Rejoinder: Who Do We Think They Are?

Ever since I argued in the Harvard Business Review last year that we should pay less attention to corporate nationality and more attention to whether our nation's work force was gaining the skills and competences it needed to compete, I've had the curious sense of being shoved -- quite against my will -- to the conservative side of the older debate over American industrial policy My first inkling of this transmigration came when The Wall Street Journal praised me and my argument in its editorial pages. If this were not cause enough for alarm, I found myself the recipient of expressions of shock and outrage from several fellow industrial-policy travelers who accused me of abandoning the worthy cause. And now, to deepen my gloom, comes Laura Tyson.

Anyone wishing to probe my detailed views on all this has only to buy my upcoming book on the subject, The Work of Nations. (Under the circumstances, the editors of this journal surely have no objection to a little blatant book promotion.) But for now, to set the record absolutely straight: I am as committed as ever to the notion that the U.S. government has a crucial role to play in the nation's economic development. Yet I no longer have great confidence in the American-owned corporation as its partner. American firms -- especially firms engaged in tradeable goods and services (more on this in a moment) -- are rapidly becoming global entities with no special relationship to the American economy. Thus, the object of American industrial policy should be to enhance the value that American workers can add to the world economy, not to increase the profitability or global market share of these errant American-owned companies. There is a crucial, and growing, difference between the two.

In the early part of her rebuttal, Tyson takes issue with me on this last point, arguing that there isn't much difference between the American work force and American companies-at least for now. Having (she assumes) disposed of this issue, she then goes on to argue why the U.S. government should promote and defend the interests of the nation in international commerce. As to these latter points, I'm in complete agreement -- except that, in pursuing these initiatives, she still assumes that the interests of American firms are good approximations for the interests of Americans, and I don't. In my view, American industrial policymakers should not treat American firms any differently than they treat other global corporations.

"Us" is the American Worker in Global Commerce
First, Tyson's assertion that corporate nationality still matters a great deal: To make her case, she shows that U.S. multinationals have most of their assets, sales, and employment in the United States. But this fact is entirely tautological. Firms are defined as U.S. multinationals precisely because they have most of their assets, sales, and employment in the United States. Tyson's point that a larger percentage of the assets, sales, and employment of American multinationals was in the United States in 1988 than in 1977 is misleading. During that period, a great many American firms that had been entirely domestic (and therefore not classified as "multinational") began to venture abroad -- but cautiously.

Similarly, no one should be surprised by Tyson's argument that domestic firms still dominate domestic economic activity -- relegating foreign firms to a small fraction of the American economy. Since most of what's made or serviced in the United States is not traded in international commerce, there is no particular reason why foreign-based corporations would have the expertise or the interest to undertake these activities-particularly when the foreign firms would have to compete with Americans who live here. Few taxicab companies, soft-drink bottlers, greeting card factories, or hairdressers are owned by foreign-based corporations.


* * *

The globalization of the American economy is most evident -- and most important to the future standard of living of Americans -- in those sectors of the economy that are tradeable internationally, or, more precisely, where the labors of Americans compete in global commerce with the labors of other nations' work forces. Here Tyson reveals very little. She acknowledges that foreign-owned firms now control one-half of the United States consumer electronics industry, one-third of the American chemical industry, and 20 percent of the U.S. automobile industry. She n-tight have added: 70 percent of the American tire industry, and almost 50 percent of the U.S. film and recording industry. And if control applies to any foreign ownership in excess of 10 percent of the outstanding shares of stock (a measure used by several federal government agencies), foreign-owned firms now control vast segments of America's banking, steel, machine tool, robotics, and telecommunications industries. Clearly, by this measure, foreign-owned firms have established a significant presence in the United States.

What about American corporations as they relate to the internationally tradeable skills of Americans? One measure is how much of the value of products sold by American corporations around the world actually derives from American workers. The answer is less and less. In each of the last three years the foreign operations of American-owned firms have accounted for more than $1 trillion in sales -- or roughly four times the total export of goods made in the United States, and about seven to eight times the value of the nation's recent trade deficit. In fact, the trade deficit turns into a net surplus when the foreign sales of American-owned firms are included, compared to the total purchases by Americans of the products of foreign-owned firms.

