137. Memorandum From the Secretary of the Council on Foreign Economic Policy (Cullen) to the Members of the Council1

CFEP 511/2


  • CFEP 511—Stimulation of Investment in Underdeveloped Countries
Your attention is invited to the attached study entitled “U.S. Foreign Investment in Less-Developed Areas.” This study was prepared under the direction of the National Advisory Council on International Monetary and Financial Problems in response to a CFEP request of May 17, 1955, for a report and such recommendations as may be appropriate concerning U.S. policy on the above subject. The conclusions and recommendations of the study have been approved by the NAC.
This study will be scheduled for Council consideration in the near future.2
Paul H. Cullen
Lt. Col., USA


NAC Document No. 1868 (Revised)



Conclusions and Recommendations

I. Investment Trends

A. Outstanding Investments

United States long-term investment abroad amounted to approximately $36.7 billion at the end of 1954. Of this total, $23.8 billion or 65 percent was private investment, of which $17.7 billion was direct investment. Approximately $12 billion, or one-third of the total investment was in the less-developed areas. Two out of every three dollars of total investment in the less developed areas was in Latin America. Investment of American private capital abroad (including arrangements by American industry to transfer technology for a consideration either in the form of equity capital or royalties) results principally from two incentives—(1) the protection of a market, or (2) the procurement of essential raw materials.
Of the $17.7 billion worth of direct private investment at the end of 1954, 34% were in Canada, with which the United States has a unique investment relationship; 15% were in familiar environment in Europe, mostly in the United Kingdom; and 35% in the equally familiar surroundings of Latin America. Outside of these areas, 7% were invested in 7 countries which represent special cases: in industrialized Japan, in countries with Anglo-Saxon traditions and institutions (Australia, New Zealand, and the Union of South Africa) and in countries with special relationships with the United States (the [Page 353] Philippines, Liberia and Israel). Apart from Latin America the rest of the less developed areas of the world had only 9% of U.S. private investments, predominantly in petroleum and mining.

B. Flow of Investment

For the five years 1950–1954 the outflow of United States foreign investment to all areas, net of repayments and repatriation, was $9.3 billion, or about $2.0 billion a year. Approximately one-half of this outflow, or $1.0 billion a year, went to the less developed areas.
Of the $1.0 billion per year to the less developed areas, about 55 percent was provided by private investment, 25 percent by the Export-Import Bank and the International Bank for Reconstruction and Development, and the balance—20 percent—through grants and soft government loans.
Half of this $1.0 billion went to Latin America, one-third to Africa and the Middle East, and one-seventh to the Far East.
The petroleum and mining and smelting industries accounted for over half of the net outflow of private investment to less developed areas.
During the past 5 years, over $400 million of the Export-Import Bank’s gross disbursements for project loans to the less developed areas have been made directly, or through the intermediary of foreign financial institutions, to private enterprises, U.S. as well as foreign owned.
Investments in the less developed areas by countries other than the United States have, since the war, been relatively small, except for investments in their dependent territories. With the strengthening of the European economies, new investments by such countries may expand and make a substantial contribution.

