Order Code RL32461
CRS Report for Congress
Received through the CRS Web
Outsourcing and Insourcing Jobs in the
U.S. Economy: Evidence Based on
Foreign Investment Data
Updated May 4, 2005
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Outsourcing and Insourcing Jobs in the U.S. Economy:
Evidence Based on Foreign Investment Data
Summary
The impact of foreign direct investment on U.S. employment is provoking a
national debate. While local communities compete with one another for investment
projects, many of the residents of those communities fear losing their jobs as U.S.
companies seek out foreign locations and foreign workers to perform work that
traditionally has been done in the United States, generally referred to as outsourcing.
Some observers suggest that current U.S. experiences with outsourcing are different
from those that have preceded them and that this merits legislative actions by
Congress to blunt the economic impact of these activities. Other observers argue that
investing abroad by U.S. multinational companies impedes the growth of new jobs
in the economy and thwarts the nation’s investments in high technology sectors.
Some opponents also argue that mid-career workers who lose good-paying
manufacturing and service-sector jobs likely will never recover their standard of
living.

Economists and others generally argue that free and unimpeded international
flows of capital have a positive impact on both domestic and foreign economies.
Direct investment is unique among international capital flows because it adds
permanently to the capital stock and skill set of a nation, but it also challenges the
general theory of capital flows because of the presence of strong cross-border and
intra-industry investment. Supporters contend that to the extent that foreign
investment shifts jobs abroad, it is a minor component of the overall economic
picture and that it is offset somewhat by the investment of foreign firms in the U.S.
economy (referred to as insourcing), which supports existing jobs and creates new
jobs in the economy.
Broad, comprehensive data on U.S. multinational companies generally lag
behind current events by two years and were not developed to address the issue of
jobs outsourcing. Many economists argue, however, that there is little evidence to
date to support the notion that the overseas investment activities of U.S.
multinational companies play a significant role in the rate at which jobs are created
in the U.S. economy. Instead, they argue that the source of job creation in the
economy is rooted in the combination of macroeconomic policies the nation has
chosen, the rate of productivity growth, and the availability of resources. This report
addresses these issues by analyzing the extent of direct investment into and out of the
economy, the role such investment plays in U.S. trade, jobs, and production, and the
relationship between direct investment and the broader economic changes that are
occurring in the U.S. economy. This report will be updated as events warrant.
Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S. and Foreign Multinational Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Employment Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Employment by Sector and Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Gross Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
U.S. Multinational Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Foreign-Owned Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Cyclical vs. Structural Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Sales of Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Why Firms Invest Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Ownership-Specific Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Location Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Commercial Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
List of Figures
Figure 1. U.S. Direct Investment Abroad and Foreign Direct Investment in the
U.S. Economy, annual Flows 1982-2004 (in billions of dollars) . . . . . . . . . 2
Figure 2. Inward and Outward Cumulative Global Direct Investment
Position, By Major Area, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 3. Employment of U.S. Parent Companies and Their Foreign Affiliates,
1982 - 2002 (1982 = 100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 4. Employment of the Foreign Affiliates of U.S. Parent Companies as a
Share of the Total Employment of U.S. Multinational Companies,
1982-2002 (in percent shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 5. U.S. and Foreign Direct Investment Position, Cumulative
Position by Country, 2003 (in billions of dollars) . . . . . . . . . . . . . . . . . . . . 13
Figure 6. Employment of U.S. Foreign Affiliates and Affiliates of Foreign
Firms in the U.S., by Country or Region, 2002 . . . . . . . . . . . . . . . . . . . . . 13
Figure 7. Changes in Gross Product of U.S. Parent Companies and Their
Foreign Affiliates (in percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Figure 8. Changes in Employment of U.S. Parent Companies and their
Foreign Affiliates (in percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Figure 9. Changes in Manufacturing Gross Product of U.S. Parent
Companies and Their Foreign Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Figure 10. Changes in Manufacturing Employment of U.S. Parent
Companies and Their Foreign Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Figure 11. Intra-Firm MNC Trade as a Share of Total U.S. Exports and
Imports, 1990-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Tables
Table 1. Global Annual Inflows of Foreign Direct Investment, By Major Area . 4
Table 2. Select Data on U.S. Multinational Companies and on Foreign
Firms Operating in the United States, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 3. Gross Product and Manufacturing Gross Product by U.S.
Multinational Companies, 1994-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 4. Employment of U.S. Multinational Companies and the Affiliates of
Foreign Firms, 1982-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 5. Employment of U.S. Foreign Affiliates by Major Sector and Area,
2000-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 6. Gross Product of U.S. Parent Companies and Their
Majority-Owned Foreign Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Table 7. U.S. Direct Investment Abroad; Investment Outflows for Selected
Regions and Countries, 1999-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table 8. Changes in Gross Product and Employment of U.S. Parent
Companies and Their Foreign Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 9. Changes in Gross Product and Employment Among U.S. Parent
Companies and Their Foreign Affiliates for Selected Industries . . . . . . . . . 23
Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods,
1990-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Table 11. Multinational Corporations’ Imports of Goods, 1990 - 2002 . . . . . . . 27
Table 12. Sales of Goods and Services by U.S. Foreign Affiliates by
Destination and Industry, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table 13. Sales of Services by U.S. Foreign Affiliates by Destination and
Industry, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Table 14. Sales of Services by U.S. Foreign Affiliates, Growth in Sales for
Selected Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table 15. Expenditures on Research and Development by U.S. Multinational
Firms and by the Affiliates of Foreign Firms Operating in the United
States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Outsourcing and Insourcing Jobs in the
U.S. Economy: Evidence Based on
Foreign Investment Data
Overview1
The United States is the largest foreign direct investor in the world and the
largest recipient of such investment funds.2 On a historical cost basis, or book value
basis, the Department of Commerce estimates that by the end of 2003 U.S. firms had
accumulated $1.8 trillion worth of direct investment abroad, compared with the $1.4
trillion foreign investors had spent to acquire or establish businesses in the United
States.3 As Figure 1 shows, the 2000-2002 slowdown in the U.S. economy
significantly reduced direct foreign investment flows.4
1 Data for this report were taken from the annual surveys conducted by the Bureau of
Economic Analysis on U.S. direct investment abroad and on foreign direct investment in the
United States. See U.S. Direct Investment Abroad: Operations of U.S. Parent Companies
and Their Foreign Affiliates; and Foreign Direct Investment in the United States:
Operations of U.S. Affiliates of Foreign Companies. Preliminary results appear in the
Survey of Current Business generally 18 months after the end of the reporting calendar year,
with the more detailed reports issued in the fall of that year.
2 This is true on a historical cost, or cumulative position basis, but the sharp drop in foreign
direct inflows after 2000 has meant that other countries recently displaced the United States
as the largest recipient of annual foreign direct inflows.
3 Borga, Maria, and Daniel R. Yorgason, Direct Investment Positions for 2003, Survey of
Current Business, July 2004, p.402. The Department of Commerce publishes two additional
estimates of the value of U.S. direct investment abroad and foreign direct investment in the
United States. These methods represent the current cost method and the market value
method. According to these methods, U.S. direct investment abroad would be valued at $2.1
trillion and $2.7 trillion, respectively; foreign direct investment would be valued at $1.6
trillion and $2.4 trillion, respectively. Abaroa, Patricia E.., The International Investment
Position of the United States at Yearend 2003, Survey of Current Business, July 2004, p.38-
39.
4 The United States defines foreign direct investment as the ownership or control, directly
or indirectly, by one foreign person (individual, branch, partnership, association,
government, etc.) of 10% or more of the voting securities of an incorporated U.S. business
enterprise or an equivalent interest in an unincorporated U.S. business enterprise. 15 CFR
§ 806.15 (a)(1). Similarly, the United States defines direct investment abroad as the
ownership or control, directly or indirectly, by one person (individual, branch, partnership,
association, government, etc.) of 10% or more of the voting securities of an incorporated
business enterprise or an equivalent interest in an unincorporated business enterprise. 15
CFR § 806.15 (a)(1).
CRS-2
Figure 1. U.S. Direct Investment Abroad and Foreign Direct
Investment in the U.S. Economy, annual Flows 1982-2004 (in
billions of dollars)
Billions of dollars
$350
$300
Foreign Direct Investment in the
United States
$250
$200
$150
U.S. Direct Investment
Abroad
$100
$50
$0
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
U.S. Department of Commerce
Foreign direct investment in the United States on an annual basis peaked at $320
billion in 2000 before plummeting to about $40 billion in 2002, according to
Commerce Department data.5 Recent Department of Commerce data indicate that
foreign direct investment rose to $113 billion in 2004, nearly triple in the amount
foreigners invested in 2004. U.S. direct investment abroad followed a similar trend:
on an annual basis, U.S. direct investment abroad totaled $160 billion in 2000, down
from $225 billion in 1999, and fell to $138 billion in 2002. Recent data indicate that
U.S. direct investment abroad rose to a record amount (in nominal terms) of $248
billion, 40% more than U.S. firms had invested abroad in 2003.
Globally, the total, or cumulative, amount of foreign direct investment reached
$8 trillion in 2003, as indicated in Figure 2. Nearly three-fourths of this amount is
invested in the most economically-advanced developed economies. The developed
economies not only are the greatest recipient of investment funds, but they are also
the greatest source of those funds. Similar to the United States, those countries that
are the largest overseas investors also tend to be the most attractive destinations for
foreign investments. The clear exception to this general observation is Japan, which
had invested $336 billion abroad through 2003, but had received $90 billion in
investment inflows. Among the developing economies, Asia, which includes China,
has accumulated $1.5 trillion in direct investment, followed by Latin America ($647
billion) and Africa ($167 billion).
5 Bach, Christopher, L., U.S. International Transactions, 2004. Survey of Current Business,
April 2005. p. 46.
CRS-3
Figure 2. Inward and Outward Cumulative Global Direct Investment
Position, By Major Area, 2003
Total = $8.2 Trillion
World
Developed economies
Western Europe
France
Germany
Netherlands
United Kingdom
United States
Australia
Japan
Developing economies
Latin America
Africa
Asia
10
8
6
4
2
0
2
4
6
8
10
Trillions of Dollars
Trillions of Dollars
Inward Stock
Outward Stock
Source: United Nations
The reduced flows of foreign direct investment going to the United States since
2001 reflect a broader change that occurred in global flows of foreign direct
investment. According to the United Nations’ World Investment Report,6 the largest
100 multinational corporations in the world experienced a stagnation of their sales,
employment, and growth in assets after 2000. Global foreign direct investment flows
dropped by 41% from $1.4 trillion in 2000 to $800 billion in 2001 and by 171% in
2002 to $680 billion, as indicated in Table 1. In 2003, global flows fell another
17%, reaching $560 billion as a result of continued slow economic growth in most
areas of the world, falling stock market valuations, lower corporate profitability, a
slowdown in corporate restructuring, and a slowdown in privatization efforts in some
areas. The share of direct investment funds going to the developed economies
dropped from 81% of the total in 2000, an unusually high share of the total
investment flows, to 66% in 2003, largely on the decline in investment funds going
to the United States. As a consequence of this shift, Africa received three times as
many investment funds as a share of the total in 2002 and 2003 as it did in 2000,
when investment inflows to that region effectively dried up. The United Nations
estimates that foreign direct investment should rebound in 2004.7
6 World Investment Report 2004, United Nations, July 2004. P. 5.
7 Prospects for FDI Flows, TNC Strategies and Promotion Policies: 2004-2007. United
Nations Conference on Trade and Development, April 24, 2004.
