,000,000 against $850,000,000 of new dollar capital. Moreover, nearly $500,000,000 of this new dollar investment went into a few projects, Canadian and Venezuelan ores, Canadian and Middle East oil, which have only begun to pay off in earnings. As their earnings increase, more of their capital needs for expansion can be financed out of retained earnings.

Third, apart from Latin America and more recently a few of the Middle East states, very little of our private investment funds have flowed into those parts of the world where the need for new capital is greatest. A breakdown of the 16 billion dollar United States private foreign investment shows that about 40 percent is in Latin America, 30 percent in Canada, with the remainder split evenly between Western Europe and the rest of the world. Living standards in those areas most in need of capital are too low to provide a wide market for the types of goods that American industry is capable of producing in huge volume and at low cost. And where raw materials required by American industry are available, transportation costs may well offset lower production costs. Consequently, for the immediate future, capital investment in these countries will have to give emphasis to the type of light industry which, using local labor and available raw materials, can produce manufactured goods for export or can reduce the country's dependence on foreign sources.

Finally, it is well to recognize that foreign investment during the last few years might well have been somewhat greater than it actually was, had it not been for our own requirements for rearmament and our own industrial expansion. With rearmament expenditures over the peak and our more urgent needs for additional plant and equipment satisfied, it is likely that the supply of American capital available for investment abroad will be considerably greater than in the recent past.

In the foregoing discussion, I have referred to United States investment in terms of the book value of foreign subsidiaries or branch offices of United States companies. Only about half of the recent annual increases in value of such United States investments has come from new dollar outflow from the United States, with the rest coming from reinvestment of the foreign earnings. If we look upon capital investment as a means of financing the United States export surplus, then we must pay primary consideration to the actual dollar outflow of capital from the United States. In the past few years, the net outflow of United States dollars into direct investment abroad has been at the rate of about $700,000,000 a year, although in 1952 such direct investment reached a peak of $850,000,000. For balance of payments purposes, to this outflow of private direct United States investment must be added the investment by United States citizens in new or outstanding foreign securities, and other long- and short-term investments. These other dollar capital movements averaged over $400,000,000 during 1950-52. Thus, the total private capital movement for the United States, both direct and portfolio, amounted to an average of about 1.1 billion dollars for 1950-52.

IV

Looking back at the growth in the United States of direct private investments abroad over the period since 1900 and looking forward to the possibilities that lie ahead, I firmly believe that if the United States is to fulfill its rôle as a great capitalist country and the world's leading creditor, we should double the average annual rate of such investment. In other words, I believe that by 1960 we should be able to invest abroad 2 billion dollars annually, with most of this in direct private investment.

In order to achieve an annual rate of 2 billion dollars by 1960, affirmative action must, and is, now being taken by the United States Government. The negotiation of treaties avoiding double taxation, and treaties of friendship, commerce and navigation which avoid discriminatory treatment of United States investments abroad, have been stepped up. Action on the part of the Administration has also been taken to insure United States capital against certain risks abroad. This has been done by means of investment guaranties, under which for a small fee United States companies can insure convertibility of profits into dollars, and against loss through expropriation. Although the program has not as yet greatly stimulated foreign investment abroad, with coverage to date amounting to $44,000,000, it has attracted considerable interest on the part of potential investors, and may expand in the future. As of February 10, 1954, 59 guaranty contracts, totaling $43,872,240, had been issued. Of this total, 54 contracts, totaling $42,078,209, were convertibility contracts, and five, totaling $1,794,031, were expropriation contracts. Investments by 50 companies in seven countries had been covered.

