Multinational Firms and Impacts on Employment, Trade and Technology

New Perspectives for a New Century

Robert E. Lipsey, Jean-Louis Mucchielli

• Publisher: Taylor & Francis
• Year: 2001
• Print ISBN: 9780415270533
• eBook ISBN: 9781134489756
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

For decades governments, politicians, and trade unions have feared that firms investing abroad involved a loss of employment and a decline in wages for the home country, the implied assumption being that global production and consumption are somehow fixed. Similarly, research on multinational firms has tended to present them as having a number of a

Part I
MULTINATIONAL FIRMS, INTERNATIONAL PRODUCTION AND HOME EMPLOYMENT

1
FOREIGN PRODUCTION BY US FIRMS AND PARENT FIRM EMPLOYMENT*

Robert E. Lipsey

1.1. Introduction

There has long been a suspicion in the United States that investment abroad by US firms, especially manufacturing firms, involves replacing US workers by foreign workers, with a resulting loss of employment and decline in wages for the firms’ workers in the United States. That suspicion was probably at its peak during the late 1960s and the 1970s, and has declined somewhat since then, but it still exists. Worries about the impact of outward foreign direct investment (FDI) led to Congressional proposals to restrict it and to administration measures to limit its financing in the United States.

The adverse effect on home labor was thought to occur through two main channels. One was the replacement of home production for the US market by imports from the affiliates and the other was the replacement of home production for export by affiliate production in the host countries. Since imports into the United States from manufacturing affiliates abroad were relatively small, most attention was focused on export replacement. However, a series of studies of export replacement failed to find evidence that it had taken place. Most studies, including parallel ones for Swedish firms, seemed to find that the net effect of affiliate production on parent exports was positive, if there was any effect at all. For the most part, these studies have found little or no effect or found that production abroad, on net balance, promoted parent exports, and presumably parent employment in the United States.

Much of the concern over outward FDI arose from the impression that production and employment abroad had been rising rapidly. That was the case from the 1950s through the mid-1970s, but in the ten years after 1977, employment in foreign affiliates of US firms outside banking fell by almost a million. It has recovered since then, but did not reach the 1977 level again until 1995. Most of this decline took place in manufacturing affiliates, and the number of these employees was still below the 1977 level in 1995.

It is clear from the data, as is demonstrated more fully below, that there has been no aggregate shift of production or employment by US multinationals out of the United States to their foreign affiliates, at least in the past twenty or twentyfive years. If there is any impact of foreign operations by US firms on US labor markets, it must be through some different mechanism. The issue we explore here is a different one.We take the level of production by US multinationals in the United States as given, determined by each firm’s judgment as to the optimal geographical allocation of its worldwide production. We then ask whether these geographical allocations affect the firms’ home employment or wage levels by altering the labor intensity or the skill intensity of the firms’ home production. They might do so if, for example, firms allocated their most labor-intensive or least skill-intensive activities or products to their foreign affiliates or to their affiliates in low-wage countries.

FDI is one vehicle by which production is allocated among countries, or reallocated over time. The basic long-term forces behind these reallocations are the rising per capita incomes of home countries, which force their comparative advantages up the capital-intensity and skill-intensity scales, and the economic growth of foreign markets. For some countries, the depletion of a natural resource alters comparative advantages. In other cases, major changes in currency values induce investment abroad. Often, home country firms have acquired, over a long time, firm-specific advantages in the industries that are seen to be inevitably declining at home. They may have built up technological skills, marketing skills, networks of trade, and brand names that provide market access at home and abroad. In that case, these firms can retain some of the rents on their firmspecific skills by FDI, establishing or acquiring production facilities in the countries to which comparative advantages in production, or in parts of a production chain, are migrating. Some familiar examples are US petroleum industry firms that invested in crude production abroad as the cost of US petroleum resources increased, and Swedish firms in the forest products and forest product machinery industries.

These shifts in the location of production are presumably reflected in the composition of a firm’s home production. We would expect that home production within a firm would shift away from industries, or segments of industries, in which the home country was losing comparative advantage. Thus, we would expect that US firms with foreign production facilities would allocate the more labor-intensive segments of their production to locations where labor, or unskilled labor, was relatively cheap. The result at home would be a shift toward more capital-intensive or skill-intensive types of production.

The data for the individual firm regressions used in this study are from the confidential individual firm responses to the benchmark survey of US direct investment abroad in 1989 conducted by the Bureau of Economic Analysis (BEA) of the US Department of Commerce. The calculations had to be performed at the BEA to preserve the confidentiality of the responses.

1.2. Have US firms moved their production and employment to foreign countries?

There are several ways to measure the importance of foreign production and employment by US firms relative to economic activity at home. The two measures we use here are production, as represented by gross product, and employment. Activity abroad can be compared with parent production and employment at home or with production and employment in the whole domestic US economy. The comparison with parent activity describes the choices made by the multinational firms themselves and the comparison with the US as a whole describes the potential impact on the US economy. The gross product data for parents begin only in 1977, after the major part of the expansion of overseas production, and are available only for benchmark survey years until 1994. The gross product data for the MNCs’ foreign operations apply only to majority-owned affiliates (MOFAs).

From 1977 to 1982 the share of foreign operations in the output of US MNCs declined, by more than 10 per cent. After that there was some recovery, to the point that the 1997 share was almost identical to the 1977 level:

Gross product of US MOFAs as per cent of gross product of parents and MOFAs, 1977–...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contributors
• Introduction
• Part I: Multinational Firms, International Production and Home Employment
• Part II: Multinational Firms and International Trade
• Part III: Multinational Firms, Linkages and Spillovers Effects
• Part IV: Multinational Firms, Structure and Diffusion of Technology and Innovation