Multinationals: Are They Good for America?

They're productive, innovative, and loaded with cash. But that doesn't mean they'll bail out the U.S. economy

by Michael Mandel

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High in the hills overlooking Corning, N.Y., the company named after the town has recently broken ground on a $300 million expansion of its research laboratories. Flush with cash from booming overseas sales, the glass giant is amping up its product development efforts at home. "It's important for the functioning of our innovation machine that we be in one location," says Corning Inc. President Peter F. Volanakis.

That's good news for the residents of Steuben County, where Corning is the largest employer. Since 2005 they have watched their unemployment rate drop faster than thatof neighboring counties, in part because of Corning's commitment to the area and its ability to sell around the world.

Americans are going to need quite a few more Cornings—global companies willing to invest in the U.S.—to ease the pain of the economic slowdown. The big multinationals are the go-to guys right now: They've got plenty of cash and soaring profits from overseas operations. They're highly productive and innovative, more so than domestic companies. And unlike consumers, banks, and smaller companies, the multinationals aren't constrained by the credit crunch.

Indeed, the top 150 U.S.-based nonfinancial multinationals, which include the likes of Hewlett-Packard (HPQ) , Pfizer (PFE) , eBay (EBAY), and Sara Lee (SLE), had more than $500 billion in cash and short-term investments at the end of 2007. Some of the big global players with extensive operations in the U.S.—companies such as Toyota and Siemens—are equally flush. By contrast, smaller domestic-oriented companies have weaker profit outlooks and more short-term debt and other liabilities on their books and therefore are having a harder time borrowing.

But will the globe-spanning giants come to the rescue of the U.S. economy? Recent history is not encouraging. Figures collected by the Bureau of Economic Analysis suggest the multinational sector has in some ways been a drag on the U.S. economy since 2000. From 2000 to 2005, the last year for which full data are available, U.S. multinationals cut more than 2 million jobs at home, even as employment in the rest of the private sector grew—and there's no sign the trend has significantly reversed. The U.S. operations of foreign multinationals also shrank over the five-year stretch, dropping 500,000 jobs as foreign investors cut costs and sold off U.S. companies. Toyota, perhaps the most successful foreign company in the U.S., added all of 9,000 jobs in the states between 2000 and 2007.

In an age of seemingly rampant globalization, the U.S. economy hasn't become noticeably more global in one key sense: Exports, despite being up in the past few years, equaled 11.8% of gross domestic product in 2007, barely above where they were in 1997. Meanwhile, sales by foreign subsidiaries of U.S.-based multinationals have skyrocketed (chart).

The good news: The combination of the falling dollar and rising costs overseas is making it more appealing for high-productivity multinationals to shift some production and employment back to the U.S. Such moves are already showing up in rising exports and the increased willingness of foreign companies to put their money into the U.S. Indeed, foreign direct investment in the U.S. in the third quarter of 2007 was at its highest level since 2000.

The uncertain role of the multinationals during this downturn makes Federal Reserve Chairman Ben S. Bernanke's job that much harder. His primary tool—cutting interest rates—isn't very effective with cash-rich multinationals that can already borrow on attractive terms. Moreover, the corporate executives who run the multinationals have far more on their minds than interest and exchange rates. Tax considerations, incentives from other countries, labor-force quality, and long-term corporate strategy all loom over their decisions as well.

Politics might soon play a bigger role, too. The Presidential race is raising questions about globalization's winners and losers. Barack Obama, in particular, has talked repeatedly about new policies that provide incentives for companies that expand their U.S. workforces—and penalties for those that do not.

EXPORTING JOBS, NOT GOODS

Multinationals have been the wild card in the economic deck for a decade. Back in 1997, four years after the passage of the North American Free Trade Agreement, the economists at the Bureau of Labor Statistics in Washington put out their biennial projections of job growth over the next 10 years. With a touching note of optimism, they assumed that exports, adjusted for inflation, would double over the next decade—a boom that would have produced a sizable number of good-paying American jobs.

But like almost everyone else, the BLS economists missed an unexpected strategy shift at the handful of big companies that account for most of the exports. Instead of ramping up American operations to sell into global markets, giant U.S. companies such as General Electric (GE), IBM (IBM), and United Technologies (UTX) took their operations overseas, expanding in Asia and Europe and becoming global enterprises with international workforces. The result: U.S. export growth fell 50% short of the BLS economists' prediction. The much prophesied job boom never happened.

In effect, U.S. multinationals have been decoupling from the U.S. economy in the past decade. They still have their headquarters in America, they're still listed on U.S. stock exchanges, and most of their shareholders are still American. But their expansion has been mainly overseas.

At Emerson Electric (EMR), for example, international sales more than doubled, to $11.6 billion, from 1997 to 2007. But exports from the U.S. rose by about 20%, to $1.3 billion. At United Technologies, which ranks among the top 20 companies in terms of foreign revenue, export revenues rose by 62%, to $6.2 billion, from 1997 to 2007. But total sales outside the U.S. jumped from $13 billion to $34 billion.

Some executives are quite clear about their strategy. "We have clients who need work done in other parts of the world to serve their clients," says Ronald A. Rittenmeyer, who serves as chairman, president, and CEO of Electronic Data Systems (EDS), which last year granted early retirement to 2,400 U.S. workers. "Our employee base will continue to shift, with the number of jobs located in high-quality, lower-cost areas outside the U.S. growing." EDS expects to have 45,000 offshore employees by the end of 2008, up from 14,000 at the end of 2005.

As the big companies have moved abroad to expand their global operations, smaller U.S. companies haven't taken their place as exporters. According to data from the Census Bureau, exporting is just as dominated by big companies as it ever was: In 2006 companies with 500 or more employees accounted for 71% of goods exported, the same as in 2000.

Only a relatively small number of U.S.-based corporations have established a substantial global presence. When the nonfinancial companies in the Standard & Poor's 1500 are ranked by their reported foreign sales, the top 150 account for 84% of the total. Virtually all of the names are easily recognizable. "There are only a few truly global companies," says John Dowdy, a partner in McKinsey's London office who recently helped lead a study on multinationals.

The dominance of a few top companies holds true in Europe as well. In a new report titled The Happy Few, economists Thierry Mayer of the University of Paris and Gianmarco I.P. Ottaviano of the University of Bologna write: "The international performance of European countries is essentially driven by a handful of high-performance firms." The same is true in Japan, where Toyota (TM), Honda (HMC), Sony (SNE), and a few other big names carry the flag.