II. Factors Affecting Flow of Private Investments

Our foreign policy is aimed at achieving the kind of world community in which trade and investment can move with a minimum of restrictions and a maximum of security and confidence. Thus, almost every aspect of our foreign policy has some ultimate effect, directly or indirectly, upon the flow of private investment abroad.
Certain measures, however, have been developed over a period of years for specifically encouraging private investment. Three such measures upon which the U.S. has placed a great deal of emphasis are investment treaties, investment guaranties, and tax concessions. These measures probably have had only a marginal [Page 354] effect on the total flow of investment, at least in the short run. Nonetheless, they are considered to be basically sound.
There is a very wide range in the relative attractiveness of different countries and areas for U.S. investors abroad. General incentives offered by the U.S. Government to encourage private foreign investments are not selective by areas and are not likely to influence materially the direction of the flow of investment to particular areas.
In order to avoid the possibility of competition with private sources of investment funds, and for other reasons, the United States has not emphasized the use of public loans to stimulate the development of United States or native private enterprises in less developed countries.
The techniques used by capital exporting countries to stimulate private investment are likely to be less significant than basic factors in the less developed areas themselves which deter private investment. Such basic factors are natural resources, political and economic instability, legislation and attitudes affecting investment, character of labor supply, degree of economic nationalism, and other fundamental conditions.
Changes in these basic factors affecting private investment in the less developed areas are likely to be slow by the very nature of the problems and are usually not amenable to direct action. Levels of private investment result from many individual judgements and decisions, and cannot be “programmed” by government policy or action. Increasing familiarity with private enterprise may tend to improve the investment climate.
Judging from the pattern of U.S. private foreign investment in the last several years, it seems evident that it has followed established economic and other relationships of the United States. In much of the Far East, Near East and Africa, particularly, commercial relations have, in the past, been relatively limited and largely carried on through the agency of British, Dutch and other European concerns. Accordingly, United States investment relations have been relatively slow to develop.
Of the three areas—Latin America, the Middle East and Africa, and the Far East—the private U.S. investment prospects appear relatively favorable in Latin America. In the Middle East and Africa, and in the Far East, with few exceptions such as the Philippines, there appears little likelihood for an early change in the present levels of U.S. private investment.
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III. Recommendations

The techniques presently in use to assist private foreign investment have been developed over a number of years, and the recommendations which follow suggest improvements instead of innovations. The problem is one which cannot be solved in a year or two.

Moreover, the circumstances with which United States policy must cope vary materially from country to country and from time to time. The agencies having responsibility in this field must continuously review the situation obtaining in each country in the light of overall objectives of United States policy in that country, so as to determine the applicability of general investment policies and programs to the circumstances then obtaining in each such country.

1. Investment Treaties

The program of negotiating treaties of Friendship, Commerce and Navigation should be vigorously pursued, with particular reference to the less developed areas. The negotiating process provides a very useful forum for considering a variety of subjects related to the stimulation of private investment in general.

To be of value for the particular objectives of the investment program such treaties must provide as a minimum for assurance of national treatment for U.S. enterprises located in the other country and for prompt, just and effective compensation in the event of expropriation. Beyond this minimum such treaties will contribute more to the investment program in those cases where it proves possible to obtain assurance of unrestricted entry for U.S. enterprises or a wide area of unrestricted entry into the other country than in those cases where it is not possible to obtain provisions containing such assurance.

These treaties must of course be based upon principles of mutuality. For this reason provision for unrestricted entry must naturally be limited to the fields in which aliens are left free to invest by the restrictions imposed by federal and state law in the United States.

2. Taxation

Every effort should be made to secure the enactment of legislation such as H.R. 77254 designed to offer tax incentives of two kinds to foreign investment. First, there is the proposed extension of the 14 percentage point rate reduction on corporate income derived [Page 356] from abroad. Second, there is the proposal to defer the tax on the unremitted income of the foreign branches of American corporations.

Further efforts should be made to interest foreign governments in concluding tax agreements which incorporate the so-called tax sparing device by means of which credit could be given, for a limited period, against United States tax for foreign income tax rate reductions or exemptions as an incentive to investment.

3. Aid and Technical Assistance Programs

Maximum use should be made of our assistance programs, including local currency loans under P.L. 480, in stimulating those conditions under which private investment and enterprise can develop and operate effectively. This should involve the following activities as appropriate:

Avoiding the governmental financing of projects before full opportunity has been given for private financing (domestic or foreign) with or without United States governmental participation.
More attention should be given to making the most effective use of our foreign aid to assist the development of indigenous private enterprise abroad as well as to promote private foreign investment.
A new emphasis should be placed in U.S. technical cooperation activities (1) on providing a range of services and assistance to foreign private and public organizations carrying on projects or programs which serve to encourage and facilitate private investment, foreign and domestic, and (2) by direct assistance to the development of capital markets and other necessary resources.

