Strong U.S. Firms Key to Healthy World Economy

Like “Engine” Charlie Wilson, General Motors’ colorful chief executive in more innocent times, most Americans intuitively assume that what is good for American companies is good for the nation. The competitiveness of the U.S. economy, most Americans believe, results from the competitive vigor of U.S.-based corporations.

This identity of interests has been so widely taken for granted that only a few theoreticians of the obvious, such as Engine Charlie and Calvin (“The business of America is business”) Coolidge, have ever felt a need to mention it.

But whether that self-evident premise makes sense today is not so clear. As American companies become more global and as foreign companies move more of their production to the United States, we must re-examine those assumed links between the interests of companies and the interests of the nation and its citizens. In the words of Robert Reich, a noted political economist at Harvard’s Kennedy School of Gvernment, we must ask: “Who is us?”

Surprisingly, despite the current infatuation with globalization, the evidence confirms the old intuition. To a significant extent, “we” are still “us”--the competitiveness of the U.S. economy remains tightly linked to the competitiveness of U.S. companies.

U.S. multinationals still locate the lion’s share of their worldwide operations in the United States. In 1988, the last year for which data is available, U.S. parent operations accounted for 78% of total assets, 70% of total sales and 70% of total employment of U.S. multinationals in the manufacturing sector.

Moreover, the domestic operations of U.S. multinationals provided more productive and higher-paying jobs than their foreign operations. Compensation per employee in parent operations was about 17% higher than in affiliate operations in developed countries and about 360% higher than in affiliate operations in developing countries.

American companies also continue to spend most of their research and development dollars at home. In 1988, for example, the proportion of total R&D; spending by U.S. companies that took place overseas was only 8.6%. And despite innumerable speeches by American corporate leaders on the globalization of American business, most large American companies do not have any foreigners on their boards.

Of course, many American companies have made huge investments abroad, attracted by lower wages, less demanding social and environmental standards and protected foreign markets. But these investments have not necessarily weakened domestic economic competitiveness. Indeed, the presumption should run the other way. Since American multinationals continue to locate most of their high-quality production activities at home, the beneficial competitive effects of their overseas operations spill over into more and better jobs, higher profits, lower prices and improved products for Americans.

But if American companies are still “us,” what about the foreign multinationals that have established affiliate operations in the United States. Can they also claim to be “us?”

In important ways, the affiliates of foreign companies operating in the United States resemble the domestic operations of American companies. Foreign affiliates are, on the average, virtually indistinguishable from domestic firms in output per worker, compensation per worker and R&D; spending per worker. Foreign firms do import significantly more than domestic companies, but this difference is likely to decline over time as foreign companies rely more on networks of local U.S suppliers for their inputs.

Although they appear to resemble American companies, foreign affiliates still represent a relatively small fraction of total economic activity within the United States, accounting for only about 11% of total manufacturing output and about 9% of total manufacturing employment in 1988.

While foreign firms represent growing shares of the domestic economy, especially in a few major industries such as automobiles and consumer electronics, they are still not as important as American firms. “They” are not yet “us,” although they are beginning to bear a strong family resemblance.

Nonetheless, globalization is here to stay. Over time, U.S. companies are likely to send larger shares of their operations abroad, while foreign companies are likely to bring more of their economic activity here. And as flows of investment become ever more important relative to flows of trade, the rivalry between the United States and the other developed countries will increasingly take the form of locational competition--vying with one another for shares of the world’s high-technology production base regardless of ownership.

In a world of global companies, the overarching goal of U.S. policy should be American competitiveness--the capacity of Americans to add value to the world economy and thereby gain a higher standard of living without going further into debt. With this goal in mind, national economic policies should be formulated to make the United States an attractive production location for the high-productivity, high-wage, research-intensive activities for both domestic and foreign firms.

This requires a policy agenda that gives priority to enhancing the education and skills of the American work force, to building America’s economic infrastructure and to fostering research and development. The nation’s human capital, infrastructure and research base are its most important immovable assets.

As a general rule the United States should continue to welcome foreign investment for both antitrust and national security purposes. All other nations do the same.

It is also sensible to invoke the principle of reciprocity under some circumstances. If American firms are kept out of foreign markets by overt discriminatory trade or investment barriers, the United States should demand that those barriers be reduced as the price for access to the American marketplace.

The principle of reciprocity is also applicable to public support for research and development. The United States should make publicly funded R&D; programs available on the same terms to any company regardless of national origin, provided the home country reciprocates. Both domestic and foreign companies receiving public R&D; monies should be required to spend them in the United States.

For example, U.S. policies to support generic R&D; for high-definition television should be open to both domestic and foreign companies, so long as they agree to do the research here and so long as similar programs in their home countries are open to U.S. firms. In high-definition TV, as in other high-technology pursuits, we cannot afford to rely on national champions alone when foreign ones such as Sony, Philips and Thomson already have substantial R&D; facilities here.

Nevertheless, America’s strength in high-technology industries still depends disproportionately on American firms, even those whose large overseas operations have contributed to the growing high-tech strength of America’s major trading partners. Moreover, America’s ability to compete with other nations for the investment and R&D; activities of foreign multinationals depends in part on the health of American companies.

Foreign firms feel that they need to be near their healthy American competitors to key into their knowledge and the network of skilled people who carry that knowledge with them. The major attraction to foreign investors is the health of the domestic economy; that in turn depends on the health of domestic companies.

The world economy is in a state of transition. National boundaries are growing ever more meaningless. Globalization is a trend that promises to define the next century. But at present, the United States is still “us.”