Attracting Foreign Direct Investment through an Ambitious Trade Agenda: New Opportunities for the U.S. Economy and Workforce

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1 Attracting Foreign Direct Investment through an Ambitious Trade Agenda: New Opportunities for the U.S. Economy and Workforce Matthew J. Slaughter July 2013 This report was sponsored by the Organization for International Investment. The views expressed in this report are those of the author Matthew J. Slaughter

2 Introduction Inward foreign direct investment (FDI) has long been an engine for U.S. economic prosperity, innovation, and job growth. For decades, many of the world s leading companies have looked to expand their reach by investing in the United States. This investment has created an array of benefits for the American economy and its workers: jobs, technologies and best practices, and much-needed capital. Today the United States faces an increasingly competitive global environment for FDI, however. Multinational companies have an unprecedented array of options when looking to expand or establish new operations. Although the United States remains the world s leading recipient of FDI, its global share has dropped significantly since the turn of the 21 st century, down from roughly 37% in 2000 to just over 17% in The United States has the opportunity to do better. Expanding its network of free-trade agreements with key economic partners will be crucial if the United States hopes to maximize the potential benefits of FDI. Global firms currently investing or looking to invest in the United States tend to be tradeintensive companies that rely on global supply networks to stay competitive. By reducing impediments to the cross-border flow of goods and services, successful Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership agreements would boost inward investment from both existing and new global companies alike. Inward FDI Creates Millions of High-Quality, High-Paying Jobs in America The U.S. affiliates of global companies despite accounting for far less than 1% of U.S. businesses perform large shares of America s productivity-enhancing activities that lead to high average compensation for American workers. While making up a relatively small share of the U.S. business community, the American operations of foreign companies account for a disproportionately large share of critical economic activities whose benefits accrue throughout the country. The following figure documents these shares for the most recent year of data, 2011 for employment and 2010 for all other items. 1 1

3 Output: U.S. subsidiaries of global companies produced $649.3 billion in output (measured in terms of value added), approximately 5.8% of all private-sector output. Capital Investment: U.S. subsidiaries of global companies purchased $149.0 billion in new property, plant, and equipment 14.4% of all non-residential private-sector capital investment. Research and Development: To discover new products and processes, U.S. subsidiaries of global companies performed $41.3 billion of research and development. This was about 14.3% of the total R&D performed by all U.S. companies. Exports: U.S. subsidiaries of global companies exported $229.3 billion of goods to the rest of the world, 17.9% of the U.S. total. Intermediate Inputs: To produce their goods and services, U.S. subsidiaries of global companies purchased over $1.9 trillion in intermediate inputs from other U.S. companies, which was about 78.7% of their total input purchases. All these activities contribute to millions of well-paying jobs in America. In 2011, these U.S. affiliates employed 5.6 million U.S. workers, 5.0% of total private-sector payroll employment. In 2010 their total compensation was $408.0 billion a per-worker average of $77,409, more than a third above the average for the rest of the private sector. Of these jobs, 37.7% nearly 2.0 million were in manufacturing, far higher than manufacturing s 10.5% share of all jobs in the overall U.S. private sector today. Why Trade Matters for FDI: The Strong Complementarity between International Trade and Investment Multinational companies tend to be among the most-productive, most-trade-intensive companies in the world. To remain competitive, these companies depend upon thriving global supply networks. Trade agreements with significant economic partners that reduce barriers and lower costs to the movement of goods and services will make the United States more attractive as an investment location for global firms. The major driver of the trade-fdi complementarity is the rise of global supply networks. Success for American companies and their workers increasingly hinges on discovering creative, efficient new ways to produce goods and services. A distinguishing feature of the world economy over the past generation has been the reconfiguration of production. Today companies both large and small increasingly operate within elaborate global supply networks in which final products are made in many stages spanning many countries and companies, all linked together by knowledge, trade, and investment. The gains for companies and countries involved in these networks have been large: more innovation, lower costs, and faster growth of output and jobs. To stay globally competitive, many successful companies in America have been at the forefront of creating and expanding global supply networks. Products made in America in their entirety are increasingly rare. Rather, more U.S. output and thus more U.S. jobs are connected to these global networks. Made in America increasingly involves the rest of the world. 2