CRS-4
Table 1. Global Annual Inflows of Foreign Direct Investment, By
Major Area
(in billions of dollars; percent shares)
2001
2002
2003
2001
2002
2003
Inflows of foreign direct
Share of annual foreign
investment
direct investment inflows
(in millions of dollars)
(in percent)
World
817.6
678.8
559.6
100.0%
100.0%
100.0%
Developed economies
571.5
489.9
366.6
69.9%
72.2%
65.5%
Western Europe
368.8
380.2
310.2
45.1%
56.0%
55.4%
European Union
357.4
374.0
295.2
43.7%
55.1%
52.7%
Other Western Europe
11.4
6.2
15.0
1.4%
0.9%
2.7%
North America
186.9
83.9
36.4
22.9%
12.4%
6.5%
United States
159.5
62.9
29.8
19.5%
9.3%
5.3%
Other developed economies
15.7
25.8
20.0
1.9%
3.8%
3.6%
Developing economies
219.7
157.6
172.0
26.9%
23.2%
30.7%
Africa
19.6
11.8
15.0
2.4%
1.7%
2.7%
Latin America
88.1
51.4
49.7
10.8%
7.6%
8.9%
Asia
112.0
94.5
107.3
13.7%
13.9%
19.2%
Central and Eastern Europe
26.4
31.2
21.0
3.2%
4.6%
3.7%
Source: World Investment Report, 2004, United Nations. Annex table B.1.
U.S. and Foreign Multinational Companies
By the end of 2002, there were more than 2,000 U.S. parent companies with
22,000 affiliates operating abroad, as Table 2 indicates. In comparison, foreign firms
had nearly 6,000 affiliates operating in the United States. U.S. parent companies
employed 22 million workers in the United States, compared with the 9.7 million
workers employed abroad by U.S. firms and the 5.9 million persons employed in the
United States by foreign firms. Although the U.S.-based affiliates of foreign firms
employ fewer workers than do the foreign affiliates of U.S. firms, they paid almost
as much in aggregate employee compensation in the United States as did the U.S.
affiliates operating abroad. The foreign affiliates of U.S. parent companies, however,
had a third higher value of gross product than did the affiliates of foreign firms
operating in the United States. In addition, the foreign affiliates of U.S. firms had
total sales that were a third higher than that of the U.S. affiliates of foreign firms.
The foreign affiliates of U.S. firms, however, paid nearly two and a half times more
in taxes to foreign governments than did the affiliates of foreign firms operating in
the United States. The overseas affiliates of U.S. parent companies also paid nearly
twice as much in taxes relative to their sales as did U.S. parent companies and as did
foreign-owned affiliates operating in the United States.
CRS-5
Table 2. Select Data on U.S. Multinational Companies and on
Foreign Firms Operating in the United States, 2002
(in millions of dollars unless otherwise indicated)
U.S. Multinational Companies
U.S. Affiliates of
Parent
Affiliates
Foreign Firms
Companies
Number of firms
2,418
24,607
5,726
Employment (thousands)
22,413.4
9,695.9
5,932.2
Employee compensation
$1,150,738
$311,678
$307,133
Gross product
$1,857,354
$611,456
$453,637
Total assets
$14,647,487
$6,865,705
$5,213,336
Sales
$6,426,628
$2,973,212
$2,225,352
Taxes
$146,672
$117,919
$44,848
R&D Expenditures
$137,968
$21,151
$27,508
Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign
Affiliates, Preliminary 2002 Estimates; and Foreign Direct Investment in the United States:
Operations of U.S. Affiliates of Foreign Companies, Preliminary 2002 Estimates.
U.S. multinational companies also play an important role in the U.S. economy,
as indicated in Table 3. According to the total output of U.S. parent companies, or
gross product, they produced $1.95 trillion in goods and services in 2002, down
slightly from the $2.1 trillion dollars they produced in 2000. This amount comprised
about 20% of total U.S. private industry gross product, a reversal in the improvement
in the share of total gross product U.S. parent companies had experienced much of
the 1990s despite significant changes in the U.S. economy as a whole. As a result,
the data seem to demonstrate the impact the slow down in the U.S. economy after
2000 had on the operations of U.S. multinational companies.
The manufacturing sector presents a similar picture. During the 1990s,
manufacturing production continued to decline as a share of U.S. parent company
gross product, falling from 53% of total output in 1994, to 45% in 2002, reflecting
the slowdown in the rate of growth in the U.S. economy and the decline overall in the
share of the U.S. economy devoted to the manufacturing sector. From 1994 to 2002,
U.S. manufacturing output as a whole fell from 20% of U.S. private gross product to
14.6%. As the manufacturing sector has come to account for a smaller share of the
U.S. economy, U.S. parent companies have followed suit by shifting their focus away
from manufacturing industries to other economic activities.
Within the U.S. economy, U.S. multinational corporations (MNCs) rank among
the largest U.S. firms. According to data collected by the Commerce Department’s
Bureau of Economic Analysis (BEA), when American parent companies and their
foreign affiliates are compared by the size structure of employment classes, 40% of
the more than 2,000 U.S. parent companies employ more than 2,499 persons each.
These large parent firms account for 95% of the total number of people employed by
U.S. MNCs. Employment abroad is even more concentrated among the largest
CRS-6
foreign affiliates of U.S. parent firms: the largest 2% of the affiliates account for 90%
of affiliate employment.8
Table 3. Gross Product and Manufacturing Gross Product by
U.S. Multinational Companies, 1994-2002
(in billions of dollars and percent share)
Gross Product
Manufacturing Gross Product
U.S. Parent U.S. Private Parent Company Share of Parent Share of U.S.
Companies
Industries
Share of U.S.
Company Gross Private Gross
Private Gross
Billions of dollars
Product
Product
Product
1994
$1,313.8
$6,013.5
21.8%
53.1%
20.2%
1995
1,365.5
6,306.9
21.7%
53.0%
20.3%
1996
1,480.6
6,667.9
22.2%
51.6%
19.6%
1997
1,573.5
7,253.6
21.7%
49.0%
19.0%
1998
1,594.5
7,678.2
20.8%
49.0%
18.6%
1999
1,914.3
8,123.0
23.6%
48.6%
18.2%
2000
2,141.5
8,606.9
24.9%
46.5%
17.7%
2001
1,952.1
8,841.1
22.1%
43.8%
15.2%
2002
1,857.4
9,254.1
20.1%
44.6%
14.6%
Source: Shares developed by CRS from Department of Commerce data.
Employment
A major source of contention in the United States regarding foreign investment
focuses on the impact such investment is having on U.S. employment.9 Some
observers argue that recent actions by U.S. parent companies are different from
previous experiences with foreign investment because the parent companies are
shifting jobs, capital, and technology offshore to their foreign affiliates in ways that
are distinctly different from previous periods, and thereby are reducing employment
in the United States. The Department of Commerce’s Bureau of Economic Analysis
provides the most comprehensive set of data on U.S. direct investment abroad and
on foreign direct investment in the United States. These data, however, were not
designed to link employment gains or losses in the United States, either for individual
jobs, individual companies or in the aggregate, with the gains and losses of jobs
abroad. The data in Table 4 indicate, though, that the employment trends of U.S.
parent companies are sensitive to economic conditions in the U.S. economy,
particularly during periods in which economic growth slows down, as it did in the
early 1980s, 1990s, and in the early 2000s.
8 Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of
Current Business, July 2000. pp. 26-45.
9 For a comprehensive look at how offshore outsourcing is affecting U.S. workers, see CRS
Report RL32292, Offshoring (a.k.a. Offshore Outsourcing) and Job Insecurity Among U.S.
Workers, by Linda Levine. Also, see Drezner, Daniel W., The Outsourcing Bogeyman.
Foreign Affairs, May/June, 2004; and Engardio, Pete, Aaron Bernstein, and Manjeet
Kripalani, Is Your Job Next? Business Week, February 3, 2003. P. 50-60.
CRS-7
Table 4. Employment of U.S. Multinational Companies and the Affiliates of Foreign Firms, 1982-2002
(in thousands, and percent share)
U.S. Multinational Companies
Shares of U.S. Civilian Employment
U.S. Civilian
U.S. Affiliates of
Employment
Affiliates of U.S. U.S. Affiliates of
Foreign Firms
U.S. Parent
Total
Parents
Affiliates
Parent
Foreign
companies
Companies
Companies
1982
25,344.8
18,704.6
6,640.2
2,448.1
99,526
18.79%
6.67%
2.46%
1983
24,782.6
18,399.5
6,383.1
2,546.5
100,834
18.25%
6.33%
2.53%
1984
24,548.4
18,130.9
6,417.5
2,714.3
105,005
17.27%
6.11%
2.58%
1985
24,531.9
18,112.6
6,419.3
2,862.2
107,150
16.90%
5.99%
2.67%
1986
24,082.0
17,831.8
6,250.2
2,937.9
109,597
16.27%
5.70%
2.68%
1987
24,255.4
17,985.8
6,269.6
3,224.3
112,440
16.00%
5.58%
2.87%
1988
24,141.1
17,737.6
6,403.5
3,844.2
114,968
15.43%
5.57%
3.34%
1989
25,387.5
18,765.4
6,622.1
4,511.5
117,342
15.99%
5.64%
3.84%
1990
25,263.6
18,429.7
6,833.9
4,734.5
118,793
15.51%
5.75%
3.99%
1991
24,837.1
17,958.9
6,878.2
4,871.9
117,718
15.26%
5.84%
4.14%
1992
24,189.7
17,529.6
6,660.1
4,715.4
118,492
14.79%
5.62%
3.98%
1993
24,221.5
17,536.9
6,684.6
4,765.6
120,259
14.58%
5.56%
3.96%
1994
25,670.0
18,565.4
7,104.6
4,840.5
123,060
15.09%
5.77%
3.93%
1995
25,921.1
18,576.2
7,344.9
4,941.8
124,900
14.87%
5.88%
3.96%
1996
26,334.0
18,790.0
7,544.0
5,105.0
126,708
14.83%
5.95%
4.03%
1997
27,851.0
19,878.0
7,973.0
5,201.9
129,558
15.34%
6.15%
4.02%
1998
28,003.6
19,819.8
8,183.8
5,646.1
131,463
15.08%
6.23%
4.29%
1999
32,227.0
23,006.8
9,220.2
6,027.6
133,488
17.24%
6.91%
4.52%
2000
33,598.2
23,885.2
9,713.0
6,429.2
136,891
17.45%
7.10%
4.70%
2001
33,225.8
23,450.2
9,885.6
6,371.9
136,933
17.13%
7.14%
4.65%
2002
32,109.3
22,413.4
9,695.9
5,420.3
136,485
16.42%
6.00%
3.97%
Source: Data developed by CRS from data published by the Department of Commerce and the Department of Labor.
CRS-8
Foreign investment data seem to indicate that, despite, or perhaps because of,
the growing international linkages between economies, an expansion or a contraction
in the rate of growth in the U.S. economy affects employment among U.S. parent
companies more than it affects employment among the overseas affiliates of these
parent companies. Nevertheless, changes in jobs among U.S. parent companies that
are related to the overall growth rate of the economy also affect the growth in
employment among the foreign affiliates, though not necessarily by the same
magnitude as indicated in Figure 3. As a result, the number of employees in the
parent companies and in the affiliates tend to rise and fall in a generally similar
pattern. While international linkages between U.S. and foreign economies mean that
economic conditions in the United States have an impact on economic conditions
abroad, there appears to be no distinct pattern between the creation or loss of jobs
within U.S. multinational companies and a commensurate loss or creation of jobs
among the foreign affiliates of those companies. Indeed, within most of the major
developed countries, those economic forces that spur direct investment inflows also
boost direct investment outflows. As a result, foreign direct investment may create
jobs in the foreign affiliate that substitute for jobs in the parent company, but foreign
investment may also positively affect job creation in both the parent company and the
foreign affiliates, which makes it difficult to identify any broad trend regarding
outsourcing.
Figure 3. Employment of U.S. Parent Companies and Their
Foreign Affiliates, 1982 - 2002 (1982 = 100)
150
140
130
Affiliates
120
110
Parents
100
90
1982
1986
1990
1994
1998
2002
1984
1988
1992
1996
2000
Year
Source: Department of Commerce
The apparent lack of a direct linkage between job gains and losses among parent
companies and their foreign affiliates likely arises from the many factors that can
affect job gains and losses both within individual companies and within the economy
as a whole. Economists typically categorize unemployment as cyclical, structural,
seasonal, and frictional. Only the first two are relevant to the current discussion and
are likely to account for the largest share of unwanted job changes during any given
CRS-9
year. When cyclical and structural unemployment coincide it often is difficult to
distinguish one from another.
