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Global Investments,
American Returns

Mainstay III:
A Report on the Domestic Contributions of
American Companies with Global Operations

by Matthew J. Slaughter
Emergency Committee for American Trade

Executive Summary

In public and private-sector debates over U.S. trade and investment policies, the role in the U.S. economy of American companies with global operations has often been misunderstood. Although there is no doubt that the United States plays an important role in the world economy, most Americans are unaware of the critical contributions that trade and foreign direct investment (FDI) of American companies with global operations make to the U.S. economy.

To broaden public understanding of the positive role of these companies, this study expands upon the research in ECAT’s previous Mainstay studies in two important ways. First, it focuses on the key issue of the U.S. standard of living. Second, it broadens the scope of the study to include all three major sectors of the economy: manufacturing, agriculture, and services.

There are two key points in Mainstay III. First, by raising U.S. worker productivity, American companies with global operations help raise the U.S. standard of living. Second, because the U.S. and foreign activities of these companies tend to complement each other, the ability of these companies to help raise the U.S. standard of living depends crucially on their ability to undertake foreign direct investment abroad.

Mainstay III is based upon analysis of the investments, research and development, exports, imports, and purchases from suppliers of American companies with global operations and many other data from 1977 through 1994. The primary data source is surveys of such companies conducted by the Bureau of Economic Analysis (BEA) within the U.S. Department of Commerce.

The following sections summarize the major findings and conclusions of the study:

I. Setting the Stage: The World Economy in which American Companies with Global Operations Compete

American companies today operate in a world economy that is increasingly concentrated outside the United States and that is rapidly expanding its international linkages through FDI and international trade.

• The U.S. share of the global economy is shrinking. For decades, the U.S. economy has been growing more slowly than the rest of the world, such that the U.S. share of total world output has been declining. This share was approximately 50 percent in 1945, but is down to only 20 percent today.

• FDI and trade help U.S. integration into the global economy. American companies with global operations have helped integrate the United States more closely into the growing world economy. Average annual outflows of FDI from the United States quadrupled from the 1960s through the 1980s, and total trade as a share of U.S. output rose from 5.6 percent in 1945 to 24.7 percent in 1995.

By participating in the world economy, American companies with global operations maintain a significant presence in the United States.

• Most employment is in the United States, not abroad. In 1977, U.S. parent companies accounted for 72.8 percent of total worldwide employment of American companies with global operations and by 1994, they accounted for 74.3 percent of the total.

• Profits earned by foreign affiliates are mostly repatriated. In 1989 (the most recent year for which these data are available), U.S. parents repatriated 72.8 percent of their foreign affiliates’ net income.

• Most intermediate inputs are purchased from domestic suppliers, not foreign suppliers. From 1977 through 1994, more than 90 percent of all intermediate inputs purchased by U.S. parents came from American suppliers, not foreign suppliers.

Overseas, American companies with global operations are located primarily in developed countries, and the sales from these operations are overwhelmingly in local markets.

• Most affiliate activity abroad is in developed — not developing — countries. In 1994, developed countries hosted nearly two-thirds of U.S. foreign affiliate employment and accounted for more than three-quarters of foreign affiliate assets and sales.

• Foreign affiliate sales are mostly abroad, not back to the United States. In 1994, only 10 percent of total U.S. affiliate sales went to the United States. The other 90 percent stayed abroad, and fully 67 percent of all sales were within the host countries of the foreign affiliates.

II. The Importance of American Companies with Global Operations to the U.S. Standard of Living: Generating High Productivity

American companies with global operations contribute in several important ways to the U.S. standard of living, and this contribution is larger than that of purely domestic firms.

• Investment in Physical Capital. American companies with global operations undertake the majority — 57 percent in most years — of total U.S. investment in physical capital in the manufacturing sector.

• Research and Development. American companies with global operations perform the majority — between 50 percent and 60 percent — of total U.S. research and development.

• Exports. American companies with global operations ship the large majority — between 60 percent and 75 percent — of total U.S. exports. Their foreign affiliates are important recipients of these exports; their share has increased to over 40 percent today.

• Imports. American companies with global operations also receive a sizable share of U.S. imports — roughly 30 percent. These imports benefit the U.S. economy in many ways, including giving U.S. companies access to foreign-produced capital goods and technologies.

All these activities help increase U.S. productivity and thereby enhance the U.S. standard of living.

III. The Importance of American Companies with Global Operations to the U.S. Standard of Living: Paying Higher Wages

American companies with global operations pay their workers higher wages than those paid by comparable American companies without global operations.

• A study of 115,000 U.S. manufacturing plants indicated that U.S. parent plants pay comparable workers higher wages than purely domestic plants. Production workers receive an average of 6.9 percent less at comparable domestic plants employing more than 500 employees and 15.2 percent less at comparable domestic plants employing fewer than 500 employees.

  Non-production workers receive an average of 5.0 percent less at comparable domestic plants employing more than 500 employees and 9.5 percent less at comparable domestic plants employing fewer than 500 employees. These results control for possible wage differences attributable to variations across plants in age, industry, location, and size. In light of all these controls, it seems likely that these wage differences are attributable to workers at U.S. parents being more productive than workers at comparable domestic plants.

IV. The Importance of American Companies with Global Operations to the U.S. Standard of Living: Linkages to American Suppliers

In addition to directly raising the U.S. standard of living themselves, American companies with global operations may also raise the U.S. standard of living through their interactions with domestic U.S. suppliers.

• Evidence exists that companies benefit from being exposed to other dynamic, successful firms. Exposure to “worldwide best practices” — whether those best practices are in the same country or abroad — tends to foster innovation, cost control, and other improvements that boost firm productivity.

• The very large amount of purchases of intermediate inputs from domestic suppliers by U.S. parents of American companies with global operations suggests the possibility that U.S. domestic suppliers have sufficient exposure to these high-productivity parents to realize some productivity gains. For the past 20 years, U.S. parents have purchased over 90 percent of their intermediate inputs — $2.4 trillion in 1994 — from domestic, not foreign, suppliers.

V. How Foreign Direct Investment Abroad Complements U.S. Parent Activity and Contributes to a High Standard of Living in the United States

Because the U.S. and foreign activities of American companies with global operations tend to complement each other, the ability of these companies to raise the U.S. standard of living depends crucially upon their ability to undertake FDI abroad.

• Analysis of BEA data, academic research, and case studies of 10 major American companies demonstrates that U.S. FDI generally complements rather than substitutes for U.S. parent activity. Within American companies with global operations, affiliate expansion generally triggers in U.S. parents additional investment, research and development, trade, and input purchases from domestic suppliers. As stated earlier, these activities are key determinants of the U.S. standard of living.

• Restrictions on FDI that prevent U.S. companies from expanding abroad generally will reduce U.S. parent activity and thus, lower the U.S. standard of living.

VI. Conclusions and Policy Recommendations

The United States must continue to strengthen the open system of global trade and investment in order to maximize the contributions of American companies with global operations to an improved standard of living for all Americans. To that end, U.S. trade and investment policies should take into account the following recommendations based on the research and findings in this study:

Copyright © 1998 by the Emergency Committee for American Trade. All rights reserved.

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