Saturday, November 29, 2014

Are US Multinationals Abandoning America?

BERKELEY – At a recent conference in Washington, DC, former Treasury Secretary Larry Summers said that US policymakers should focus on productive activities that take place in the United States and employ American workers, not on corporations that are legally registered in the US but locate production elsewhere. He cited research by former Labor Secretary Robert Reich, who, more than 20 years ago, warned that as US multinational companies shifted employment and production abroad, their interests were diverging from the country’s economic interests.

It is easy to agree with Summers and Reich that national economic policy should concentrate on US competitiveness, not on the well-being of particular companies. But their sharp distinction between the country’s economic interests and the interests of US multinational companies is misleading.

In 2009, the latest year for which comprehensive data are available, there were just 2,226 US multinationals out of approximately 30 million businesses operating in the US. America’s multinationals tend to be large, capital-intensive, research-intensive, and trade-intensive, and they are responsible for a substantial and disproportionate share of US economic activity.

Indeed, in 2009, US multinationals accounted for 23% of value added in the American economy’s private (non-bank) sector, along with 30% of capital investment, 69% of research & development, 25% of employee compensation, 20% of employment, 51% of exports, and 42% of imports. In that year, the average compensation of the 22.2 million US workers employed by US multinationals was $68,118 – about 25% higher than the economy-wide average.

Equally important, the US operations of these firms accounted for 63% of their global sales, 68% of their global employment, 70% of their global capital investment, 77% of their total employee compensation, and 84% of their global R&D. The particularly high domestic shares for R&D and compensation indicate that US multinationals have strong incentives to keep their high-wage, research-intensive activities in the US – good news for America’s skilled workers and the country’s capacity for innovation.

Nonetheless, the data also reveal worrisome trends. First, although US multinationals’ shares of private-sector R&D and compensation were unchanged between 1999 and 2009, their shares of value added, capital investment, and employment declined. Moreover, their exports grew more slowly than total exports, their imports grew more quickly than total imports, and the multinational sector as a whole moved from a net trade surplus in 1999 to a net trade deficit in 2009.

Second, during the 2000’s, US multinationals expanded abroad more quickly than they did at home. As a result, from 1999 to 2009, the US share of their global operations fell by roughly 7-8 percentage points in value added, capital investment, and employment, and by about 3-4 percentage points in R&D and compensation. The shrinking domestic share of their total employment – a share that also fell by four percentage points in the 1990’s – has fueled concerns that they have been relocating jobs to their foreign subsidiaries.

But the data tell a more complicated story. From 1999 to 2009, US multinationals in manufacturing cut their US employment by 2.1 million, or 23.5%, but increased employment in their foreign subsidiaries by only 230,000 (5.3%) – not nearly enough to explain the much larger decline in their US employment.

Moreover, US manufacturing companies that were not multinationals slashed their employment by 3.3 million, or 52%, during the same period. A growing body of research concludes that labor-saving technological change and outsourcing to foreign contract manufacturers were important factors behind the significant cyclically-adjusted decline in US manufacturing employment by both multinationals and other US companies in the 2000’s.

So, while US multinationals may not have been shifting jobs to their foreign subsidiaries, they, like other US companies, were probably outsourcing more of their production to foreign contractors in which they held no equity stake. Indeed, it is possible that such arm’s-length outsourcing was a significant factor behind the 84% increase in imports by US multinationals and the 52% increase in private-sector imports that occurred between 1999 and 2009.

To understand domestic and foreign employment trends by US multinationals, it is also important to look at services. And here the data say something else. From 1999 to 2009, employment in US multinationals’ foreign subsidiaries increased by 2.8 million, or 36.2%. But manufacturing accounted for only 8% of this increase, while services accounted for the lion’s share. Moreover, US multinationals in services increased their employment both at home and abroad – by almost 1.2 million workers in their domestic operations and more than twice as many in their foreign subsidiaries.

During the 2000’s, rapid growth in emerging markets boosted business and consumer demand for many services in which US multinationals are strongly competitive. Since many of these services require face-to-face interaction with customers, US multinationals had to expand their foreign employment to satisfy demand in these markets. At the same time, their growing sales abroad boosted their US employment in such activities as advertising, design, R&D, and management.

Previous research has found that increases in employment in US multinationals’ foreign subsidiaries are positively correlated with increases in employment in their US operations: in other words, employment abroad complements employment at home, rather than substituting for it.

Facts, not perceptions, should guide policymaking where multinationals are concerned. And the facts indicate that, despite decades of globalization, US multinationals continue to make significant contributions to US competitiveness – and to locate most of their economic activity at home, not abroad. What policymakers should really worry about are indications that the US may be losing its competitiveness as a location for this activity.

This article draws on “A Warning Sign from Global Companies,” co-authored with Matt Slaughter, Harvard Business Review (March 2012).

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    1. CommentedMiguel de Arriba

      And multinationals do not relocate only in industrial as well as financial support for not paying taxes.
      Apple pays lower taxes in Ireland, Burger King, Starbucks and McDonald's avoid paying taxes through Swiss operations.

    2. CommentedMiguel de Arriba

      The author contradicts himself. On the one hand, citing numbers on the other hand, a summary that does not correspond with the information provided.

    3. CommentedProcyon Mukherjee

      That the competitiveness is sliding is out in the open with the slide of U.S. position to the 5th in the last Global Competitiveness Report. One of the striking features in this report is the link of public debt with competitiveness. Those nations with high public debt and with rising risks in the sovereign debt default area, the public spending on R&D and Technology innovation in those have dwindled; U.S. is no exception given this trend. U.S. multinationals is part of this challenge, but where they score more is in their ability to leverage financial capital to build efficiency walls that are less pregnable than the rest. Labor market efficiency and technology readiness is a laudable element, so the good things should not be ignored.

      Migration of jobs, that cannot be sustained by efficient deployment of capital and labor, is a given in the globalized world (of capital and labor), there is no need to single out U.S. Multinationals for that denouement.

      Procyon Mukherjee

    4. CommentedNikhil Sonnad

      It's not fair to begin this discussion at 1999. I suspect that this point is misleading:

      "From 1999 to 2009, US multinationals in manufacturing cut their US employment by 2.1 million, or 23.5%, but increased employment in their foreign subsidiaries by only 230,000 (5.3%) – not nearly enough to explain the much larger decline in their US employment."

      I don't have the figures at the ready, but I suspect that that figure would be much more dramatic over a period beginning in the mid-20th century. After all, globalization and "Made in China" were already thriving by 1999.

      I do not disagree with the central thesis of this argument. But I see no problem in admitting that multinationals are in fact abandoning America, and have been for a long time. While Americans may see that as a threat to their future, many in other parts of the world see it as a reason for hope and opportunity.