Long-term changes in the basic structure of the economy, especially in such
dynamic economies as the United States’ alter the composition of jobs in the
economy. Such changes occurred during the Industrial Revolution, when large
numbers of workers migrated from farms to the rapidly developing manufacturing
industries in northern cities. These structural changes represent the contraction and
expansion of individual industries within the economy that arise from changes in
technology and productivity that also direct changes in the composition of the
Nation’s trade activities and foreign investment patterns. Other job changes are
related to the impact of the business cycle on the economy. Such a cycle is
characterized by a general slowdown or expansion in the rate of growth in the
economy due to broad macroeconomic factors and generally affects large segments
of the economy.
Employment Trends
Both U.S. parent companies and their foreign affiliates lost employment during
the economic contraction of the early 1980s, as is indicated in Table 4 (page 7).
These multinational companies apparently were affected more by the cyclical
changes than were purely domestic firms. As a result, the parent companies’ share
of total U.S. civilian employment declined (the relative share of U.S. employment
represented by the U.S. foreign affiliates is provided only for comparison purposes).
The affiliates of foreign firms operating in the United States bucked this trend and
added to their absolute level of employment until 2002, when they reduced the
number of workers and fell as a share of overall U.S. civilian employment. During
the entire period most of the workers added by the affiliates were added through
acquisitions of existing U.S. firms, rather than by establishing new enterprises.10
While such acquisitions do not necessarily add to the total number of firms in the
economy, they do support existing jobs and may even add to the overall demand for
workers. In 1982, U.S. multinational companies employed 25.3 million workers. Of
this number, 18.7 million workers were employed by the parent company and 6.6
million workers were employed abroad by the foreign affiliates of those parent
companies. Throughout the 1980s, an economic recession and a broad restructuring
of the economy caused U.S. parent companies to lose employment, while
employment among the foreign affiliates of these parent companies generally held
even.
By 1988, U.S. parent companies reversed the downward slide in their
employment and began expanding their employment roles, a year behind the turn-
around in employment of their foreign affiliates. Prior to this turn-around, the parent
companies’ share of the U.S. civilian labor force had fallen from 18.8% to 16%
between 1982 and 1989. In comparison, the employment of U.S. affiliates abroad
fell from a representative share of U.S. civilian employment of 6.7% in 1982 to 5.6%
in 1989. During the same time, foreign firms were investing heavily in the United
10 Anderson, Thomas W. “Foreign Direct Investment in the United States: New Investment
in 2002.” Survey of Current Business, June 2003, p. 55-62.
CRS-10
States and their employment rose from 2.5 million workers in 1982 to 4.5 million in
1989, or from 2.5% of U.S. civilian employment in 1982 to 3.8% in 1989.
Employment among U.S. parent companies dipped again in the early 1990s and in
the early 2000s in response to economic downturns that occurred during those
periods. During each U.S. economic downturn, the level of employment of U.S.
parent companies declined more sharply than it did among their foreign affiliates and
the decline in employment lasted longer than it did among the employment of the
foreign affiliates. As a result, the share of employment represented by the foreign
affiliates increased from 26% in the 1980s to 30% in 2002 as a share of total U.S.
multinational company employment, as indicated by Figure 4.
Figure 4. Employment of the Foreign Affiliates of U.S.
Parent Companies as a Share of the Total Employment of
U.S. Multinational Companies, 1982-2002
(in percent shares)
Percent Share
31
30
29
Affiliate Employment Share
of Total MNC Employment
28
27
26
25
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Department of Commerce
The 1990s marked a major turn-around in employment for U.S. multinational
companies. In 1994, U.S. parent companies began to regain employment at a faster
rate than did the U.S. economy as a whole, thereby raising their share of total U.S.
civilian employment. By 2000, U.S. parent company employment had reached 23.9
million, an all-time high and was equivalent to 17.5% of U.S. civilian employment,
the highest share of such employment since 1983. Employment among the affiliates
of foreign firms operating in the United States also peaked in 2000, while the
overseas affiliates of U.S. parent companies continued to add workers through 2001,
before they also were forced to reduce their total number of workers in 2002 due to
slowing economic growth abroad. During the 1991 to 2002 period, employment in
U.S. parent companies and in the affiliates of foreign firms operating in the United
States grew by 25% and 11%, respectively. For U.S. parent companies, employment
gains outpaced the overall rate of growth in U.S. civilian employment, which grew
by 16% during the 11-year period. Employment among the foreign affiliates of U.S.
firms, however, grew by an even faster 41% during the same period.
CRS-11
Employment by Sector and Area
Department of Commerce data indicate that recent foreign investment activity
offers no evidence of a major deviation from well established long-term trends.
These trends indicate that over half of all the employment of the foreign affiliates in
2002 was in the manufacturing sector, as indicated in Table 5. Within the
manufacturing sector, employment by the affiliates of foreign firms was concentrated
most heavily in the transportation equipment sector, including automobile
production, chemicals, and computers and equipment. Employment in the
transportation sector decreased slightly between 2000 and 2002, while employment
in the chemicals sector increased slightly and employment in the computers and
electronic products sector increased by 3%. With few exceptions, employment in
other sectors either increased slightly or held even during the 2000 to 2002 period.
One notable exception is the wholesale trade sector in which employment fell from
521 thousand to 501 thousand, a decrease of 4%. Employment dropped by an even
larger 15% in the textiles, apparel, and leather products industry. The finance and
insurance sectors, however, experienced particularly robust growth and increased
employment by over 11% during the three-year period. Employment in the
information services and data processing services sector, generally viewed as white
collar service jobs, also increased by 31% over the three-year period.
By country, over two-thirds of the investments and the employees of U.S.
overseas investors are in the most highly developed economies where labor
compensation, standards of living, and consumer tastes are most closely comparable
to those in the United States. These countries are also the largest foreign direct
investors and the largest foreign employers in the United States, as indicated in
Figures 5 and 6. U.S. direct investment abroad and employment have been heavily
concentrated in Europe since the end of World War II. This investment coincided
with the rapid expansion in economic activity that followed WWII and the formation
of the European Economic Community (EEC), now the European Union. Initially,
U.S. firms wanted to establish a foothold in Europe inside the tariff protection
created by the formation of the EEC and access to the European market continues to
draw U.S. direct investment. Moreover, with the enlargement of the European
Union,11 U.S. direct investment abroad likely will remain focused on this region for
some time to come.
11 For additional information, see CRS Report RS21344, European Union Enlargement, by
Kristin Archick, updated April 9, 2004.
CRS-12
Table 5. Employment of U.S. Foreign Affiliates by Major Sector
and Area, 2000-2002
(in thousands)
Industries
2000 2001 2002
All industries
8,171.4
8,193.4
8,183.9
Mining
53.2
59.8
62.7
Utilities
68.3
87.8
81.5
Manufacturing
4,726.3
4,710.4
4,698.1
Food
235.9
321.0
260.6
Beverages and tobacco products
206.4
213.8
235.8
Textiles, apparel, and leather products
77.9
82.4
66.2
Petroleum and coal products
157.1
137.8
133.2
Chemicals
761.1
755.3
783.7
Pharmaceuticals
316.9
326.2
327.3
Metal products
208.7
215.7
245.7
Machinery
442.0
438.0
426.6
Computers and electronic products
753.4
725.4
773.8
Communications equipment
143.5
139.2
135.5
Semiconductors, electronic components
297.1
268.7
252.5
Transportation equipment
1,123.9
1,082.3
1,050.5
Wholesale trade
521.5
471.0
501.1
Information
307.6
324.0
336.2
Broadcasting and telecommunications
130.1
119.3
119.4
Information services and data processing
103.4
126.4
135.9
Finance and insurance
285.7
322.5
318.9
Professional, scientific, and technical services
485.5
499.7
527.1
Computer systems design and related services
297.6
309.7
307.3
Other industries
1,723.2
1,718.0
1,658.4
Retail trade
538.9
551.2
544.6
Administration, support, and waste management
447.7
427.7
436.5
Accommodation and food services
368.5
379.3
336.5
Countries

All countries
8,171.4
8,193.4
8,183.9
Canada
1,051.7
1,044.2
1,062.4
Europe
3,713.8
3,749.4
3,685.7
France
546.2
540.5
543.6
Germany
601.3
601.0
615.6
Italy
204.4
211.3
220.7
Netherlands
168.4
175.8
179.9
Spain
182.1
184.3
182.6
United Kingdom
1,188.6
1,204.8
1,121.5
Latin America
1,613.3
1,585.7
1,594.3
Brazil
351.8
348.0
336.7
Mexico
822.6
801.8
841.2
Africa
137.2
139.1
139.0
Middle East
64.0
60.2
59.5
Asia and Pacific
1,591.3
1,614.8
1,643.0
Australia
262.4
265.3
255.3
China
252.0
272.9
287.7
Japan
229.1
235.1
246.1
Malaysia
123.2
118.7
105.3
Singapore
115.9
112.9
110.7
Source: Department of Commerce.
CRS-13
Figure 5. U.S. and Foreign Direct Investment Position,
Cumulative Position by Country, 2003 (in billions of
dollars)
U.S.Direct Investment
Foreign Direct Investment
Position Abroad
Position In the U.S.
Total = $1,790 Bil.
Total = $1,378 Bil.
Canada
$192
$105
Europe
$963
$1,001
France
$48
$143
Germany
$80
$149
Netherlands
$179
$146
Switzerland
$86
$113
United Kingdom
$273
$230
Latin America
$304
$70
Africa
$19
$2
Middle East
$17
$8
Asia
$294
$193
Japan
$73
$159
$1,500
$1,000
$500
$0
$500
$1,000
$1,500
Figure 6. Employment of U.S. Foreign Affiliates and
Affiliates of Foreign Firms in the U.S., by Country or
Region, 2002
Employment of U.S.
Employment of Foreign
Foreign Affiliates
Affiliates in the U.S.
Total = 8.2 Mil.
Total = 5.4 Mil.
Canada
1.0
0.5
Europe
3.7
3.8
France
0.5
0.5
Germany
0.6
0.7
Netherlands
0.2
0.5
Switzerland
0.1
0.4
United Kingdom
1.2
1.0
Latin America
1.6
0.4
Africa
0.1
0.0
Middle East
0.1
0.0
Asia
1.6
0.8
Japan
0.2
0.6
5.0
4.0
3.0
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
CRS-14
Some U.S. observers are concerned that the U.S. economy is losing jobs to
developing countries where labor rates are considerably below those in the United
States, but the data show no appreciable change in the underlying trend that favors
investment and jobs in developed economies. In addition, U.S. foreign affiliates as
a whole lost employment in 2002, similar to U.S. parent companies. Employment
losses were mostly concentrated among the highly developed economies of Europe,
because their close ties with the U.S. economy make them highly susceptible to the
slowdown in the U.S. economy. Among the developing countries, U.S. investors
have long been attracted to Latin America, likely because of its close proximity to the
United States. In 2002, Mexico had over 840,000 employees, second only to Canada
with the highest number of employees associated with U.S. direct investment abroad.
Between 2001 and 2002, U.S. direct investment employment in Latin America and
Asia increased, while employment in Africa and the Middle East dropped, leading
some observers to conclude that investment and employment among the developed
and developing countries represent two relatively independent groups and that little
employment is exchanged between them. This proposition would mean that
employment shifts occur primarily between developing countries, such as in Latin
American and Asia, and among developed countries, primarily within Europe and
between Europe and Japan and Canada.
On average, the U.S. economy created about 2 million civilian jobs per year
from 1982 to 1992 and about 1.7 million jobs per year from 1992 to 2002. The
foreign affiliates of U.S. parent companies created an average of about 24,000 jobs
per year from 1982 to 1992 and about 300,000 jobs per year from 1992 to 2002.
