Why US Multinationals Expand Abroad

Mark Thoma points us to an article by David Wessel, who points out that new data from the BEA indicates that US-based multinational corporations (MNCs) decreased employment in the US while increasing employment outside the US:

Big U.S. Firms Shift Hiring Abroad
U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy.

I would like to sound a note of extreme caution when interpreting such data. It's easy to jump to the conclusion that this data indicates that MNCs are shifting jobs overseas, and that foreign employment growth is coming at the expense of jobs in the US. However, that is probably not what's going on here.

The vast majority of employment and sales by the foreign affiliates of US-based MNCs are serving the local market. When GE, or Microsoft, or Coca-Cola, or American Express expand their operations overseas, it is almost always with the primary goal of satisfying local demand, rather than replacing workers in the US. Yes, of course some offshore outsourcing does happen (though much less over the past few years than happened in the early 2000s), but really that's not what's driving the dramatic difference in employment patterns of US MNCs within the US compared to outside the US.

The following table shows employment changes and sales growth between 1999 and 2008 by major region. (Source: BEA data.) As you can see, employment of US-based MNCs did indeed fall by about 8% in the US during the period, while employment by those same MNCs rose elsewhere in the world by about 30%. In fact, US-based MNCs increased employment in the Asia-Pacific region by almost 75% over the period.


However, this reflects the fact that sales grew much faster for MNCs in countries other than the US. For example, the US branches of US-based MNCs sold only about 46% more in the US market in 2008 than they did in 1999. Meanwhile, the affiliates of US MNCs located in Europe increased their sales (excluding to the US) by 122%, while affiliates in the Asia-Pacific region increased their sales to markets other than the US by 177%. In other words, US-based MNCs expanded their operations outside the US dramatically during the period, but not primarily in order to produce stuff to be shipped to the US; rather, that overseas expansion was to serve overseas markets, which were booming for them.

The next table provides another perspective on this phenomenon, looking at absolute values of sales. In 2008, for example, the US branches of US-based MNCs sold approximately $8.7 trillion to the US market, while selling about $550 billion to non-US markets (i.e. exports). Meanwhile, the affiliates of US-based MNCs in Canada sold about $108 bn to the US but about $485 bn to markets outside the US (presumably most of that within Canada itself). And affiliates in Asia shipped only about 5% of their production back to the US -- the other 95% of sales by those affiliates of US-based MNCs were to markets outside the US (again, probably mostly in the Asia-Pacific region itself).


The point is not to argue that offshoring never happens. It does. But the pattern of international trade, particularly when it comes to the activity of MNCs, is much more complex and nuanced than that. And the clearest implication of this data is that the primary motivation for MNCs to expand their operations outside the US is not to produce stuff more cheaply there to be sold to the US. Rather, MNCs expand overseas mainly to service overseas markets.


UPDATE: I fixed a calculation error in the tables and modified the text to match.