Outsourcing and Insourcing Jobs in the U.S.
Economy: Evidence Based on Foreign
Investment Data
James K. Jackson
Specialist in International Trade and Finance
May 10, 2012
Congressional Research Service
7-5700
www.crs.gov
RL32461
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Outsourcing and Insourcing Jobs in the U.S. Economy
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.
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Contents
Overview.......................................................................................................................................... 1
U.S. and Foreign Multinational Companies .................................................................................... 4
Employment .............................................................................................................................. 6
Employment Trends................................................................................................................. 10
Employment by Sector and Area............................................................................................. 12
Gross Product................................................................................................................................. 16
U.S. Multinational Companies ................................................................................................ 17
Foreign-Owned Firms ............................................................................................................. 19
Cyclical vs. Structural Changes ..................................................................................................... 20
Trade .............................................................................................................................................. 28
Sales............................................................................................................................................... 31
Sales of Services...................................................................................................................... 33
Research and Development ........................................................................................................... 35
Why Firms Invest Abroad.............................................................................................................. 36
Ownership-Specific Advantages.............................................................................................. 38
Location Advantages ............................................................................................................... 39
Commercial Benefits ............................................................................................................... 40
Conclusion ..................................................................................................................................... 41
Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Investment Abroad,
Annual Flows 1990-2009 ............................................................................................................. 2
Figure 2. Inward and Outward Global Direct Investment Position, By Major Area, 2009............. 3
Figure 3. Index of Employment of U.S. Parent Companies and Their Foreign Affiliates,
1992-2008 (1990 = 100) ............................................................................................................... 9
Figure 4. Employment of the Foreign Affiliates of U.S. Parent Companies as a Share of
the Total Employment of U.S. Multinational Companies, 1985-2008 ....................................... 11
Figure 5. U.S. Direct Investment Position Abroad and Foreign Direct Investment Position
in the United States, Cumulative Position by Country, 2009 ..................................................... 14
Figure 6. Employment of U.S. Foreign Affiliates Abroad and Affiliates of Foreign Firms
in the U.S., by Country or Region, 2008 .................................................................................... 15
Figure 7. Average Annual Percent Change in Gross Product of U.S. Parent Companies
and Their Foreign Affiliates, Selected Periods ........................................................................... 22
Figure 8. Average Annual Percent Change in Employment of U.S. Parent Companies and
Their Foreign Affiliates, Selected Periods.................................................................................. 24
Figure 9. Average Annual Percent Change in Manufacturing Gross Product of U.S. Parent
Companies and Their Foreign Affiliates, Selected Periods ........................................................ 25
Figure 10. Average Annual Percent Change in Manufacturing Employment of U.S. Parent
Companies and Their Foreign Affiliates, Selected Periods ........................................................ 26
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Figure 11. Intra-Firm MNC Trade as a Share of Total U.S. Exports and Imports, 1990-
2008 ............................................................................................................................................ 29
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, 2008................................................................................................................. 5
Table 3. Gross Product and Manufacturing Gross Product by U.S. Multinational
Companies, 1994-2008................................................................................................................. 6
Table 4. Employment of U.S. Multinational Companies and the Affiliates of Foreign
Firms, 1992-2008.......................................................................................................................... 8
Table 5. Employment of Non-Bank U.S. Foreign Affiliates by Major Sector and Area,
2006-2008................................................................................................................................... 12
Table 6. Gross Product of U.S. Parent Companies and Their Majority-Owned Foreign
Affiliates ..................................................................................................................................... 16
Table 7. U.S. Direct Investment Abroad; Investment Outflows for Selected Regions and
Countries, 2005-2009 ................................................................................................................. 18
Table 8. Average Annual Percent Change in Gross Product and Employment of U.S.
Parent Companies and Their Foreign Affiliates, Selected Industries, Selected Periods............. 23
Table 9. Changes in Gross Product and Employment Among U.S. Parent Companies and
Their Foreign Affiliates for Selected Industries ......................................................................... 27
Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods, 1992-2007................. 30
Table 11. Multinational Corporations’ Intra-Firm Imports of U.S. Goods, 1992-2008 ................. 31
Table 12. Sales of Goods and Services by U.S. Foreign Affiliates by Destination and
Industry, 2008 ............................................................................................................................. 32
Table 13. Sales of Services by U.S. Foreign Affiliates by Destination and Industry, 2008........... 34
Table 14. Sales of Services by U.S. Foreign Affiliates, Average Annual Rates of Change
for Selected Periods .................................................................................................................... 35
Table 15. Expenditures on Research and Development by U.S. Multinational Firms and
by the Affiliates of Foreign Firms Operating in the United States ............................................. 36
Contacts
Author Contact Information........................................................................................................... 43
Acknowledgments ......................................................................................................................... 43
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Outsourcing and Insourcing Jobs in the U.S. Economy
Overview
The United States is the largest foreign direct investor in the world and the largest recipient of
such investment funds.1 This active role in foreign investment has sparked a national debate over
various aspects of foreign investment, including the impact on employment; the implications for
national security of foreign direct investment in U.S. industrial firms; the effect on corporate
research and development; and the implications for high-technology jobs, especially on science
and engineering activities that are deemed to be important for continuing economic advancement.
In 2004, Congress awarded a grant through P.L. 108-447 to the National Academy of Public
Administration (NAPA) to conduct a comprehensive study on outsourcing, or off-shoring, and its
major economic effects, particularly on any “associated shifts in employment.”2 The NAPA study
distinguished between outsourcing, or the contracting of services or activities to unaffiliated firms
located either domestically or internationally, from off-shoring, or the shifting of services or
activities abroad to unaffiliated firms or to affiliated firms. The data used in this report, however,
do not distinguish between outsourcing and off-shoring or among a broad range of other activities
that may be associated with foreign investment.
On a historical cost basis, or book value basis, the Department of Commerce estimates that by the
end of 2009, U.S. firms had accumulated $3.5 trillion worth of direct investment abroad,
compared with the $2.3 trillion foreign investors had spent to acquire or establish businesses in
the United States, when direct investment is measured at historical cost.3 As Figure 1 shows,
direct foreign investment flows generally have increased since 2003, while U.S. direct investment
abroad dropped sharply in 2005 as a result of one-time tax provisions, but then rebounded sharply
in 2006.4
1 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 have occasionally displaced the United States as the largest recipient of annual foreign
direct inflows.
2 This study was completed in three parts, with associated publications. See Off-shoring: An Elusive Phenomenon,
National Academy of Public Administration, January 2006; Off-Shoring: How Big is it?, October 2006; and Off-
Shoring: What Are Its Effects?, National Academy of Public Administration, January 2007.
3 Ibarra-Caton, Marilyn, Direct Investment Positions for 2009, Survey of Current Business, July 2010, p 20. The
position, or stock, is the net book value of U.S. parent company’s equity in, and outstanding loans to, their affiliates
abroad. A change in the position in a given year consists of three components: equity and intercompany inflows,
reinvested earnings of incorporated affiliates, and valuation adjustments to account for changes in the value of financial
assets. The Commerce Department also publishes data on the U.S. direct investment position valued on a current-cost
and market value bases. These estimates indicate that U.S. direct investment abroad increased by $308 billion, but
increased when measured by market value by $1.2 trillion in 2009 to reach $3.7 and $3.1 trillion, respectively. Nguyen,
Elena L., The International Investment Position of the United States at Yearend 2009, Survey of Current Business, July
2010, p.10.
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).
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Figure 1. Foreign Direct Investment in the United States and U.S. Investment
Abroad, Annual Flows 1990-2009
$500
$400
$300
$200
$100
$0
0
1
2
3
4
5
6
7
8
9
0
01
2
3
4
5
6
7
8
9
199 199 199 199 199 199 199 199 199 199 200 20
200 200 200 200 200 200 200 200
U.S. Direct Investment Abroad
Foreign Direct Investment in the U.S.
Source: U.S. Department of Commerce.
Note: The drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent companies to take
advantage of a one-time tax provision.
Recent Department of Commerce data indicate that foreigners invested $152 billion in U.S.
businesses and real estate in 2009, down sharply from the $319 billion invested in 2008.5
Similarly, new spending by U.S. firms on businesses and real estate abroad, or U.S. direct
investment abroad,6 fell from the $332 billion invested in 2008 to $221 billion in 2009.
Globally, the total, or cumulative, amount of foreign direct investment reached nearly $18 trillion
in 2009 (the latest year for which detailed data are available), 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.
5 Weinberg, Douglas B., Erin M. Whitaker, U.S. International Transactions: Fourth Quarter and Year 2009. Survey of
Current Business, April 2010. p. 28. Direct investment data reported in the balance of payments differ from capital
flow data reported elsewhere, because the balance of payments data have not been adjusted for current cost adjustments
to earnings.