4 The United States historically offers several strengths that are well suited to many high-value, firmwide functions: e.g., highly educated workers, deep capital markets, and a culture of innovation and risk-taking. These American advantages are matched with a variety of global strengths: world-class technology, know-how, and components in other advanced countries; abundant labor well-suited to labor-intensive tasks in many emerging markets. Thus do companies in America connect to the world with well-paying U.S. jobs that involve some of the most integrative, innovative, and technologically advanced parts of global supply networks such as R&D, skilled production, logistics, management, and marketing. The pending deals now in negotiation with America s transatlantic and transpacific partners hold great potential to deepen and expand the role of the United States in the global supply networks of foreignheadquartered multinational companies. Part of this growth in America would be to better serve U.S. customers e.g., by more reliable, lower-cost goods and services that can be better supported by American after-sales service and support. Part of this growth in America would also be to better serve the world s customers via expanded U.S. exports of knowledge-intensive intermediate inputs and also final goods and services, whatever the particulars of each multinational s global production patterns. As noted above, the U.S. affiliates of foreign companies already produce nearly 18% of U.S. exports in goods and services, underscoring that access to foreign markets is a key strategy driving high-value FDI into the American market. TPP and TTIP Countries Have Driven Most of America s Inward Investment The Transatlantic Trade and Investment Partnership (TTIP) and the Trans -Pacific Partnership (TPP), if successfully negotiated, would deepen and strengthen ties with many of the most significant U.S. economic partners. A large majority of inward FDI in the United States already originates from TTIP and TPP countries, making these deals particularly important in the broader effort to recruit global business investment. Both the TPP and TTIP are ambitious. They aspire to more closely connect the U.S. economy with some of the largest and/or fastest-growing countries in the global economy, and to do so not just in terms of trade but in terms of investment as well. At the time of writing in June 2013, 12 total countries have either been involved in or have announced their intention to join TPP negotiations: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The TPP s scope is wide. The goal is to include additional Asia-Pacific countries in successive clusters to eventually cover a region that represents more than half of global output and over 40% of world trade. 2 These countries are already major U.S. trading partners. In 2012, U.S. goods exports to the Asia-Pacific region totaled $942 billion, 61% of America s worldwide total. In 2011, U.S. services exports to the region totaled $226 billion, 38% of America s total. 3 As with the TPP, the TTIP s scope is wide. Today the U.S. and the 27 EU countries together account for almost 50% of global output and 30% of global trade. They are already major trading partners. In 2012, the EU accounted for 21% and 19%, respectively, of total U.S. exports and imports of goods and services--$459 billion in total U.S. exports that year. Daily two-way trade in goods and services is estimated to have reached $2.7 billion in

5 For the most recent year of available data, 2010, the following figure reports what share of the total activity (measured five ways) of U.S. affiliates of foreign-headquartered multinationals is accounted for by affiliates whose parent companies are located in TTIP or TPP countries. 5 The key message of this figure is that the U.S. affiliates of multinationals from TTIP countries account for about 50% of all U.S. affiliate activity and the U.S. affiliates of multinationals from TPP countries account for about 25% of all U.S. affiliate activity. Global companies from either TTIP or TPP countries thus account for the very large majority of all U.S. affiliate activity: 81.0% of output (measured in terms of value added), 83.8% of the capital stock, 83.3% of employment, 80.1% of exports, and 68.4% of research and development. The following figure reports shares of 2010 output by all U.S. affiliates accounted for by particular countries. Affiliates of the seven largest investing countries were all from either TPP (Canada, and Japan) or TTIP (U.K., Germany, France, Switzerland, and the Netherlands) countries. Together, affiliates of these seven countries accounted for 75% of all output. 6 4

6 TPP and TTIP countries already account for the large majority of FDI in the United States. Successfully concluded agreements could make this already-large presence even larger. TPP and TTIP Offer Opportunities for Attracting New Investment to America The scale and ambition of TPP and TTIP underscore the benefits they could bring to the United States at what remains a challenging time for the U.S. economy and workforce. By removing tariff and non-tariff barriers, these agreements could boost the inward investment of both existing and new global companies alike by reducing th e cost of global supply networks and enhancing market access for U.S. goods and services. The TPP and TTIP aim to eliminate a wide range of both tariff and non-tariff barriers. Although average tariffs between the United States and partner countries are already quite low for many products, there remain certain tariff spikes in a number of industries that these agreements would eliminate. And even where tariffs are already relatively low, the sheer scale of trade involved (see above) means that any reduction in tariff levels can bring significant gain for companies both in America and abroad as well. Beyond tariffs, the TPP and TTIP aim to eliminate a number of non-tariff barriers and, related to this, to enhance the consistency and transparency of regulatory regimes across partner countries. Companies looking to expand globally often find regulatory differences to be at least as challenging as classic border barriers such as tariffs. Indeed, because earlier rounds of world trade negotiations have succeeded in reducing tariffs the relative importance of non-tariff and other regulatory barriers has risen. Successful TPP and TTIP agreements should boost the investment into the United States of both existing and new global companies alike, in part by boosting the attractiveness of America s position in many global supply networks. Research has shown that even modest reductions in tariff and non-tariff border barriers can trigger much-larger cost savings and efficiency gains in complex global supply networks involving many stages across many countries. 7 In addition, simplifying and harmonizing across countries regulations in product safety, transport, and other areas will enhance the durability and predictability of global supply networks. As a key partner in the TPP and TTIP agreements, the United States and its workers will enjoy enhanced opportunities in the supply networks of global companies. Successful TPP and TTIP agreements should also boost the investment into the United States in part by boosting the attractiveness of America s export capacity. Global companies will see greater competitiveness of their exports out of America exports both of intermediates that are part of global supply networks and also of final goods and services destined for business and consumer customers alike. Multinational companies are already involved in a very large share of the trade in goods and services between the U.S. and its TPP and TTIP partners. Indeed, intrafirm trading trade that takes place within the same company accounts for more than half of total U.S. trade with the EU. 8 5

