from Renewing America

Why Companies Are Leaving the United States, and How to Get Them Back

The Harvard Business School (snub1/flickr).

March 6, 2012

The Harvard Business School (snub1/flickr).
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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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New York -- Why are big companies not investing more in the United States? A recent survey of some 10,000 former Harvard Business School (HBS) grads carried out as part of the school's U.S. Competitiveness Project has some telling answers. The findings were discussed at a fascinating meeting of business leaders in New York Monday evening.

CFR's recent Independent Task Force on U.S. Trade and Investment Policy documented the problem. In the 1990s U.S.-headquartered multinational companies created 4.4 million jobs in the United States, even as they were also expanding abroad, creating 2.7 million jobs in their foreign affiliates. Over the past decade, however, while U.S.-based companies went on adding some 2.4 million jobs abroad, they cut their American workforce by 2.9 million.

The HBS survey, carried out by Professors Michael Porter and Jan Rivkin, offers some persuasive explanations. Among the 10,000 alumni surveyed were nearly 1,800 business executives who had been personally involved in decisions on relocating business activities. The survey zeroes in on some 600 decisions in which companies were weighing whether to keep operations in the United States or move abroad; in more than 500 of those decisions, the United States lost.

And these are not just production jobs or customer and back-office support work. Some 42 percent of all relocation decisions also involved research, development, and engineering--activities that are critical for the United States to retain its lead in innovation.

Why are U.S. companies leaving? In some cases, Porter and Rivkin suggest, they probably bought a bill of goods, believing that the cost savings from offshoring would be greater than they turned out to be. Many companies have faced unexpected business challenges abroad, including rising wages, increased transportation costs, and weak intellectual property protection. Buyer's remorse may account for why more companies are starting to bring work back home.

But the survey reveals deep skepticism about the United States as a business location. I would group the responses into three categories: problems we can do nothing about; problems we could do something about but shouldn't; and finally problems that we could and should address.

In the first category are things like proximity to customers, proximity to suppliers, and faster growing markets abroad. With the torrid growth rates in many emerging markets, it is inevitable, and desirable, that some business activities will move offshore to meet that demand. In many cases those investments also serve to boost U.S. exports.

In the second category, which was cited by 70 percent of those involved in location decisions, is lower wages. This is not a competition that the United States can, or should want to, win. Wages have already been falling for most U.S. workers over the past decade, but they would have to fall a lot farther to offset the advantages of a China or Mexico. As Michael Porter put it to the New York audience: "Having companies succeed while wages not competitiveness."

The final category is where the game for investment will be won or lost by the United States, which is why our Task Force called on President Obama to launch a National Investment Initiative. The action items are clear. Astonishingly, 31 percent of executives cited "better access to skilled labor" as a rationale for moving overseas, versus just 29 percent who cited it as a reason for staying. That is a serious indictment of U.S. education and immigration policies. Lower tax rates are another big issue, though intriguingly the complaints were primarily about the complexity of the U.S. tax code rather than the level of corporate taxation. Tax reform and immigration reform were items one and two on the wish list of business leaders.

Other items raise trickier questions. Some companies cited fewer or less expensive regulations as an incentive to move abroad, though here again the complaints were mostly about the complexity of U.S. regulations rather than the intent. Anyone who has bought a home and been forced to sign 75 pages or so of indecipherable legalese can readily understand this complaint. And finally, nearly one-quarter cited "more generous incentives from local authorities." States eager to attract investment well understand the pressure to cut taxes, build roads, and throw in land or other goodies to attract companies. Sometimes the benefits are worth it, and sometimes not; deciding which is the case is the tricky part.

The survey has a wealth of other interesting conclusions. Importantly, and I will return to this tomorrow, it raises questions not just about what governments can do to make the United States a better place to do business, but about what the companies themselves should be doing.

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