6 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).
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The clear exception to this general observation is Japan, which had invested over $700 billion
abroad through 2009, but had received over $200 billion in investment inflows. Among the
developing economies, Asia, which includes China, has accumulated $2.9 trillion in direct
investment, followed by Latin America ($1.5 trillion) and Africa ($500 billion).
Figure 2. Inward and Outward Global Direct Investment Position,
By Major Area, 2009
Source: United Nations.
Global direct investment flows picked up sharply after 2004, following three years of reduced
flows. According to the United Nations’ World Investment Report,7 the largest 100 multinational
corporations in the world experienced a stagnation of their sales, employment, and growth in
assets from 2000 to 2003, but global foreign direct investment flows picked up in the 2006-2007
period before falling in 2008, as indicated in Table 1. In 2006, and 2007 global direct investment
flows grew by 38%, and 18%, respectively, to reach nearly $2 trillion. The rise in global direct
investment flows was driven by an increase in corporate profits worldwide and resulting higher
stock prices that raised the value of cross-border mergers and acquisitions. In 2008, global direct
investment flows fell by 14% to total $1.7 trillion, due in part to the tightening up of credit
markets and slowing economic growth. Furthermore, the global financial crisis sharply reduced
global investment flows in 2009 to $1.1 trillion. The developed economies generally absorb about
two-thirds of global direct investment flows, with the developing economies sharing the rest.
Africa continues to receive the smallest share, generally less than 3%, with Latin America
receiving about 8% and Asia getting between 18% and 22%. These shares changed abruptly in
7 World Investment Report 2010, United Nations, July 2010. P. 5.
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2009 as the financial crisis tightened credit and reduced merger and acquisition activity, a major
factor in direct investment in the developed economies.
Table 1. Global Annual Inflows of Foreign Direct Investment, By Major Area
(in billions of dollars; percent shares)
2007 2008 2009 2007 2008 2009
Inflows of foreign direct investment
Share of annual foreign direct
investment inflows
(in billions of dollars)
(in percent)
World
$2,100.0 $1,770.9 $1,114.2 100.0% 100.0% 100.0%
Developed economies
1,444.1 1,018.3 565.9
68.8 57.5 50.8
Western
Europe
988.4 551.1 378.4 47.1 31.1 34.0
European
Union
923.8 536.9 361.9 44.0 30.3 32.5
Other Western Europe
64.6
14.1
16.4
3.1
0.8
1.5
North
America
374.4 379.8 148.5 17.8 21.4 13.3
United
States
266.0 324.6 129.9 12.7 18.3 11.7
Other developed econ.
81.3
87.4
39.0
3.9
4.9
3.5
Developing economies
564.9 630.0 478.3 26.9 35.6 42.9
Africa
63.1 72.2 58.6 3.0 4.1 5.3
Latin
America
163.6 183.2 116.6 7.8 10.3 10.5
Asia
338.2 374.6 303.2 16.1 21.2 27.2
Other Europe
91.0
122.6
69.9
4.3
6.9
6.3
Source: World Investment Report, 2010, United Nations. Annex table B.1, 2010.
U.S. and Foreign Multinational Companies
By the end of 2008, there were more than 2,200 U.S. parent companies with more than 26,000
affiliates operating abroad, as Table 2 indicates. In comparison, foreign firms had more than
5,500 affiliates operating in the United States. U.S. parent companies employed over 21 million
workers in the United States, compared with the 11.9 million workers employed abroad by U.S.
firms and more than 6 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 data also suggest that U.S. parent companies are
more efficient than either the U.S. affiliates of U.S. firms or foreign firms operating in the United
States with higher output per employee. Foreign firms operating in the United States are more
capital intensive relative to employment than U.S. parent firms or U.S. affiliates, likely reflecting
the newer age of the capital stock of the foreign firms. The U.S. affiliates of foreign companies,
however, had one-quarter higher value of gross product than did the foreign affiliates of U.S.
firms operating abroad. The foreign affiliates of U.S. firms, however, had total sales that were
nearly twice as high as that of the U.S. affiliates of foreign firms, likely reflecting the slowdown
in economic growth that had begun in the United States. The foreign affiliates of U.S. firms,
however, paid more than three times more in taxes to foreign governments than did the affiliates
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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.
Table 2. Select Data on U.S. Multinational Companies and on Foreign Firms
Operating in the United States, 2008
(dollar amounts in millions of dollars)
U.S. Multinational Companies
U.S. Affiliates
Parent
Foreign
of Foreign Firms
Companies
Affiliates
Number of firms
2,220
26,548
5,546
Employment (thousands)
21,103
11,879
6,279
Employee compensation
$1,373,115
$490,124
$451,984
Gross product
$2,396,288
$1,211,854
$1,726,681
Total assets
$16,841,239
$12,504,725
$12,666,896
Sales $8,727,800
$6,107,864
$3,819,986
Taxes $165,028
$195,100
$33,398
R&D
Expenditures NA
$36,991 $44,713
Source: U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary
2007 Estimates; and Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies,
Preliminary 2007 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
$2.4 trillion in goods and services in 2008, down slightly from the $2.59 trillion dollars they
produced in 2007. This amount comprised about 19% of total U.S. private industry gross product,
a share of total gross product of U.S. parent companies that was the lowest since the early 1990s.
The data also demonstrate the impact the improvement in the U.S. economy after 2002 had on the
operations of U.S. multinational companies, as those companies grew slightly faster than the
economy as a whole and increased their share of private gross product.
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 44% in 2003, 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. After the turnaround in U.S. economic growth in 2003, the share of output arising from the
manufacturing sector rose to 45.7% in 2005 among U.S. parent companies, although the
manufacturing sector continued to slide as a share of overall U.S. gross product and as a share of
gross product of multinational firms. Since 2005, however, parent company share of U.S.
manufacturing fell to around 40%, where it remained through 2008.
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
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people employed by U.S. MNCs. Employment abroad is even more concentrated among the
largest 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, 1994-2008
(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. Private
Company Gross
Private Gross
Gross Product
Billions of dollars
Product
Product
1994 $1,313.8
$6,013.5
21.8%
53.1%
18.3%
1995 1,365.5
6,306.9
21.7%
53.0%
18.4%
1996 1,480.6
6,667.9
22.2%
51.6%
17.8%
1997 1,573.5
7,253.6
21.7%
49.0%
17.7%
1998 1,594.5
7,678.2
20.8%
49.0%
17.6%
1999 1,914.3
8,123.0
23.6%
48.6%
16.9%
2000 2,141.5
8,614.3
24.9%
46.5%
16.6%
2001 1,892.4
8,869.7
21.3%
43.8%
15.1%
2002 1,858.8
9,131.2
20.4%
44.6%
14.8%
2003 1,958.1
9,542.3
20.5%
44.2%
14.2%
2004 2,215.8
10,194.3
21.7%
45.6%
14.0%
2005 2,303.1
10,853.1
21.2%
43.6%
13.6%
2006 2,536.9
11,529.3
22.0%
39.6%
13.7%
2007 2,588.8
12,064.6
21.5%
41.1%
13.4%
2008 2,396.3
12,424.6
19.3%
40.9%
13.2%
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
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 has affected U.S. workers, see CRS Report RL32292,
Offshoring (or Offshore Outsourcing) and Job Loss Among U.S. Workers, by Linda Levine. Also, see Drezner, Daniel
W., The Outsourcing Bogeyman, Foreign Affairs, May/June, 2004; and Engardio, Pete, Aaron Berstein, and Manjeet
Kripalani, Is Your Job Next? Business Week, February 3, 2003. P. 50-60.
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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 also so not capture the
extent to which firms may outsource such services as legal, payroll, accounting, and advertising
to other firms, both domestic and foreign. While estimates of this effect span a wide range,
studies by the National Association of Public Administrators (NAPA) concluded that outsourcing
services to domestic firms was substantially larger than other types of business restructuring.10
The data in Table 4 indicate that the employment trends of U.S. parent companies also 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, in the early 2000s, and again in
2008.
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 rate of growth of the economy
also affect the rate of growth in other countries and, therefore, in employment among the foreign
affiliates, though not necessarily by the same magnitude, as indicated in Figure 3. Between 2002
and 2008, job gains were greater among the foreign affiliates of U.S. firms than among the parent
companies, which is especially apparent when expressed in index number terms. Employment
patterns among the parent companies and the foreign affiliates likely will be less promising in the
2009-2011 period as a result of the global economic recession and recovery.
The historical data generally indicate that the number of employees in the parent companies and
in the affiliates tend to rise and fall in a 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 the employment effects of direct investment.
