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American Multinationals and American Economic Interests: New Dimensions to an Old Debate

by | March 17th, 2009 | 02:55 pm
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Are multinational corporations in the United States relocating their manufacturing sites overseas, abandoning workers and communities at home? And are their investments abroad “hollowing out” America’s productive capacity?

At a time of global economic and financial turmoil, these questions are as controversial as ever.  The 2008 election rekindled the debate over the practices of multinational corporations that spread technology and reposition their production around the globe.  President Obama pledged in his campaign to “end tax breaks for corporations that ship jobs overseas.” 

The Obama promise was part of what I would call a “new critique” of the involvement of US multinational corporations in the globalization of industry.

The first proposition of this “new critique” is that US-based multinational corporations, acting out of self-interest, abandon their former sites, depriving workers and communities of productive activities and well-paying alternatives.  While individual corporate decisions may have such an effect, it is important to remember that US multinationals continue to have a disproportionately large economic impact on the US home economy—they generate 20 percent of total US employment and 25 percent of total US output.  The plants of US multinationals are the most productive plants in the United States, in terms of both total factor productivity and labor productivity.1  They are also the most technology-intensive, and pay the highest wages.  The plants of US multinationals show labor productivity 16.6 percent higher than those at large domestic firms, and 44.6 percent higher than those at small US firms.  In short—far from supporting the “abandonment” hypothesisUS multinationals continue to make a large and growing contribution to the home economy even as they move some of their operations from the United States.

The second proposition in the “new critique” asserts that outward investment by US-based multinational corporations substitutes external production for exports, drains off capital, and “hollows out” the home economy in a zero-sum process that damages those left behind. To determine whether this proposition is correct, it is crucial to look closely at the counterfactual—what would happen in the home economy if the multinational corporation did not make the outward investment?

To discover whether US multinational corporations substitute production abroad for exports, it is necessary to compare the export behavior of “likes with likes” while varying only the extent of outward investment. The evidence shows that the stay-at-home option does not strengthen the home industrial base, or lead to more exports from home. On the contrary, the stay-at-home option leads to a less competitive industrial base in the United States and fewer exports from the United States.  If US multinationals were prevented from moving abroad, or if obstacles and disincentives were put in their path, the United States would be weaker and the labor market less filled with export-related jobs

The finding that home country firms that engage in outward foreign direct investment (FDI) export more from home than similar firms that do not engage in outward investment bears directly on the composition of good jobs/bad jobs in the home country market, since export-related jobs across all developed countries offer a wage-and-benefit premium in comparison to other jobs in comparable firms. In the United States, export jobs pay wages 10-11 percent higher than nonexport related jobs.2  Thus, outward investment by US multinationals results in a higher proportion of good jobs (relatively high wages and benefits) compared with bad jobs (relatively lower wages and benefits) at home.

The benefits that accrue to US companies that engage in foreign investment are not limited to their superior export performance.  US multinationals that invest abroad use frontier production processes in their home country plants more frequently, have higher levels of worker productivity, and enjoy more rapid growth rates of overall productivity than others.3  Taken altogether, American-owned firms that engage in overseas investment pay their blue-collar production workers 7-15 percent more than comparable non-outward investors (7 percent more in large US MNC plants, 15 percent more in small US MNC plants).4  

Turning to the contention that outward investment on the part of US multinationals “drains off” capital that otherwise would be invested at home, the evidence also suggests complementary rather than zero-sum dynamics in parent multinational strategy.  Mihir Desai, Fritz Foley, and James Hines discover that years in which American multinational firms make greater capital expenditures abroad coincide with greater capital spending by the same firms at home.5  The evidence paints a picture in which outward investment is an integral part of multinational corporate strategy to maximize the competitive position of the whole corporation, a goal for which headquarters raise the needed amount of capital from sources all around the globe.  In determining where to deploy capital and where to locate production, relative costs—including relative wages and benefits (as well as relative skills and relative productivity)—play a definite role. But in the end operations at home and operations abroad complement each other, as the multinational parent tries to make the deployment of tangible and intangible assets most productive and profitable.

To be sure, changing patterns of multinational investment—like changing patterns of technology deployment generally—contribute to job losses and dislocations for some workers as well as to new opportunities for others.  The appropriate response for home country authorities is to design adjustment programs and retraining programs to cushion the impact on those adversely affected, not to impede capital flows and engage in a futile effort to preserve jobs in uncompetitive economic activities at home.6

The data and analysis that underlie these arguments can be found in a larger working paper from morant@georgetown.edu.


Notes

1. Mark E. Doms and J. Bradford Jensen. 1998. “Comparing Wages, Skills, and Productivity Between Domestic and Foreign Owned Manufacturing Establishments in the United States,” Geography and Ownership as Bases for Economic Accounting, ed. Robert E. Baldwin, Robert E. Lipsey, and J. David Richardson, National Bureau of Economic Research and University of Chicago Press.

2. J. David Richardson. 2005. Uneven Gains and Unbalanced Burdens?  Three Decades of American Globalization., op. cit.

3. Andrew B. Bernard, J. Bradford Jensen, Peter K. Schott. Importers, Exporters and Multinationals: A Portrait of Firms in the U. S. that Trade Goods. Working Paper 05-10, Peterson Institute for International Economics, Washington, 2005.

4. J. David Richardson. 2005. Global Forces, American Faces: US Economic Globalization at the Grass Roots.  Washington, DC: Institute for International Economics. Draft.

5. Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr., “Foreign Direct Investment and the Domestic Capital Stock”, American Economic Review 95, No. 2 (May 2005), 33-38.

6. For an agenda of retraining and adjustment policies for the United States, see Howard Rosen. 2008. Strengthening Trade Adjustment Assistance [pdf].  Washington, DC: Peterson Institute for International Economics. Policy Brief  08-2, January. See also Lori G. Kletzer and Howard Rosen, “Reforming US Labor-Market Adjustment Programs to Better Assist US Workers[pdf], chapter 10 in C. Fred Bergsten and the Institute for International Economics, The United States and the World Economy: Foreign Economic Policy for the Next Decade (Peterson Institute for International Economics, Washington, 2005).

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