Section 6: Outward FDI: Runaway Plants or Domestic Opportunities?

Section 6: Outward FDI: Runaway Plants or Domestic Opportunities?

“Weekly Guide … What Happens in the US When US Multinationals Invest Abroad? … Who Benefits from the Globalization of Research & Development? … Outward FDI and US Manufacturing & Services … Offshoring and Outsourcing … Country Specific Discussions … Conclusion & Looking Ahead”
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Summaries

  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 1. Weekly Guide > Introduction: Outward FDI
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > 20 Years of Evidence Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Guest Lecture: Professor Lindsay Oldenski on Runaway Plants and the Impact on Jobs
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Guest Lecture: Professor Lindsay Oldenski on R&D Expenditures
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Declining Industries Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Maturing Industries Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > High-End Industries Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 3. Who Benefits from the Globalization of Research & Development? > Are Concerns About Losing R&D Valid? Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 4. Outward FDI and US Manufacturing & Services > US Manufacturing Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 4. Outward FDI and US Manufacturing & Services > US Service Sector & Comparative Advantage Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 5. Offshoring and Outsourcing > The Effects of Offshoring and Outsourcing Lecture
  • Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 7. Conclusion & Looking Ahead > Conclusion: Summary

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 1. Weekly Guide > Introduction: Outward FDI

  • So we have moved from focusing on trade, investment, and technology this week to highlighting the importance of multinational corporations, of direct investors in the United States.
  • What we discovered first of all is the extraordinary benefits, direct benefits to workers, to communities, to R&D in host country, in this case, the United States so that foreign investors bring good jobs and highly dynamic activity into the United States.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > 20 Years of Evidence Lecture

  • They’re going to look at the behavior of more than 10,000 American firms over more than 20 years and measure precisely what happens at home in terms of job creation, in terms economic activity, in terms of exports, in terms of R and D, when those firms expand abroad. So this is an empirical question.
  • That is to say the average effect of expanding abroad- you build a plant abroad, you create more jobs abroad, you do more R&D abroad- is you invest more abroad, is to invest more in the United States, do more R&D, expand exports from the United States, create more jobs.
  • So what we discover is that this foreign investment by US multinationals substitute for economic activity or complement for economic activity within the United States, we find that it overwhelmingly complements economic activity in the United States.
  • The question we want to focus on today is, does that process come at the expense of the welfare, the growth, the economic activity in developed countries, like the United States? Now, this is a recurrent theme in political campaigns in the United States that what is happening when American multinationals invest abroad is that these constitute runaway plants.
  • If a US multinational increases employment in its foreign affiliates by 10%, then that’s actually associated with an increase in employment in the American branches by 4%. And the same goes for our capital expenditures and exports from the United States.
  • The common assertion is that when a firm invests abroad, it doesn’t invest so much in the United States.
  • When a firm creates jobs abroad, jobs are lost in the United States.
  • It actually gives the American branches more scope to invest in higher-scale, higher-end activities, in which the United States has a comparative advantage.
  • Many people are going to think that when a firm invests abroad it invests less at home.
  • What we find is that actually more investment abroad leads to higher levels of investment at home, that more investment abroad leads to higher levels of exports at home.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Guest Lecture: Professor Lindsay Oldenski on Runaway Plants and the Impact on Jobs