10 Off-Shoring: How Big Is It?, National Academy of Public Administrators, October 2006, p. 4.
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Table 4. Employment of U.S. Multinational Companies and the Affiliates of Foreign
Firms, 1992-2008
(in thousands, and percent share)
U.S. Multinational
Companies
Shares of U.S. Civilian Employment
U.S.
Affiliates U.S. Civilian
of
Affiliates
U.S.
Employment
Foreign
U.S.
of
Affiliates
Total
Parents Affiliates Firms
Parent
U.S.
of
Companies Parent
Foreign
Companies Companies
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 33,226.0 22,735.1 9,803.6
6,371.9
136,933
16.60%
7.16%
4.65%
2002 30,597.3 22,117.6 9,776.0
5,420.3
136,485
16.21%
7.16%
3.97%
2003 30,762.3 21,104.8 9,657.5
5,253.0
137,736
15.32%
7.01%
3.81%
2004 31,405.5 21,377.5 10,028.0
5,562.3
139,252
15.21%
7.23%
4.03%
2005 32,101.8 21,768.5 10,333.3
5,530.1
141,730
15.36%
7.29%
3.90%
2006 32,765.7 21,615.8 11,149.9
5,800.6
144,427
14.97%
7.72%
4.02$
2007 35,075.1 23,337.6 11,737.5
6,015.9
146,047
15.98%
8.04%
4.12%
2008 32,982.8 21,103.4 11,879..4
6,279.2
145,362
14.52%
8.17%
4.32%
Source: Data developed by CRS from data published by the Department of Commerce and the Department of
Labor.
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Figure 3. Index of Employment of U.S. Parent Companies and Their Foreign
Affiliates, 1992-2008 (1990 = 100)
180
170
160
150
140
130
120
110
100
90
82
84
86
6
8
0
2
4
6
08
19
19
19
1988
1990
1992
1994
199
199
200
200
200
200
20
Year
Parents
Affiliates
Source: U.S. 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 types are
relevant to the current discussion and are likely to account for the largest share of unwanted job
changes during any given year. When cyclical and structural unemployment coincide it often is
difficult to distinguish among them.
Long-term changes in the basic structure of the economy, especially in such dynamic economies
as the U.S. economy, 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.
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Employment Trends
Both U.S. parent companies and their foreign affiliates lost employment during the economic
contraction of the early 2000s, as is indicated in Table 3. 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 until 2004, when it
began to increase, indicating that U.S. parent companies had at least stemmed the decline in their
share of U.S. civilian employment (the relative share of U.S. employment represented by the U.S.
foreign affiliates is provided only for comparison purposes). This improvement in the share of
employment in the U.S. economy represented by U.S. multinational companies was reversed in
2008, when the share fell to its lowest level in recent years. The affiliates of foreign firms
operating in the United States bucked this trend and added to their absolute level of employment
except in 2003, 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.11
Merger and acquisition activity dropped sharply in 2008 as a result of the global financial crisis,
which made it difficult for firms to secure lines of credit for acquisitions. While 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 1985, U.S. multinational companies employed 24.5 million workers. Of this number, 18.1
million workers were employed by the parent company and 6.4 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 1989, 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.
During the 1990s, the parent companies’ share of the U.S. civilian labor force rose from 14.79%
in 1992 to 17.45% in 2000. In comparison, the employment of U.S. affiliates abroad rose from a
representative share of U.S. civilian employment of 5.62% in 1992 to 7.16 % in 2001. During the
same time, foreign firms were investing heavily in the United States and their employment rose
from 4.7 million workers in 1992 to 6.4 million in 2001, or from 4% of U.S. civilian employment
in 1992 to 4.7% in 2000.
Employment among U.S. parent companies dipped again between 2001 and 2004 in response to
an economic downturns that occurred during this period. Employment among U.S. parent
companies and their foreign affiliates rose after 2004 as economic growth in the United States and
abroad rebounded. 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
34% in 2005 as a share of total U.S. multinational company employment, as indicated in Figure
4. As previously indicated, the economic recession of 2008 caused parent companies to reduce
11 Anderson, Thomas, “Foreign Direct Investment in the United States: New Investment in 2008.” Survey of Current
Business, June 2009, p. 54-61.
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their overall employment by over 2 million workers and reduced their share of total civilian
employment to 14.5%.
Figure 4. Employment of the Foreign Affiliates of U.S. Parent Companies as a Share
of the Total Employment of U.S. Multinational Companies, 1985-2008
(in percent shares)
37
36
35
34
33
t 32
31
rcen
Pe 30
29
28
27
26
25
2
84
0
8
4
06
198
19
1986
1988
199
1992
1994
1996
199
2000
2002
200
20
2008
Affiliate Share of Total MNC Employment
Source: U.S. 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, mirroring the trend of U.S. parent companies. Employment among 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. From 2004
through 2007, employment picked up in all three categories of firms as U.S. parent companies
increased their employment and the foreign affiliates of U.S. parent firms expanded their
employment to the highest levels recorded. In 2008, employment among U.S. parent companies
declined, while employment among the foreign affiliates of U.S. firms and among the affiliates of
foreign firms operating in the United States continued to add workers.
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Employment by Sector and Area
Despite various concerns about the nature of recent foreign investment, 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 2008 was in the manufacturing sector, as indicated in. Table 5. (Data in
this table are for the non-bank U.S. affiliates rather than for the more inclusive category used
elsewhere in order to provide detailed industry-level data.) Within the manufacturing sector,
employment by the foreign affiliates of U.S. firms was concentrated most heavily in the
transportation equipment sector, including automobile production, chemicals, and computers and
equipment. Employment in the services sectors, wholesale trade, and retail trade grew most
rapidly from 2006 to 2008 among the U.S. foreign affiliates. Sharp declines in employment were
experienced in the utilities sector, beverages, textiles, and communications equipment. Most other
sectors showed moderate increases in employment over the three-year period.
Table 5. Employment of Non-Bank U.S. Foreign Affiliates by Major Sector and Area,
2006-2008
(in thousands)
Industries 2006
2007
2008
All industries
9,617.4
10,016.6
10,123.8
Mining 138.9
120.3
144.2
Utilities 38.4
26.5
19.1
Manufacturing 5,132.9
5,194.9
5,209.1
Food
131.5
113.1
239.5
Beverages
463.4
503.9
162.6
Textiles
274.4
218.9
67.9
Petroleum
164.3
169.8
181.6
Chemicals
749.5
777.1
790.0
Pharmaceuticals
328.3
351.7
361.4
Metal products
259.2
264.0
252.7
Machinery
331.1
326.2
340.3
Computers and electronic products
780.4
797.5
891.9
Communications equipment
148.3
143.9
128.0
Semiconductors, electronic components
325.6
340.3
326.6
Transportation equipment
1,263.4
1,277.6
1,198.3
Wholesale trade
411.9
454.6
419.6
Information 377.6
394.7
333.7
Broadcasting and telecommunications
97.1
109.8
117.3
Information services and data processing
157.3
155.6
86.4
Finance and insurance
369.2
399.0
312.4
Professional, scientific, and technical services
579.9
646.6
682.8
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Industries 2006
2007
2008
Computer
systems
383.7
408.5
425.5
Other industries
2,568.7
2,780.0
3,002.9
Retail
trade
851.2
924.1
960.2
Administration
669.4
753.6
755.9
Accommodation
652.9
677.5
721.7
Countries
All countries
9,617.4
10,016.6
10,123.8
Canada 1,086.2
1,099.2
1,064.4
Europe 4,143.4
4,184.5
4,213.3
France
601.8
616.1
604.4
Germany
606.1
610.6
621.3
Italy
241.3
243.1
232.9
Netherlands
220.0
223.8
228.8
Spain
194.2
197.1
188.1
United
Kingdom
1216.8
1191.9
1,174.2
Latin America
1,851.7
1,962.9
1,935.7
Brazil
433.2
469.7
485.8
Mexico
900.4
940.2
901.7
Africa 160.6
164.7
172.4
Middle East
69.2
78.9
90.9
Asia and Pacific
2,306.3
2,526.4
2,647.1
Australia
280.7
295.9
288.2
China
591.5
679.2
774.2
Japan
280.6
302.9
296.7
Malaysia
127.9
111.4
102.7
Singapore
116.0
126.7
118.8
Source: Department of Commerce.
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 Figure 5 and Figure 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
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of the European Union,12 the largest share of U.S. direct investment abroad likely will remain
focused on this region for some time to come. Nevertheless, from 2006 to 2008, employment by
U.S. firms in Asia, particularly in China, Malaysia, and Singapore grew especially rapidly. In
China, for instance, employment over the 2006-2008 period grew by 31% to reach 774,000. As a
whole, employment by U.S. firms in Asia accounts for one-fourth of the total employment by
U.S. firms abroad.
