It is increasingly asserted that U.S. multinationals have abandoned the United States—i.e., that they have little activity left in their American parents, having “hollowed out” parent employment, capital investment, and other key activities for relocation abroad. The drumbeat of recent layoff announcements might seem to bear out this view.

So is it true that the operations of U.S. parents are no longer substantial? No. 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—capital investment, research and development, and international trade—that lead to jobs and 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 incorrect. They maintain

a large presence in America, both relative to the overall U.S. economy and relative to the size of their

foreign affiliates.

A. U.S. Parent Activities Are Large in the Overall U.S. Economy

U.S. parents strengthen America through their own extensive operations in the United States. Beyond employing millions of Americans, parent companies perform large amounts of the crucial activities that make their workers and the overall economy more competitive and productive. For 2006, the most recent year for which comprehensive government data on the operations of U.S. multinationals are available, Figure 1 reports the share of U.S. private-sector economic activities accounted for by U.S. parents. § §

Figure 1

U.S. Parent Companies Account for Large Shares

 of the Overall U.S. Economy

The key message of Figure 1 is that U.S. parent companies perform large shares of America’s productivity-enhancing activities that lead to high average compensation for American workers.

In the BEA surveys, parent (and affiliate) employment is measured as the number of full-time and part-time employees on payroll at yearend. If at that time employment of a parent (or an affiliate) was unusually high or low because of temporary factors (e.g., a strike), survey instructions then request reporting either of employment during “normal operations” or of an annual average. Capital investment consists of property, plant, and equipment. Please see the Data Appendix for details on how U.S. parent activity was matched with that of the overall private sector for each item in Figure 1.

Employment: Parent companies employed over 21.7 million workers in the United States. This was 19.1% of total U.S. private-sector payroll employment.

• Output: Parent companies accounted for 24.9% of all U.S. private-sector output (measured in terms of gross domestic product)—over $2.5 trillion.

• Capital Investment: Parent companies purchased $442.6 billion in new property, plant, and equipment—31.3% of all U.S. private-sector capital investment.

• Exports: Parent companies exported $495.1 billion of goods to the rest of the world. This constituted nearly half—48.0%—of the U.S. total.

• Research and Development: To discover new products and processes, parent companies performed $187.8 billion of research and development. This was 75.8% of the total R&D performed by all U.S. companies.

Moreover, the size of U.S. parent operations in the overall U.S. economy has been quite stable for decades. For example, a generation ago in 1988, U.S. parents’ capital investment and R&D spending were 31.4% and 72.5%, respectively, of the economy-wide private-sector totals—very close to the 2006 shares cited above. This stability over time contradicts the idea that U.S. multinationals have been “abandoning” the United States in recent years, and instead demonstrates their ongoing contributions to the overall U.S. economy.

All these productivity-enhancing activities contribute to larger average paychecks for employees of U.S. multinationals. Figure 2 shows this, which reports 2006 average annual compensation for workers at U.S. parents and their counterparts in the rest of the U.S. private sector.

SharesFigure 2

U.S. Parent Companies Pay Higher Average Compensation

Than the Rest of the U.S. Private Sector

Total 2006 compensation at U.S. parent companies was over $1.36 trillion—a per-worker average of $62,784. This average was $12,163—fully 24.0%—above the 2006 average for the rest of the private sector of $50,621. Much of this compensation differential stems from the nexus of competition advantages

achieved by these multinational companies. ***

Employee compensation as measured in the BEA surveys of multinationals includes wages, salaries, and benefits—mandated, contracted, and voluntary. See Data Appendix for details on the calculations in Figure 2. Academic studies for the United States and many other countries have repeatedly found that multinational companies pay higher average compensation than do non-multinationals, even when controlling for observable company differences such as size and capital intensity. For a detailed discussion of the facts and interpretation of these performance differences, see, e.g., Lewis and Richardson (2001) and Council of Economic Advisers (2007).

U.S. parent companies also contribute to the U.S. economy through their interactions with other domestic U.S. firms and, more broadly, the schools and other institutions that foster skills, talents, and overall productivity. The performance of domestic competitors is enhanced by exposure to new techniques and practices of parent companies. Parent companies can also strengthen domestic suppliers and customers—e.g., by sharing information with and placing standards on suppliers. The scope for these links from parents to other domestic companies is very large.

