Like "Engine" Charlie Wilson, the colorful chief executive of General Motors in the years after World War II, most Americans intuitively assume that what is good for American companies like GM is good for the nation. The competitiveness of the U.S. economy, most Americans believe, means the competitiveness of corporations based in the United States. This identity of interests has been so widely taken for granted that only a few theoreticians of the obvious, like Engine Charlie and Calvin Coolidge ("The business of America is business"), have ever seen a need to express it.
The tradition of identifying nations and corporations extends far back into the past when corporations served the monarchs who gave them special charters. But whether that premise makes sense today is not at all clear. The actual behavior of many American corporations shows that they do not always act as if national loyalty were their guiding motivation. Corporations are quick to relocate to remote countries with lower wages, less demanding social standards, or national laws requiring local production.
Indeed, some are now suggesting that national corporations are entirely a thing of the past. In several articles and an upcoming book that have crystallized the issue, Robert B. Reich warns that as American companies have become ever more global in their operations, the links between them and the U.S. economy are rapidly disappearing, and so policymakers must distinguish sharply between American economic interests and the economic interests of American companies. Whether the U.S. can provide high-wage jobs and support rising living standards depends, in Reich's view, less on the strength of American companies than on the strength and competitiveness of the economic activities located within our borders.
On this fundamental insight, Reich's logic is persuasive. He has framed precisely the right question: How are we to disentangle the interest of the nation-based corporation from that of the nation and its citizens? But the specifics of his analysis and his policy inferences can be challenged in two key respects.
First, his picture is, at best, premature. The economic fate of nations is still tied closely to the success of their domestically based corporations. Second, he assumes that globalization implies a symmetry of national economic policies, when in reality there are wide disparities. Many foreign markets are highly regulated, often to America's disadvantage. Consequently America cannot just foster the best possible workforce and then rely on market forces to bring high-wage jobs to our shores.
Reich argues his case by contrasting two hypothetical corporations. Corporation A, headquartered in the United States and owned by American investors, is an American company. But it is also a global one: Most of its employees are non-Americans, and it undertakes much of its research and development and product design and most of its complex manufacturing outside of the United States.
Corporation B, headquartered in a foreign country and owned primarily by foreign investors, is a foreign company. But like Corporation A, it is also a global company: Much of its R&D and product design and most of its employment and manufacturing are located abroad -- in the U.S.
Which of these two corporations is more important to the economic future of the United States? Or, as Reich asks, "Who is Us?" -- Corporation A, the American company, or Corporation B, the foreign company? The answer seems obvious and counter to conventional wisdom.
But is the question fair? Have a significant number of American companies really globalized to such an extent that most of their economic activities are located abroad? And have foreign companies increased their investment in the United States so much that they now contribute as much or more to national economic competitiveness than American companies? Although both American and foreign companies are indeed becoming more global, as Reich suggests, the answer to both questions, for now and for the foreseeable future, is "no."
We Are Us
Despite several decades of substantial foreign direct investment by U.S. multinationals, the competitiveness of the U.S. economy remains tightly linked to the competitiveness of U.S. companies. U.S. multinationals still locate the lion's share of their worldwide operations within the U.S. In 1988, the last year for which data are available, U.S. parent operations accounted for 78 percent of the total assets, 70 percent of the total sales, and 74 percent of the total employment of U.S. multinationals. All of these shares were actually higher in 1988 than they were in 1977, the reverse of what one would expect if the links between the domestic economy and U.S. multinationals were precipitously disappearing, as Reich argues.
Within manufacturing, U.S. parent operations accounted for 78 percent of the total assets, 70 percent of the total sales, and 70 percent of the total employment of U.S. multinationals in 1988. The data reveal, moreover, that parent operations provided more productive jobs than affiliate operations. Assets per employee in the manufacturing parent operations were about 20 percent higher than in affiliate operations in developed countries and almost 200 percent higher than in affiliate operations in the developing countries. Similarly, compensation per employee in parent operations was about 17 percent higher than in affiliate operations in developed countries and about 360 percent higher than in affiliate operations in the developing countries. In short, American firms locate their "higher-end" jobs and operations at home.
Although American companies may have increased their overseas R&D spending by 33 percent between 1986 and 1988, compared with a 6-percent increase in R&D spending at home, the companies continue to spend the bulk of their R&D budgets within the United States. Between 1966 and 1982, the last year for which data are available, the share of R&D spending by U.S. multinationals in their overseas operations increased from 6.5 percent to only 8.8 percent. This overseas share was far lower than comparable shares for sales (29.4 percent) and assets (26.4 percent).
By 1988 the proportion of the total R&D spending by all U.S. companies that took place overseas had slipped to 8.6 percent, down from 9.4 percent in 1980. Again the trend does not support the notion of increasing globalization. In fact, according to John Dunning, a scholar who has done extensive research on multinationals, the available evidence suggests that except for some European firms and a few U.S. companies, such as IBM, the average share of R&D activity undertaken by global companies outside their home countries is quite small. For Japanese firms it is negligible. Outside of their home environments, global companies mainly produce goods and services, not innovations.
The leadership of American companies also remains overwhelmingly American. Despite innumerable speeches by American corporate leaders on the globalization of American business, most large American companies do not have any foreigners on their boards of directors. According to a recent survey of directors by the executive search firm Korn Ferry reported in The Economist, the proportion of the top 1,000 firms with a non-American on the board has declined from a recent peak of 17 percent in 1982 to only 12 percent in 1990.
So, overall, despite globalization, a disproportionate share of the activity of U.S. multinationals, especially their high-wage, high-productivity, research-intensive activity, remains in the U.S. Of course, many American companies have made huge investments overseas. But these investments have not necessarily weakened domestic economic competitiveness. Indeed, the presumption should run the other way. Since American multinationals continue to locate the bulk of their high-quality productive activities in the U.S., the beneficial competitive effects of their overseas operations spill over into more and better jobs, higher profits, lower prices, and improved products at home.
For the foreseeable future, there are likely to be very few American corporations with a type-A personality -- headquartered at home, but with most of their employees and complex manufacturing located abroad. U.S. multinational companies remain "us" in significant ways.
But Are "They" Also Us?
But what about the foreign multinationals that have established affiliate operations in the U.S.? Are they also us? In some industries, such as consumer electronics, U.S. national competitiveness now depends largely on foreign affiliates. In other industries, such as computers, U.S. competitiveness depends almost entirely on American companies, most of which have substantial overseas operations.
Instead of a simple yes or no answer to Reich's question, I suggest five propositions for assessing the contributions of foreign affiliates to national competitiveness.
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