American Multinationals and American Economic Interests: New Dimensions to an Old Debate

The 2008 election rekindled debate about whether US multinationals shift technology across borders and relocate production in ways that might harm workers and communities at home. President Obama now pledges to end tax breaks for corporations that ship jobs overseas. The preoccupation about the behavior of American multinationals takes three forms: (1) that US-based multinational corporations may follow a strategy that leads them to abandon the home economy, leaving the workers and communities to cope on their own with few appealing alternatives after the multinationals have left; (2) worse, that US-based multinational corporations may not just abandon home sites but drain off capital, substitute production abroad for exports, and "hollow out" the domestic economy in a zero-sum process that damages those left behind; and (3) worst, that US-based multinational corporations may deploy a rent-gathering apparatus that switches from sharing supranormal profits and externalities with US workers and communities to extracting rents from the United States. Each contains a hypothetical outcome that can be compared with contemporary evidence from the United States and other home countries. This working paper shows that multinational corporations do not locate their operations in a zero-sum manner that favors host economies at the expense of the home economy. The two-way flow of inward and outward investment does not create an outcome that can be reasonably characterized in any way as "hollowing out" the home economy. The evidence consistently shows that the expansion of MNC operations abroad and the strengthening of MNC operations in the home country are complementary, and the answer to the counterfactual--would the home country be better off, or would workers in the home country be better off, if home-country MNCs were prevented from engaging in outward investment?--is indisputably negative. Making it more difficult to engage in outward investment would not strengthen the home economy in the United States. Quite the contrary, placing obstacles in the way of US multinationals using the United States as the center for conducting their global operations would leave them, their suppliers, their workers, and the communities where they are located worse off and less competitive in the world economy.International investment, foreign direct investment, multinational corporations, exports

Foreign Manufacturing Multinationals and the Transformation of the Chinese Economy: New Measurements, New Perspectives

What is the relationship between foreign manufacturing multinational corporations (MNCs) and the expansion of indigenous technological and managerial technological capabilities among Chinese firms? China has been remarkably successful in designing industrial policies, joint venture requirements, and technology transfer pressures to use FDI to create indigenous national champions in a handful of prominent sectors: high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector. But what is striking in the aggregate data is how relatively thin the layer of horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms has proven to be. Despite the large size of manufacturing FDI inflows, the impact of multinational corporate investment in China has been largely confined to building plants that incorporate capital, technology, and managerial expertise controlled by the foreigner. As the skill-intensity of exports increases, the percentage of the value of the final product that derives from imported components rises sharply. China has remained a low value-added assembler of more sophisticated inputs imported from abroad--a “workbench” economy. Where do the gains from FDI in China end up? While manufacturing MNCs may build plants in China, the largest impact from deployment of worldwide earnings is to bolster production, employment, R&D, and local purchases in their home markets. For the United States the most recent data show that US-headquartered MNCs have 70 percent of their operations, make 89 percent of their purchases, spend 87 percent of their R&D dollars, and locate more than half of their workforce within the US economy--this is where most of the earnings from FDI in China are delivered.Foreign Direct Investment, International Investment, China, Multinational Corporations, Exports

Three Threats: An Analytical Framework for the CFIUS Process

Under what conditions might a foreign acquisition of a US company constitute a genuine national security threat to the United States? What kinds of risks and threats should analysts and strategists on the Committee on Foreign Investment in the United States (CFIUS), as well as their congressional overseers, be prepared to identify and deal with? This study looks at three types of foreign acquisitions of US companies that may pose a legitimate national security threat. The first is a proposed acquisition that would make the United States dependent on a foreign-controlled supplier of goods or services that are crucial to the functioning of the US economy and that this supplier might delay, deny, or place conditions on the provision of those goods or services. The second is a proposed acquisition that would allow the transfer to a foreign-controlled entity of technology or other expertise that might be deployed in a manner harmful to US national interests. The third potential threat is a proposed acquisition that would provide the capability to infiltrate, conduct surveillance on, or sabotage the provision of goods or services that are crucial to the functioning of the US economy. This study analyzes these threats in detail and considers what criteria are needed for a proposed foreign acquisition to be considered threatening. Ultimately, the vast majority of foreign acquisitions pose no credible threat to national security on these grounds.

