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Economic lesson for Team Trump: As US firms expand, invest and hire overseas, they expand, invest and hire in US
View related content: Carpe Diem
The table above (click to enlarge) is based on financial data included in the World Investment Report 2016, a report produced annually by the United Nations Conference on Trade and Development (UNCTAD) and just released with data for 2016. Table 24 of the UNCTAD report lists the world’s top 100 non-financial “Multinational Enterprises,” ranked by foreign assets in 2016, and the table above features the 22 multi-national corporations (MNCs) in that group that are headquartered in the US. Displayed above are: a) foreign assets, b) foreign sales, and c) foreign employees, both alone and most importantly as shares of the global totals for those three items for the 22 US-based companies. Those items with shares above 50% are displayed above in bold.
This post is an updated version using 2016 UNCTAD data of a CD blog post published last year using 2015 data that was inspired by Daniel Griswold’s post “Trump’s Carrier “success” signals a retreat of U.S. business in global markets.” An excerpt of Dan’s post appears below featuring slightly different, but related, data on international sales that reinforce the lessons from the data above. A recent Wall Street Journal op-ed by Dartmouth’s Tuck School of Business Dean Matthew Slaughter (“The ‘Exporting Jobs’ Canard“) is also relevant to the data in the table above, and you’ll find an excerpt from his op-ed below.
Here are some key points from the table above:,
1. Many of the largest US-based MNCs have close to (or more than) two-thirds of their total sales outside the US, e.g. Mondelez (76%), Schlumberger (76%), Coca-Cola (76%), Intel (78%), Apple (65%), Proctor and Gamble (59%), HP (61%). Other large American MNCs generate more than 50% of their sales overseas, e.g. GE (57%), Exxon Mobil (56%), IBM (53%), Microsoft (52%), Pfizer (50.1%) and Alphabet (54%).
2. Almost all of these MNCs have close to half, or more than half, of their workforces outside the US, and some employ nearly 75% of their workers overseas, e.g., Johnson and Johnson (74%) and Amazon (73%) — that’s almost 3 foreign workers for every US employee. Mondelez employs more than six foreign workers for every American worker (87% of its workforce is foreign).
3. Many of the US MNCs above have close to half, or more than half of their corporate assets (property, plant, and equipment) located outside the US, and some like Chevron, Apple, Coca-Cola, Schlumberger, Intel, and Mondelez have two-thirds or more of their assets overseas.
4. Of the top 25 (50) largest MNCs in the world ranked by foreign assets, only 4 (10) are located in the US, and of the top 100 MNCs, 78 are located outside the US and these foreign-based rivals are engaged in intense competition with US-based companies for global sales and market share.
MP: To remain competitive and profitable in an extremely competitive global marketplace, US firms have to operate as efficiently as possible, and produce their products at the lowest possible cost to survive. The long-term viability and sustainability of US MNCs forces them to minimize production costs for their customers in global markets, and sometimes that requires them to shift production overseas, possibly to take advantage of lower labor costs, lower taxes, or more favorable regulations. It’s also frequently the case that expanding production and manufacturing operations overseas takes place to better serve retail markets outside the US and the 95% of non-American global consumers.
For example, Intel and Coca-Cola generated more than $3 in foreign sales last year for every dollar in domestic sales, and Apple generated nearly $2 in foreign sales for every dollar of sales in the US. It therefore makes perfect economic sense for those US-based MNCs to manufacture and assemble their products overseas, since such a large majority of their sales take place in foreign markets, and not the US market. Forcing Intel, Coca-Cola or Apple to shift production of their products to the US where labor costs and corporate taxes are higher, and where production is moved away further from the retail markets where those products will ultimately be sold, could disrupt those companies’ carefully orchestrated, and maximally-efficient global supply chains. If Team Trump is successful at penalizing for political purposes US companies like Intel and Apple that make global production decisions based on what minimizes production costs and best serves their retail markets, it could put many of those companies at a competitive disadvantage by forcing them to incur higher operational costs.