• In 2006, U.S. parents purchased a total of $5.76 trillion in intermediate inputs. Of this total, 89.1%—$5.14 trillion—was bought from other companies in the United States. †††

Contrary to the common assumption that the global engagement of U.S. multinationals has eliminated their links to domestic suppliers, over 89 cents out of every dollar spent by U.S. parents on intermediate inputs is paid to other companies in the United States, not abroad. And this heavy reliance on domestic suppliers has been virtually unchanged for decades: in 1977, U.S. parents purchased 91.3% of their inputs from other companies in the

United States.

The key message here is that although small in number at just 2,278 companies in 2006, U.S. multinationals play a substantial role in the U.S. economy. They employ millions, invest billions in R&D and capital, and buy from vendors and ultimately produce trillions of dollars in goods and services. These activities constitute sizable shares of the overall private sector today, as they have for decades, and they are a key pillar of strength for the overall U.S. economy.

Total purchases of intermediate inputs by parent companies are calculated as total sales less value-added output. Imported intermediate inputs are measured as total parent imports of goods. This implicitly assumes that all imported goods by parent companies are intermediates rather than final goods. Because some of these imports are final goods and services rather than intermediates, the calculated share of inputs bought from domestic suppliers that is reported above lies below the true domestic-supplier share.

Case Study: Microsoft Corporation

The contribution of U.S. multinationals to the overall U.S. economy often extends beyond their main business practices of hiring and paying workers, buying inputs, and investing in capital and R&D. Many of these multinationals interact with schools, governments, and other institutions in ways that foster the human capital and institutions that help underpin U.S. productivity.

Since its inception in 1975, Microsoft Corporation has believed in the power of technology to enable individuals and communities to realize their full potential. Using technology as a catalyst, Microsoft works to create worldwide networks through which key education leaders and innovators share experiences, ideas, and approaches that can be applied around the world. Microsoft and its partners also share expertise with local governments, industries and educators, providing the tools and opportunities required to stimulate local software economies and equip citizens for success in the 21st century.

In 2003, Microsoft launched Partners in Learning, a global initiative designed to increase technology access for schools, foster new approaches to teaching and learning, and provide education leaders with the proper tools to create and influence change. To date, Partners in Learning programs have reached more than 80,000 teachers and 3 million students in the United States. Building on these efforts, in January 2008 Microsoft renewed its commitment to Partners in Learning, extending the company’s global investment to nearly $500 million over 10 years.

Other examples of initiatives include DigiGirlz, a set of programs that provide free opportunities for high-school girls to learn about careers in technology, talk with Microsoft employees about their life experiences, and enjoy hands-on computer and technology workshops.

Research is another area to highlight. Microsoft Research balances an open academic model with an effective process for transferring its research to product development teams. Microsoft Research has invested more than $50 million over the past four years in support of academic research in the United States, a sum that has established collaborative institutes at schools including Carnegie Mellon University, Georgia Tech, the Massachusetts Institute of Technology, and University of Maryland.

B. By Several Measures, U.S. Parent Activities Are Large Relative to Their Foreign Affiliates

What about the magnitude of U.S. parent activities relative to the scale of their foreign affiliates? Do affiliates loom much larger than parents, such that U.S. multinationals have a far larger footprint outside the United States than inside?

Figure 3 answers this question by showing the share of U.S. multinationals’ 2006 worldwide employment, output, capital investment, and R&D that was accounted for by their U.S. parent operations.

MillionsFigure 3

U.S. Parents Account for the Large Majority of Worldwide

Activity of U.S. Multinationals80.0

The key message of Figure 3 is that the worldwide operations of U.S. multinational companies are highly concentrated in America in their U.S. parents, not abroad in their foreign affiliates.

• Employment: U.S. parents account for 69.6% of worldwide employment of U.S. multinationals—21.7 million parent workers versus 9.5 million at affiliates. This translates into a ratio of almost 2.3 U.S. employees for every one affiliate employee.

• Output: U.S. parents account for 71.6% of worldwide output (in terms of value added) of U.S .multinationals—over $2.5 trillion versus about $1.0 trillion.

• Capital Investment: U.S. parents undertake 74.3% of worldwide capital investment by U.S. multinationals—$442.6 billion versus just $153.2 billion. For every $1 in affiliate capital expenditures, parents invested $2.89 worth in the United States.

