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The Global Jobs Competition Heats Up

Authors: Martin N. Baily, Brookings Institution, Matthew J. Slaughter, Adjunct Senior Fellow for Business and Globalization, and Laura D'Andrea Tyson, Professor, Haas School of Business at the University of California, Berkeley
July 1, 2010
Wall Street Journal

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For generations, coal miners gauged the health of their workplace with a critical indicator: canaries. Any buildup of carbon monoxide and other gases would silence the singing canaries before reaching levels toxic to humans.

Today, another leading indicator—multinational companies headquartered in the U.S.—is signaling widespread and legitimate concerns about the health of the U.S. economy. A new McKinsey report that the three of us advised argues that all Americans should heed their message.

U.S. multinational companies have long been among America's strongest firms. Although they comprise far less than 1% of U.S. companies, they account for about 19% of all private jobs, 25% of all private wages, 48% of total exports of goods, and a remarkable 74% of nonpublic R&D spending. For decades, U.S. multinationals have driven an outsized share of U.S. productivity growth, the foundation of rising standards of living for everyone. They are responsible for 41% of the increase in private labor productivity since 1990.

Despite the common allegation that multinationals simply "export jobs" out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10 million from 4.8 million. During that same period, employment in U.S. parent companies rose to 22 million from 17.7 million.

But there is no guarantee that the past will be prologue. McKinsey conducted in-depth interviews with senior executives from 26 of America's largest and best-known multinationals. Their message is sobering: Today the U.S. is in an era of global competition to attract, retain and grow the operations of multinational companies that it's never faced before.

These leading executives laud many longstanding economic strengths of the U.S., such as its large and competitive domestic market. But they also see dozens of other countries—and not just fast-growing economies such as Brazil, Russia, India and China—making dramatic improvements in the policies and overall economic environment they present to the world's leading companies. These improvements are not simply a matter of tax holidays and other financial subsidies. Rather, these countries have opened their markets broadly, and they are redefining where U.S. multinationals can successfully operate.

All of the business leaders interviewed for this study agreed that U.S. tax policy has a "major impact" on their competitiveness and investment decisions, and most said that policies like limits on skilled immigration handicap their companies. In the words of one executive, tax considerations are "often one of the largest line items in the investment projection." Moreover, many of these leaders voiced concern about the future ability of this country to attract and grow corporate investment, R&D and jobs. U.S. multinationals will not aggressively invest and hire here at home if they can't realize attractive returns from doing so.

It is our strong belief that their concerns must be taken seriously by U.S. policy makers at all levels. We aren't saying that America's economic policy should be driven by the considerations of U.S. multinational firms alone—far from it. But when millions of American workers are facing severe hardship, driving our strongest companies with the best-paying jobs overseas certainly won't help. Lawmakers must acknowledge the outsized contributions multinationals have made to America's economic strength.

The world and the options it presents to global firms have changed dramatically in recent years; the U.S. cannot rest on past success and take its multinationals for granted. Policy makers must partner with business leaders to craft policies aimed at sustaining an environment in which U.S. multinationals can thrive. If they don't, going forward we all should expect smaller contributions to the U.S. economy by less vibrant U.S. multinationals: less R&D, less investment, fewer exports and fewer jobs.

There are several deep challenges now facing the U.S. economy in the wake of the financial crisis. Perhaps most importantly, U.S. companies have yet to resume vigorous job creation. Peak to trough thus far, the U.S. economy has lost 8.5 million private payroll jobs—down to 107.1 million in December 2009 from 115.6 million December 2007. In the past five months, the U.S. has regained only 495,000 private jobs—and more than a third are temporary. In addition to creating more jobs, America's economy needs to be rebalanced away from consumption and towards capital investment and exports.

U.S. multinationals are uniquely positioned to help America meet these challenges. But this will require far-sighted policy initiatives like liberalizing trade and protecting intellectual property.

These firms are now the canaries in the U.S. economic coal mine. Will our lawmakers pay attention?

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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