Academic research is beginning to validate what corporate CEOs have known for decades: U.S. companies thrive by setting up production facilities close to their customers, either domestic or foreign. Multinational firms account for over 87% of value-added among manufacturers and about two-thirds of all employment. While multinationals have been unfairly maligned for exporting jobs and capital, the dynamic process of globalization strengthens the long-term prospects of the firms, including U.S.-based operations.
Since at least the 1920s, major American industrial firms have invested abroad, starting with Europe and Canada, to access large and sophisticated markets. The driving force was not low-cost labor -- otherwise they would have long ago moved to China or Pakistan -- but proximity to hungry consumers and to local knowledge, logistics and technical skills. By the 21st century, around 42% of the global sales of U.S. manufacturing multinationals came from sales by their foreign affiliates. Total sales by foreign affiliates are over $2.5 trillion and are five to six times larger than exports from the domestic parent.
Importantly, data dug up by MAPI's chief economist Dan Meckstroth show that the vast majority of sales by foreign affiliates -- about 88% -- is to the local or regional markets. In 2004, only 10% of sales by foreign affiliates went back to the U.S. parent for sale in the United States, a slight decline over the last 10 years. This belies the populist notion that U.S. multinationals are sending production abroad simply to seek lower costs and displace domestic production. Moreover, U.S. firms also show little growth in outsourcing to foreign suppliers, as the percent of their purchases represented by imports has grown only slightly from 14% in 1994 to 16% in 2004.
In 2004, the lion's share, 64%, of employees of the foreign affiliates of U.S. manufacturing firms were still located in high-cost countries such as Germany and Canada, compared to 73% in 1977. The respective shares of total employment for U.S. multinational manufacturing firms in foreign and U.S. domestic locations has changed little over the past 30 years. The U.S. parent share declined from 78% in 1977 to about 72% in 2004.
Finally, despite the hue and cry about exporting research and development (R&D) to lowercost locations, the share of R&D performed in the United States by U.S. multinationals has
remained steady at about 86% since 1990.
Besides seeking higher-growth markets, there are many other reasons for locating production in foreign locations. Academic research consistently shows the complementary relationships between the work of U.S. parents and their foreign affiliates, such as:
- Foreign affiliates' growth draws in component parts from the U.S. parent;
- The larger scale of global operations leverages the management, finance, purchasing,logistics, sales and administrative functions of the parent;
- Global operations lead to around-the-clock manufacturing and services operations, and customers benefit from prompt delivery, improved availability and customization;
- Markets in foreign countries provide extended life for products introduced in the United States, and thus amortize R&D costs over a larger base and improve profitability;
- Global scale and competition lowers prices for consumers, increases the variety of goods and services available, and gives the parent firm larger global market share; and
- Global operations give parent firms access to a larger pool of technical workers who help customize and improve product quality and value.
A template that worked in Europe two generations ago is now being employed in the growth areas of the future: China, India, Southeast Asia, Brazil, Russia and Central Europe. U.S. manufacturing has maintained a better than 20% global market share for decades, and expanding to these growth areas will help maintain it for generations to come.
Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.