7 The bottom line is that successful TPP and TTIP negotiations would likely spur new FDI into the United States that would expand America s production and trade ties with the world all to the ultimate benefit of the millions of Americans at these high-productivity global companies. Conclusion As the world s leading recipient of FDI, the United States has always been an attractive place for global companies to invest. However, the global landscape continues to evolve with many emerging economies now competing to attract these companies. Comprehensive and ambitious TTIP and TPP agreements will set a new standard in economic liberalization and a strong U.S. role in these agreements will demonstrate U.S. leadership on trade and investment that will help the United States secure a rising share of worldwide FDI. TTIP and TPP success would boost America s efforts to meet its competitiveness challenge of too few jobs and too little economic growth. Today over 22 million Americans remain unemployed or underemployed; rates of job creation are little ahead of population growth; and real earnings for most of those working are not rising. Bold new agreements that most closely connect America with some of the world s largest and fastest-growing economies constitute doing what matters, and hold great potential to spur growth in output, jobs, and incomes for American workers. 6

8 ENDNOTES 1 All data cited in this passage come from data available on-line at from the Bureau of Economic Analysis of the U.S. Department of Commerce. The data all refer to majority-owned affiliates. In 2009 there were in America 4,662 majority-owned affiliates of foreign-headquartered multinationals. 2 United States Trade Representative, document Trans-Pacific Partnership, Frequently Asked Questions. Accessed from on 6/3/13. 3 United States Trade Representative, document Trans-Pacific Partnership (TPP) Trade Ministers Report to Leaders. Accessed from on 6/3/13. 4 United States Trade Representative, document Fact Sheet: The United States to Negotiate Transatlantic Trade and Investment Partnership. Accessed from on 6/3/13. 5 All shares in this figure are calculated or estimated from data available on-line at from the Bureau of Economic Analysis of the U.S. Department of Commerce. A foreign-based multinational company is any foreign entity, called the parent, that holds at least a 10% direct ownership stake in at least one U.S. business enterprise, called the affiliate. The underlying BEA data used in this figure cover majority-owned affiliates. For the TTIP countries these shares are calculated because the BEA reports the level of all five activities for the collective 27 member countries of the EU. For the TPP countries these shares are estimated because the BEA does not aggregate activity measures for the 11 TPP countries as it does for the 27 EU members and because for certain smaller TPP countries the BEA suppresses some or all of these activity measures. These estimates were created by first calculating the shares for the larger TPP countries for which BEA data are fully reported (e.g., Japan) and then adding to these calculated shares estimated shares based on the relative size of these smaller TPP countries. 6 All data for this figure come from data available on-line at from the Bureau of Economic Analysis of the U.S. Department of Commerce. The data all refer to majority-owned affiliates. 7 See, for example, the research by Kei-Mu Yi, Can Vertical Specialization Explain the Growth of World Trade, Journal of Political Economy, 2003, Vol. 111, No United States Trade Representative, document European Union. Accessed from on 6/3/13. 7

9 About the author Matthew J. Slaughter is Associate Dean for Faculty and Signal Companies Professor of Management at the Tuck School of Business at Dartmouth. He is also a Research Associate at the National Bureau of Economic Research, an adjunct Senior Fellow at the Council on Foreign Relations, and a member of the Congressional Budget Office s Panel of Economic Advisers. From 2005 to 2007, he served as a Member of the President s Council of Economic Advisers. About the Organization for International Investment The Organization for International Investment is a business association in Washington, D.C. representing the U.S. operations of many of the world's leading global companies, which insource millions of American jobs. OFII advocates for fair, non-discriminatory treatment of foreign-based companies and works to promote policies that will encourage them to establish U.S. operations, increase American employment, and boost U.S. economic growth. 8

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