There is no indication from the data, however, how many, if any at all, of the jobs
created abroad by U.S. affiliates may have come at the expense of jobs created in the
United States by U.S. parent companies.12 Over both periods, about two-thirds of the
jobs that were added were in developed countries. As a result, U.S. foreign affiliates
created on average about 100,000 jobs per year in low-cost developing countries
during the 1992 to 2002 period, or about 6% of the average number of jobs created
by the U.S. economy in a year.
Gross Product
Another concern expressed about U.S. direct investment abroad is that as U.S.
parent companies shift jobs abroad, they also transfer economic production abroad,
thereby permanently replacing U.S. domestic production with foreign production.
This effect is partially muted by foreigners investing in the United States. A large
share of such investment is comprised of foreign acquisitions of existing U.S. firms.
Although such acquisitions can not be characterized as creating new jobs, they do
help sustain U.S. employment and production. There is bound to be some shifting of
jobs and economic activities within the U.S. economy and between economies as part
of the overall structural changes that occur within such dynamic economies as the
U.S. economy. In addition, such shifting occurs as a result of greater economic
specialization both within countries and between countries. As Table 6 indicates,
12 See the following for availability of information on job loss associated with outsourcing:
CRS Report RL30799, Unemployment Through Layoffs: What Are the Reasons?, by Linda
Levine.
CRS-15
U.S. parent companies had a gross product, or total U.S. output, of $1.9 trillion in
2002, representing 75% of the total output of U.S. multinational companies,
compared with a gross product of their majority-owned foreign affiliates of $611
billion. As the U.S. economy expanded rapidly in the last half of the 1990s, U.S.
parent companies performed better than their overseas affiliates and increased their
share of total multinational company gross product from 74.6% in 1995 to 78% in
2000, before slipping back slightly as the pace of economic growth slowed down in
2001 and 2002.
Table 6. Gross Product of U.S. Parent Companies and Their
Majority-Owned Foreign Affiliates
(in millions of dollars and percent share)
Majority-
Majority-
Total Gross
Parent
Owned
Parent
Owned
Product
Companies
Foreign
Companies
foreign
Affiliates
Affiliates
(millions of dollars)
(percent shares)
1994
$1,717,488
$1,313,792
$403,696
76.5%
23.5%
1995
1,831,046
1,365,470
465,576
74.6%
25.4%
1996
1,978,948
1,480,638
498,310
74.8%
25.2%
1997
2,094,318
1,573,451
520,867
75.1%
24.9%
1998
2,100,773
1,594,504
506,269
75.9%
24.1%
1999
2,480,739
1,914,343
566,396
77.2%
22.8%
2000
2,748,106
2,141,480
606,626
77.9%
22.1%
2001
2,535,568
1,952,124
583,444
77.0%
23.0%
2002
2,468,810
1,857,354
611,456
75.2%
24.8%
Source: Department of Commerce.
U.S. Multinational Companies
While U.S. MNCs used their economic strengths to expand abroad during the
1980s and 1990s, the U.S.-based parent firms lost market shares at home, in large
part due to corporate downsizing efforts to improve profits.13 U.S. MNC parent
companies’ share of all U.S. business gross domestic product (GDP) — the broadest
measure of economic activity — declined from 32% to 25% from 1977 to 198914.
This share stayed fairly constant at about 22% through much of the 1990s until 1998,
when the parent companies experienced a short boost in their share of U.S. GDP as
they benefitted from the rapidly growing U.S. economy. The economic slowdown
in 2002 affected the parent companies disproportionately, as they lost shares of GDP.
These MNC parent companies increased their share of all U.S. business GDP in the
services sector, which rose from 6% to 8% of U.S. GDP during the period from 1989
to 1998. The MNC share of all other industries rose from 16% to 18% during the 10-
year period, but they lost shares in the manufacturing sector (from 62% to 58%) at
13 Mataloni, Raymond J. Jr., and Lee Goldberg. “Gross Product of U.S. Multinational
Companies, 1977-91.” Survey of Current Business, February 1994. P. 42-63.
14 Mataloni, Operations of U.S. Multinational Companies. p. 31.
CRS-16
a time when the U.S. manufacturing sector as a whole was shrinking as a share of
national GDP (from 20% to 16%).15
U.S. parent companies continue to place the largest share of their annual
investments in developed countries, primarily in Western Europe, as indicated in
Table 7. This tendency increased from 1999 to 2003 when U.S. direct investment
shifted even more in favor of the richest developed economies: the share of U.S.
direct investment going to developing countries fell from 28% in 1999 to 25% in
2003. The shift in U.S. direct investment abroad over the last decade reflects
fundamental changes that occurred in the U.S. economy during the same period. As
investment within the U.S. economy shifted from extractive, processing, and
manufacturing industries toward high technology services and financial industries,
U.S. investment abroad mirrored those changes. Consequently, U.S. direct
investment abroad focused less on the extractive, processing, and basic
manufacturing industries in developing countries and more on high technology,
finance, and services industries located mostly in highly-developed countries with
advanced infrastructure and communications systems.16 Investments in the finance
and services sectors grew twice as fast, on the whole, as direct investment abroad
overall during the 1996-2000 period. Within the manufacturing sector, food
processing, chemicals, and metals lagged in growth behind the industrial machinery,
electronic, and transportation sectors.
Foreign-Owned Firms
On average, foreign-owned establishments operating within the United States
are outperforming their U.S.-owned counterparts. Although foreign-owned firms
account for less than 4% of all U.S. manufacturing establishments, they have 14%
more value added on average and 15% higher value of shipments than other
manufacturers. The average plant size for foreign-owned firms is much larger — five
times — than for U.S. firms, on average, in similar industries. This difference in
plant size apparently rises from the fact that there are no small plants among those
that are foreign-owned. As a result of the larger plant scale and newer plant age,
foreign-owned firms paid wages on average that were 14% higher than all U.S.
manufacturing firms, had 40% higher productivity per worker, and 50% greater
output per worker than the average of comparable U.S.-owned manufacturing plants.
Foreign-owned firms also display higher capital intensity in a larger number of
industries than all U.S. establishments.17
Differences between foreign-owned firms and all U.S. firms should be viewed
with some caution. First, the two groups of firms are not strictly comparable: the
group of foreign-owned firms comprises a subset of all foreign firms, which includes
15 Ibid., p. 31.
16 CRS Report RS21118, U.S. Direct Investment Abroad: Trends and Current Issues, by
James K. Jackson.
17 Mataloni, Raymond J., Jr. “An Examination of the Low Rates of Return of Foreign-
Owned U.S. Companies.” Survey of Current Business, March 2000, p. 55-73; Mataloni,
Raymond J., Jr. “Real Gross Product of U.S. Companies’ Majority-Owned Foreign
Affiliates.” Survey of Current Business, April 1997, p. 8-17.
CRS-17
primarily very large firms; the group of U.S. firms includes all firms, spanning a
broader range of sizes. Secondly, the differences reflect a range of additional factors,
including the prospect that foreign firms which invest in the United States likely are
large firms with proven technologies or techniques they have successfully transferred
to the United States. Small foreign ventures, experimenting with unproven
technologies, are unlikely to want the added risk of investing overseas. Foreign
investors also tend to opt for larger scale and higher capital-intensity plants than the
average U.S. firm to offset the risks inherent in investing abroad and to generate
higher profits to make it economical to manage an operation far removed from the
parent firm.
Table 7. U.S. Direct Investment Abroad; Investment Outflows
for Selected Regions and Countries, 1999-2003
(millions of dollars)
1999
2000
2001
2002
2003
All countries
$209,392
$142,627
$124,873
$115,340
$151,884
Canada
22,824
16,899
16,841
11,534
13,826
Europe
109,484
77,976
65,580
69,665
99,191
France
2,111
1,967
476
3,324
1,504
Germany
5,658
3,811
11,823
-216
8,676
Ireland
4,741
9,823
2,437
5,663
9,093
Italy
3,729
6,404
1,767
1,807
3,485
Luxembourg
4,535
2,474
20,402
8,879
5,241
Netherlands
13,320
961
12,025
14,633
14,968
Spain
5,689
2,249
1,642
2,694
3,375
Sweden
6,710
14,504
-6,883
1,877
3,000
Switzerland
6,929
8,687
4,170
6,683
14,444
United Kingdom
47,265
28,317
7,890
16,852
30,455
Latin America
44,658
23,212
25,691
6,428
13,171
Mexico
8,164
4,203
14,226
5,171
5,667
Bermuda
6,871
9,363
7,007
-1,991
1,832
UK Islands
11,264
989
-1,129
2,157
3,057
Africa
596
716
2,438
1,443
2,211
Egypt
-190
-99
578
375
183
South Africa
1,155
346
-86
103
89
Other
155
333
2,139
-475
1,598
Middle East
1,000
1,375
1,397
1,703
2,093
Israel
1,442
467
1,000
112
517
Saudi Arabia
-320
395
-319
346
400
United Arab Emirates
-127
94
98
436
108
Oman
23
-8
57
-46
163
Qatar
82
150
164
680
664
Asia and Pacific
30,831
22,449
12,927
24,568
21,392
Australia
4,868
890
-751
5,139
3,881
China
1,947
1,817
1,912
924
1,540
Hong Kong
4,447
4,922
4,787
1,687
1,725
India
269
92
214
887
243
Japan
10,602
4,295
-4,731
7,877
5,800
South Korea
2,557
2,338
1,206
1,755
954
Singapore
3,863
3,688
5,593
4,377
5,699
Source: Department of Commerce.
CRS-18
Cyclical vs. Structural Changes
The data published by Bureau of Economic Analysis provides detailed data on
a broad range of industries represented by U.S. parent companies and their foreign
affiliates. These data can be used to compare differences in performance between
U.S. parent companies and their foreign affiliates in terms of gross production and
employment across a range of industrial sectors. This comparison can be used to
determine if there has been any noticeable shift in production or jobs from U.S.
parent companies to their foreign affiliates in the 1999 to 2002 period that is different
from what has happened during other periods of slow economic growth in the United
States. In addition, the BEA data can be used to determine if any such shift can be
attributed to structural changes in the economy or to cyclical changes that are
associated with the business cycle. Not only is this distinction important in order to
understand how direct investment is affecting the economy, but it is essential in
determining what, if any, legislative prescription would be appropriate.
The data in Table 8 compare the effects of the economic expansion period of
1995 to 1998 with the economic slowdown in the 1999 to 2002 period. These two
periods are useful for comparing the overall economic performance of U.S. parent
companies and their foreign affiliates by examining their rates of growth in output
and employment during a period when the U.S. economy grew at an annual average
rate of more than 6% per year and the later period when the economy grew at an
average annual rate of about 3%. If U.S. parent companies are prone to outsourcing
more jobs during periods when the U.S. economy is growing more slowly, then
industries that are experiencing long-term structural decline would be expected to
show relatively poor economic performance by the parent company in both periods
relative to a more robust performance by the foreign affiliates. In contrast, industries
that are experiencing strong growth during the expansion part of the business cycle
would be expected to show stronger growth in gross product and employment by the
parent firms than by the foreign affiliates.
The period between 1999 and 2002, however, shows the impact a slowdown in
the U.S. economy has on the operations of U.S. parent companies. During this
period, the U.S. parent companies’ gross product decreased by 3%, while the gross
product of U.S. foreign affiliates rose by 8%, slightly below the rate they experienced
in the 1995 to 1998 period. Employment fell among parent companies, mostly in the
2000-2002 period as a result of the slowdown in the U.S. economy, while
employment grew on average at a 5% rate among the affiliates, a rate that is about
one-third of that the affiliates experienced in the 1995 to 1998 period. In contrast,
during the 1995-1998 period, parent company’s gross product grew at nearly 17%,
about twice the rate of the foreign affiliates, although employment among the parents
grew by about 7%, or half the rate of the growth in employment among foreign
affiliates as indicated in Figures 7 and 8. These trends make it difficult to detect a
general shift of jobs abroad by U.S. parent companies. In many cases, both
employment and gross product of the parent firms and the foreign affiliates seem to
move in the same general direction. This partial synchronization may reflect the
overwhelming impact the U.S. economy has on the global economy.