Figure 5. U.S. Direct Investment Position Abroad and Foreign Direct Investment
Position in the United States, Cumulative Position by Country, 2009
(in billions of dollars)
Japan
104
264
Asia
511
361
Middle East
37 18
Africa
45 2
Latin America
679
28
United Kingdom
679
454
Switzerland
148
189
Netherlands
472
238
Germany
117
218
France
86
189
Europe
1,976
1,685
Canada
260
226
2500
2000
1500
1000
500
0
500
1000
1500
2000
Billions
USDIA
FDIUS
Source: U.S. Department of Commerce
12 For additional information, see CRS Report RS21344, European Union Enlargement, by Kristin Archick.
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Figure 6. Employment of U.S. Foreign Affiliates Abroad and Affiliates of Foreign
Firms in the U.S., by Country or Region, 2008
Japan
0.6
0.7
Asia
3.3
0.9
Middle East
0.1
0.1
Africa
0.2
0.0
Latin America
2.3
0.4
United Kingdom
1.3
1.0
Switzerland
0.1
0.4
Netherlands
0.2
0.4
Germany
0.7
0.6
France
0.6
0.6
Europe
4.8
3.6
Canada
1.1
0.5
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Millions
U.S. Foreign Affiliates
Foreign Affiliates in the U.S.
Source: U.S. Department of Commerce
Some U.S. observers are concerned that the U.S. economy is losing jobs to developing countries
where wage rates and environmental standards are considerably below those in the United States.
The data, however, 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 the early 2000s, 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 made 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 2008, U.S. affiliates in Mexico had 900 thousand
employees, third behind affiliates in the United Kingdom with nearly 1.17 million employees and
affiliates in Canada with 1.06 million employees. At times, employment associated with U.S.
direct investment in Latin America and Asia has increased, while employment in Africa and the
Middle East has 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. From 2003 to 2007, the economy created
an average of more than 2 million jobs per year. In 2008, the economy lost more t han 2 million
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as a result of the economic recession. 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. From 2005 to 2007, these affiliates created more than 300,000 jobs per year,
reflecting the increase in economic activity abroad. This amount dropped to about 100 thousand
jobs in 2008, again reflecting the economic recession and financial crisis. 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.13 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 2007 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 would be 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. Such shifts in employment would continue to occur even in the absence of foreign
investment. In addition, such shifting occurs as a result of greater economic specialization both
within countries and between countries. As Table 6 indicates, U.S. parent companies had a gross
product, or total U.S. output, of $3.6 trillion in 2008, representing 66% of the total output of U.S.
multinational companies, compared with a gross product of their majority-owned foreign
affiliates of $1.2 trillion. As the U.S. economy expanded rapidly in the last half of the 1990s
through 2001, 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 76% in 2001.
Since then, however, output among U.S. parent companies grew at a slower pace than did that of
their majority-owned foreign affiliates, which had grown to account for nearly 30% of total
output of the U.S. multinational companies in 2007. In 2008, the rate of economic activity in the
U.S. economy slowed down relative to that in other advanced economies, so that output by U.S.
parent companies started declining sooner than that of output in affiliates located abroad.
Table 6. Gross Product of U.S. Parent Companies and Their Majority-Owned Foreign
Affiliates
Total Gross
Parent
Majority-Owned
Parent
Majority-Owned
Product
Companies
Foreign Affiliates Companies
Foreign Affiliates
(millions of dollars)
(percent shares)
1994 $1,717,488
$1,313,792
$403,696
76.5%
23.5%
13 See the following for availability of information on job loss associated with outsourcing:CRS Report RL30799,
Unemployment Through Layoffs and Offshore Outsourcing, by Linda Levine.
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Outsourcing and Insourcing Jobs in the U.S. Economy
Total Gross
Parent
Majority-Owned
Parent
Majority-Owned
Product
Companies
Foreign Affiliates Companies
Foreign Affiliates
(millions of dollars)
(percent shares)
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 2,478,056
1,892,399
585,657
76.4%
23.6%
2002 2,460,411
1,858,805
601,606
75.5%
24.5%
2003 2,655,903
1,958,125
667,778
73.7%
26.3%
2004 2,991,723
2,173,467
818,256
72.6%
27.4%
2005 3,185,159
2,303,060
882,099
72.3%
27.7%
2006 3,538,079
2,536,873
1,001,206
71.7%
28.3%
2007 3,706,396
2,588,811
1,117,585
69.8%
30.2%
2008 3,608,142
2,396,288
1,211,854
66.4%
33.6%
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.14 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 1989.15 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. During the
period from 1989 to 1998, 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. 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 a time when the U.S. manufacturing sector as a
whole was shrinking as a share of national GDP (from 20% to 16%).16
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
14 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.
15 Mataloni, Operations of U.S. Multinational Companies. p. 31.
16 Ibid., p. 31.
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richest developed economies: the share of U.S. direct investment going to developing countries
fell from 28% in 1999 to 25% in 2003. In the 2005 through 2009 period, investment flows were
somewhat erratic due to a one-time tax provisions in 2005 that sharply reduced U.S. direct
investment that year and the following year as flows returned to their historical trend, and the
economic recession in 2008 and 2009. During this five-year period, flows to Asia increased as a
share of total U.S. direct investment abroad, primarily due to a large increase in direct investment
in China. Shifts in U.S. direct investment abroad over the last decade reflect fundamental changes
that occurred in the U.S. economy during the 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.17 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.
Table 7. U.S. Direct Investment Abroad; Investment Outflows for Selected Regions
and Countries, 2005-2009
(millions of dollars)
2005
2006 2007 2008 2009
All Countries
$15,369 $224, 220 $393,518 $330,491 $248,074
Canada
13,556 -1,551
22,331 5,986
18,085
Europe
-29,035 147,687 239,803 192,691 129,014
France
-1,156
7,076
12,010
-168
2,393
Germany
7,978
2,703 9,569 1,154 6,775
Ireland
-15,041
20,148 15,506 25,433 24,704
Italy
-1,155
2,891 3,704 2,284 2,291
Luxembourg
-8,797 17,359 24,535 23,069 14,874
Netherlands
-19,284
41,118
109,097
52,839
42,974
Spain
3,616
-861 8,758 4,798 1,112
Sweden
875 2,616 2,364 4,230 -10,144
Switzerland
-8,545
11,019
7,365
23,700
15,039
United Kingdom
6,269
30,535
21,978
37,138
20,119
Latin America
74 35,672 55,324 77,018 66,149
Mexico
9,596
9,444 9,798 6,898 5,924
Bermuda
-1,000 19,944 14,785 21,903 26,588
U.K. Islands
-12,586
-6,374
12,640
21,701
10,198
Africa
2,564
5,157 4,490 3,764 5,733
17 CRS Report RS21118, U.S. Direct Investment Abroad: Trends and Current Issues, by James K. Jackson.
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2005
2006 2007 2008 2009
Egypt
1,112
54
996
1,630
1,410
South Africa
82
159
1,000
267
412
Other
2,216
4,800
3,090
193
1,909
Middle East
3,785
5,699 4,070 3,907 4,925
Israel
3,058
2,416 554 657 144
Saudi Arabia
-209
768
560
344
2,916
United
Arab
Emirates -64 1,322 255 321 542
Qatar
1,034
695
2,181
(D)
(D)
Asia and Pacific
24,426
31,566 67,500 47,125 24,168
Australia
(D) 1,473 10,122 10,182 6,202
China
1,955
4,226
5,243
15,839
-6,997
Hong Kong
4,688
4,174
11,533
-332
6,367
India
721 1,834 3,915 3,514 1,349
Japan
5,940
2,709
15,721
-1,150
6,140
Korea
1,687
2,518
821
2,142
3,368
Singapore
3,206
8,035
14,003
8,996
5,833
Source: Department of Commerce.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to protect the
confidentiality of the foreign investor. The drop in U.S. direct investment abroad in 2005 reflects actions by U.S.
parent firms to reduce the amount of reinvested earnings going to their foreign affiliates for distribution to the
U.S. parent firms in order to take advantage of one-time tax provisions in the American Jobs Creation Act of
2004 (P.L. 108-357).
Foreign-Owned Firms
The performance of foreign-owned establishments, on average, compared with their U.S.-owned
counterparts presents a mixed picture. Historically, foreign-owned firms operating in the United
States have had lower rates of return, as measured by return on assets, than U.S.-owned firms,
although the gap between the two groups appears to have narrowed over time. According the
Bureau of Economic Analysis, this narrowing of the gap in the rate of return appears to be related
to age effects, or the costs associated with acquiring or establishing a new business that can entail
startup costs that disappear over time and market share.18 By other measures, foreign-owned
manufacturing firms appear to be outperforming their U.S. counterparts. 19Although foreign-
owned firms account for less than 3% of all U.S. manufacturing establishments, they have had six
times more value added on average and seven times higher value of shipments than other
manufacturing establishments. The average plant size for foreign-owned firms is much larger—
six times—than for other U.S. firms, on average, in similar industries. This difference in plant
18 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.
