As Congress debates how best to reform U.S. international taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rules, some lawmakers have expressed concern that these changes could encourage U.S. multinational companies to “ship American jobs overseas.”
Economic studies, however, show that these concerns are misplaced. Indeed, the evidence indicates that improving the competitive position of U.S. multinational firms in the global market returns substantial dividends to the U.S. economy.
In 2000, U.S. non-bank multinationals and their majority-owned affiliates generated nearly $2.7 trillion in gross output – equal to 27 percent of the U.S. Gross National Product that year.
These parent firms employed 23 million people in the U.S., about one of every five jobs in the economy. 45 percent of all manufacturing workers are employed by U.S. parent firms while 53 percent of all workers in the “information” industry (publishing, movies, and broadcasting) are employed by U.S. parents.
By contrast, the foreign subsidiaries of U.S. parent companies employed about 8 million workers in 2000. Thus, for every one employee overseas, these parents employed three domestic workers.
In a recent study of the impact on domestic employment of the overseas manufacturing of U.S. multinationals, Professor Robert E. Lipsey determined: “There is no indication in aggregate data that movements of production from the United States to foreign affiliates have had any negative effect on employment by parent firms or in the United States as a whole, at least in the last twenty years.”
Lipsey did find some effects of foreign production on employment within firms. Some firms did shift “more labor-intensive segments of their production to their developing country affiliates and the more capital-intensive segments to their home operations…”1 Yet, Lipsey found only a “weak evidence for a wage or skill effect. If there is any effect it is that foreign operations are associated with higher wages at home.” As the Table 1. shows, on average, U.S. workers earn 50 more than their overseas counterparts.
In another study, Lipsey found that the foreign investments of companies do not diminish or substitute for their domestic investments.2 Table 2 shows that while U.S. multinationals made nearly $114 billion in capital expenditures abroad in 2000, they made $406 billion in domestic capital expenditures – a ratio of 3.6 to 1. Lipsey also reports that foreign investments tend to lead to an increase in home country exports.
Studies find that foreign subsidiaries are heavily reliant on their domestic operations for everything from R&D and marketing support to the manufacturing of goods sold by foreign subsidiaries. Indeed, in 1999, while U.S. multinationals contributed roughly $440 billion of merchandise exports, about two-thirds of all merchandise exports that year, roughly 40 percent of those exports were shipped by U.S. parents to their foreign subsidiaries. Of the $142 billion U.S. multinationals spent on R&D in 1999, 87 percent was performed in this country.
A recent study by the Organization for Economic Cooperation and Development (OECD) finds that each dollar of outward foreign direct investment is associated with $2.00 of additional exports and an increase in the bilateral trade surplus of $1.70. Moreover, the study found that “increased foreign direct investment and the outsourcing of production exert similarly modest effects on OECD labour markets. As with trade, FDI is still largely an intra-OECD affair. Some 85 percent of outflows originate in, and 65 percent of inflows are directed at, other high-wage, high value-added OECD countries.”
Footnotes 1. Raymond J. Mataloni, Jr. and Daniel R. Yorgason, “Operations of U.S. Multinational Companies: Preliminary Results from the 1999 Benchmark Survey,” U.S. Department of Commerce, Survey of Current Business, March 2002, p. 39. 2. Organization for Economic Cooperation and Development, Policy Brief, “Open Markets Matter: The Benefits of Trade and Investment Liberalization,” October, 1999.
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