American firms are making large profits overseas, even as their American profits wither. While profits earned by American firms in the United States dropped by 19 percent in 1989, the overseas profits of American-owned firms surged by 14 percent. In the first half of 1990, the foreign affiliates of American corporations accounted for a record 43 percent of their parents' total profits. General Motors, Ford, IBM, DEC, and Coca-Cola, among many others, earned most of their 1990 profits outside the United States. Largely for this reason, the overseas capital spending of American-owned firms has mushroomed -- by 17 percent in 1990, on top of 13 percent in 1989, and 24 percent in 1988 -- even as their capital investments in America have slowed to under 7 percent a year. The trend is clear. American firms aren't exactly abandoning America; it is more accurate to say that they are joining the world, and spreading their production across many continents, as they become truly global firms. It's the same with the siting of high value-added production -- research and development, sophisticated design and manufacturing engineering, complex fabrication. Tyson argues that U.S. multinationals are still allocating most of their R&D budgets to America. But she acknowledges that the trend toward global siting is gathering remarkable speed -- American firms increased their overseas R&D spending by 33 percent between 1986 and 1988, compared with a 6-percent increase in R&D spending back home.


* * *

Actually, all these data understate the extent of global economic integration. Foreign citizens who are on the payrolls of the far-flung affiliates of American corporations contribute only a small fraction of the total foreign value added to these firms' products; the same goes for Americans on the payrolls of foreign firms. The greater share is added through cross-border supply contracts, licensing agreements, and joint ventures. And a large and growing number of high-paid professional workers within every advanced nation are contracting with foreign-owned firms -- conveying their services (legal, financial, research, engineering, advertising, management consulting) directly to the foreign company for a fee. These tasks, performed by Americans and purchased by foreign-owned corporations, represent some of the most lucrative ways in which Americans engage in global commerce. Here, as before, the key question is: Who is hiring Americans to add what value to world markets? How can this value be increased? My point, which Tyson has not disproven, is that the profitability and world market share of American firms have less and less to do with the answers.

Industrial Policy Lives
We need a government willing to take an active role in helping American workers add more value to global markets. In fact, my argument about the disengagement of the American corporation from America underscores this need. For if we can't count on the American-owned corporation to take special responsibility for improving the competitiveness of the American work force, then the job necessarily falls to government Tyson and I both want an activist industrial policy. But she wants government to promote American firms; I want government to promote American workers, regardless of the nationality of the corporation they work for.

For example, Tyson argues that the federal government should encourage foreign firms to invest in the United States -- either by quietly threatening to keep them out of the American market if they don't or by luring them here with subsidies and tax breaks. Where they are most like us, she notes, correctly, our policies have encouraged them to be so. Agreed. But by my definition of us, American-owned firms should be treated no differently. Whatever pressure tactics we apply to foreign-owned firms to induce them to invest in the United States (according to international rules that define fair practices) should be applied in equal measure to those that are American-owned.

Tyson points out that the European Community no longer cares about corporate ownership in examining whether a firm has dumped integrated circuits in Europe; the Community looks instead to whether the technology underlying the circuits in question has been developed and diffused within Europe. This in precisely my point. In seeking to lure certain kinds of investments to America, corporate nationality should be irrelevant. The important issue is whether, and to what extent, the global corporation (of whatever nationality) helps American workers add value. American governors and mayors, bidding for global capital regardless of the form it takes, have been among the most active proponents of this view.