  • The runaway plant question is asking when US-based multinationals increase their foreign activity, is this bad for workers in the US? And it seems like a simple question, but it’s actually pretty complicated, because firms increase their foreign activities for a number of different reasons.
  • These reasons may or may not be related to their domestic hiring activities.
  • It’s going to depend on what products the firms are making, what their competitors are doing, what sorts of new technologies they have, even who the individual CEO is at any given time.
  • All of these things make it really difficult to sort out what exactly the relationship is between foreign expansion and domestic hiring by US firms.
  • So what if the most simple case is true, such that if you’ve got a firm that has a plant in the US and then when they open a plant in another country, they simply shut down the plant in the US and just move all of their production to the other country? Or it doesn’t even have to be that extreme.
  • So if you believe that multinational firms only have a fixed number of jobs- there’s a fixed number of workers that they can hire, and they can hire them either in the US or at a foreign location- then that would definitely be the case.
  • Policies that would restrict their ability to expand abroad or hire workers abroad would benefit the workers in the US. However, firms are not actually limited in the number of workers that they can hire.
  • As firms become more productive, as they expand, they produce more, they become more profitable, and they hire more workers, and so it’s not immediately clear whether they’re going to hire those workers in the US or in their foreign locations.
  • So if a US firm wants to sell to customers in India, instead of just making everything in the US and shipping it, sometimes that’s just too logistically difficult.
  • So it’s unclear at first glance which will be the case, whether hiring abroad will hurt US workers if they are substituting for each other, if hiring abroad won’t have any effect, or if it might actually help US workers if it leads to increased productivity and hiring everywhere.
  • What kind of evidence are you actually looking at? Well, so to start with, you can’t just look at two different firms, one that expands its operations abroad and one that doesn’t, and then compare what their domestic hiring behaviors have been, because these firms are going to differ in important ways.
  • So first of all, you need data on a very large number of firms.
  • For example, the study that I recently did used data on thousands of firms that are US-headquartered multinationals.
  • Then you also need to look at how these firms behave over time.
  • So these US government data on US-headquartered multinational firms are available for about 20 years.
  • So by looking at a large number of firms over a large number of years, you can hold constant all of the things that are unique about each individual firm.
  • You can control for all of these things and just look at changes within the firm over time that result from changes in their offshoring.
  • When you have observations on thousands of firms over about 20 years, you can take advantage of all of this information about the different firms and the many, many years of observations to control for everything that is unique about each of the individual firms, control for everything that was going on in the world economy at any given time.
  • When all of those things are controlled for or held constant, you can focus on the things that you really care about, which is the offshoring activities, the foreign expansion by the US firms, and the effect that this has on US workers.
  • So expansion abroad by US multinational firms is actually associated with greater hiring of workers in the US. And this suggests that the runway plant theory is just not true.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Guest Lecture: Professor Lindsay Oldenski on R&D Expenditures

  • When a firm invests abroad, even in China, doesn’t that mean they’re going to invest less in the United States? Well, actually that’s not accurate.
  • Well, one of the most controversial issues now is what happens when American multinationals do more and more R&D, research and development.
  • These types of research and development jobs doing product development, jobs working in labs, jobs coming up with new ideas, new innovations, these are things that US workers are very good at.
  • So while research and development at the foreign plants of US firms has increased over the years, since 1997, US multinationals have increased their R&D spending in foreign locations by about $25 billion.
  • So there’s still much more R&D by US firms going on in the US. Of all research and development spending by US-based multinationals, about 85% of it happens in the US. So it’s clearly not the case that the firms are simply moving all of their R&D to other locations.
  • Then when we do a statistical analysis, like we did with the employment question, we can see using a large number of firms over many years, we can see that the same thing is true for R&D as was true for employment.
  • So what are the policy implications of this analysis that you’ve done? Well, because what we found is that when US firms are successful abroad, and they’re able to expand internationally, this also benefits US workers.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Declining Industries Lecture

  • What is striking again the closer you look at the evidence is that this phenomenon of complementarity is taking place in high end expanding industries, in mature industries, and in declining industries.
  • What is happening in the textile industry in the United States? Well, we read that textile manufacturers are increasingly doing their garments, their footwear, their sewing overseas.
  • You might be surprised when you look at the data that there is a strong textile industry but shifting in the direction of high end fabric, industrial yarn- kinds of products that are used in furniture, that are used in automobiles, that are used in construction.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > Maturing Industries Lecture

  • Now let’s look at a mature industry, the automotive industry.
  • Well, he also taught me a lot about the automotive industry, and one of the things he taught me, which statistically is correct, is the most popular and best selling truck in the world- in the history of the world- is the Ford F150. Now the Ford F150 is assembled in the United States in Dearborn, Michigan, and in Kansas City, but it’s high powered V8 engine comes from Windsor, Canada, and it’s chassis steel comes from Monterrey, Mexico.
  • So what you find is the competitiveness of the best selling truck in the world depends upon NAFTA, that is to say the most unpopular free trade agreement in the world and a free trade agreement that the United Auto Workers fought.
  • The jobs in Dearborn and the jobs in Kansas City depend upon NAFTA.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 2. What Happens in the US When US Multinationals Invest Abroad? > High-End Industries Lecture

