THE BLOG
03/03/2008 03:42 am ET | Updated May 25, 2011

"U.S. Multinationals Have Been Decoupling from the U.S. Economy," says BusinessWeek

No one blinks when the editor of a magazine called Multinational Monitor (that's me) suggests that multinational corporate interests diverge from and frequently contradict those of regular people.

But it's another matter when the questioning comes from BusinessWeek.

"Multinationals: Are They Good for America?" is the cover story in the current issue of the weekly chronicler of business. The answer to the question, from BusinessWeek's chief economist Michael Mandel, is a little bit "on the one hand, on the other hand," but the ultimate conclusion is: not particularly. The article emphasizes that the success of U.S.-based multinationals -- the corporate sector best positioned to handle a U.S. recession and benefit from the declining dollar, because it sells so much in other countries -- is not doing much to help the U.S. economy, by the measures that matter most.

In favor of multinationals, the BusinessWeek article cites research indicating they are more productive, pay more, and are better managed than their domestic counterparts. U.S. multinationals also tend to base research and development in the United States, providing high-paying jobs.

But while multinationals are more efficient by many measures -- and BusinessWeek does not discuss whether they are efficient because they are multinational, or whether efficient firms grow to become multinationals -- they don't deliver on many of the things people want most from an economy.

Most importantly, multinationals have a terrible record on job creation. U.S.-based multinationals cut more than 2 million jobs in the United States from 2000 to 2005, BusinessWeek reports. Foreign multinationals also cut jobs in the United States during that period, reducing U.S. employment by 500,000.

This is not just an issue of moving to lower-wage, lower-cost locales. As compared to large companies doing business just in the United States, multinationals provide many fewer jobs overall, counting jobs both in the United States and abroad, relative to their share of sales and profits.

But a lot of the explanation for the reduction in multinationals' jobs in the United States is about the companies shifting jobs to lower-wage locations (and sub-contracting, an issue BusinessWeek does not discuss). "Instead of ramping up American operations to sell into the global markets, giant U.S. companies such as General Electric, IBM and United Technologies took their operations overseas," BusinessWeek's Mandel writes. "In effect, U.S. multinationals have been decoupling from the U.S. economy in the past decade."

The free-falling U.S. dollar should encourage global producers to invest increasingly in the United States, which will become progressively cheaper as the dollar falls more. But BusinessWeek cautions that tax considerations, among other issues, will slow this process.

This leads to a second key issue the BusinessWeek article raises: multinationals' tax avoidance strategies. "Moving operations overseas gives a multinational an almost infinite number of legal and quasi-legal strategies for reducing U.S. corporate income taxes." Among the time-worn strategies the article references: transfer pricing (so that U.S. subsidiaries overpay for products from other country subsidiaries, thereby locating revenues and profits in low-tax jurisdictions); transferring intellectual property to subsidiaries in low-tax jurisdictions, and making U.S. subsidiaries pay high royalties; and borrowing in high-tax jurisdictions to take advantage of interest-rate deductions.

A third problem BusinessWeek identifies is the ability of multinationals to blackmail (my word, not BusinessWeek's) countries by demanding concessions in exchange for locating production sites.

The article focuses on the semiconductor industry, as an area where research continues in the United States, and where there is a prospect of expanded manufacturing. It then quotes industry leaders who brazenly declare that the United States has no choice but to shower companies with tax breaks and incentives.

"We have to choose to compete on the investment level and match other countries' offerings on incentives and tax breaks," George Scalise, president of the Semiconductor Industry Association declares. "If we don't do this, it will be very difficult for us to maintain our leadership in technology and innovation."

Echoes Hector Ruiz, CEO of Advanced Micro Devices: "It's not corporate welfare. [This is] a competitive world."

What Ruiz doesn't say is that the competition is rigged. In the multinational, corporate-dominated world, the competition is between countries (and states and towns), and the people who live there. No matter which of these jurisdictions manages to outbid the others, the same companies still win.