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Why FDI Matters for US Jobs and Wages

The Biden administration has offered several proposals to reform the taxation of U.S. multinationals, addressing profit shifting as well as a broader view that offshoring is bad for the U.S. economy and companies should be encouraged to “reshor” as much as possible. activities as possible in the United States. . Contrary to claims by the Biden administration, raising taxes on cross-border investment would hurt economic growth and jobs in the United States. Research shows that FDI creates jobs in the United States and increases worker wages and productivity.

Cross-border investment can take two forms: outward foreign direct investment (FDI) and inward FDI. Outward FDI occurs when an American multinational invests abroad, either by obtaining a majority stake in a company or by buying capital, such as building a new factory. Inward FDI occurs when a foreign multinational makes a similar type of investment in the United States

Some commentators view outward FDI as harmful to the US economy, believing that US multinationals replace US workers with foreign workers and cause job cuts in the domestic market. While such substitution can occur, multinational activity more often than not serves as a complement to US industry, not a substitute.

Multinationals are among the largest employers in the United States In 2017, American multinationals accounted for nearly one-fifth of the private sector workforce and more than half of manufacturing employment. They represent an even larger share of total compensation. In the manufacturing sector alone, about 60% of all wages paid come from American multinationals. And as noted above, their contributions to R&D are just as significant, accounting for two-thirds of all industrial R&D in the United States, as shown below.

Multinationals make up a significant portion of compensation because they tend to pay higher wages and provide better benefits than other comparable private sector jobs. In 2017, US parent companies and US subsidiaries of foreign multinationals paid more than $10,000 more per employee in total compensation than comparable US companies in the private sector. McKinsey analysis finds that multinationals have been responsible for almost 40% of productivity gains since 1990, which has spurred wage growth across the US economy. In part, multinationals have helped American industries move from low-value jobs to high-value jobs, such as R&D and other service-based activities.

Of course, the change has imposed transition costs on some communities in the United States, as happened during the China Shock. But the evidence suggests more broadly that while companies have expanded beyond the United States, it hasn’t always come at the expense of the American workforce. Between 2004 and 2014, nearly 42% of American multinationals that expanded overseas also expanded their employment in the United States. Of the multinationals that have reduced their foreign workforce, about half have also reduced their employment in the United States. Multinationals tend to expand their operations both domestically and overseas as they become more profitable, and shrink as they become less profitable.

According to one view, multinationals mainly operate overseas due to lower regulatory costs and the availability of cheap labor. Although these factors motivate some offshoring decisions, American companies in a globalized economy do not only sell to American consumers, but also to foreign customers. Thus, for many companies, it is often more efficient to operate in countries closer to their foreign customers. These “horizontal” FDIs are the most widespread: American multinationals prefer to invest in middle-income countries, such as China, rather than in low-income countries, such as in Africa. According to World Bank classifications, these middle-income countries accounted for just under half of employment at foreign affiliates of U.S. multinationals in 2017, while the majority of investment still occurred in high-income countries.

From 1987 to 2011, nearly 95% of foreign affiliates of US multinational manufacturing companies sold at least some products in their local market, and 37% sold exclusively in their local market. Even if we consider the foreign affiliates of American multinationals that produce abroad and then export their final goods or intermediate inputs to the United States, most of the exports come from developed countries. Among the top 10 countries that export to the United States, only one third of total exports come from developing countries, mainly China and Mexico.

Industry-level data also shows a similar trend for FDI activity in the United States. Input-output measures developed by Antras and Chor (2018) show that the largest outward FDI industries are also the largest inbound. In other words, most of the activities consist mainly of selling to final consumers in local markets (at home or abroad), rather than focusing on reducing the input costs of the production process. Expanded market access allows American multinationals to be more profitable, which can translate into profits reinvested in the United States, often increasing the wages of American workers.

If taxes were raised on cross-border investment as President Biden advocated, it could reduce American productivity, reduce jobs in the United States, and lead to lower wages for many workers. An article focusing on developing countries found that outward FDI increases countries’ total factor productivity in the long run. Another study looked at 50 countries, including the United States, and found that outward FDI was positively associated with long-term economic growth. And yet another analysis generally found a positive link between local employment rates and outward FDI in the United States, although some regions experienced an increase in inequality between low- and high-skilled workers.

Policymakers must exercise caution when redefining the tax system for multinational corporations, or risk raising taxes on cross-border investment more broadly and stifling US growth.