THE INVESTMENT FLOW

Should It Be Dammed?

A CHERISHED aim of the U.S.

Government has long been to encourage U.S. business to invest abroad. Now that aim is being re-examined and questioned, even in Government circles, because foreign investment contributes to the outflow of U.S. gold.

When Ford recently decided to buy the rest of the stock (44%) of its British subsidiary, the prospect of $300 million in U.S. capital flowing to Great Britain so worried Treasury Secretary Anderson that he personally tried--unsuccessfully--to get the company to reconsider its plans. The Ford episode highlights the whole question of whether the vast outflow of U.S. private capital should be curbed as one method of dealing with the gold outflow.

This year some 3,000 U.S. companies will invest about $1.25 billion abroad v. $1.2 billion in 1959 and $1.1 billion in 1958. Altogether, U.S. private investment abroad amounts to about $30 billion, 50% more than U.S. Government investment abroad. While the pace of foreign investments has been stepped up by a scramble to get into the Common Market area before the tariff walls go up, it is based more solidly on worldwide economic growth. Says Basil James, the American sales director of British Aluminium, which is 49% owned by Reynolds aluminum: "American business has become aware that the fastest-growing markets may be outside the U.S. To serve these markets we have to be competitive, and establishing our own production and merchandising facilities abroad has helped us to that end."

Anxious to attract U.S. industry, many countries go out of their way to give U.S. firms special consideration. France's economic ministry promises government loans of up to 15% of the cost of a plant built in any of the country's depressed areas. What U.S. companies find most fetching abroad is the chance to make bigger profits than in the U.S., thanks to lower costs and rapidly growing markets. H. J. Heinz makes half its sales in foreign markets, and this half produces two-thirds of all Heinz profits. Chesebrough-Pond's gets 57% of its profits from the 40% foreign slice of its sales, Coca-Cola 40% from 35%, Colgate-Palmolive 64% from 51% and International Telephone & Telegraph 75% from 60%. In most of the industrialized free-world countries, there are few or no restrictions on returning profits to the firm's home country.

Do enough profits return to the U.S. to balance the money that goes abroad? Most businessmen say that they do eventually--and then some. Last year alone, $2.2 billion returned to the U.S.

Companies use their foreign profits, plus depreciation funds stored up abroad and local borrowing, to finance most of their expansion abroad, thus do not further aggravate the dollar drain. General Motors, which will spend abroad 25% of the $1.25 billion it has set aside for expansion next year, calculates that not more than 10% of its total overseas investment represents dollars that actually went abroad. Says Gene Leonard, managing director of G.M.'s plant in Bienne, Switzerland: "We send currency back to the U.S. instead of draining American reserves. American companies spend as little as they can from their American resources in plant investment. After all, there's also such a thing as a dollar-drain problem inside a company."

U.S. firms keep a substantial amount of profits abroad to take advantage of economies that are growing faster than the U.S. economy, provide more investment opportunities. Another incentive to keep profits abroad is the U.S. tax system. While such countries as Switzerland tax no earnings made outside their borders, the U.S. imposes taxes on repatriated profits that have already been taxed abroad, requiring companies to make up the difference between a lower foreign tax rate and the U.S. tax rate of 52%. Thus, a U.S. firm that paid 40% taxes abroad would have to pay 12% in additional taxes on bringing its profits home.

Most businessmen--and many Government experts--think that putting restrictions on foreign investment would be a great mistake. Says Livingston Merchant, Under Secretary of State for Political Affairs: "To impose restrictions on private capital movement overseas as a remedy to our situation, or to restrict travel of U.S. citizens abroad--both of which loom important in the payments deficit--is contrary to the concept of our free enterprise economy." William H. McCoy, managing director of Du Pont in Great Britain, puts it in more practical terms: "If you keep your horns drawn in, you are simply going to lose out in the export market. It's as simple as that."

Without private U.S. investment abroad, the nation might find that it had to spend more on foreign aid or that it might leave the door open for others--especially the economically rising Communist nations--to move in. Foreign investors also argue that the balance-of-payments problem might be helped by offering tax advantages to firms bringing back profits to the U.S. The money made abroad would return to the U.S. more quickly, they say, if the Government allowed foreign profits to be taxed at foreign rates only.

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