  • Let’s take Seagate, the largest maker of disk drives for the high performance electronics industry in the world.
  • There’s no reason why one would expect them to be equal, but the best jobs, the highest skilled jobs, are located in the United States for the high end, rapidly growing Seagate disk drives.
  • So all three of these cases- the subsegment of textiles, getting into industrial yarns, the main line bread and butter of the automotive industry, the Ford F150 truck, and then the high- end, high performance disk drive in the electronics industry- you find the same phenomenon that these are globally engaged firms and their jobs in the United States depend upon them having access to overseas trade and to overseas investment.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 3. Who Benefits from the Globalization of Research & Development? > Are Concerns About Losing R&D Valid? Lecture

  • One of the most sensitive dimensions has to do with the globalization of R&D by US multinationals.
  • It seems like outward investment, whether it’s capital investment or whether it’s the spread of R&D around the world, seems to strike a note of anxiety that American companies are building research facilities in China and India and elsewhere around the world- that maybe this is a substitution for investment or for R&D that could take place in the United States.
  • So what we have done is look at the evidence- again, more than 10,000 firms over 20 years- to see what happens to their R&D operations at home when they expand R&D abroad. And once again, we’re going to see some winners and losers.
  • That is to say, when US firms undertake more R&D abroad, they actually undertake more R&D at home.
  • So what Caterpillar does is run a 24-hour R&D cycle.
  • The R&D that is done in the United States complements that which is done in India.
  • Well, the readings give you a second and different kind of R&D case study.
  • Again, an illustration of the complementarity of the best engineers in Germany and the best engineers in the United States in the health care field.
  • Emily, let’s look at the globalization of R&D research and development.
  • Now, here, once again, when you look at the popular press, what you’re going to find is that creating research and development campuses in India or in China means that we’re not doing as much R&D at home.
  • We’re shifting it abroad. This is somehow damaging to the United States, because we’re letting the R&D be done some place else and not here.
  • So the same zero sum perspective- that is to say, if somebody else gets R&D, if another country gets R&D, that means that the firms are going to do less R&D in the United States.
  • Emily, you looked at this focusing specifically on the globalization of R&D on the part of US multinationals.
  • So the evidence from the reading shows that when a US multinational increases research and development efforts abroad, it also increases research and development domestically within the United States, capital expenditures in the US, as well as export sales, and employment domestically.
  • Do you believe that? Do you believe this? So what you’re saying, Emily, is that if a US multinational does more R&D in China or India or Europe, that doesn’t diminish the amount of R&D that it does in the United States? Not at all.
  • They set up an R&D campus in Chennai, India, where they operate a 24-hour R&D research cycle.
  • So during the day, in Illinois, the domestic research and development campus will look at data, map it, then send it to Chennai, India, where it’s analyzed and sent back to the US overnight so that in the morning, when the workers in Illinois go back to work, they have this data available.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 4. Outward FDI and US Manufacturing & Services > US Manufacturing Lecture

  • We discovered that the number of manufacturing jobs is declining and the share of manufacturing in the US economy is declining, true.
  • We also discovered that the absolute size of the manufacturing base, the absolute size of the US industrial base, is rising and becoming more capital intensive and R&D intensive.
  • These are the sources that I asked you to read to discover what is going on in the manufacturing base.
  • What have we added this week? It is getting bigger and stronger in part because multinational corporations are using the United States as the base for their worldwide operations, foreign multinationals and now US multinationals.
  • The ability of US multinationals to remain globally engaged- that is to say, to undertake foreign investment from the United States to spread their R&D from the United States- is making the US manufacturing base larger and more competitive now.
  • Is the US manufacturing base shrinking? And the common answer is yes.
  • One of the reasons why it is becoming larger and more competitive is because multinationals located in the United States are able to spread their operations out from the United States in terms of investment job creation and R&D. And this process reinforces their market position back at home.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 4. Outward FDI and US Manufacturing & Services > US Service Sector & Comparative Advantage Lecture

  • What we want to introduce right now is the service sector, service jobs.
  • What you will find is that service jobs in the United States- first of all, they’re twice as big as the manufacturing sector.
  • There are those who do construction services, software services, management services, business consulting services, engineering services.
  • All of these are high- skilled, high paying services.
  • In terms of construction services, business services, accounting services, legal services, university professors services these are all service jobs that are professional, that are higher- paying, that are higher skilled.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 5. Offshoring and Outsourcing > The Effects of Offshoring and Outsourcing Lecture