19 Foreign Direct Investment in the United States, Establishment Data for 2002, Bureau of Economic Analysis, June
2007.
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size apparently rises from an absence of 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 60% higher than other U.S. manufacturing firms, had 40% higher productivity per
worker, and 58% 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.
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 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.
Cyclical vs. Structural Changes
The Bureau of Economic Analysis publishes detailed data on a broad range of industries
represented by U.S. parent companies and their foreign affiliates. These data are 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 during three time periods,
representing two periods of fast growth separated by a period of slower growth to measure the
performance of U.S. parent firms and their foreign affiliates during these periods. In particular,
the data are compared 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, when economic
growth slowed in the United states, that is different from what has happened during the 1995
to1998 period and 2003 to2008 periods when growth was relatively stronger. The data are then
used to determine if shifts in production from parent companies to foreign affiliates can be
attributed to structural changes in the economy or to cyclical changes that are associated with the
business cycle. Structural changes, for instance, can occur in industries that are maturing and
experiencing economies and improvements due to technological improvements, or in declining
industries that are shedding jobs and capital. It is not always possible to tell which stage of
economic change certain sectors are experiencing, but such a distinction is important in order to
understand how direct investment is affecting the economy, and for determining what, if any,
legislative prescription would be appropriate.
The data in Table 8 compare two periods of economic expansion—1995 to 1998 and 2003 to
2008—with the economic slowdown in the 1999 to 2002 period. These three 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 the first and third
periods when the U.S. economy grew at an annual average rate of more than 3% per year and the
later period when the economy grew at an average annual rate of about 2.5%. Economic sectors
that are experiencing long-term structural changes would be expected to perform at lower rates
during expansions and contractions in the economy, while both declining and expanding sectors
would be expected to be affected by cyclical changes in the economy. although expanding sectors
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would resume their expansion once the economic downturn had ended. 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 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’ average
annual gross product decreased by 1%, while the average annual gross product of U.S. foreign
affiliates rose by 2.6%, slightly below the average annual rate of growth 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 1.7%
average annual rate among the affiliates, a rate that is about one-third the 4.8% average annual
rate the affiliates experienced in the 1995 to 1998 period and below the average annual rate of
8.8% increase in employment the affiliates experienced in the 2003 to 2008 period. In contrast,
during the 1995-1998 period, parent company’s gross product grew at an average annual rate of
5.6%, about twice the rate of the foreign affiliates, although employment among the parents grew
by 2.2% during the period, or half the rate of the growth in employment among foreign affiliates
as indicated in Figure 7 and Figure 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 due to a growing network of economic and financial ties.
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Figure 7. Average Annual Percent Change in Gross Product of U.S. Parent
Companies and Their Foreign Affiliates, Selected Periods
16
Average Annual Percent Change
14
12
10
8
6
4
2
0
%Chg. 1995 to 1998
%Chg. 1999 to 2002
%Chg. 2003 to 2008
-2
Parent Companies
Affiliate Companies
Source: U.S. Department of Commerce
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Table 8. Average Annual Percent Change in Gross Product and Employment of U.S. Parent Companies and Their Foreign
Affiliates, Selected Industries, Selected Periods
Average Annual Percent Change
Average Annual Percent Change
Average Annual Percent Change
1995 to 1998
1999 to 2002
2003 to 2008
Gross Product
Employment
Gross Product
Employment
Gross Product
Employment
Parents Affiliates Parents Affiliates Parents Affiliates Parents Affiliates Parents Affiliates Parents Affiliates
All industries
5.6% 2.9% 2.2% 4.8% -1.0%
2.6% -0.9%
1.7% 4.5% 14.7% 0.0% 8.8%
Oil and gas extraction
78.1
-4.8
38.0
44.8
13.9
-16.0
2.9
6.1
22.5
363.0
13.1
1.8
Manufacturing
2.7 1.1 -2.0
1.1 -3.7
3.6 -2.4
0.3 2.7 2.0 -2.3
5.5
Food and kindred
-0.6
2.3 -11.4
-5.4 -2.0
-1.5 3.1 2.6 1.6 11.7 -2.3
12.0
products
Chemicals and allied
2.5 4.0 -4.1
1.5 3.2 4.2 0.1 1.2 7.3 5.8 -0.6
1.9
products
Primary and fabricated
0.7 3.6 0.8 -1.2 1.3 2.0 -1.2
0.7 0.8 8.3 -6.4
0.5
metals
Computer and office
-1.7 -4.7 0.0 4.7 -3.7 9.7 0.9 -3.0 0.7 1.3 -0.7 5.2
equipment
Electronic
equipment
6.5 -1.4 1.0 -4.2 -6.9 -5.9 -7.3 -5.9 14.9
35.0 2.6 22.4
Transportation
6.8 5.5 1.1 6.4 -12.6
-7.3 -7.2
3.6 2.9 -1.9 -1.8
1.9
equipment
Motor vehicles and
1.3 5.5 -4.2 2.6 -10.6 -3.9 -3.8 -33.3 -7.3 1.8 -5.8 -20.0
equipment
Textile products and
3.6 2.6 -1.9 -0.4 -11.3
-7.9 -11.9
-0.9 -3.3 14.3 -7.9 3.8
apparel
Wholesale trade
26.6 1.2 16.6 32.9 3.1 -4.2 0.1 5.2 10.2 110.0 7.9 3.5
Finance
16.7 20.4 3.9 9.5 9.5 3.7 0.5 6.2 0.5 8.9 -8.6 21.4
Insurance
-3.0 16.0 -2.8 1.3 10.4 5.3 -0.6 6.0 -2.5 6.9 -2.3 3.8
Real estate
3.8 21.0 3.2 233.0 6.2 10.8 9.1 1.3 38.3 68.9 8.7 -20.0
Retail trade
10.3 5.6 8.1 NA 6.7 24.1 1.0 12.3 3.7 20.4 1.3 12.5
Services
14.4
17.3 11.4
17.1 0.9 0.2 -1.3
0.9 7.1 2.3 35.7
1.7
Source: Data are from the Department of Commerce; percent changes developed by CRS.
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Outsourcing and Insourcing Jobs in the U.S. Economy
Figure 8. Average Annual Percent Change in Employment of U.S. Parent Companies
and Their Foreign Affiliates, Selected Periods
10
Average Annual Percent Change
8
6
4
2
0
%Chg. 1995 to 1998
%Chg. 1999 to 2002
%Chg. 2003 to 2008
-2
Parent Companies
Affiliate Companies
Source: U.S. Department of Commerce
Gross product in the manufacturing sector fared poorly over the second period, but showed some
gains in the 1995 to 1998 period and in the 2003 to 2008 recovery. Output by U.S. parent
companies in the later period increased by 2.7% on an average annual basis, while output among
the foreign affiliates increased by 2.0%, as indicated in Figure 9 and Figure 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 at an average annual rate of 2.7%, more than twice
the rate among the overseas affiliates. Employment among the parent companies, however, fell at
an average annual rate of 2% 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 at an average annual rate of 1%, 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 at an average annual rate of 3.7%, and
employment fell at an average annual rate of 2.4%, 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 that had already occurred. In comparison, U.S.-owned
foreign manufacturing affiliates experienced a 3.6% increase in average annual gross product, but
only a average annual increase in employment of 0.3%. During the recovery of 2003 to 2008,
however, gross product among U.S. parent manufacturing companies increased at an average
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annual rate of 2.7%, while the foreign affiliates experienced an increase of 2.0%. Despite this
recovery in output, U.S. parent companies continued to experience a loss of manufacturing jobs,
while the foreign affiliates expanded their employment rolls by an average annual rate of 5.5%.
Figure 9. Average Annual Percent Change in Manufacturing Gross Product of U.S.
Parent Companies and Their Foreign Affiliates, Selected Periods
4
Average Annual Percent Change
3
2
1
0
-1
%Chg. 1995 to 1998
%Chg. 1999 to 2002
%Chg. 2003 to 2008
-2
-3
-4
-5
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. In the 1995 to 1998 period, as the U.S.
economy expanded, gross product in the wholesale trade sector among parent companies grew at
an average annual rate of 26.6% and employment grew at an average annual rate of 16.6%.