CRS-19
Table 8. Changes in Gross Product and Employment of U.S. Parent Companies and Their Foreign Affiliates
(in percent shares)
Percent Change 1995 to 1998
Percent Change 1999 to 2002
Gross Product
Employment
Gross Product
Employment
Parents
Affiliates
Parents
Affiliates
Parents
Affiliates
Parents
Affiliates
All industries
16.8%
8.7%
6.7%
14.3%
-3.0%
8.0%
-2.6%
5.2%
Oil and gas extraction
234.4%
-14.3%
113.9%
134.3%
41.8%
-48.0%
8.7%
18.2%
Manufacturing
8.1%
3.4%
-6.2%
3.4%
-11.0%
10.7%
-7.2%
0.9%
Food and kindred products
-1.7%
6.9%
-34.1%
-16.2%
-6.0%
-4.5%
9.3%
7.9%
Chemicals and allied products
7.4%
11.9%
-12.2%
4.4%
9.7%
12.5%
0.2%
3.5%
Primary and fabricated metals
2.0%
10.7%
2.3%
-3.5%
3.9%
5.9%
-3.6%
2.1%
Computer and office equipment
-5.1%
-14.0%
0.0%
14.0%
-11.1%
29.2%
2.8%
-9.0%
Electronic equipment
19.4%
-4.2%
2.9%
-12.5%
-20.6%
-17.7%
-21.9%
-17.8%
Transportation equipment
20.4%
16.4%
3.3%
19.2%
-37.8%
-22.0%
-21.7%
10.7%
Motor vehicles and equipment
3.9%
16.5%
-12.7%
7.7%
-31.7%
-11.9%
-11.3%
-100.0%
Textile products and apparel
10.7%
7.7%
-5.8%
-1.4%
-33.8%
-23.7%
-35.7%
-2.6%
Wholesale trade
79.9%
3.6%
49.8%
98.8%
9.3%
-12.6%
0.3%
15.6%
Finance
50.1%
61.1%
11.7%
28.4%
28.3%
11.0%
1.6%
18.6%
Insurance
-9.0%
48.2%
-8.3%
3.9%
31.3%
15.9%
-1.8%
18.0%
Real estate
11.3%
62.8%
9.6%
700.0%
18.5%
32.3%
27.4%
4.0%
Retail trade
31.0%
16.8%
24.2%
NA
14.0%
39.4%
0.8%
38.9%
Source: Data are from the Department of Commerce; percent shares developed by CRS.

































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































CRS-20
Figure 7. Changes in Gross Product of U.S.
Parent Companies and Their Foreign
Affiliates (in percent)
Percent
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
%Chg. 1995 to 1998
%Chg. 1999 to 2002
Parent Companies
Affiliate Companies
Source: U.S. Department of Commerce
Figure 8. Changes in Employment of U.S.
Parent Companies and their Foreign
Affiliates (in percent)
Percent
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
%Chg. 1995 to 1998
%Chg. 1999 to 2002
Parent Companies
Affiliate Companies
Source: U.S. Department of Commerce










































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































CRS-21
The manufacturing sector fared poorly over both periods, especially for U.S.
parent companies, as indicated in Figures 9 and 10. This performance illustrates the
impact a temporary slowdown in the business cycle has on industrial sectors that also
are experiencing long-term structural changes. From 1995 to 1998, manufacturing
gross product among parent companies increased by 8%, more than twice the rate
among the overseas affiliates. Employment among the parent companies, however
fell by 6% as the U.S. manufacturing sector continued to experience structural
changes and a robust increase in productivity. In contrast, employment among the
foreign affiliates increased by 3%, commensurate with their rate of growth in gross
product. During the period 1999 to 2002, when U.S. economic growth slowed, gross
product in the manufacturing sector among parent companies fell by 11%, and
employment fell by 7%, or fell at a slightly faster rate than in the previous period,
likely reflecting the effects of the slowdown in growth combined with the advanced
stages of structural retrenchment had already occurred. In comparison, U.S.-owned
foreign manufacturing affiliates experienced a 11% increase in gross product, but
only a 1% increase in employment.
Figure 9. Changes in Manufacturing Gross
Product of U.S. Parent Companies and Their
Foreign Affiliates
Percent
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
%Chg. 1995 to 1998
%Chg. 1999 to 2002
Parent Companies
Affiliate Companies
Source: U.S. Department of Commerce
In other major industries, the results are mixed. The impact on wholesale trade
shows the impact of the economic slowdown in the 1999 to 2002 period, as indicated
in Table 8 (page 19). In the 1995 to 1998 period, as the U.S. economy expanded,
gross product in the wholesale trade sector among parent companies grew by 80%
and employment grew by 50%. Among the foreign affiliates in the wholesale trade
sector, gross product increased by less than 4%, but employment increased by 99%.
In the 1999 to 2002 period, when the rate of economic growth had slowed, gross
product among parent companies increased by 9%, while employment stayed even.
Among affiliates, gross product fell by 13%, but employment increased by 16%.


































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































CRS-22
Figure 10. Changes in Manufacturing
Employment of U.S. Parent Companies and Their
Foreign Affiliates
Percent
20.0
15.0
10.0
5.0
0.0
-5.0
%Chg. 1995 to 1998
%Chg. 1999 to 2002
Parent Companies Affiliate Companies
Source: U.S. Department of Commerce
Finance, a sector where the United States is generally believed to have a
competitive edge, shows a different pattern. In the 1995-1998 period, gross product
among U.S. parents in finance grew by 50% and employment expanded by 12%.
Affiliates in finance experienced similarly robust growth: gross product increased by
61% and employment grew by 28% as U.S. finance firms used their expertise to
capture market shares abroad. While the finance sector was affected by the slower
growth in the economy, gross product among parent companies during the 1999-2002
period grew by 28%, compared with an increase of 11% for foreign affiliates.
Despite the stronger rate of growth, U.S. parents increased employment by 2%, while
foreign affiliates increased employment by 19%.
In 1999, the Bureau of Economic Analysis changed the composition of
industries in its survey to include more high-tech service sectors. These sectors are
listed in Table 9, with data for the 1999 to 2002 period. During this period, parent
companies in six industries averaged a positive rate of growth, but in only five of
those did they also have growth in employment. Foreign affiliates experienced a
decline in the rate of growth and a loss in employment in three sectors: audio and
video equipment, semiconductors and electronic components, and architectural and
engineering services. In two cases, parent companies had positive growth, but lost
employment — computers and peripheral equipment and magnetic and optical media.
In two sectors, navigational and measuring instruments and magnetic and optical
media, parent companies experienced especially strong growth in gross product and
an increase in jobs. Similarly, foreign affiliates experienced especially strong growth
in gross product in navigational and measuring instruments, but a decline in magnetic
and optical media.
CRS-23
Table 9. Changes in Gross Product and Employment Among
U.S. Parent Companies and Their Foreign Affiliates for Selected
Industries
Gross Product
Employment
Parents
Affiliates
Parents
Affiliates
(Percent change 1999 to 2002)





Computers and peripheral equipment
0.25%
73.16%
16.44%
-25.34%
Communications equipment
-11.39%
-1.30%
-29.72%
8.28%
Audio and video equipment
-50.79%
-61.76%
-43.87%
-100.00%
Semiconductors and electronic components
-52.40%
-12.33%
-14.70%
-3.07%
Navigational and measuring instruments
253.82%
221.12%
194.34%
14.23%
Magnetic and optical media
-35.99%
8.92%
-24.51%
-100.00%
Professional services
2.72%
0.66%
-3.84%
2.75%
Architectural and engineering services
4.94%
-6.19%
-8.78%
-21.92%
Computer systems design
-4.36%
-5.50%
-6.81%
6.27%
Management services
26.26%
70.79%
12.07%
0.96%
Advertising services
30.42%
1.21%
6.73%
4.31%
Source: Department of Commerce.
The results for other sectors do not show a consistent pattern. U.S. parent
companies increased gross product faster than their foreign affiliates in computers
and peripheral equipment, but both parents and foreign affiliates experienced a loss
in gross product in semiconductors and electronic components, although the affiliates
gained in employment, whereas parents lost nearly 10% of their employees over the
period. In professional services, the foreign affiliates increased output more than
three times faster and increased employment faster than the parent companies, while
in the remaining services sectors — management services and advertising services
— parent companies outperformed their foreign affiliates both in terms of gross
product and in terms of growth in jobs.
Trade
Another aspect of foreign direct investment that causes concern is the impact
foreign direct investment has on the amount of foreign trade associated with those
investments. Some observers argue that foreign direct investment and trade are
substitutes, so that overseas investment reverses trade patterns by shifting production
and jobs abroad. According to this scenario, as firms invest abroad, they shift
production abroad, thereby eliminating jobs in the United States. As production
shifts abroad, jobs are lost in the United States and goods once produced in the
United States are now imported from abroad.
If foreign direct investment is a substitute for trade and replaces jobs in the
parent company, it would be reasonable to expect the share of intra-firm trade to
increase over time along with the flow of foreign investment. Such intra-firm trade
represents trade between U.S. parent companies and their foreign affiliates and the
U.S. affiliates of foreign firms and their foreign parent company. In particular, if
CRS-24
foreign investment is displacing jobs and domestic production, or outsourcing jobs,
it would be reasonable to expect imports from U.S. foreign affiliates to the U.S.
parent company to increase over time. There is little doubt that some firms do indeed
replace domestic production with production from abroad, which would shift trade
patterns, but the share of U.S. trade represented by U.S. parent companies and their
affiliates during the 1990s did not increase as would be expected. Instead, as
indicated in Figure 11, intra-firm exports and imports fell as a share of total U.S.
exports and imports during the 1990s. Since 2000, intra-firm trade, both exports and
imports, increased as a share of total U.S. exports and imports respectively. It is
unclear if this represents a new trend, or the effects of the economic slowdown in the
U.S. economy and a temporary shift in trade patterns.
Figure 11. Intra-Firm MNC Trade as a Share of Total U.S.
Exports and Imports, 1990-2002
Percent share
50
40
30
20
10
0
1990
1992
1994
1996
1998
2000
2002
Exports
Imports
Source: Department of Commerce
As Table 10 indicates, the share of U.S. exports shipped by U.S. parent
companies peaked at 67% in 1994, but dropped to 58% in 2002. Similarly, the share
of U.S. exports shipped by the U.S. affiliates of foreign parent companies fell from
23% in 1990 to 20% in 2002. In addition to the decline in the overall share of U.S.
exports, intra-firm trade, or exports from U.S. parent companies to their foreign
affiliates, fell from 27% of U.S. exports in 1990 to 23% in 2000, but bounced back
up to 27% in 2002. The exports of U.S. affiliates of foreign firms to their foreign
parent companies fell from 10% of U.S. exports in 1990 to 8% in 2000, but this also
increased in 2001 and 2002 to 9%. Similarly, total intra-firm exports fell from 37%
of U.S. exports in 1990 to 32% in 2000, but has risen to 36% of total U.S. exports
since 2000. The increase in the share of intra-firm exports since 2000 as the U.S.
economic growth slowed may indicate that intra-firm is more stable than exports as
a whole, so that its share rises or falls as U.S. exports fall or rise, respectively, with
business cycle conditions.
CRS-25
Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods, 1990-2002
(in millions of dollars)
Exports By U.S. Parent Companies
Exports By Foreign Affiliates
Total U.S.