Higher Taxes on Multinationals Would Hurt US Workers and Exports

President Barack Obama declared in his State of the Union address--echoing the rhetoric during his days as presidential candidate--that "it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America." Do US multinationals deserve tax punishment because they "ship jobs overseas"? Hufbauer and Moran cite studies that compare US firms engaged in outward investment with similar firms that stay at home. They conclude that outward bound firms consistently export more from the United States than the home firms. If US tax policy were changed so as to hinder outward investment by US firms, evidence indicates US export performance would be weaker, not stronger. These tax changes would not lead to more investment at home either. The best bottom line for American workers--and the American economy as a whole--is to keep the United States a favorable location for American multinationals to do business. The plants of US multinationals are the most productive in the United States, most technology-intensive, and pay the highest wages. In contrast to most countries that maintain simple territorial tax systems, either de jure or de facto, the United States subjects its multinationals to worldwide taxation. The United States should align its taxation of multinationals to the territorial norms of foreign competitors--from France and Germany to Brazil, India, and China. It should adopt its own version of territorial taxation and allow US-based multinationals to repatriate dividends from their foreign subsidiaries at a flat rate of 5 percent, with no foreign tax credit. This was successfully tried for 2005 in the American Jobs Creation Act of 2004 (the AJCA). The result was a gush of repatriated income, around $300 billion, and revenue that the US Treasury would never have seen. In 2010, the Congress should lay aside the administration's proposals for punishing US multinationals with higher taxes and instead make the AJCA tax of 5 percent on repatriated dividends a permanent part of the tax code.

Reforming OPIC for the 21st Century

The mission of the Overseas Private Investment Corporation (OPIC)--created in 1969 through an amendment to the Foreign Assistance Act--is "to mobilize and facilitate the participation of United States private capital and skills in the economic and social development of less developed countries and areas, and countries in transition from nonmarket to market economies, thereby complementing the development assistance objectives of the United States." OPIC pursues this mission by insuring US investors against political risks that include expropriation, currency inconvertibility, and political violence; by financing US investors overseas through loans and loan guarantees; and by providing credits to private investment funds that make equity investments in businesses in underdeveloped countries and regions.

North-South Relations in the 1980s

Throughout the 1970s the North-South dialogue was dominated by the debate about global negotiations to oversee massive resource transfers from North to South, the debate about a central role for commodity agreements to augment the export earnings of Southern nations. and the debate about the creation of international regulations and codes to prevent the exploitation of the South by the North via the mechanism of the latter\u27s transnational corporations

CFIUS reforms must be reformed

Congress and the White House are proposing a fundamental “reform” of CFIUS regulations, via the Foreign Investment Risk Review Modernization Act. This Perspective argues that these so-called reforms would damage US interests and shows how the FIRRMA reforms must be reformed

Chinese Investment in Latin American Resources: The Good, the Bad, and the Ugly

China's need for vast amounts of minerals to sustain its high economic growth rate has led Chinese investors to acquire stakes in natural resource companies, extend loans to mining and petroleum investors, and write long-term procurement contracts for oil and minerals in Africa, Latin America, Australia, Canada, and other resource-rich regions. These efforts to procure raw materials might be exacerbating the problems of strong demand; "locking up" natural resource supplies, gaining preferential access to available output, and extending control over the world's extractive industries. But Chinese investment need not have a zero-sum effect if Chinese procurement arrangements expand, diversify, and make more competitive the global supplier system. Previous Peterson Institute research (see Moran 2010) and new research undertaken in this paper, show that the majority of Chinese investments and procurement arrangements serve to help diversify and make more competitive the portion of the world natural resource base located in Latin America. For a more comprehensive analysis, we conduct a structured comparison of four Peruvian mines with foreign ownership: two Organization for Economic Cooperation and Development-based, and two Chinese. We examine what conditions or policy measures are most effective in inducing Chinese investors to adopt international industry standards and best-practices, and which are not. We distill from this case study some lessons for other countries in Latin America, Africa, and elsewhere that intend to use Chinese investment to develop their extractive sectors: first, that financial markets bring accountability; second, that the host country regulatory environment makes a significant difference; and third, that foreign investment is a catalyst for change.Chinese foreign direct investment, foreign direct investment (FDI), natural resources, Peru, environmental impact, corporate social responsibility.

Does Foreign Direct Investment Promote Development?

What is the impact of foreign direct investment (FDI) on development? The answer is important for the lives of millions--if not billions--of workers, families, and communities in the developing world. The answer is crucial for policymakers in developing and developed countries, and in multilateral agencies. This volume gathers together the cutting edge of new research on FDI and host country economic performance and presents the most sophisticated critiques of current and past inquiries. It probes the limits of what can be determined from available evidence and from innovative investigative techniques. In addition, the book presents new results, concludes with an analysis of the implications for contemporary policy debates, and proposeds new avenues for future research.