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Are USA Multinationals Abandoning America?

By LauraTyson*BERKELEY – Ata recent conference in Washington, DC, former Treasury Secretary Larry Summerssaid that US policymakers should focus on productive activities that take placein the United States and employ American workers, not on corporations that arelegally registered in the US but locate production elsewhere. He cited researchby former Labor Secretary Robert Reich, who, more than 20 years ago, warnedthat as US multinational companies shifted employment and production abroad,their interests were diverging from the country’s economic interests.It is easy toagree with Summers and Reich that national economic policy should concentrateon US competitiveness, not on the well-being of particular companies. But theirsharp distinction between the country’s economic interests and the interests ofUS multinational companies is misleading.

In 2009, thelatest year for which comprehensive data are available, there were just 2,226US multinationals out of approximately 30 million businesses operating in theUS. America’s multinationals tend to be large, capital-intensive,research-intensive, and trade-intensive, and they are responsible for asubstantial and disproportionate share of US economic activity.Indeed, in2009, US multinationals accounted for 23% of value added in the Americaneconomy’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 ofthe 22.2 million US workers employed by US multinationals was $68,118 – about25% higher than the economy-wide average.Equallyimportant, the US operations of these firms accounted for 63% of their globalsales, 68% of their global employment, 70% of their global capital investment,77% of their total employee compensation, and 84% of their global R&D. Theparticularly high domestic shares for R&D and compensation indicate that USmultinationals have strong incentives to keep their high-wage,research-intensive activities in the US – good news for America’s skilledworkers 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 and2009, their shares of value added, capital investment, and employment declined.Moreover, their exports grew more slowly than total exports, their imports grewmore quickly than total imports, and the multinational sector as a whole movedfrom 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 didat home. As a result, from 1999 to 2009, the US share of their globaloperations fell by roughly 7-8 percentage points in value added, capitalinvestment, and employment, and by about 3-4 percentage points in R&D andcompensation. The shrinking domestic share of their total employment – a sharethat also fell by four percentage points in the 1990’s – has fueled concerns thatthey have been relocating jobs to their foreign subsidiaries.But the datatell a more complicated story. From 1999 to 2009, US multinationals inmanufacturing cut their US employment by 2.1 million, or 23.5%, but increasedemployment in their foreign subsidiaries by only 230,000 (5.3%) – not nearlyenough to explain the much larger decline in their US employment.Moreover, USmanufacturing companies that were not multinationals slashed their employmentby 3.3 million, or 52%, during the same period. A growing body of researchconcludes that labor-saving technological change and outsourcing to foreigncontract manufacturers were important factors behind the significantcyclically-adjusted decline in US manufacturing employment by bothmultinationals and other US companies in the 2000’s.So, while USmultinationals may not have been shifting jobs to their foreign subsidiaries,they, like other US companies, were probably outsourcing more of theirproduction to foreign contractors in which they held no equity stake. Indeed,it is possible that such arm’s-length outsourcing was a significant factorbehind the 84% increase in imports by US multinationals and the 52% increase inprivate-sector imports that occurred between 1999 and 2009.To understanddomestic and foreign employment trends by US multinationals, it is alsoimportant to look at services. And here the data say something else. From 1999to 2009, employment in US multinationals’ foreign subsidiaries increased by 2.8million, or 36.2%. But manufacturing accounted for only 8% of this increase,while services accounted for the lion’s share. Moreover, US multinationals inservices increased their employment both at home and abroad – by almost 1.2million workers in their domestic operations and more than twice as many intheir foreign subsidiaries.During the2000’s, rapid growth in emerging markets boosted business and consumer demandfor many services in which US multinationals are strongly competitive. Sincemany of these services require face-to-face interaction with customers, USmultinationals had to expand their foreign employment to satisfy demand inthese markets. At the same time, their growing sales abroad boosted their USemployment in such activities as advertising, design, R&D, and management.Previousresearch has found that increases in employment in US multinationals’ foreignsubsidiaries are positively correlated with increases in employment in their USoperations: in other words, employment abroad complements employment at home,rather than substituting for it.Facts, notperceptions, should guide policymaking where multinationals are concerned. Andthe facts indicate that, despite decades of globalization, US multinationalscontinue to make significant contributions to US competitiveness – and tolocate most of their economic activity at home, not abroad. What policymakersshould really worry about are indications that the US may be losing itscompetitiveness as a location for this activity.

*Laura Tyson, a formerchair of the US President's Council of Economic Advisers, is a professor at theHaas School of Business at the University of California, Berkeley. 

This articledraws on “A Warning Sign from Global Companies,”co-authored with Matt Slaughter, Harvard Business Review (March2012).
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