Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

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31 December 2008

Is it bad when an American company invests abroad?

First of all, if a company invests abroad, it probably believes it is good for its objectives. Second, it is likely to be beneficial to the country in which they make the investment since it means an influx of money for building new facilities or renting them, more jobs, and easier access to quality goods and services. But does it produce more good than bad for Americans? Such questions are not always easy to answer and may be unanswerable, which is why it is best to simply decide such things on the basis of leaving as much to individual choice as possible. Nonetheless, sometimes the answer is relatively straightforward, as it is in this case.

As I have noted a number of times, we have an idiocentric corporate tax policy which provides a strong incentive for American companies to invest more abroad and less in the U.S. Of course, it would generally be best for Americans if they were able to invest more rather than less in the U.S., which is why it is critically important that the U.S. corporate tax rate be greatly reduced. The example of Ireland has made it clear that a much lower rate will actually be likely to produce more revenue to government, so the extraordinarily high corporate tax rate in the U.S. is only punitive to U.S. corporations and to many individual Americans. It is also a case of government cutting off its own nose to spit itself. In sum, it is truly and completely idiocentric policy.

I am in the early stage of reading what is rapidly becoming a fascinating book. It is Global Tax Revolution, The Rise of Tax Competition and the Battle to Defend It by Chris Edwards and Daniel J. Mitchell. It was published by the Cato Institute of Washington, D.C. in 2008. The information below comes from this book.

But, when a U.S. company invests abroad now under whatever incentives it has, what is the result? First, it is not the case that most of this investment is in countries with very low wages. On the contrary, the U.S. Bureau of Economic Analysis data says that 81% of the production of all U.S.-owned foreign affiliates is in high-income countries and 77% of U.S. direct investment is also. Britain, Canada, and the Netherlands are the three top countries for U.S. foreign investment. In comparison, investments in China represented only 1% of total U.S. foreign direct investment in 2006.

In 2007, Ford Motor Company invested in a second major automobile assembly plant in China and added to production in India, each at an expense of about $500 million. In each case, the resulting production is expected to be consumed by the country in which the plant was built. These plants and expansions were for the purpose of gaining more of the home market in each country. In general, the purpose of U.S. company foreign direct investment is to generate more global sales and to gain an increasing portion of growing and strong markets in other countries. 90% of the sales of U.S. foreign affiliates are in foreign markets, with only 10% of these sales being due to imports of these products into the U.S.

U.S. multinational corporations exported 54% of all U.S. exports in 2005. The effect of this has been determined by The Organization for Economic Cooperation and Development, which claims that every dollar of outward foreign direct investment by a country results in $2 of additional exports from that country. Foreign investment of a U.S. company commonly results in an expansion of the U.S. operations of that company. As a company's foreign sales increase, that company's headquarters operations will commonly increase and these are often high-paying jobs. Another major beneficiary operation is R&D, which again is an operation with many high-paying jobs.

Most U.S. multinational corporation jobs are in the U.S. In 2005, it was 86% of those jobs. These multinational companies performed 79% of all U.S. business R&D, according to government statistics. I personally know that these statistics underestimate the R&D performed by small companies, which in general are not going to do the paperwork from which the government derives such statistics. However, it remains true that multinationals do a very large portion of U.S. business R&D. It is also the case that as U.S. multinational companies have increased sales abroad, their U.S. R&D jobs have increased greatly.

Intel is an interesting example. 84% of its revenues came from abroad in 2006, but more than half of its 94,000 employees are in the U.S. 4/5 of its R&D is done in the U.S., however. 12 of 16 semiconductor plants are in the U.S., with the rest in Ireland, Israel, and soon to be in China. Dow Chemical is the second largest chemical company in the world, after the German BASF. 63% of revenues come from abroad. Dow operates 150 manufacturing facilities in 37 countries, but 55% of its assets are in the U.S. and half of its employees are also here. It has 5,600 people in R&D, with 67% of them in the U.S.

So, the lesson is that the greater a U.S. multinational company's sales and operations abroad, the more high-paying and even total jobs they generate in the U.S. They also generally increase their net investment in facilities. Overall, Americans clearly do benefit from their ability to trade with people overseas.

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