Tyson next warns that [t]hey are good for us in the short run, but the long-run dynamic effects may be different. She worries in particular that, unless we're careful, foreign firms will monopolize an industry -- displacing or detering the expansion of American companies, or buying American firms and closing them down. But as history has revealed, the desire to monopolize is not exclusively a foreign urge. American companies, from time to time, have sought to do precisely the same thing. Our antitrust laws were enacted to prevent firms operating in the United States from engaging in such practices. The Antitrust Division of the Justice Department and the Federal Trade Commission have been moribund for almost a decade, but at other times in the nation's history they have policed the market vigorously -- blocking proposed mergers, disemboweling entire corporate empires, even preventing foreign firms from selling their wares in the United States. (There are signs of a reawakening. At this writing, the Antitrust Division of the Justice Department is investigating whether certain Japanese companies have attempted to monopolize.) Tyson may feel that these laws are not up to the job of preventing foreign-owned firms from monopolizing our market, but she has not made her case.

Next: Should policymakers finance projects, like Sematech, designed to ensure that America has access to the technologies we need? Tyson says yes, and I agree. But why limit membership in such consortia to U.S. companies? The original American members of Sematech have all gone global in the meantime -- parceling out the fruits of Sematech's research around the world. Government should impose conditions without regard to corporate nationality. Any global firm ought to be invited to participate in a publicly funded research consortium so long as the firm thereafter applies what it learns within the United States. Here again the Europeans point the way: Europe's semiconductor research project, nicknamed Jessi, has just admitted IBM to membership. Meanwhile, Jessi's board has voted to reconsider whether British International Computers Ltd. (ICL) should remain a member, in fight of its recent purchase by Fujitsu. In other words, what seems to be emerging in Europe is not only a pro-European R&D policy, but also an anti-Japan-cartel policy, aimed at preventing the Japanese from amassing too much power over microelectronic technologies. Corporate nationality doesn't matter as long as Europeans are developing their own technological capabilities, and no set of firms is monopolizing the world market. These are the sorts of criteria that should guide America's high-technology policies as well.


* * *

Tyson also complains that [t]hey are allowed to compete with us here, but we are not allowed to compete with them there. Her ire is directed particularly at Japan, and I agree that Japan has been slow to open itself to global competition. By all means, let's keep the pressure on Japan to open its market to our goods, but in doing so let's be sure to define "us" correctly. Tyson is concerned about Japan's barriers to sales by American companies. I'm not. Our primary goal should not be to open Japan to the sales of American companies, but to open Japan's borders to the work products of Americans. Our trade representative in Washington has spent considerable time and energy of late trying to force Japan to accept cellular telephones and pagers made by Motorola (mostly in Kuala Lumpur) and to allow Toys-R-Us to sell its wares (mostly produced in Southeast Asia and Latin America). These priorities make no sense from the standpoint of the American work force. How do we pry open foreign markets? Tyson argues for a system of "selective reciprocity," through which foreign firms in a particular industry would be barred from investing in America so long as American firms in that industry were barred from investing in the country where the foreign firm was based. Tit for tat. This strategy might work if the goal is to enhance the profitability and global market share of American firms, but it may backfire if the goal is to improve the productivity of American workers. My goal is the latter. Thus, I don't want to bar foreign firms from operating in the United States -- particularly if they'll spend more money training American workers than is spent by American firms in the same industry, pay American workers higher salaries, give them more job security and make them far more productive than American firms do -- even if the country where they have their worldwide headquarters prohibits American firms from investing there. Studies have shown that Japanese firms, in particular, fulfill all these criteria.

Tyson's analysis of the nation's security needs is unobjectionable -- that is, until she starts fretting once again about the nationality of corporate ownership. It makes sense to diversify our sources of critical military supplies and technologies across many nations and firms, to subject defense contractors to more stringent antitrust supervision, and to require that certain critical R&D capabilities be maintained in laboratories and factories within the Unites States, employing American citizens. But why should American firms be subject to any less stringent requirements?

Tyson and I agree on many things. But we don't agree on the difference between global capital and national labor. Money is unpatriotic; these days, investment dollars are speeding to wherever on earth they can get the highest return. People, however, are relatively immobile and they belong to societies with particular cultures and histories and hopes. It is up to governments to represent people, to respond to their needs and fulfill their hopes -- not to represent global money.

You may also like