At a recent conference in Washington D.C., former treasury secretary Larry Summers said that US policymakers should focus on productive activities that take place in the US 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, 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, 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 per cent of value added in the American economy's private (non-bank) sector, along with 30 per cent of capital investment, 69 per cent of research & development, 25 per cent of employee compensation, 20 per cent of employment, 51 per cent of exports, and 42 per cent of imports.

In that year, the average compensation of the 22.2 million US workers employed by US multinationals was $68,118 (Dh250,207) — about 25 per cent higher than the economy-wide average.

Skilled workers

Equally important, the US operations of these firms accounted for 63 per cent of their global sales, 68 per cent of their global employment, 70 per cent of their global capital investment, 77 per cent of their total employee compensation, and 84 per cent 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 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 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 has fuelled 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 per cent, but increased employment in their foreign subsidiaries by only 230,000 (5.3 per cent) — 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 per cent, 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.

Outsourcing

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 per cent increase in imports by US multinationals and the 52 per cent 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 per cent. But manufacturing accounted for only 8 per cent 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 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. At the same time, their growing sales abroad boosted their US employment in such activities as advertising, design, R&D, and management.

The facts indicate that, 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.

 

Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business, University of California.