Among the foreign affiliates in the wholesale trade sector, gross product increased at an average
annual rate of 1.2%, but employment increased at an average annual rate of 32.9%. In the 1999 to
2002 period, when the rate of economic growth had slowed, gross product among parent
companies increased at an average annual rate of 3%, while employment stayed even. Among
affiliates, gross product fell at an average annual rate of 4%, but employment increased by an
average annual rate of 5%. In the 2003 to 2008 period, however, both U.S. parent companies and
their foreign affiliates experienced a resurgence in the average annual rate of growth in the
wholesale trade sector (10.2% and 110.0%, respectively), but employment grew at a much slower
average annual rate among the affiliates (3.5%) than among the U.S. parent companies (7.9%).
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Figure 10. Average Annual Percent Change in Manufacturing Employment of U.S.
Parent Companies and Their Foreign Affiliates, Selected Periods
6
Average Annual Percent Change
5
4
3
2
1
0
-1
%Chg. 1995 to 1998
%Chg. 1999 to 2002
%Chg. 2003 to 2008
-2
-3
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 at
an average annual rate of 16.7% and employment expanded by 3.9%. Affiliates in finance
experienced similarly robust growth: gross product increased at an average annual rate of 20.4%
and employment grew at an average annual rate of 9.58% as U.S. finance firms used their
expertise to capture market shares abroad. The finance sector was affected by the slower growth
in the economy in the 1999 to 2002 period, as average annual gross product among parent
companies grew by 9.5%, compared with an increase of 3.7% for foreign affiliates. During the
same period, employment among U.S. parent firms in the finance sector grew by 0.5%, while
employment among the affiliates grew at an average annual rate of 6.2%. The response during the
recovery period, 2003 to 2008, by both the U.S. parents and the foreign affiliates is unique: gross
product among U.S. parents rose at an average annual rate of 0.5% and employment fell at an
average annual rate of 8.6%, gross product among the foreign affiliates grew at an average rate of
8.9% and employment grew by 21.4%, likely reflecting the differential effects of the financial
crisis on American, European, and Asian finance firms.
In 1999, the Bureau of Economic Analysis changed the composition of industries in its survey to
include more high-tech service sectors. Twenty of these sectors are listed in Table 9, with data for
the 1999 to 2002 period and for the 2003 to 2008 period. During the first period, average annual
gross product by parent companies fell in eight of the sectors, reflecting the lower overall rate of
economic growth during the period of lower economic growth. Not all of these eight sectors,
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however, experienced lower average annual losses in employment. Indeed, in 12 of the sectors,
the average annual rate of gross output for the parent firms increased over the 1999 to 2002
period, with most of those sectors experiencing positive increases in employment.
Table 9. Changes in Gross Product and Employment Among U.S. Parent Companies
and Their Foreign Affiliates for Selected Industries
1999 to 2002
2003 to 2008
Average Annual Percent Change Average Annual Percent Change
Gross Product
Employment
Gross Product Employment
Par. Affl. Par. Affl. Par. Affl. Par Affl.
Computers and electronic products -3.7%
9.7%
0.9%
-3.0%
0.7%
1.3%
-0.7
5.2
Computers and equipment
0.1
24.4
5.5
-8.4
-0.9
-6.8
6.0
13.6
Communications
equipment
-3.8 -0.4 -9.9 2.8 -1.4 -1.7 -7.7 NA
Audio and video equipment
-16.9
-20.6
-14.6
-33.3
NA
23.9
NA
NA
Semiconductors and components
-17.5
-4.1
-4.9
-1.0
-2.3
11.7
-0.4
9.6
Navigational and other instruments
84.6
73.7
64.8
4.7
10.5
3.6
1.0
-0.4
Magnetic and optical media
-12.0
3.0
-8.2
-33.3
NA
27.2
NA
NA
Professional
services
0.9 0.2 -1.3 0.9 13.2
10.4
7.6 7.0
Architectural and engineering serv.
1.6
-2.1
-2.9
-7.3
31.9
28.1
20.9
NA
Computer systems design
-1.4
-1.8
-2.3
2.1
9.4
3.7
2.1
NA
Management and consulting
8.7
23.6
4.0
0.3
3.0
21.7
-4.0
-9.4
Advertising and related services
10.1
0.4
2.2
1.4
1.4
16.4
-1.0
-2.4
Other -1.1
2.2
-2.2
3.4
23.6
42.6
18.5
32.5
Mang. of nonbank companies
-56.2
17.6
30.9
32.9
77.9
-67.1
81.6
119.8
Administrative
support
4.9 -1.8 -5.8 1.7 14.5 25.4 3.0 NA
Health care and social assistance
7.8
72.4
3.1
10.7
0.3
10.0
-6.2
-7.6
Accommodation and food services
3.5
-1.1
5.5
1.9
1.5
16.9
-0.9
27.7
Accommodation
3.4 -1.5 5.8 1.2 -8.4
18.3
-10.1
NA
Food services
3.6
-1.0
5.3
2.0
8.6
16.6
3.4
NA
Miscel aneous services
7.7
-5.4
14.5
-2.4
46.1
87.6
21.9
NA
Source: Department of Commerce.
The pattern of the foreign affiliates closely resembles that of the parent firms, with the affiliates
experiencing positive rates of growth and employment in about a dozen sectors. Some sectors,
though, experienced falling rates of output and employment during the 1999-2002 period and
during the 2003-2008 period, reflecting a broader scale of economic decline that extended beyond
the economic downturn. In the seven high technology sectors, parent companies regained positive
growth and rising employment in all but the communications equipment and semiconductor
sectors. The foreign affiliates also experienced a continued decline in gross product in
communications equipment sector during the 2003-2008 period. In the 13 services sectors both
parent companies and foreign affiliates experienced a rebound in employment in nearly all of the
sectors, reflecting the continued growth of the services sectors in the advanced economies.
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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 U.S. direct investment abroad supplants U.S. exports, jobs, and research and
development funds, thereby reducing employment and wages in the U.S. economy. Others are
concerned that outward direct investment alters the industrial composition of domestic production
and trade flows, which can affect the sectoral and regional distribution of employment and the
relative demand for skilled and unskilled labor.20 According to this scenario, as firms invest
abroad, they shift production abroad and replace U.S.-based production with exports back to the
United States, thereby eliminating jobs in the United States. As production shifts abroad, jobs are
lost in the United States and goods that once were produced in the United States are now
imported from abroad. However, most studies indicate that, on balance, direct investment abroad
increases U.S. exports and helps sustain employment and wages at home.21
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 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 as a share of total trade. 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 since 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. From 2000 to 2003, intra-firm trade, both exports and imports, increased as a share of total
U.S. exports and imports respectively, but since 2003, intrafirm trade in exports and imports has
trended downward as a share of total U.S. exports and imports.
20 International Investment Perspectives: 2006 Edition, the Organization for Economic Cooperation and Development.
p. 99.
21 Ibid., p. 101; Brainard, S. Lael, and David A. Riker, Are U.S. Multinationals Exporting U.S. Jobs? NBER Working
Paper 5958, National Bureau of Economic Research, March 1997.
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Figure 11. Intra-Firm MNC Trade as a Share of Total U.S. Exports and Imports,
1990-2008
60
50
40
e
tag 30
rcen
Pe
20
10
0
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
199 199 199 199 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200
Exports
Imports
Source: U.S. 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 45% in 2008. Similarly, the share of U.S. exports shipped by the U.S.
affiliates of foreign parent companies fell from 23% in 1992 to 18% in 2008. 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 25% of U.S. exports in 1992 to 21% in 2008, as
exports to firms not associated with the parent firm increased. The exports of U.S. affiliates of
foreign firms to their foreign parent companies has remained steady at about 9% from 1992 to
2008. Similarly, total intra-firm exports fell from 35% of U.S. exports in 1992 to 30% in 2008.
The intra-firm share of U.S. exports remained relatively stable during the economic downturn in
the early 2000s, suggesting that such intra-firm trade 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.
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Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods, 1992-2007
(in millions of dollars)
Exports By U.S. Parent
Exports By Foreign
Intra-
Companies
Affiliates
MNC
Total
Exports
U.S.
By
Intra-
as
Exports
Share
Share
To
Others MNC
Share
of
of
To
of
Foreign
Exports of
Goods
Total
Total
Foreign
Total
Total
Total
U.S.
Parent
Affiliates
U.S.
Group
U.S.