• Research and Development: U.S. parents perform 86.8% of worldwide R&D by U.S. multinationals: $187.8 billion versus just $28.5 billion, or $6.59 in parent knowledge discovery for every $1 by affiliates.

The data clearly show that the United States, not abroad, is where U.S. multinationals perform the large majority of their operations. Indeed, this U.S. concentration is especially pronounced for capital spending and R&D, which reflects America’s underlying endowments in skilled workers and institutions such as intellectual property rights that together support investments in human and physical capital.

Have there been changes over time in this much larger scale of U.S. parents relative to foreign affiliates? Some, but not much. A generation ago, the share of U.S. parents in the worldwide activity of U.S. multinationals was slightly higher than that cited above. In 1988, U.S. parents accounted for 78.8% of U.S. multinationals’ worldwide employment and 79.2% of their worldwide capital investment. So over the past generation, the foreign-affiliate share of employment has risen by an annual average about 0.5 percentage points, with a similar per-year increase in investment share of about 0.3 percentage points.

Why has the worldwide share of multinationals’ activity gradually shifted from U.S. parents to foreign affiliates? As will be detailed in Chapter 4, this shift has been driven by continued expansion of parents that was outpaced by even faster expansion of affiliates, not by parent contraction. For example, in 1988 U.S. parents employed just 17.7 million workers and undertook $177.2 billion in capital investment—just 81.6% and 40.0% of the respective 2006 U.S. parent totals underlying Figure 1. The long-term trend has been for parents to continue growing in the United States (which accounts for their steady shares of the overall U.S. private sector documented above), but for affiliates to grow even faster.

This faster affiliate expansion, in turn, has largely reflected faster growth abroad in overall output and incomes and thus in customers to be served. Recall the growth statistics from introduction: from 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 the world’s fast-growing economies will be larger than the United States.

Thus, the correct reading of the data is expanding business activity by both parents and affiliates as well. The notion of a fixed amount of business activity being reallocated from parents to affiliates is not borne out by

the facts.

C. Foreign Affiliates are Located Mostly in High-Income Countries, Not Low-Income Countries

Foreign affiliates are located primarily in high-income countries that in many ways have economic structures similar to the United States, not in low-income countries. For example, in 2006 affiliates in high-income countries accounted for 79% of total affiliate output—and a similar 90% of output by all affiliates newly established or acquired in that year. § § § Figure 4 documents this fact by showing the share of selected countries in total 2006 affiliate output (value added) of $995.6 billion.

TotalsFigure 4

High-Income Countries Account for the

Large Majority of Worldwide

liate Activity

These average rates of growth of gross domestic product were calculated from annual rates of GDP growth reported in International

Monetary Fund (2008), Tables A1-A4.

§ § § Mataloni (2008); the country income classifications used there and followed in this sub-section are constructed by the World Bank.

The three countries that in 2006 accounted for the largest shares of affiliate output were the United Kingdom (15.5%), Canada (11.5%), and Germany (8.6%). China and India, despite their very fast overall GDP growth of the past generation, respectively accounted for just 1.8% and 0.5% of total affiliate output. This concentration of affiliate activity in other high-income countries is consistent with U.S. multinationals expanding abroad mainly to gain global competitiveness by serving foreign customers, a theme Chapter 3 explores in greater detail.

It is true that affiliate activity is spreading from high-income to low-income countries. For example, the latter’s share of all-affiliate output rose by six percentage points from 1999 to 2006. But like with the gradual shift from U.S. parents to overall foreign affiliates discussed above, here, too, the shift in activity from high-income-country affiliates to low-income-country affiliates has been driven mainly by faster economic growth in the latter.

The bottom line of this chapter is that the facts demonstrate that U.S. multinationals make substantial contributions to the overall U.S. economy. The magnitude of U.S. parent activities is very large—both relative to the overall U.S. economy and relative to the scale of their foreign affiliates—in ways that strengthen America’s productivity and average standard of living.

It is often asserted that U.S. multinationals are somehow “abandoning” the U.S. economy. Such claims simply do not square with the facts.

Chapter 3 next explores how the overall success of U.S. multinational companies depends increasingly on their global competitiveness.