Economy-worlds

A. The Central Message of This Report

The central message of this report is that U.S. multinational companies strengthen the American economy through a combination of their domestic activity and their international engagement.
Strong U.S. multinational companies that are able to compete effectively in foreign markets will be better positioned to help lead America out of recession. The ability of U.S. multinational companies to stem job losses in the United States and eventually return to hiring more American workers depends on the health, vitality, and competitiveness of their worldwide operations.
The strength of the American economy is driven by the productivity and competitiveness of the companies operating in America. Innovative and efficient companies in the United States that profitably create goods and services, in full partnership with their workers and their broader communities, are the foundation of a globally competitive U.S. economy that can deliver productivity growth and rising standards of living.
U.S. multinational companies enhance the American economy by their capital investment, their research
and development, and by supporting good-paying American jobs. This report develops its central message in three parts.
• U.S. multinational companies are, first and foremost, American companies. As a group, U.S. multinationals perform large shares of America’s productivity-enhancing activities that lead to high average compensation for American workers. And the worldwide operations of U.S. multinationals are highly concentrated in America in their U.S. parents, not abroad in their foreign affiliates. The idea that U.S. multinationals have somehow “abandoned” the United States is not supported by the facts. They maintain a large presence in America, both relative to the overall U.S. economy and relative to the size of their foreign affiliates.
• International engagement drives the overall strength of U.S. multinational companies. Although the United States is still the world’s largest single-country market, in the past generation it has been a slow-growth market compared with much of the world. Even with today’s worldwide recession, this means that the overall strength of U.S. multinationals is increasingly tied to their success in both America and abroad. It also means that viewing the domestic and foreign operations of U.S. multinationals as unrelated is increasingly incorrect. U.S. multinationals must make strategic investment and employment decisions from a truly global perspective, with links across all locations and with dynamic variation in successful strategies both across companies at a point in time and within companies over time.
• Foreign-affiliate activity tends to complement, not substitute for, key parent activities in the United States such as employment, worker compensation, and capital investment. Being globally engaged requires U.S. multinationals to establish operations abroad and also to expand and integrate these foreign activities with their U.S. parents. The idea that global expansion tends to “hollow out” U.S. operations is incorrect. Rather, the scale and scope of U.S. parent activities increasingly depends on successful engagement abroad. Expansion by U.S. parents and their affiliates contributes to the productivity and average standard of living of all Americans.

B. Setting the Stage: Is America Losing Its Economic Strength?

Historically, rising U.S. standards of living have been driven by companies becoming more productive—i.e., raising their output per worker by creating new products and processes. Nobel laureate in economics Paul Krugman describes the importance of productivity thus:
Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker… Compared with the problem of slow productivity growth, all our other long-term economic concerns … are minor issues. Or more accurately, they matter only to the extent that they have an impact on our productivity growth.‡
What forces drive companies to be more productive? There is a wealth of evidence from many industries and countries that a central driving force is competition. Companies exposed to high competitive intensity—in not just their output markets but the markets for labor and capital as well—tend to be more productive. It is also well established that the forces of international competition—via trade and investment—spur productivity growth the most. This is because globally engaged companies themselves tend to create and use the world’s most efficient and innovative methods and organizations. Companies that export or, even more so, are multinational tend to have higher productivity than their purely domestic counterparts do. §
The economic success of the United States over the 20th century was founded on extended periods of strong productivity growth. For example, in the post World War II generation of 1948 to 1973, annual growth of productivity in the non-farm business sector averaged 2.8%. It slowed dramatically then, averaging just half that rate—1.4%—for the generation from 1973 to 1995. This generation of “lost” productivity saw many more economic and broader political-economy challenges. Productivity growth then sped up again, averaging 2.5% from 1996 through 2008.
Throughout much of this time, U.S multinationals have been among America’s productivity leaders. Indeed, one recent study calculated that since 1977, labor productivity in their U.S. parent operations has grown at at least twice the rate of the overall economy. From 1977 to 1995, parent productivity growth averaged 2.8% per year vs. just 1.4% per year in the overall non-farm business sector. From 1995 to 2000, these respective average growth rates were 6.0% and 2.8%. Indeed, the post-1995 parent productivity performance was so strong that it accounted for nearly half of the economy-wide acceleration.** As this report will document, for decades parent operations have undertaken vast investments in the United States—in human capital, in physical capital, and in research and development—that make their workers and the overall U.S. economy more productive and competitive.
So how globally competitive is the United States today? On the one hand, some would answer, “strong.” In its most recent 2007-2008 analysis, the World Economic Forum ranked the United States #1 in overall global competitiveness. In its 2007 report, Competitiveness Index: Where America Stands, the Council on Competitiveness concluded that America’s business productivity remains a key strength.
Recently, however, America’s economic strength is being called into greater question. This partly reflects the much faster growth of countries such as China, India, and central and eastern Europe. For the generation of 1990 through 2008, growth in U.S. gross domestic product averaged 2.7%—in contrast to 1990-2007 averages of 3.4% for the overall world, 4.6% for emerging and developing countries as a whole, 6.3% in India, and a remarkable 9.9% in China.†† Forecasts now abound projecting when fast-growing economies will be larger than the U.S.
But it also reflects warning signs at home.
• Today the United States is in the middle of the worst financial crisis since the 1930s, together with a lengthy and in many ways deepening recession.
• After accelerating from 1995 into early this decade, U.S. productivity growth in the non-farm business sector has decelerated since 2002—to annual rates in 2005-2007 of just 1.7, 1.0, and 1.4 percent, respectively. There is now greater uncertainty about the underlying structural rate of U.S. productivity growth, with commensurate greater concern of slipping back to slow rate of the pre-1995 generation.
• Alarms are also being sounded about the waning competitiveness of key sectors, with ongoing large U.S. trade deficits often presented as evidence of this slide.
Many of these rising concerns about America’s competitiveness are especially focused on the competitiveness of U.S.-based multinational companies. As explained above, the performance of U.S. multinationals is especially important for the U.S. economy overall because these companies (along with the U.S. affiliates of foreign multinationals) have long been among America’s most productive. And as will be explained below, for the overall success of these companies, it has long been essential to engage in the global economy—both by serving fast-growing markets abroad and by drawing on productive strengths there as well.
Despite all this, the contribution to the American economy of the global success of U.S. multinationals is increasingly being called into question. In recent years, an increasing number of voices have been arguing that these companies succeed only by “exporting jobs” abroad, hollowing out their U.S. operations to the detriment of the overall U.S. economy.
At the same time that their contributions to the U.S. economy are increasingly questioned here at home, U.S. multinationals are increasingly challenged by companies from around the world—not just from other high-income countries. The most recent Fortune 500 list of the world’s largest companies lists 62 from emerging economies—double from just 31 in 2003. Outward cross-border M&A transactions by these companies are exploding; for example, foreign direct investments out of China and India now exceed $20 billion per year, up more than tenfold from just a few years ago.
The purpose of this report is to document how U.S. multinational companies enhance the American economy by supporting American capital investment, research and development, employment, and wages.
This thesis will be explained in this report using a blend of three types of evidence. One is official government statistics collected by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. By design and legal mandate, BEA statistics track all multinational companies headquartered in the United States. No other U.S. government or private-sector data matches the BEA’s breadth, depth, and rigor. A second type of evidence will be research findings from peer-reviewed academic studies of the performance of multinational companies. And the third is case studies, to amplify the comprehensive statistics and research findings with concrete examples.

