Arab Investment: New Report

Foreign direct investment in the United States rose by a record 31 percent in 1981, to $89.9 billion. In reporting these figures recently, the Commerce Department noted that "investments by Japan, France and Kuwait were up sharply."

A closer study of the report shows, however, that Arab investment as a whole—far from being of a size that could justify the warnings, still often heard, of an alleged "Arab takeover" of American industry—remains rather modest compared to those of the European countries and Japan.

What the report did not put into perspective was the fact that a single Kuwait Petroleum Corporation (KPC) of Santa Fe International, a California drilling and oil-services company—accounted for nearly 3 percent of that foreign investment, and that investors from the Organization of Petroleum Exporting Countries (OPEC)—Arab and non-Arab—accounted for just under 4 percent of total foreign investment last year.

Arab equity investments and corporate acquisitions in 1981, besides the mammoth Santa Fe deal, included two other purchases by KPC, of 50 percent shares in oil refining or exploration companies in Arizona and Hawaii.

Saudi Arabian investments included the purchase of stakes in a New York brokerage house (Donaldson, Lufkin & Jenrette) and an Idaho silver mine. Among other Arab investments in the past year have been the acquisition of Financial General Bankshares, a Washington, D.C.-based bank holding company, and of another New York brokerage, Smith Barney Upham & Harris.

These investments are quite apart from official and private Arab purchases of real estate and government and corporate securities and debt-issues, which are estimated by some analysts to amount to some $70 billion, or just over 1 percent of total foreign holdings in the U.S. The investments in U.S. government paper are viewed by U.S. government officials as a positive expression of confidence in the U.S. economy. In depositing or investing their oil surpluses in the U.S., the Arab OPEC states have, as one official put it, been "buying a piece of our inflation."

Now, however, because of reduced world demand for oil and the downward pressure on oil prices, Arab oil revenues are severely stretched. This could mean a sharp reduction in official Arab purchases of U.S. government securities when the Treasury puts some $100 billion worth of U.S. debt instruments up for sale later this year. Up to now, the Saudis, particularly, have favored the "T-bill" market because of its size, its confidentiality, its short term, its security and its positive rate of return.

Since some Arab oil producers will even be running budget deficits, there could be a net outflow of OPEC holdings of U.S. government securities in the near future. Administration officials say that such a development would be offset by the positive effects on the Western economies by an improvement in their trade balances with the oil exporters, and by a replacement of the Arab surpluses with new surpluses from former oil-deficit states such as West Germany and Japan.