Overseas Investment Is a Good Thing

Alex Adrianson /

“Overseas investments,” writes Steven Malanga, “rarely cost jobs in a corporation’s home country,” but instead bring substantial benefits for the home country.

President Obama has proposed eliminating what he sees as an unfair incentive in the tax code for U.S. companies to move jobs overseas. In fact, as explained in an earlier post, the provision he is targeting—which allows U.S. firms to defer tax liability on the profits they earn abroad—was designed to mitigate the disadvantages of the U.S. tax code for U.S. companies competing globally.

But what about this idea that corporations invest abroad in order to take advantage of low-cost labor? Malanga, senior fellow at the Manhattan Institute, points to research showing that multinational corporations in rich countries are five times more likely to invest in other rich countries than in poor countries. In other words, they’re not getting a bargain on labor costs. So why are they investing in overseas operations? Malanga writes:

What we’ve learned is that companies don’t expand overseas primarily to eliminate local jobs, but to tap into other appealing markets where, if they succeed, they only become stronger. And lots of research has confirmed this idea, not just about U.S. firms, but about multinationals in other countries too. Studies of the Italian, French and German economies have found that when a business in one of these countries makes a decision to expand overseas the move rarely results in a net loss in domestic jobs, according to research summarized by Harvard’s Mihir A. Desai in a new paper published by the National Bureau of Economic Research, “Securing Jobs or the New Protectionism?” In fact, a company’s successful overseas expansion brings advantages to a home country, according to a study of Japanese multinationals which found that firms that increased their overseas investments also increased their domestic employment at a growth rate from three-to-eight times quicker than job growth among purely domestic firms.

The same holds true for the United States and its shrinking manufacturing industry. Desai looked at who was responsible for the decline in manufacturing jobs in the U.S. from 1986 to 2003 and found that it wasn’t multinationals. In fact, they have been expanding their manufacturing jobs in the U.S. even as they have been investing overseas. Instead, “the rapid decline of manufacturing employment in the late 1990s and early 2000s might well best be understood as marking the exit of purely domestic, low-productivity players rather than the displacement of domestic activity abroad by multinational firms,” Desai writes.

This shouldn’t be surprising. It’s a difficult and risky leap to go from a domestic company to an international one, and for the most part companies that succeed at it are our strongest firms. In a global marketplace, they are the firms most likely to face down new foreign competitors entering the country. Short of high tariffs to punish foreign products and make them uncompetitive here, it is our multinationals that give us our biggest edge.

Cross-posted at InsiderOnline.