Share of
Intra-MNC
Exports of
Share of
To Foreign
By Others
Total
To Foreign
Exports
Goods
Total
Total
Total U.S.
Parent
U.S.
Affiliates
Exports
Group
Exports
1990
$392,923
$241,285
61%
$106,426
$92,308
23%
$37,764
$59,330
$144,190
1991
421,763
257,861
61%
115,311
96,933
23%
42,222
66,969
157,533
1992
448,166
265,915
59%
105,999
103,925
23%
48,767
78,326
154,766
1993
465,090
274,666
59%
113,762
106,615
23%
47,350
83,809
161,112
1994
512,626
344,504
67%
136,128
120,683
24%
51,147
47,439
187,275
1995
584,742
374,002
64%
152,666
135,153
23%
57,246
75,587
209,912
1996
625,075
405,721
65%
161,751
140,886
23%
60,831
78,468
222,582
1997
689,182
441,272
64%
186,526
141,305
21%
63,025
106,605
249,551
1998
682,138
438,292
64%
185,372
151,005
22%
57,565
92,841
242,937
1999
695,797
435,192
63%
162,503
153,572
22%
59,881
107,033
222,384
2000
781,918
448,807
57%
182,719
165,321
21%
65,342
166,291
248,061
2001
731,026
419,014
57%
197,967
157,459
22%
65,897
312,012
263,864
2002
693,257
399,781
58%
184,799
137,037
20%
61,530
293,476
246,329
Source: Department of Commerce.
CRS-26
On the import side, intra-firm trade has also declined as a share of total U.S.
imports, but unlike exports, there was not a turnaround after 2000, as indicated in
Table 11. Imports shipped to U.S. parent companies fell from 43% of total U.S.
imports in 1990 to 37% of U.S. imports in 2002. Similarly, U.S. imports by the U.S.
affiliates of foreign firms fell from 37% of U.S. imports in 1990 to 28% of U.S.
imports in 2002. In addition, intra-firm imports, or imports from the foreign affiliates
of U.S. parent companies to those parent companies fell from 21% of total U.S.
imports to 19% of U.S. imports from 1990 to 2002. During the same time, imports
from foreign parent companies to their U.S. affiliates fell from 37% to 28% of U.S.
imports, so that intra-firm imports fell from 48% of total U.S. imports to 41% over
the 1990 to 2002 period, due in part to imports shipped to importers outside the intra-
firm trade relationship.
Sales
Another way of viewing the impact foreign direct investment has on U.S. jobs
is by examining the sales patterns of U.S. multinational companies. If U.S. parent
companies are embarking on a more extensive effort to outsource jobs abroad, it is
reasonable to expect that this pattern would affect the sales from these foreign
affiliates to the U.S. parent company or that sales to other U.S. persons by foreign-
sourced goods would increase over time. In addition, some observers are concerned
that certain types of service jobs are being moved abroad with service activities being
outsourced to foreign workers. The BEA data on sales of U.S. multinational
companies, however, follows a pattern similar to that of the trade patterns of these
companies and does not offer conclusive evidence of an increase in jobs or activities
being outsourced abroad.
As Table 12 indicates, the foreign affiliates of U.S. parent companies had $2.5
trillion in sales in 2002. The largest share of affiliate sales — about two-thirds —
is in the local market where the affiliate is located. U.S. parent companies also use
their foreign affiliates as a springboard to increase sales in neighboring areas or
countries. Such sales to other foreign countries in 2002 accounted for about one-
fourth of the affiliates’ sales. European affiliates, which accounted for slightly over
half of all affiliate sales, also accounted for the lowest share of their sales back to the
United States, where about one-third of their sales is to other foreign countries,
mostly to other countries within the European Common Market. Out of all U.S.
affiliate sales, 9% of those sales was shipped back to parent firms in the United
States, a share that has remained quite stable over the last decade, and another 1.6%
of their sales were to other U.S. persons, or to importers that are not directly
associated with the parent company.
CRS-27
Table 11. Multinational Corporations’ Imports of Goods, 1990-2002
(in millions of U.S. dollars)
Imports Shipped to U.S. Parents
Imports Shipped to Foreign Affiliates
Total U.S.
Share of
Share of
From the
From
Intra-MNC
Imports of
Total
From
Total
Foreign
Others
Imports
Goods
Total
Total
U.S.
Affiliates
U.S.
Parent
Imports
Imports
Group
1990
$495,978
$213,358
43%
$102,150
$182,936
37%
$137,458
$99,684
$239,608
1991
488,450
212,642
44%
102,783
178,702
37%
132,166
97,106
234,949
1992
532,663
219,676
41%
93,893
184,464
35%
137,799
128,523
231,692
1993
580,659
223,901
39%
97,112
200,599
35%
150,789
156,159
247,901
1994
663,256
256,820
39%
113,415
232,362
35%
174,641
174,074
288,056
1995
743,543
289,941
39%
122,273
250,824
34%
191,222
202,778
313,495
1996
795,289
326,200
41%
137,160
268,673
34%
197,656
200,416
334,816
1997
869,704
350,822
40%
147,452
264,924
30%
202,355
253,958
349,807
1998
911,896
355,976
39%
158,146
292,046
32%
205,181
263,874
363,327
1999
1,024,618
388,480
38%
164,449
324,994
32%
229,857
311,144
394,306
2000
1,218,022
446,016
37%
191,150
366,647
30%
272,374
404,224
463,524
2001
1,141,959
437,133
38%
216,899
347,823
30%
266,451
357,003
483,350
2002
1,163,549
427,559
37%
217,673
324,578
28%
256,691
411,412
474,364
Source: Department of Commerce.
CRS-28
Table 12. Sales of Goods and Services by U.S. Foreign
Affiliates by Destination and Industry, 2002
(millions of dollars, percent share)
Other
To U.S.
Other U.S.
Total
Local
foreign
parents
Persons
countries
(Millions of $)
Percent Share
Sales by Destination
All countries
$2,548,625
9.0%
63.9%
25.5%
1.6%
Canada
336,830
19.7%
71.3%
4.6%
4.4%
Europe
1,322,029
4.6%
59.6%
35.0%
0.8%
Latin America
308,180
18.1%
62.8%
16.9%
2.2%
Africa
33,827
16.8%
57.6%
22.8%
2.8%
Middle East
15,399
29.0%
42.9%
25.6%
2.5%
Asia and Pacific
532,360
6.7%
71.8%
20.2%
1.2%
Sales by Industry
All industries
$2,548,625
9.0%
63.9%
25.5%
1.6%
Mining
94,171
16.1%
54.0%
26.6%
3.3%
Utilities
40,570
0.0%
0.0%
3.4%
0.0%
Manufacturing
1,208,610
12.3%
56.7%
28.8%
2.2%
Wholesale trade
647,333
6.3%
63.1%
30.0%
0.5%
Information
78,686
4.0%
78.6%
17.1%
0.3%
Finance and insurance
198,704
7.6%
71.0%
19.0%
2.3%
Services
79,284
4.3%
82.4%
13.1%
0.1%
Other industries
201,267
0.0%
0.0%
9.4%
0.0%
Source: Department of Commerce.
Affiliates located in the Middle East, which accounted for the lowest share
overall of affiliate sales, sent one-third of their goods back to the United States,
which represents the largest share of sales back to the United States for any region.
A large part of these sales originated in Israel, which has had a free trade agreement
(FTA) with the United States since 1985. In fact, among all the regions, sales by
affiliates in the Middle East are most evenly spread among sales to the United States,
local sales, and sales to other foreign countries. Canada represents the most unequal
distribution of sales, with over 71% of affiliate sales taking place in Canada. Sales
by European affiliates are heavily concentrated within Europe: sales either in the
local area or to neighboring countries account for 95% of all sales by European
affiliates. Sales by affiliates in Africa and Latin America are similar in that about
60% of their sales are in their local markets, about 20% is sent to the United States,
and about 20% is sent to other foreign countries, likely within the region.
Sales by industry indicate that manufactured goods account for about half of all
affiliate sales and that about 12% of these goods are shipped back to the United
States. The largest share of sales by industry that are accounted for by sales to U.S.
parent companies is in the mining industry, as U.S. parent companies have invested
abroad in order to gain access to raw materials. All other industries show low levels
of sales back to the U.S. parent, with a heavy concentration of sales in the local
market and to other foreign countries.
CRS-29
Sales of Services
For some, another concern is that U.S. parent firms have started moving service
jobs offshore, or outsourcing, in sectors that once were thought to be immune to such
activities.18 As Table 13 indicates, U.S. foreign affiliates had $420 billion in services
sales in 2002, down slightly from such sales in 2001. Of this amount, 3.6% consisted
of service sales back to the U.S. parent company. The largest share — 81% — of
sales of services were made in the local market. This share is substantially higher
than the comparable share for sales of goods and services combined and is consistent
with the general view that the distinguishing feature of services is that they are
consumed where they are produced. Africa and the Middle East are the areas with
the highest share of sales back to the U.S. parent companies, while Canada and
Europe represent the areas with the lowest share of services sales back to the U.S.
parent. By industry, the highest share of service sales is in the area of finance and
insurance, although the Bureau of Economic Analysis has suppressed much of the
data in order to protect the identity of individual firms. The strong sales of financial
services is not unusual, however, given the general conclusion that U.S. financial
services companies are among the most competitive in the world.
Table 13. Sales of Services by U.S. Foreign Affiliates by
Destination and Industry, 2002
(millions of dollars, percent share)
Other
Total
To U.S.
Other U.S.
Local
Foreign
Parents
Persons
Countries
Millions of $
Percent share
Sales by Destination
All countries
420,219
3.6%
81.1%
14.3%
0.9%
Canada
42,188
3.4%
93.4%
2.1%
1.2%
Europe
220,763
3.5%
77.8%
18.2%
0.5%
Latin America
55,138
3.9%
75.1%
19.1%
1.9%
Africa
3,591
12.2%
64.0%
20.7%
3.1%
Middle East
2,605
14.1%
77.6%
8.1%
0.2%
Asia and Pacific
95,933
3.3%
87.7%
7.9%
1.1%
Sales by Industry
All industries
420,219
3.6%
81.1%
14.3%
0.9%
Mining
10,705
(D)
(D)
(D)
(D)
Utilities
40,475
0.0%
0.0%
3.4%
96.6%
Manufacturing
12,135
5.7%
57.2%
35.5%
1.6%
Wholesale trade
21,424
4.7%
70.1%
24.7%
0.5%
Information
(D)
(D)
(D)
(D)
(D)
Finance and insurance
109,116
5.0%
74.4%
19.0%
1.6%
Services
(D)
(D)
(D)
(D)
(D)
Other industries
(D)
(D)
(D)
(D)
(D)
Source: Bureau of Economic Analysis.
Note: A (D) indicates that the Bureau of Economic Analysis has suppressed data to protect the
identify of individual companies.
18 Lohr, Steve. “High-End Technology Work Not Immune to Outsourcing.” The New York
Times, June 16, 2004, p. C1.
CRS-30
Although the dollar amount of sales of services back to the United States by
U.S. foreign affiliates is low compared to the overall amount of sales of services, as
Table 14 indicates, the rate of growth in the sale of services back to the U.S. parent
has been among the highest of service sales to all areas. Between 1995 and 1998,
when the U.S. economy was expanding rapidly, sales of services back to the U.S.
parent company grew by 76%, far faster than the rate of growth of sales of services
at the local level. Sales of services from affiliates in Europe and Latin America back
to the U.S. parent company grew at an especially rapid pace, which contrast with the
sales of goods in which sales from European affiliates back to the U.S. parent
generally represent a very small part of their overall sales.
In the 1999 to 2002 period in which the pace of U.S. economic growth slowed
relative to the previously period, sales of services dropped sharply. Similarly, sales
of services to U.S. parent companies fell by more than half, but still managed to grow
at a pace that was faster than that for sales of services as a whole.