Exports
Exports
Exports
1992 448,166 265,915 59%
105,999 103,925 23%
48,767 78,326 154,766 35%
1993 465,090 274,666 59%
113,762 106,615 23%
47,350 83,809 161,112 35%
1994 512,626 344,504 67%
136,128 120,683 24%
51,147 47,439 187,275 37%
1995 584,742 374,002 64%
152,666 135,153 23%
57,246 75,587 209,912 36%
1996 625,075 405,721 65%
161,751 140,886 23%
60,831 78,468 222,582 36%
1997 689,182 441,272 64%
186,526 141,305 21%
63,025 106,605 249,551 36%
1998 682,138 438,292 64%
185,372 151,005 22%
57,565 92,841 242,937 36%
1999 695,797 435,192 63%
162,503 153,572 22%
59,881 107,033 222,384 32%
2000 771,994 448,807 58%
182,719 165,321 21%
65,342 167,790 248,061 32%
2001 718,712 419,014 58%
197,967 157,459 21%
65,897 314,569 263,864 36%
2002 682,422 399,781 59%
184,799 137,037 20%
61,530 282,641 246,329 36%
2003 715,848 408,600 57%
183,976 147,643 21%
71,186 307,248 255,164 36%
2004 806,161 438,193 54%
164,344 155,507 19%
74,784 367,968 239,128 30%
2005 892,337 485,627 54%
174,743 169,238 19%
78,799 406,710 253,542 28%
2006 1,015,812 531,963 52%
237,553 195,292 19%
88,621 483,849 326,174 32%
2007 1,138,384 558,622 49%
257,660 215,554 19%
106,088 579,762 363,748 32%
2008 1,304,896 592,995 45%
269,752 232,413 18%
116,560 711,901 386,312 30%
Source: Department of Commerce.
On the import side, intra-firm trade has also declined as a share of total U.S. imports, defying the
notion that U.S. firms are supplanting U.S. production with imports by outsourcing production
abroad. Until recently, intra-firm imports has remained fairly stable as a share of total U.S.
imports as indicated in Table 11 Imports shipped to U.S. parent companies fell from 41% of total
U.S. imports in 1992 to 33% of U.S. imports in 2008. Similarly, U.S. imports by the U.S.
affiliates of foreign firms fell from 35% of U.S. imports in 1992 to 26% of U.S. imports in 2008.
In addition, intra-firm imports, or imports from the foreign affiliates of U.S. parent companies to
those parent companies fell from 17% of total U.S. imports to 12% of U.S. imports from 1992 to
2008, which raises questions about the concept of U.S. outsourcing of production abroad
replacing U.S. domestic production. During the same 1992-2008 period, imports from foreign
parent companies and their associated affiliates (collectively known as the foreign parent group)
to their U.S. affiliates fell from 35% to 26% of U.S. imports, so that intra-firm imports as a whole
fell from 43% of total U.S. imports to 33%, due in part to imports shipped to importers outside
the intra-firm trade relationship. These data do not seem to conform with the argument that U.S.
firms have shifted some production facilities abroad and have supplanted domestic production
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with imports. At the same time, data are not conclusive and may also indicate that foreign
investment can stimulate foreign sales, which boosts domestic production and mitigates the
economic impact of foreign outsourcing.
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 of 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 in support of an increase in jobs or activities being outsourced abroad.
As Table 12 indicates, the foreign affiliates of U.S. parent companies had $5.2 trillion in sales in
2008. The largest share of affiliate sales—about 60%—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 2008 accounted for
about 30% of the affiliates’ sales. European affiliates, which accounted for about half of all
affiliate sales, also accounted for the lowest share of their sales back to the United States, where
over 40% of their sales is to other foreign countries, mostly to other countries within the
European Common Market. Out of all U.S. affiliate sales, 7.9% 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 2.1% of their sales were to other U.S. persons, or to importers that are not directly
associated with the parent company.
Table 11. Multinational Corporations’ Intra-Firm Imports of U.S. Goods, 1992-2008
(in millions of U.S. dollars)
Imports Shipped to U.S.
Imports Shipped to
Intra-
Parents
Foreign Affiliates
Total
MNC
U.S.
Intra-
Imports
Imports
From
From
as
Share
Share
MNC
of
the
Others
Share
of Total From
of Total
Imports
Goods
Total
Total
Foreign
of Total
U.S.
Affiliates
U.S.
Parent
U.S.
Imports
Imports Group
Imports
1992 532,663 219,676 41%
93,893
184,464 35%
137,799 128,523 231,692 43%
1993 580,659 223,901 39%
97,112
200,599 35%
150,789 156,159 247,901 43%
1994 663,256 256,820 39%
113,415 232,362 35%
174,641 174,074 288,056 43%
1995 743,543 289,941 39%
122,273 250,824 34%
191,222 202,778 313,495 42%
1996 795,289 326,200 41%
137,160 268,673 34%
197,656 200,416 334,816 42%
1997 869,704 350,822 40%
147,452 264,924 30%
202,355 253,958 349,807 40%
1998 911,896 355,976 39%
158,146 292,046 32%
205,181 263,874 363,327 40%
1999 1,024,618 388,480 38%
164,449 324,994 32%
229,857 311,144 394,306 38%
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Imports Shipped to U.S.
Imports Shipped to
Intra-
Parents
Foreign Affiliates
Total
MNC
U.S.
Intra-
Imports
Imports
From
From
as
Share
Share
MNC
of
the
Others
Share
of Total From
of Total
Imports
Goods
Total
Total
Foreign
of Total
U.S.
Affiliates
U.S.
Parent
U.S.
Imports
Imports Group
Imports
2000 1,226,684 446,016 37%
191,150 366,647 30%
272,374 404,224 463,524 38%
2001 1,148,231 437,133 37%
216,899 347,823 30%
266,451 392,688 483,350 41%
2002 1,167,377 427,559 37%
217,673 324,578 28%
256,691 415,240 474,364 41%
2003 1,264,860 471,132 37%
232,522 356,756 28%
290,492 436,972 523,014 41%
2004 1,477,996 540,904 37%
217,216 394,463 27%
320,268 542,629 537,484 36%
2005 1,683,188 603,345 36%
220,522 452,968 27%
360,026 626,875 580,548 35%
2006 1,863,072 694,517 37%
237,583 482,363 26%
380,974 686,192 618,557 33%
2007 1,969,375 728,413 37%
259,561 533,430 27%
426,813 707,532 686,374 35%
2008 2,139,548 768,127 36%
262,826 566,925 26%
451,919 804,496 714,745 33%
Source: Department of Commerce.
Table 12. Sales of Goods and Services by U.S. Foreign Affiliates by Destination and
Industry, 2008
Total
To U.S.
Local
Other Foreign Other U.S.
Parents
Countries
Persons
Billions of Dollars Percent Share
Sales by Destination
Al countries
$5,202.2
7.9%
58.6%
31.4%
2.1%
Canada 593.3
17.4%
74.9%
2.9%
4.8%
Europe 2,726.1
4.8%
53.0%
40.7%
1.5%
Latin America
598.0
12.6%
59.5%
25.0%
2.9%
Africa 97.2
25.0%
49.2%
23.4%
2.4%
Middle East
48.6
14.0%
58.3%
24.9%
2.8%
Asia and Pacific
1,139.0
6.2%
62.0%
28.4%
1.5%
Sales by Industry
Al industries
$5,202.2
7.9%
58.6%
31.4%
2.1%
Mining 338.0
13.7%
42.2%
39.8%
4.2%
Utilities 48.7
(D)
87.7%
(D)
(D)
Manufacturing 2,285.2 9.2%
54.5%
34.0%
2.2%
Wholesale trade
1,391.8
7.6%
53.8%
37.5%
1.1%
Information 184.8
3.3%
61.4%
32.2%
3.1%
Finance and insurance
286.0
6.4%
73.4%
17.3%
2.9%
Services 173.7
6.4%
74.2%
17.9%
1.5%
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Total
To U.S.
Local
Other Foreign Other U.S.
Parents
Countries
Persons
Billions of Dollars Percent Share
Other industries
494.1
(D)
84.1%
(D)
(D)
Source: Department of Commerce.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to protect the
confidentiality of the foreign investor.
Affiliates located in the Middle East, which accounted for the lowest amount overall of affiliate
sales, sent 14% of their goods back to the parent firm in the United States. A large part of these
sales originated in Israel, which has had a free trade agreement (FTA) with the United States since
1985. Among all the regions, sales by affiliates in Africa 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 75% 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 93% of all sales by European affiliates. Sales by affiliates in
Latin America are dominated by local sales, which accounted for about 60% of total sales, with
about 13% of sales sent to the United States, and 25% 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 9% 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 nearby foreign countries.
Sales of Services
For some observers, 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.22 A
report published by the National Academy of Public Administrators (NAPA) on the impact of
foreign investment on the services sectors, especially on services involving advanced science and
engineering education concluded that, “services off-shoring has had little economic impact on the
S&E (science and engineering) labor market, education of S&E workers, or S&E career choices
of American students.”23 As Table 13 indicates, U.S. foreign affiliates had $841 billion in services
sales in 2008. Of this amount, 4.9% consisted of service sales back to the U.S. parent company.