As promised, here’s a key excerpt from Daniel Griswold’s post (emphasis mine):
Most of what American companies sell abroad these days are not exports from the United States but goods supplied through their foreign-owned affiliates. This is how multinational companies compete for customers. In 2013, according to the most recent records from the U.S. Commerce Department, U.S. majority-owned affiliates abroad supplied $4.32 trillion in goods compared to $1.59 trillion in exports. That means that U.S. producers generate almost three times as much revenue from the sale of goods through their affiliates abroad as they do by exporting from the United States.
And what those U.S.-owned affiliates produce abroad is overwhelmingly sold abroad. Of the $4.32 trillion in goods that the affiliates supplied, $339 billion, or less than 8%, was sold as imports to the United States; more than 92% was sold in the host country or in third countries. In China, 96% of the goods supplied by U.S. majority-owned affiliates was sold in China or other countries outside the United States. In Mexico, 68% of the goods they supplied was sold in Mexico or third countries.
If a Trump administration succeeds in bribing and/or intimidating U.S. companies to cut back on their direct investment abroad, the result will be an increasing surrender of market share to their foreign rivals. Fewer goods produced and sold through their foreign affiliates will mean fewer American brand name products sold in global markets. That withdrawal will quickly translate into fewer Americans — managers, accountants, engineers, and production workers — employed in parent-company operations here in the United States.
And here’s an excerpt from Matthew Slaughter’s op-ed (my emphasis):
President Trump has voiced a widely shared—but incorrect—belief that the global economy is a zero-sum game. “One by one,” Mr. Trump said in his inaugural address, “the factories shuttered and left our shores, with not even a thought about the millions and millions of American workers that were left behind.” In his first White House meeting a few days later, Mr. Trump warned a roomful of CEOs that companies sending factories overseas would face a new border tax.
Mr. Trump assumes that when U.S. multinationals expand abroad, it necessarily reduces the number of people they employ in the U.S. But this assumption is wrong, and tariffs would hurt American workers, not help them.
Academic research has repeatedly found that when U.S. multinationals hire more people at their overseas affiliates, it does not come at the expense of American jobs. How can this be? Large firms need workers of many different skills and occupations, and the jobs done by employees abroad are often complements to, not substitutes for, those done by workers at home. Manufacturing abroad, for example, can allow workers in the U.S. to focus on higher value-added tasks such as research and development, marketing, and general management. Additionally, expanding overseas to serve foreign customers or save costs often helps the overall company grow, resulting in more U.S. hiring.
Between 2004 and 2014, total employment at foreign affiliates of U.S. multinationals rose by 4.8 million, from nine million to 13.8 million. Yet the number of jobs at U.S. parent companies rose nearly as much, by 4.2 million, from 22.4 million to 26.6 million. Over the same period, the value-added and capital investment grew faster among U.S. parent companies than in their foreign affiliates. In fact, on these two measures the American parent companies outperformed the overall U.S. private sector. This suggests that having overseas affiliates gives companies a competitive advantage that allows them to invest more at home. More than ever, jobs in America are connected to the world.
President Trump is right that America needs millions more good-paying jobs. But he does not seem to realize they can be created by U.S.-based multinationals that know how to invest capital, operate globally and create knowledge. Limit the ability of U.S. multinational companies to flourish abroad and you limit their ability to create high-paying jobs in America.
Bottom Line: It’s important to remember that large US-based MNCs like the ones in the table above (but also hundreds of other US multinational firms) operate globally — they produce and sell their products globally, they hire workers globally, they invest in capital assets globally, and they compete with global rivals in an intensely competitive global marketplace. Those firms are already exposed to constant risks, challenges, and gales of Schumpeterian creative destruction, and have to focus relentlessly on operational efficiencies and low production costs to survive, and they have to make decisions at the global level to compete with their foreign rivals and maintain or grow market share. Saddling American firms with unnecessary political burdens, uncertainties, and risks from a protectionist, nationalist administration that forces firms like those in the table above to think domestically instead of globally isn’t a formula to make America great. It’s a formula that’s guaranteed to make American companies weaker and the country poorer, and in the process eliminate, not create more jobs, for US workers.