In addition, in his Budget Message to Congress on January 21, President Eisenhower made four very important specific tax recommendations for encouragement of private United States investments abroad, namely:

a. Business income from foreign subsidiaries or from segregated foreign branches which operate and elect to be taxed as subsidiaries should be taxed at a rate 14 percentage points lower than the regular corporate rate. This lower rate of tax should apply only to earnings after January 1, 1954. [This provision of law has heretofore been restricted to Western Hemisphere corporations and has been very beneficial in inducing United States investors to make foreign investments in Latin America.]

b. The present definition of foreign taxes which may be credited against the United States income tax should be broadened to include any tax other than an income tax which is the principal form of taxation on business in a country, except turnover, general sales, or excise taxes, and social security taxes. This country, by its tax laws, should not bring indirect pressure on other countries to adapt their tax systems and rates to ours.

c. The over-all limitation on foreign tax credits should be removed. This limitation discourages companies operating profitably in one foreign country from starting business in another foreign country where operations at a loss may be expected in the first few years.

d. Regulated investment companies concentrating on foreign investments should be permitted to pass on to their stockholders the credit for foreign taxes which would be available on direct individual investments.

In addition to these specific recommendations for more favorable tax treatment for foreign investment, President Eisenhower, in the same Message, made a general recommendation pertaining to all business which would allow "larger depreciation charges --in the early years of the life of the property by the use of the declining balance method of depreciation at rates double those permitted under the straight line method." He also recommended other methods for achieving the same result so long as they do not result in larger charges than those available under the declining balance method. If enacted by the Congress these would be, of course, applicable to all business, but they are of particular importance to all new investment, including foreign investment.

Likewise, the United States is encouraging other countries to help create the climate that will attract private investment. As one example of what can be done, let me take the case of Turkey. Just before Clarence Randall took over the Chairmanship of the Commission on Foreign Economic Policy, he went there with the encouragement of the United States Government and at the invitation of the Government of Turkey, to advise on the kind of steps that might be taken to provide a more favorable climate for private investment. The Turkish Grand National Assembly enacted on January 18, 1954, a "Foreign Investment Encouragement Law" which repeals previous restrictive legislation and sets up a high-level Committee on the Encouragement of Foreign Investment.

In this regard, it should be made clear that investment is not something that just happens. Nor does it grow naturally. It is a result, on the whole, of policy decisions by the government of the country which desires the investment of funds. Investors seek profits which may be freely paid to them in their own currency. They wish to be free of discriminatory treatment and abnormal risks. Since American investors have the enormous range of free choices on this continent--including Canada-- where there are none of these difficulties, a climate that will induce foreign investment must, in general, approach and, if possible, exceed in attractiveness the conditions in North America. The Turks were trying to create such conditions.

Turkish economic stability, including maintenance of exchange rates and balance of payments equilibrium, stable credit and price policies, exchange control, import restrictions and bilateral trade and payments arrangements, were examined with a view to facilitating transfers of the earnings on and the principal of foreign capital. Political stability, including the risk of foreign aggression, internal political conditions, including the older statist philosophy and its threat of government competition through nationalized enterprises, had to be considered for the effect they might have on investors. Since Turkey has a stable democratic political structure with vigorous political parties, since the Turkish people have definitely rejected statism, and since the government has been divesting itself of existing state enterprises, investors have little reason to fear nationalization.

The Government of Turkey has now given the following assurances: 1, that the scope of operations open to foreign investment in Turkey should be expanded; 2, that the earnings on and the proceeds of the sale of invested capital should be freely transferable abroad; 3, that any new law should be made retroactive and its benefits applied to existing foreign investments in Turkey; 4, that the government recognized the desirability of facilitating transactions in Turkish securities on world stock exchanges; 5, that it desired to create a promotional organization to attract private foreign capital; and 6, that it intended to push on quickly in implementing these proposals.

The new investment law passed by the Grand National Assembly of Turkey on January 18, 1954, reaffirms the first three and the financial part of the fourth above-stated assurances. A proposed new corporation law will accomplish the remainder of the fourth objective, and the administrative implementation of this law will include the setting up of a promotional organization which will likely be established in both Ankara and New York City. The Turkish Government has made clear that it will create facilities for mobilizing and investing the savings of the Turkish people in the active development of agriculture and industry under the impetus of private enterprise and individual initiative. It will also provide for the ready admission into Turkey of necessary foreign technical and managerial personnel, will give all possible facilities to the establishment and operation of modern business enterprises, and will seek, where desirable, to enlist the coöperation of foreign investors with Turkish enterprise and capital. I firmly believe that the implementation of this law will result in attracting to Turkey a considerable new flow of United States private capital in the year ahead.

