Business operations abroad pay off at home

The perception is that the foreign operations of US multinationals are at the expense of the US economy but the facts say otherwise, writes Laura Tyson

AT A recent conference in Washington, DC, former treasury secretary Larry Summers said 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 labour secretary Robert Reich, who, over 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 wellbeing of particular companies. However, 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 about 30m 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 and development, 25% of employee compensation, 20% of employment, 51% of exports, and 42% of imports.

In that year, the average compensation of the 22.2m US workers employed by US multinationals was $68,118 (€51,400) — about 25% above 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 US multinationals have strong incentives to keep their high-wage, research-intensive activities in the US — good news for America’s skilled workers and US 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 moved from a net trade surplus in 1999 to a net trade deficit in 2009.

Second, during the 2000s, 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 seven or eight percentage points in value added, capital investment, and employment, and by about three or four percentage points in R&D and compensation.

The shrinking domestic share of their total employment — which fell by four percentage points in the 1990s — has fuelled concerns that they have been relocating jobs to their foreign subsidiaries including many in Ireland.

However, the data tells a more complicated story. From 1999 to 2009, US multinationals in manufacturing cut their US employment by 2.1m, 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 3.3m, or 52%, during the same period. A growing body of research concludes that labour-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 2000s.

So, US multinationals, 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% rise in imports by US multinationals and the 52% rise in private-sector imports that occurred from 1999 to 2009.

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

During the 2000s, 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. Their growing sales abroad also 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.

Facts, not perceptions, should guide policymaking where multinationals are concerned. The facts indicate that, despite decades of globalisation, US multinationals make significant contributions to US competitiveness — and to locate most of their economic activity at home. Policymakers should worry about indications the US may be losing its competitiveness as a location for this activity.

* Laura Tyson, is a professor at the Haas School of Business, University of California, Berkeley. Copyright: Project Syndicate, 2012

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