Table 14. Sales of Services by U.S. Foreign Affiliates, Growth in
Sales for Selected Periods
(percent change)
Other foreign
Total
To U.S. parents
Local
countries
Time period
% Chg
% Chg
% Chg
% Chg
% Chg
% Chg
% Chg
% Chg
1995 to
1999 to
1995 to
1999 to
1995 to
1999 to
1995 to
1999 to
1998
2002
1998
2002
1998
2002
1998
2002
All countries
49.4%
12.7%
75.9%
3.3%
45.0%
6.3%
94.9%
84.9%
Canada
37.7%
14.0%
5.2%
11.4%
38.5%
14.1%
50.4%
281.2%
Europe
59.6%
7.2%
193.7%
34.5%
52.6%
13.3%
-3.7%
97.4%
Latin America
96.3%
21.9%
76.8%
-19.7%
97.5%
23.4%
147.1%
31.8%
Africa
34.6%
5.1%
(D)
-31.3%
(D)
-8.4%
40.8% 2757.7%
Middle East
54.8%
-46.2%
(D)
26.0%
(D)
-52.4%
59.3%
51.1%
Asia and Pacific
23.1%
25.5%
13.5%
-23.6%
19.3%
24.5%
158.2%
100.7%
Source: Department of Commerce.
Note: A (D) indicates that the Bureau of Economic Analysis has suppressed data to protect the
identify of individual companies.
Research and Development
National governments and many state and local governments spend considerable
amounts of money attracting foreign direct investment under the belief that such
investment has a positive impact on their respective economies.19 Although various
academic studies have found that such “spillover” effects appear to be small, a recent
study challenges these conclusions.20 The authors argue that technology spillovers
from foreign direct investment to U.S.-owned manufacturing firms accounted for
about 11 % of the growth in productivity in the U.S. firms between 1987 and 1996.
19 Incentives. United Nations Conference on Trade and Development, United Nations, 2004.
20 Keller, Wolfgang, and Stephen R. Yeaple, Multinational Enterprises, International Trade,
and Productivity Growth: Firm-Level Evidence From the United States. IMF Working
Paper WP/03/248, International Monetary Fund, December 2003.
CRS-31
In addition, as Table 15 indicates, foreign firms spend more on high-technology
research and development within the United States than U.S. firms spend abroad. All
three types of firms indicated in the table experienced a slowdown in R&D spending
in 1991 in response to the slowdown in economic growth in that period. Since 1991,
however, R&D spending in nominal terms has increased every year by all three types
of firms, except in 2002. In addition, affiliates of foreign firms operating in the
United States outspent the foreign affiliates of U.S. multinational companies in every
year, making the United States a net recipient of R&D expenditures.
Table 15. Expenditures on Research and Development by U.S.
Multinational Firms and by the Affiliates of Foreign Firms
Operating in the United States
(millions of dollars)
U.S. Multinational Companies
U.S. Affiliates of
Foreign Firms
Parent Companies
Affiliates
1990
$72,802
$10,417
$12,593
1991
67,366
9,396
11,872
1992
72,107
11,084
13,864
1993
74,176
10,954
14,199
1994
91,574
11,877
15,566
1995
96,500
13,238
17,542
1996
100,551
14,039
17,984
1997
106,800
14,593
17,216
1998
113,777
14,664
22,375
1999
126,291
18,144
24,027
2000
135,467
20,457
26,089
2001
143,546
19,402
26,415
2002
137,968
21,151
25,453
Source: Department of Commerce.
Why Firms Invest Abroad
Foreign direct investment challenges a number of concepts economists hold
about international capital flows. Most explanations of such capital flows argue that
direct investment is just another form of international capital flows and that capital
flows to locations where the rate of return is the highest. While this may be true in
a general sense, the bulk of foreign direct investment takes place between highly
developed countries where rates of return are very similar. In addition, those
countries that are large investors are also recipients of large amounts of direct
investment and investment flows into and out of these countries seem to move
together, so that those economic conditions that encourage inflows of direct
investment also promote outflows of direct investment.21
21 Lipsey, Robert E., Interpreting Developed Countries’ Foreign Direct Investment. NBER
Working Paper 7810. National Bureau of Economic Research, July 2000. P. 3-4.
CRS-32
Economists generally believe that firms invest abroad to increase their profits.
They are less certain about which factors trigger the initial investment decision, about
why firms choose to invest where they do, and about what distinguishes firms that
invest abroad from those that remain purely domestic. In most cases, economists
conclude that a broad range of factors influence a firm’s decision to invest abroad
that include far more than a simple search for low-cost labor. The United Nations
characterizes the major determinants of foreign direct investment as the confluence
of three sets of determining factors that exist simultaneously: the presence of
ownership-specific competitive advantages in a transnational corporation, the
presence of locational advantages in a host country, and the presence of superior
commercial benefits in an intra-firm as against arm’s-length relationship between
investor and recipient.22
For some, foreign direct investment seems to be characterized by a relatively
simple process of firms seeking out low-cost production locations and low-cost
resources, including low-cost labor. Multinational firms, however, are motivated by
more than a single factor, and likely invest abroad not only to gain access to a low-
cost resource, but to improve their efficiency, or to improve their market share. In
all, direct investment is a complex activity that involves a long-term commitment to
a business venture in a foreign country that requires the coordination and
management of considerable resources and assets across countries. The relative
importance of factors that determine where investments are located depend on a
broad range of factors that can change over time and with economic conditions.
Although low-cost abundant labor is a principal resource that some firms seek,
academic studies of foreign direct investment indicate that it is always labor plus
other advantages, particularly industrial infrastructure, that influence a firm’s
investment decision. Based on observations through 1998, the United Nations
concluded that investments based solely on low-cost labor have been highly mobile
and have increased dramatically the risk of losing any locational advantage based on
just that factor alone.23
According to the United Nations, technological improvements in the area of
telecommunications and computers make it possible for firms to extend their
efficiency strategies across national borders. When firms undertake competitiveness-
enhancing foreign direct investment, they seek not only cost-reductions and bigger
market shares, but also access to technology and innovative capacity, which can be
highly influenced by national policies. Nations that are successful in attracting direct
investment generally possess such infrastructure facilities as high-quality
telecommunications links, reliable transportation systems, and such skills as
accountancy, legal services, purchasing and marketing, finance and R&D capabilities,
and large markets.24
22 World Investment Report 1998: Trends and Determinants. United Nations, New York,
1998. P. 89.
23 Ibid, p. 118.
24 Ibid, p. 108-109.
CRS-33
At times, economists have puzzled over the presence of foreign direct
investment, because it seemed unthinkable to most of them that nations would
simultaneously import and export the same good and that investments would occur
within the same industry between two different trading countries and by the same
company. For some economists, trade and investment were thought to be opposites;
therefore, as long as international trade was free, there was no reason for international
investment to occur. These economists based their conclusions on the argument that
free trade caused commodity prices between countries to converge. Such a
convergence was expected eventually to equalize wage rates and rates of return on
investments and to make investing abroad of little economic value.25
Ownership-Specific Advantages
Economists generally argue that foreign investment is a viable option for some
firms due to economic advantages that arise from a unique set of characteristics that
are related to specific types of firms. These characteristics include managerial
ability, technical advantages, or market strength, which give firms an incentive to
invest abroad and to provide the advantages necessary to be competitive in markets
at home and abroad.26 These analysts conclude that market imperfections and firm-
specific factors27 give some firms economic advantages over their competitors that
allow them to attain an oligopolistic position in their home and in foreign markets
and to increase their market shares. Such firms possess a competitive advantage over
their foreign competitors or they would be incapable of overcoming the
disadvantages of operating in a foreign market — additional costs associated with
managing an enterprise at some distance, and added political and economic risks.
Some of the potential advantages that firms might enjoy could arise from market
imperfections and from firm specific advantages that arise from producing in large
25 This result, known as the factor-price equalization theorem, is a fundamental result in the
theory of international trade. It states that, under certain conditions, free trade will equalize
the prices of goods between trading countries. When goods’ prices are the same, this
theorem states, the prices of the factors of production (labor and capital) will also be
equalized. This result is based on a number of assumptions: nations share similar
production technology; there is a free international flow of capital and labor; there are
perfectly competitive goods and price clearing markets; and consumer tastes do not change
with changes in income. For a detailed presentation, see Silberberg, Eugene. The Structure
of Economics. New York, McGraw-Hill, Inc., 1990. p. 553-554.
26 Mundell, Robert A. International Trade and Factor Mobility. American Economic
Review, June 1957. p. 321.
27 Horst, Thomas. Firm and Industry Determinants of the Decision to Invest Abroad: An
Empirical Study. The Review of Economics and Statistics, August 1972. p. 258-266; Caves,
Richard E. Causes of Direct Investment: Foreign Firm’s Shares in Canadian and United
Kingdom Manufacturing Industries. The Review of Economics and Statistics, August 1974.
p. 279-293; Grubaugh, Stephen G. Determinants of Direct Foreign Investment. The Review
of Economics and Statistics, February 1987. p. 149-152; Ethier, The Multinational Firm,
p. 805-833; and Benvignati, Anita M. Industry Determinants and “Differences” in U.S.
Intrafirm and Arms-Length Exports. The Review of Economics and Statistics, August 1990.
p. 481-488.
CRS-34
quantities (economies of scale),28 the market power of the firm,29 the absolute size of
the firm,30 cost advantages that arise from patents or other special advantages, or
from product-specific advantages (product differentiation).31
Location Advantages
Foreign direct investment may also be one step in a series of actions
multinational firms take to grow or to remain competitive by gaining access to new
markets.32 Some of these actions may be related to gaining access to markets that are
protected by high tariffs or by other economic barriers.33 In some cases, foreign
investment is driven by a product cycle process that starts in the introduction of a
new product and in the growth of market shares.34 At this early stage, product
innovations serve as a basis for market advantages over competitors and production
is centered in the home country, with foreign subsidiaries acting primarily as
marketing agents.
In later phases, competition increases as the innovation is acquired by other
producers. In this stage, businesses invest abroad in order to maintain the market
shares they gained through exporting. As a result, the transition from exporting, to
assembling, to producing in the foreign market may be a natural process, with foreign
investment being the facilitating link. While some of the motivation for shifting
production abroad may be to avoid tariffs, or other export restraints, lower
transportation costs and proximity to the foreign market are important
28 Root, Franklin R. International Trade and Investment Cincinnati, South-Western
Publishing Co., 1984. p. 457-458; Markusen, James R. Multinationals, Multi-Plant
Economies, and the Gains From Trade. Journal of International Economics, May 1984;
Haldi, John, and David Whitcomb. Economies of Scale in Industrial Plants. Journal of
Political Economy, August 1967. p. 373-385; and Kim, H. Youn. Economies of Scale in
Multi-Product Firms: an Empirical Analysis. Economica, May 1987. p. 185-206.
29 Dunning, John H.,and Alan M. Rugman. The Influence of Hymer’s Dissertation on the
Theory of Foreign Direct Investment. American Economic Review, May 1985. p. 228.
30 Glickman, Norman J., and Douglas P. Woodward. The New Competitors. New York,
Basic Books, Inc., 1989. p. 80-90.
31 Caves, Richard E. “International Corporations: The Industrial Economics of Foreign
Investment.” Economica, February 1971. p. 3-11; and Bergsten, C. Fred, Thomas Horst, and
Theodore H. Moran. American Multinationals and American Interests. Washington, The
Brookings Institution, 1978. p. 215-216. For an overview of empirical studies, see Stevens,
Guy V.G. “The Determinants of Investment.” In Dunning, John H., ed. Economic Analysis
and the Multinational Enterprise. New York, Praeger Publishers, 1974.
32 Lipsey, Robert E., and Merle Yahr Weiss. Foreign Production and Exports of Individual
Firms. The Review of Economics and Statistics, May 1984. p. 491.
33 Helpman, Elhanan, and Paul R. Krugman. Market Structure and Foreign Trade.
Cambridge, The MIT Press, 1985. p. 247-259.
34 Vernon, Raymond. “International Investment and International Trade in the Product
Cycle.” Quarterly Journal of Economics, May 1966. p. 190-207; and Wells, Louis T. Jr.
