Do Multinationals That Expand Abroad Invest Less at Home?

Summary: Underneath the political theatrics about the US budget, there is serious debate about how US taxes might be reformed. A key component in this debate is treatment of US multinationals when they engage in outward investment. In this column, we present evidence that foreign expansion by US firms is associated with increases in the domestic activities by those same firms, suggesting that policies penalizing firms for investing abroad will hurt, rather than help, the US economy.

There is a long history of politicians claiming that American multinational corporations (MNCs) “ship jobs overseas” when they invest outside the United States. President Obama, for example, has proposed special support for US firms that stay at home, and criticized those that move abroad.1 This line of attack implicitly assumes that expansion abroad by US firms substitutes for expansion at home, thus harming US workers. However, it is also possible that foreign expansion increases the productivity and market share of firms in a way that benefits US workers. Empirical studies on this topic have come to diverse conclusions. For example, Mihir A. Desai, C. Fritz Foley, and James R. Hines (2009) find evidence of complementarities, while Ann Harrison and Margaret McMillan (2011) obtain mixed results. 2

New Evidence on the Domestic Effects of Outward Expansion by US Firms

We take a fresh and up-to-date look at the extent to which MNC activity at home and abroad are substitutes or complements using confidential firm-level data on the activities of all US-owned multinationals over a 20-year period, collected by the US Bureau of Economic Analysis (Hufbauer, Moran, and Oldenski 2013). By employing panel regression methods, we are able to identify whether expansion abroad by a typical US MNC is associated with a reduction or expansion in the activities of that same firm on US soil. We include firm fixed effects, which allow us to examine changes within each firm over time, rather than comparing one firm to another, and year fixed effects, which hold constant everything external to the firm that was going on in a given year.

Figure 1 summarizes the relationship between US MNC activities at home and abroad. These results draw on firm-level data from 1990 through 2009, covering more than 1,500 US MNCs and their more than 10,000 affiliates. The first thing to note about the relationships between foreign direct investment (FDI) and domestic growth presented in figure 1 is that they are all positive. By any measure, increasing FDI by a US firm is associated with an increase in domestic US activities by that same firm. When a US firm increases the employment at its foreign affiliates by 10 percent, employment by that same firm in the United States goes up by an average of 4 percent. Capital expenditures and exports from the United States by that firm also increase by about 4 percent. Research and development (R&D) spending, which is associated not just with overall US employment but with employment in highly skilled and highly paid jobs, increases by 5.4 percent. The results are similar when increases in FDI are measured by affiliate sales or capital expenditures instead of employment. All of these positive relationships are significant at the 1 percent level.

Figure 1: Increases in foreign activity of US MNCs are accompanied by increases in domestic activity

figure

Note: All results are statistically significant at the 1 percent level.

Source: Hufbauer, Moran, Oldenski (2013).

What about a counterfactual scenario? What would happen at home if MNC expansion abroad were limited or made more difficult? It is impossible to know precisely what would happen at home if a US firm engaged in less activity abroad. On the basis of our findings of positive interactions between increases in measures of firm activity at home and firm activity abroad, however, it appears plausible that increasing foreign affiliate activity increases the overall productivity of an MNC in a way that leads to higher employment in all locations, both at home and abroad. If this is the case, then inhibiting overseas expansion would have negative consequences for the US economy. Or, it could happen that US exports and greater US employment follow foreign affiliate activity, for example, by providing post-sales services or parts and maintenance. Again, if this is the case, then inhibiting overseas expansion would have negative consequences for the US economy.

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