4. Public Lending

The policy of the Export-Import Bank and the International Bank for Reconstruction and Development in placing emphasis on obtaining a maximum amount of private loan participation and equity investment in their lending operations should be welcomed and encouraged. The Export-Import Bank should continue, when appropriate, to stimulate private equity investment through the extension of accompanying loans, particularly when American firms otherwise prepared to make a substantial investment in foreign operations are unable to do so without an accompanying Export-Import Bank loan. The Eximbank should also continue, when appropriate, to support through loans foreign investment institutions enjoying local private participation and with the power to promote private investment. When the International Finance Corporation is established (presumably early in 1956) the United States representatives should exert their influence to make sure that it fulfills its objectives of encouraging the growth of productive private enterprise to the maximum extent possible, whenever financing is not available [Page 357] from private sources, and supplementing but not competing with or having any priority over the Export-Import Bank or the International Bank.

5. Investment Guaranties

The investment guaranty program should be continued for a further period and expanded by agreement to additional countries insofar as practicable. Although presently operative in fourteen less developed countries, the program was extended to only four of them prior to 1954. In administering this program the major emphasis should be upon direct investment. The administering agency should be asked to recommend for appropriate interagency consideration any changes considered necessary in the authorizing legislation to make the program more effective.

6. Local Investment Institutions

It is recommended that attention be given to development of local capital markets and financial institutions. Among the useful techniques which might be considered is the establishment or encouragement of local investment institutions, preferably with private participation, and with functions and objectives similar to those of the International Finance Corporation. Consideration might be given to specific allocation of aid, both dollars and local currency, to such institutions. Those institutions might, as appropriate:

be empowered to issue securities and thus provide an outlet for local savings;
provide risk capital as well as loanable funds;
be empowered to extend credit both to indigenous enterprise and foreign enterprise doing business in the country.

7. Strengthening of U.S. Missions Abroad

U.S. missions abroad should be staffed with personnel competent to deal with investment problems. They can play the most effective role in improving investment conditions abroad and maintaining a constant flow of investment information. From the Ambassador down, the personnel of our missions should be in a position to influence local government and business leaders and to achieve better understanding regarding mutually acceptable conditions for foreign investment. In many instances, influential local leaders have no practical economic experience yet they have to make decisions of tremendous economic import. In this kind of situation our missions can be of great help in steering foreign governments toward sound economic policies.

At present U.S. missions and consular establishments—particularly in the less developed countries—are ill equipped to perform [Page 358] such functions adequately. Many of the personnel have no specialized investment training, they are burdened with heavy reporting schedules and cannot devote sufficient time to the local factors adversely affecting U.S. private investment; they are often shifted to fill gaps in political and consular work. This is particularly true of the less developed areas where personnel shortages and emphasis on political reporting forces the missions to neglect economic and investment reporting. In many instances, the lack of local personnel to help American officers better understand local conditions is the rule rather than the exception. All too often officers are transferred just as they acquire competence in gauging local situations and have established effective contacts.

Where appropriate, consideration should be given to stationing abroad special officers with business, financial or investment experience to work unobtrusively on the problem of establishing a better understanding of the conditions and institutions which will promote higher rates of investment of domestic and foreign capital, that is, to seek to improve the investment climate. Such officers should serve as members of the country team under the supervision of the Ambassador.

It should be understood that any improvements in Foreign Service operations in the respects mentioned above must be accomplished in terms of the total resources of the Department of State, and the total obligation of that Department for all aspects of our foreign relations.

8. Domestic Activities

The U.S. Government should continue to develop close collaboration with private U.S. groups and organizations in order to effectively aid U.S. investors.

The activities of the missions abroad cannot be successfully carried on unless the interested agencies at home are appropriately organized and adequately staffed with competent personnel and unless the activities of the several agencies are closely coordinated.

  1. Source: Department of State, ECFEP Files: Lot 61 D 282A, Investment in Underdeveloped Countries—CFEP 511. Official Use Only.
  2. The recommendations below were approved at the Council meeting held on January 4, 1956. (Memorandum by CFEP Secretary Cullen, January 4, 1956; Eisenhower Library, CFEP Records)
  3. For NAC Use Only.
  4. H.R. 7725 was introduced by Congressman Jere Cooper (D–Tenn.) on July 29.