“Test of a Product Cycle Model of International Trade: U.S. Exports of Consumer
Durables.” Quarterly Journal of Economics, February 1969. p. 152-162.
CRS-35
considerations.35 This shift is apparent in U.S. direct investment abroad where large
shares of foreign production are consumed in the local market or shipped to
neighboring countries, rather than being exported back to the United States.
Evidence indicates that there is little empirical basis for expecting a universal
linkage between foreign investment and trade.36 If there is a tendency for overseas
production to substitute for some exports from an area, it appears to be offset by
influences that tend to increase exports of related products or services.37 Studies
show that the higher the level of output by a U.S. firm in a foreign area, the higher
are the firm’s exports from the United States to that area and the smaller are the
exports of other foreign firms. This pattern may be influenced by the host country’s
trade policy, which may discourage imports, thereby encouraging the affiliates of
foreign companies to produce locally.38 Moreover, multinational companies may
gain added economic flexibility as a result of their foreign subsidiaries, which allows
the parent companies to alter their sources of inputs in response to cheaper imports:
instead of altering prices of domestically produced goods to remain competitive,
multinational firms shift the source of their production to their offshore
subsidiaries.39
Commercial Benefits
The decision to invest abroad also represents a critical strategic move for a
company operating in a global industry — a move that the company determines
jointly with the use and development of its production and distribution facilities
35 Stevens, Guy V.G., and Robert E. Lipsey. Interactions Between Domestic and Foreign
Investment. Cambridge, Mass., National Bureau of Economic Research, 1988. (Working
Paper No. 2714) p. 11; and U.S. Department of Commerce. Bureau of Economic Analysis.
Survey of Current Business, May 1986. U.S. Merchandise Trade Associated With U.S.
Multinational Companies, by Betty L. Barker. p. 56.
36 Kahley, William J. Countervailing Advantage and Foreign Direct Investment in the
United States. Federal Reserve Bank of Atlanta, 1988. Working Paper Series. (Working
Paper 88-1) p. 9; Stevens, and Lipsey, Interactions Between Domestic and Foreign
Investment, p. 29; and U.S. Library of Congress. Congressional Research Service. Foreign
Direct Investment: Effects on the U.S. Trade Balance. Report No. 89-416 E, by James K.
Jackson. Washington, 1989.
37 Lipsey, Robert E., and Merle Yahr Weiss. “Foreign Production and Exports of Individual
firms.” The Review of Economics and Statistics, May 1984. p. 305; Williamson, Peter J.
“Multinational Enterprise Behavior and Domestic Industry Under Import Threat.” The
Review of Economics and Statistics, August 1986. p. 359; and Horst, Thomas. “American
Multinationals and the U.S. Economy.” American Economic Review, May 1976. p. 149.
38 Lipsey, and Weiss, Foreign Production and Exports in Manufacturing Industries, p. 490
39 Williamson, Peter J. “Multinational Enterprise Behavior and Domestic Industry
Adjustment Under Import Threat.” The Review of Economics and Statistics, August 1986.
p. 365; and Alder, Michael, and Guy V.G. Stevens. “The Trade Effects of Direct
Investment.” Journal of Finance, May 1974. p. 657.
CRS-36
worldwide.40 Such macroeconomic factors as monetary and fiscal policies have been
found to be prime determinants not only of U.S. trade performance but also of a
firm’s investment behavior through their influence on exchange rates, prices, and
wage and productivity behavior.41 These and such other external conditions as
relative growth rates among national economies, exchange rate movements,
productivity, trade restraints, and the desire to acquire technology42 are among the
most important factors in determining foreign investments. As a result of these
market conditions,43 multinational firms compensate for such market failures as
poorly developed or non-functioning capital or labor markets, by investing abroad
and by shifting resources among their foreign subsidiaries. The importance of these
factors in motivating direct investment varies over time and among companies and
foreign markets. For example, economists trace much of the surge of U.S. direct
investment into Common Market countries in the late 1950s and the 1960s to
attempts by U.S. companies to avoid trade barriers, to expectations of an increased
rate of economic growth in these countries, and to efforts to overcome the perceived
overvaluation of the dollar. Once these initial investments were established, a high
level of earnings from them continued to be reinvested, probably to maintain market
shares and profit margins.44
Additional analyses indicate that foreign investment and, therefore, foreign
production, may allow corporations to reduce such risks as bad weather, national
business cycles, strikes, and changes in government policies.45 Recent analysis
suggests that the establishment of foreign subsidiaries can give multinational
companies added flexibility in setting their prices in response to increased
competition or to such other factors as changes in exchange rates.46 This may include
the ability to switch among their various subsidiaries in supplying major markets to
40 Caves, Richard E. and Sanjeev K. Mehra. “Entry of Foreign Multinationals into U.S.
Manufacturing Industries.” In Porter, Michael E., ed. Competition in Global Industries.
Boston, Harvard Business School Press, 1986. p. 473.
41 Lipsey, Robert E., and Irving B. Kravis. The Competitive Position of U.S. Manufacturing
Firms. Cambridge, Mass., National Bureau of Economic Research, 1985. (Working Paper
No. 1557). p. 2; and Aliber, Robert Z. “A Theory of Direct Foreign Investment.” In
Kindleberger, Charles P. The International Corporation. Cambridge, Mass., The M.I.T.
Press, 1970.
42 Lipsey, and Kravis, The Competitive Position of U.S. Manufacturing Firms, p. 2; and
Ray, Edward John. The Determinants of Foreign Direct Investment in the United States:
1979-1985. Cambridge, Mass., National Bureau of Economic Research, 1988. p. 2.
43 Root, International Trade and Investment, p. 464.
44 Ibid., p. 3.
45 Little, Jane Sneddon. “The Industrial Composition of Foreign Direct Investment in the
United States and Abroad: A Preliminary Look.” Federal Reserve Bank of Boston
New England Economic Review, May-June 1984. p. 38-39.
46 Helpman and Krugman, Market Structure and Foreign Trade, p. 67-83; and Mann,
Catherine L. “Prices, Profit Margins, and Exchange Rates.” Board of Governors of the
Federal Reserve System. Federal Reserve Bulletin, June 1986. p. 366-379.
CRS-37
maintain their competitive position without altering the market price of their goods.47
As a result, local prices may grow less sensitive to changes in the costs of imports.
Linkages between the foreign affiliates and the parent companies apparently allow
the affiliates to curtail price changes, which might erode their price competitiveness,
during periods of fluctuating exchange rates in order to maintain or even to enlarge
their market shares in foreign countries.48
Conclusions
This report utilizes a broad collection of data on direct investment published by
the Bureau of Economic Analysis to assess the impact of U.S. direct investment
abroad and foreign direct investment in the United States on the U.S. economy.
These data were analyzed to determine if U.S. parent companies are shifting jobs
abroad in a way that is different or unique from previous experiences with such
investment. Data published by the BEA are the most extensive set of published data
on foreign investment activities, but they were not developed to address the issue of
jobs outsourcing and it is not possible with the BEA data to track job losses or gains
in specific industries, specific companies, or specific plants with changes in jobs
abroad. Broad, comprehensive data on U.S. multinational companies published by
the BEA lag behind current events by two years, which means that assessing these
activities may seem to be out of sync with the more limited anecdotal examples that
appear in the popular press and raises questions about the relevancy of the data to
assessing short-term developments compared with long term trends.
Despite these caveats, the data offer no conclusive evidence that current
investment trends are substantially different from those of previous periods. A
comparison of gross product and employment between U.S. parent companies and
their foreign affiliates over two distinct periods indicates that U.S. business cycles
have a stronger impact on U.S. parent companies than on the foreign affiliates, but
that even the affiliates are affected. Any long-term structural changes that are
occurring in the economy apparently are reinforced by the business cycle in the
economy, but these same business cycles affect the foreign affiliates. As a result of
this partial synchronization effect, U.S. direct investment abroad and foreign direct
investment in the United States generally move in the same direction. From the data
examined, it is not apparent that U.S. parent companies are outsourcing jobs at a
faster pace or in a manner that is fundamentally different or distinct from previous
periods. An increase in economic growth in the U.S. parent companies relative to the
rate of growth in the foreign affiliates likely increases pressure within the economy
to complete structural changes and to shift capital and labor from declining sectors
to expanding sectors. Such changes may also lead to a greater number of jobs being
outsourced, but this effect likely would be muted by the overall strong demand for
jobs within the economy and by new foreign investments in the economy.
47 Williamson, Multinational Enterprise Behavior and Domestic Industry Adjustment Under
Import Threat, p. 60.
48 Ohno, Kenichi. Exchange Rate Fluctuations, Pass-Through, and Market Share. IMF Staff
Papers, June 1990. p. 294-309.
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On the other hand, an economic slowdown among U.S. parent companies
relative to the rate of growth among foreign affiliates likely would lead to an overall
decline in employment throughout the economy. This overall decline in employment
would make it difficult to distinguish between those sectors that are undergoing long-
term structural changes compared with those sectors that are experiencing short-term
job losses due to the relatively slower rate of economic growth. U.S. parent
companies may or may not respond to the economic slowdown by outsourcing jobs
abroad because the dominating presence of the U.S. economy in the world economy
means that an economic slowdown in the United States likely reduces economic
growth abroad as well and that the foreign affiliates of those parent companies may
not be a position to add more jobs. The uneven effect of an economic slowdown
among U.S. parent companies on their investment behavior abroad likely means that
jobs outsourcing may appear to be more acute during periods in which the long-term
structural changes in the economy coincide with the short-term economic
adjustments that arise from a slowdown in the rate of growth of the U.S. economy.
Trade and sales data also indicate that there is no perceptible change in previous
patterns that would signal a shift toward a greater emphasis on foreign production
and imports. In fact, BEA data indicate that intra-firm trade has declined over the
last decade. Although not conclusive, this result is contrary to what would be
expected if U.S. parent companies were outsourcing a greater share of their
production abroad and importing more goods from their foreign affiliates. These
results also seem to challenge estimates that predict a large shift of jobs abroad over
the next half decade.
Concerns about the currency of BEA do not seem to be warranted. One
characteristic of U.S. direct investment abroad and foreign direct investment in the
United States is the relative stability in the patterns of that investment over time.
This pattern is unlikely to change over a short period of time, so that the lag in
publication of BEA data is unlikely to alter appreciably any general conclusions
about the role of direct investment in the economy. A large share of U.S. direct
investment abroad remains concentrated in the most highly developed economies and
the share of jobs supported by the foreign affiliates comprises a small share relative
to the U.S. economy. Employment and jobs in the U.S. economy continue to arise
from economic factors that are unique to the U.S. economy and to U.S. economic
policies. On average, U.S. foreign affiliates are expected to continue to produce
about 300,000 jobs a year, a small share of the average number of jobs produced by
the U.S. economy during any given year.
For Congress, the data on direct investment seem to indicate that the number of
jobs created by U.S. parent companies and by the foreign affiliates of those parent
companies is tied closely to the overall performance of the U.S. economy. Such
economic measures as employment, trade, and investment will rise and fall among
U.S. parent companies and their foreign affiliates generally in tandem. Swings in the
rate of growth in the economy that are associated with the business cycle tend to
affect U.S. parent companies more than they affect their foreign affiliates and more
than those U.S. firms that are purely domestic firms. Policies that ameliorate the
business cycle, especially the downside of the cycle when the economy is
experiencing a slow rate of economic growth, likely would do the most to help U.S.
parent companies. Furthermore, Congress may choose to address the economic
CRS-39
plight of those workers and communities that experience a disproportionate share of
the adjustment costs that are associated with the business cycle by providing
specialized assistance or other types of short-term support.
Workers and communities that are involved with economic activities that are
facing long-term structural decline may require support to assist displaced workers
regain employment or to find new business partners to sustain economic development
in those communities. Workers in industries that are undergoing long-term structural
decline may well see production and jobs move abroad. Addressing such long-term
structural decline, however, is especially challenging, because the economic forces
that are working against such industries can be immense.