  • As we focus on service industries, we encounter debates about offshoring, that is to say, when US companies set up an affiliate to do services in India, or Mexico, or the Caribbean; or outsourcing, where they don’t have an affiliate but they go to a call center.
  • They go to another company that is providing services in the Caribbean, or in India- I’m thinking of places that are English speaking for American companies- and they purchase services that they previously did in-house.
  • What you find, when we go back to the comparative advantage in high-skilled services, is that US companies and US purchasers of services are tending to locate the more routinized, lower paying services abroad, and keeping the high-skilled, high paying services in the United States.
  • So you may find that some medical services- such as reading x-rays or reading charts- which have been done in the United States are being shifted to the Caribbean, or to India, to English speaking countries where the charts can be read and the x-rays can be reviewed.
  • What you find is that the high-end of medical services, including medical diagnostics, the high-end of construction services, the high-end of business consulting and management services, the high-end of software engineering is being done in the United States.
  • One hope is that some of the potential trade expansion initiatives, like the Trans-Pacific Partnership- which we discussed- to expand trade between the United States and the Asian region, would include services, because the United States would be a big net winner.
  • ” We’re going to lose some low-skill services.
  • So let us hope that new trade agreements have a big service component.
  • That is that cheaper low-end services abroad come back to make US firms and US investors more competitive.
  • So even within the zero sum phenomenon- we’re shipping some lower skilled services offshore- that makes the companies that can buy them in the United States more competitive.
  • It reinforces the base for the higher skilled workers in the United States.
  • So we conclude this week by thinking that the objective of public policy should be to make the United States a business-friendly location for international companies, foreign international companies and US multinationals, to locate their operations here.
  • We disagree with those who say, well, the way to do that is to penalize them if they move abroad. We did not conclude that the way to strengthen the US as a basis for international operations is to penalize companies to move abroad. We want companies in the United States to be globally engaged.
  • Remember this complementarity that we have been looking at this week: reinforcing jobs, reinforcing investment, reinforcing R&D in the United States.
  • The objective is to ensure that international companies can continue to use the United States as a base for their international operations.
  • Now, Julie Ann you’ve looked at the phenomenon of outsourcing and offshoring, which frequently refers to the service sector.
  • First of all, what is offshoring and outsourcing? And what has been going on in those processes? So offshoring, we’re talking about the service sector sending jobs abroad, which can either happen within the company, the wholly owned subsidiaries, or to other companies itself.
  • So the US actually has a comparative advantage in these high-end, high-performance, high-skilled, high-wage jobs, which happen to be in business, accounting, finance, engineering, law, actually, entertainment also as well.
  • So these jobs then allow for a productivity effect to happen in the United States.
  • So what you’re saying is that there is a comparative advantage process in the service sector? When we keep service jobs here, these tend to be high-end service jobs- again, on engineering, software, management, finance- and when we outsource services, they tend to be the lower skilled, lower paying? So it is a common misconception that it’s just a unilateral exchange between countries.
  • The US actually has a trade surplus in offshoring services, which means that other countries offshore the high-skilled services that the US actually has the comparative advantage in.
  • They actually offshore to the United States, which is kind of an inshoring of jobs for the United States, which means that both developed and developing countries are able to win.
  • As we focus on service industries, we encounter debates about offshoring, that is to say, when US companies set up an affiliate to do services in India, or Mexico, or the Caribbean; or outsourcing, where they don’t have an affiliate but they go to a call center.

Outward FDI: Runaway Plants or Domestic Opportunities? (Week 6) > 7. Conclusion & Looking Ahead > Conclusion: Summary

  • We asked, does outward investment on the part of US multinationals undermine jobs, undermine R & D, undermine investment in the United States? And we treated that as an empirical question.
  • What we found, both through statistical analysis and through a series of case studies, is that no, outward investment and outward engagement in trade and investment and technology flows reinforces and compliments the strength of the American economy – creates more jobs, not fewer jobs, stimulates more investment, not less investment, and even in the controversial area of R&D, has complementary effects so that the globalization of R&D does not threaten the United States.

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