One critical dimension of the breadth of this study will be its industry coverage. Many of today’s policy discussions address globalization of goods only. But today’s reality is that while manufacturing of goods remains a critical part of the U.S. economy—31% of all U.S. output in 2007—services now constitute the majority of the U.S economy.‡ ‡ U.S. economic strength depends ever more critically on the global competitive success of all multinationals—not just in manufacturing, as has long been the case, but their counterparts in services as well.

What Is a U.S. Multinational Company? The Bureau of Economic Analysis Data

Before proceeding, it is important to understand the structure and scope of the BEA data used in this report. Each year since 1977, the BEA has tracked U.S.-headquartered multinationals through legally mandated surveys (with penalties for non-compliance) that collect and publicly disseminate operational and financial data. By design, BEA statistics track all multinational companies headquartered in the United States. There is no other U.S. government or private-sector data source on U.S. multinationals that matches the BEA’s breadth, depth,
or rigor.
In accord with the statistical practice of many countries, the BEA defines a U.S. multinational company as any U.S. enterprise that holds at least a 10% direct ownership stake in at least one foreign business enterprise.
The U.S. enterprise is the U.S. “parent.” It is a person, resident in the United States, that owns or controls 10% or more of the voting securities, or the equivalent, in a foreign business enterprise. Person is broadly defined to include any individual, branch, partnership, associated group, association, estate, trust, corporation, or other organization (e.g., a government entity).
The foreign business enterprise is the foreign “affiliate,” over which the U.S. parent is presumed to hold and exert some degree of managerial control. The 10% stake is defined broadly: it is the ownership or control, directly or indirectly, by one U.S. person of 10% or more of the voting securities of an incorporated foreign business enterprise or the equivalent interest in an unincorporated business enterprise.
All data in this report excludes banks. The BEA collects and disseminates very little information about affiliates whose main line of business is banking. This is because banking subsidiaries already disclose substantial information to other government agencies, such as the Federal Reserve System. Also, data in this report cover majority-owned foreign affiliates, not all foreign affiliates—i.e., those affiliates owned 50% or more by the U.S. parent(s). This is because the BEA collects and disseminates far less information about minority-owned affiliates, over which U.S. parents hold a more ambiguous degree of control. That said, majority-owned affiliates constitute the large majority of total affiliate activity: in 2006, 86.9% of total employment and 87.2% of total sales. And this majority-owned share has recently been rising: e.g., the employment share in 1999 was just 84%.
All publicly available BEA data on U.S. multinationals are aggregated to avoid identifying individual companies: by primary industry of operation; by affiliate country; or by various combinations of these criteria. Finally, note that at the time of writing 2006 is the most recent year for which BEA data are publicly available (where data items are reported for either year end or year average, where year is fiscal year ending in that calendar year). In 2006 there were 2,278 U.S. multinational parents that controlled 23,853 majority-owned foreign affiliates.