There are three main reasons why the U.S. direct investment position (or stock of U.S. direct investments) in a particular foreign country is usually much smaller than the assets of U.S. companies' foreign affiliates in that country: (1) Some of the assets of foreign affiliates may have been financed through sources other than U.S. direct investors, (2) the direct investment position is reported net of debt owed to the affiliates by their U.S. parent companies, and (3) some of the investments may have been made indirectly, through affiliates located in other countries.
Definitions. In accordance with international statistical guidelines, BEA measures the U.S. direct investment position abroad as the sum of the equity and debt financing provided by U.S. parent companies to their foreign affiliates. (A foreign affiliate is a foreign business in which a U.S. investor has a 10 percent or more ownership interest, either direct or indirect.) Debt financing is entered on a net basis, with debt owed by the foreign affiliates to their U.S. parents subtracted from debt owed by the parents to their affiliates. Investments are recorded as being in the countries with which the parent companies have direct transactions, even if the funds subsequently are redirected to other countries.
Non-U.S.-parent funding. Sources of funding of foreign affiliates other than the direct investments of their U.S. parents include local and third-country borrowing by the affiliates, as well as equity financing provided by other owners of the affiliates. This funding can be substantial and often exceeds the funding provided by U.S. parents.
"Reverse debt." Although most debt between U.S. parent companies and their foreign affiliates is owed by the affiliates to the parents, loans in the reverse direction are significant. Such reverse debt may arise for a variety of reasons, but a common reason is to provide trade credit in connection with parent-company imports of goods produced by foreign affiliates. At yearend 2015, the intercompany debt component of the U.S. direct investment position abroad was valued at $194.6 billion, which was the net of $742.8 billion owed by foreign affiliates to their U.S. parents and $548.2 billion owed by U.S. parents to their foreign affiliates.
Indirect ownership. Indirect ownership of foreign affiliates occurs when a foreign affiliate of a U.S. company, in turn, has foreign affiliates of its own that also qualify as affiliates of the U.S. company. In such cases, the U.S. investment may contribute to the assets of both the directly and indirectly owned affiliates, but it would be recorded only once in the direct investment position, as investment in the affiliate with which the U.S. company has direct transactions. Indirect ownership is an increasingly common phenomenon in U.S. direct investment abroad. Many foreign affiliates of U.S. companies are owned through foreign holding companies, which currently account for about a third of the U.S. direct investment position abroad.
Patterns. Patterns. Each dollar of investment in the U.S. direct investment position abroad generally corresponds to several dollars in foreign affiliate assets. In 2012, for example, the direct investment position was $4.4 trillion (historical cost basis), whereas the assets of these affiliates totaled $21.7 trillion. Thus, each dollar of position corresponded to about $5 in foreign affiliate assets. Assets also exceed the position in individual countries, though the relationships differ from one country to another. For the United Kingdom, for example, the position was $537.0 billion, and the assets, $4,840.0 billion, or about nine times as large. For China, the position was $54.5 billion and the assets, $264.4 billion, or about five times as large. Assets were about four times as large as the position for India.
Example of China. All three reasons why assets exceed the position can be seen at work in the case of China. First, Chinese affiliates have substantial borrowings from local and third-country lenders, and many Chinese affiliates are only partly U.S.-owned. Partial ownership occurs in many countries but is particularly important in China, where the share of a business that can be held by foreign investors is regulated in some industries. In addition, some Chinese affiliates of U.S. companies are owned indirectly, including some that are owned through affiliates in Hong Kong or in other Asian countries. In these cases, the U.S. investment that ultimately funds the operations in China is recorded in the U.S. direct investment position in the countries of the directly held affiliates rather than in China. Finally, the position in Chinese affiliates is further reduced by U.S-parent-company debt owed to these affiliates, some of which may have arisen as a byproduct of the parents' imports of goods from these affiliates.