The largest share—74%—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. Latin America and the Middle East are the areas with the
highest share of sales back to the U.S. parent companies, while Asia and Europe represent the
areas with the lowest share of services sales back to the U.S. parent. The Commerce Department
has suppressed a large amount of the data on sales of services by industry in order to protect the
22 Lohr, Steve. “High-End Technology Work Not Immune to Outsourcing.” The New York Times, June 16, 2004, p. C1.
23 Off-shoring: What Are It’s Effects?, National Academy of Public Administration, January 2007, p. xiii.
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confidentiality of individual firms, but the highest share of service sales in the local market is in
the areas of finance and insurance and information. 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,
2008
Total
To U.S.
Local
Other Foreign Other U.S.
Parents
Countries
Persons
Billions of Dollars
Percent share
Sales by Destination
Al countries
$840.8
4.9%
73.8%
18.4%
2.9%
Canada 83.4 7.2%
86.9%
1.7%
4.2%
Europe 469.0 4.6%
68.9%
23.8%
2.8%
Latin America
89.5
7.0%
66.1%
24.4%
2.5%
Africa 8.7 5.4%
71.7%
17.9%
5.1%
Middle East
10.3
7.4%
81.4%
6.9%
4.4%
Asia and Pacific
179.8
3.7%
84.0%
9.7%
2.6%
Sales by Industry
Al industries
$840.8
4.9%
73.8%
18.4%
2.9%
Mining 30.5 0.4%
74.2%
22.8%
2.5%
Utilities (D)
(D)
(D)
(D)
(D)
Manufacturing 33.0
2.9%
58.6%
38.3% 0.2%
Wholesale trade
42.3
10.5%
52.3%
36.1%
1.1%
Information 127.1
(D)
76.1%
(D) (D)
Finance and insurance
175.7
6.5%
75.5%
14.9%
3.0%
Services (D)
(D)
(D)
(D)
(D)
Other industries
228.2
3.6%
74.0%
19.1%
3.2%
Source: Department of Commerce.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce to protect the
confidentiality of the foreign investor.
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 1999 and 2002, when the U.S. economy was slowing, the
average annual rate of growth in the sales of services back to the U.S. parent company grew by
11%, based mostly on sales by affiliates in Europe. The average annual rate of growth in the sales
of services from affiliates in Africa fell by 11%, while sales from other areas rose slowly.
In the 2003 to 2008 period during which the pace of U.S. economic growth picked up relative to
the previous period, the overall average annual rate of growth in the sales of services rose by
nearly 75%. Similarly, sales of services to U.S. parent companies rose by 93%, or at nearly eight
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times the rate experienced in the previous period. The average annual rate in the sale of services
back to the United States grew at especially rapid pace from affiliates in Canada and Africa.
Overall, the average annual rate in the sales of services to the local markets grew by about 12%,
still more than double the rate experienced in the previous period. Sales of services to other
foreign countries, however, fell from 37% to 24% as sales to the U.S. parents and in the local
market absorbed the largest share of production of services sales.
Table 14. Sales of Services by U.S. Foreign Affiliates, Average Annual Rates of Change
for Selected Periods
(percent change)
Total
To U.S. Parents
Local
Other Foreign
Countries
Avg. Ann Avg. Ann
Avg. Ann
Avg. Ann
Avg. Ann Avg. Ann
Avg. Ann
Avg. Ann
Time period % Chg
% Chg
% Chg
% Chg
% Chg
% Chg
% Chg
% Chg
1999 to
2003 to
1999 to
2003 to
1999 to
2003 to
1999 to 2002 2003 to 2008
2002
2008
2002
2008
2002
2008
Al
countries
6.7% 74.9% 11.2% 92.9% 3.6% 63.1% 36.6% 113.8%
Canada
5.0 82.4 2.5 278.9
5.1 73.0 103.1
83.0
Europe 5.7 82.4 28.2 77.9 0.7 64.9 42.4 140.9
Latin
America
8.1 48.3 1.3 98.6 7.9 37.9 11.5 67.8
Africa 5.1 88.7 -11.0 21.3 2.0 88.0 925.6 97.0
Middle
East
-14.8 271.7 4.0 105.6 -16.2 295.9 9.8
155.6
Asia and
10.9 63.1 0.7 65.7 9.5 60.4 49.3 57.2
Pacific
Source: Department of Commerce.
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.24 Although various academic studies have found that such
“spillover” effects appear to be small, a 2003 study challenges these conclusions.25 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. In addition, as Table 15 indicates, foreign firms generally spend more on high-technology
research and development within the United States than U.S. firms spend abroad. All three types
of R&D spending indicated in the table experienced a slowdown in R&D spending in 1991, 2002,
and 2008 in response to the slowdown in economic growth in those periods. Other than those
three years, however, R&D spending in nominal terms has increased every year by all three types
of firms. In addition, affiliates of foreign firms operating in the United States outspent the foreign
24 Incentives. United Nations Conference on Trade and Development, United Nations, 2004.
25 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.
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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
Parent Companies
Affiliates
Foreign Firms
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
2003 139,884
22,793
29,803
2004 164,189
25,840
29,900
2005 178,542
28,316
31,694
2006 184,428
29,583
34,257
2007 200,397
35,019
39,806
2008 199,105
36,991
36,991
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
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conditions that encourage inflows of direct investment also promote outflows of direct
investment.26
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: (1) the presence
of ownership-specific competitive advantages in a transnational corporation, (2) the presence of
locational advantages in a host country, and (3) the presence of superior commercial benefits in
an intra-firm as against arm’s-length relationship between investor and recipient.27
For some observers, 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
characteristics 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.28
According to the United Nations, technological improvements in the area of telecommunications
and computers have helped to 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.29
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
26 Lipsey, Robert E., Interpreting Developed Countries’ Foreign Direct Investment. NBER Working Paper 7810.
National Bureau of Economic Research, July 2000. P. 3-4.
27 World Investment Report 1998: Trends and Determinants. United Nations, New York, 1998. P. 89.
28 Ibid, p. 118.
29 Ibid, p. 108-109.
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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.30 These observations have not been borne out over time
as foreign direct investment has become a prominent feature of the globalization process. This
suggests that a complex set of factors account for the continued presence of foreign direct
investment.
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.31 These analysts conclude that market
imperfections and firm-specific factors32 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 quantities (economies of scale),33 the market power of the firm,34 the
30 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.
31 Mundell, Robert A. International Trade and Factor Mobility. American Economic Review, June 1957. p. 321.
32 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.
33 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.
34 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.
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absolute size of the firm,35 cost advantages that arise from patents or other special advantages, or
from product-specific advantages (product differentiation).36
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.37 Some of these actions may be
related to gaining access to markets that are protected by high tariffs or by other economic
barriers.38 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.39 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 considerations.40
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.41 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.42 Studies show that the higher the level of output by a U.S. firm in a
35 Glickman, Norman J., and Douglas P. Woodward. The New Competitors. New York, Basic Books, Inc., 1989. p. 80-
90.
36 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.
37 Lipsey, Robert E., and Merle Yahr Weiss. Foreign Production and Exports of Individual Firms. The Review of
Economics and Statistics, May 1984. p. 491.
38 Helpman, Elhanan, and Paul R. Krugman. Market Structure and Foreign Trade. Cambridge, The MIT Press, 1985. p.
247-259.
39 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.
40 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.
41 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.
42 Lipsey, Robert E., and Merle Yahr Weiss. “Foreign Production and Exports of Individual firms.” The Review of
(continued...)
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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.43 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 also tend to shift the source of their production to their
offshore subsidiaries.44
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 worldwide.45 In some cases, these investments can span a
number of locations and production stages through a multi-layer supply chain. 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.46 These and such other
external conditions as relative growth rates among national economies, exchange rate
movements, productivity, trade restraints, and the desire to acquire technology47 are among the
most important factors in determining foreign investments. As a result of these market
conditions,48 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
(...continued)
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.
43 Lipsey, and Weiss, Foreign Production and Exports in Manufacturing Industries, p. 490
44 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.
45 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.
46 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.
47 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.
48 Root, International Trade and Investment, p. 464.
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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.49
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.50 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.51 This may include
the ability to switch among their various subsidiaries in supplying major markets to maintain their
competitive position without altering the market price of their goods.52 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.53
Conclusion
This report utilizes a broad collection of data on direct investment published by the Bureau of
Economic Analysis of the U.S. Department of Commerce 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 three distinct time
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
49 Ibid., p. 3.
50 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.
51 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.
52 Williamson, Multinational Enterprise Behavior and Domestic Industry Adjustment Under Import Threat, p. 60.
53 Ohno, Kenichi. Exchange Rate Fluctuations, Pass-Through, and Market Share. IMF Staff Papers, June 1990. p. 294-
309.
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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 systematically 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.
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
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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 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..
Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
Acknowledgments
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.
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