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The Benefits of International Investment
Tuesday, August 15, 2017 - 7:15pm
Like trade, international investment is critical to American jobs and competitiveness. In addition to exporting, U.S. corporations can access new customers in foreign markets by investing abroad, creating foreign affiliates and becoming multinationals in the process. Sales by these foreign affiliates topped $7 trillion in 2013 (latest available)—a sum representing about 40% of U.S. multinational corporations’ total sales. Many of America’s largest companies earn more than half their revenue in this way.
Why do companies invest in other countries instead of simply exporting? Most of these overseas investments are in sectors that cannot be served by means of exports from the United States. This includes many services as well as manufacturing operations for goods, such as detergent or potato chips, which generally cannot be exported due to high transportation costs or barriers to trade.
U.S. firms’ investments abroad bring real benefits to Americans, including on the jobs front. A study found that U.S. companies that invest abroad tend to create more jobs in the United States and pay higher wages than companies focused solely on the domestic market. They are also more resilient, more stable as employers, and less likely to go bankrupt. Indeed, the U.S. Department of Commerce reports that U.S. multinational corporations added 289,000 U.S. jobs in 2007-2009 even as the sharpest recession in a generation caused the U.S. economy to shed more than 8 million jobs overall.
U.S. multinationals have continued to concentrate their high-wage, high-skill jobs in the United States, according to a recent Commerce Department report. The trillions of dollars in revenue U.S. multinationals earn through their foreign operations help fund their research and development activities, 84% of which continue to be performed in the United States, according to the U.S. Department of Commerce.
Still, myths about international investment abound. Many Americans believe “offshoring” is a major driver of job loss, but the facts show otherwise. While it discontinued compilation of these data in 2004, the Bureau of Labor Statistics previously reported the movement of work to overseas locations accounted for the loss of very small numbers of jobs, representing between 0.5% and 1.3% of all U.S. jobs lost in “mass layoffs” in the 1997-2003 period, according to a report by the American Action Forum.
Some charge that international investment is really about substituting foreign production for domestic production and thus replacing U.S. workers with low-wage foreign labor. But just 8.9% of the production of foreign affiliates of U.S. multinationals was sold in the U.S. market in 2009, according to data compiled by the U.S. Department of Commerce (most recent available). In other words, more than 90% of their production is sold abroad.
Another myth is that an open investment regime allowing U.S. multinationals to invest abroad creates a race to the bottom. Not only are two-thirds of U.S. multinationals’ capital expenditures and employment in the United States, but two-thirds of the portion that does go abroad is directed to developed countries with wages and labor standards similar to those in the United States, according to data from the U.S. Department of Commerce. When U.S. multinationals do invest in developing countries, they tend to create the best paying jobs around, with the best working conditions.
Above all, it is important to keep in mind that investment flows into the United States as well. Foreign companies have invested $3.1 trillion in the United States and directly employ more than 6.4 million Americans with an annual payroll of more than $400 billion, according to the U.S. Department of Commerce. U.S. affiliates of foreign-headquartered companies purchase billions of dollars’ worth of inputs from local suppliers and small businesses and account for more than one-quarter of all U.S. merchandise exports, according to the Organization for International Investment.
International investment is a two-way street. To generate jobs and growth, the United States must attract foreign investment while actively supporting U.S. investment abroad.