V

What has been done so far in Turkey can be done equally well by any country really interested in attracting foreign investors. The United States Government stands ready, is indeed directed by provisions of the Mutual Security Act, to do all that may properly be done to aid other governments in taking the steps necessary to make themselves into "show windows" most attractive to the world investment community.

Inflamed nationalistic feelings fed by old oppression and Communist agitation will be responsible in some countries for hostility to the principle of development through private investment. Increasingly, we hope it will be realized that private investment is the best, indeed the only means of supplying adequate funds to do the job for which the underdeveloped world is clamoring. Will countries with plentiful oil resources indefinitely endure the deprivations which result from using their scarce foreign exchange to import oil that could be produced by private investors on fair terms? Will other countries with valuable resources be able indefinitely to satisfy their people's demand for development by assurances that leave unexploited resources "in the ground" or "on the land"? I do not believe so, and it would certainly seem that the majority of people in all countries would not choose to do so if there were a "fair" alternative. Whatever practices may have accompanied investment at some times and places in the past, there is no thought of, or necessity for, exploitation in making a case for private investment now.

On another front, the Foreign Operations Administration, in expanding its basic materials program in dependent overseas territories, is endeavoring to fit in with the financing of spur railroads, port facilities, highways and other public utilities necessary to the private development of the resources of the underdeveloped areas concerned. In addition, the Foreign Operations Administration is trying, in various ways, to develop an awareness on the part of private capital in the United States that overseas investment can be, and since World War II has been, very profitable. One study in this period shows that despite the problems of expropriation and convertibility there has been a higher net profit in overseas direct private investment than in domestic private investment. This is true of all categories--petroleum, manufacturing, mining, etc.--except public utilities.

Another course of action suggested by the International Development Advisory Board that has been given consideration is "that the United States take the initiative in creating an International Finance Corporation, as an affiliate of the International Bank, with authority to make loans in local and foreign currencies to private enterprise without the requirement of government guaranties and also to make non-voting equity investments in local currencies in participation with private investors." There are still other possibilities for assistance by the United States in this area through direct loans to country or regional development banks. Capital contributions would be required from the governments concerned, with equity capital provided by local and foreign investors and with the equity investors managing the bank. Such a plan, it is to be hoped, would foster local savings, the development of a capital market, and general economic development. It would consequently stimulate additional private investment from abroad. It goes without saying, of course, that neither of these two proposals would compete with the International Bank for Reconstruction and Development.

As was stated at the beginning of this article, one of the axioms of the Eisenhower Administration's foreign economic policy is that the free world must build its long-term economic future primarily on the resources and efforts of each country--working in harmony with the other free world countries--and not on repeated extensions of grant aid from the United States. The solid basis for the long-term pull is being laid, and we can draw positive encouragement from the recent growth of the free world economy, as shown by the economic indices as they stood at the end of the first year.

This strong economic advance abroad has resulted in sharp decreases in the President's requests for foreign aid appropriations for the coming fiscal year. It has provided the climate in which the building of a free and self-sustaining trade and payments system in a world of expanding trade may now go forward. The greatest contribution the United States can make to such a system, of course, is the maintenance of a healthy and dynamic economy at home. But, beyond that, there are many steps in the foreign field in regard to which the United States can and must take affirmative leadership. Foremost among these is to induce private capital to enter those areas abroad where the need is greatest. The attainment of this objective is not only a part of our foreign economic policy which looks toward a steadily expanding world economy, but in particular is of vital self-interest to the economic welfare of every American business. As we have seen above, the Eisenhower Administration has under advisement or is already putting into practice methods to increase the flow of United States private capital abroad so that, as the President has rightly said in his Economic Report, "Private capital may play a fuller rôle in developing new sources of materials, creating new productive facilities, and contributing to an increase in standards of living throughout the free world."