The Rise of the Multinational Corporation

Date posted: Monday, October 3, 2011

How globalization marginalized the American workforce.

Photograph via Flickr by Benjamin B.

Photograph via Flickr by Benjamin B.

Over the past two years, politicians have used the profit growth of many U.S. Fortune 100 companies as evidence of an economic recovery. But for the first time ever during an economic recovery period, huge corporate profits are not translating into domestic job growth. Multinational Companies (MNCs) have been expanding their work forces, but they are expanding primarily overseas, and American workers are facing a new reality—they are no longer competing against 140 million other Americans, but against three billion people from all over the globe, many of whom are hungry, determined, and increasingly well educated. America’s largest companies have gone global and no longer need the American worker. Wall Street and Main Street, often thought to be interlinked, have suddenly diverged.

Since the inception of the Stimulus Bill in early 2009, conservatives have blamed the sluggish economy on government spending and a ballooning national debt. Liberals, on the other hand, believe that the government is not spending enough. Arguably, there is a third diagnosis: over the past 20 to 30 years, in an environment of softened international trade laws, large U.S. corporations have steadily divorced themselves from their country of origin and the effect has been devastating to America’s middle and lower classes. Under current policies it can only get worse.

Starting with the Reagan administration in the early 1980s, protectionist ideology was increasingly abandoned in favor of policies supporting the General Agreement on Tariffs and Trade and the World Trade Organization, which both advocated minimal barriers to international trade. Free trade with Canada began in 1987, leading to the establishment of the North American Free Trade Agreement under President Clinton in 1994.

The easing of tariff laws has allowed companies to manufacture their products abroad, taking advantage of low-cost labor in emerging economies. In the 1990s, China became the Western world’s manufacturing hub for basic goods and products and has since expanded into high tech and defense manufacturing. Communication improvements aided by the Internet have opened the door for the outsourcing of many other types of labor as well, a trend which has accelerated in recent years, with MNCs like Apple and IBM flocking to set up shop in BRIC countries (Brazil, Russia, India, and China), where revenue and profit growth are the highest.

Angelina Clarke, an emerging markets expert and consultant in Sao Paolo, Brazil, explained, “If you are not learning constantly, and you are not scared that a hungry kid from an emerging market will eat your lunch, then you’d better have very rich parents, government protection for your industry, or a killer network of hard-to-replicate personal connections. The meritocracy is now global.” Clarke said this during a video conversation, stepping onto the patio of her high-rise apartment in downtown Sao Paolo and showing a hazy skyline pierced by high-rise after high-rise, with construction cranes dangling off the sides. The panorama resembled the Midtown Manhattan of about five years ago.

Developing nations, especially BRIC countries, are becoming more competitive even in areas that the U.S. has long been dominant in—design and manufacture of semi-conductors, pharmaceuticals, and information technology services—and knowledge-based jobs are increasingly disappearing abroad.

Roughly 20 percent of the 100 companies polled had an offshoring strategy in 2005. By 2008, that number increased to 50 percent.

In this atmosphere, the U.S. government should be working harder than ever to educate our population and boost the skills of our workforce. Instead, it is reducing funding to the Pell Grant program, and, starting in 2012, removing subsidization for graduate school loans.  These cuts come in the face of college tuition rates that have risen by 50 percent at many schools over the past 10 years. As a result, education is becoming harder to access even for the best and brightest, a phenomenon that will only weaken the nation’s ability to compete in the emerging global labor marketplace.

The precise figures on offshoring are unavailable, as U.S. companies are not required to publish their domestic employment statistics. But in an article published by the Conference Board of the Duke University Fuqua School of Business, roughly 20 percent of the 100 companies polled had an offshoring strategy in 2005. By 2008, that number increased to 50 percent.

Nobel Laureate Michael Spence examines the paradigm shift of the United States employment picture in the July/August issue of Foreign Affairs. He analyzes U.S. economic prospects by dividing labor into two categories: “tradable” and “nontradable” jobs—ones that can be “traded,” or outsourced, and ones that must be performed locally in order for the good or the service to be delivered.

Government and healthcare are the two largest sectors of employment in the nontradable sector, followed by retail, construction, and the hotel and restaurant industries. Between 1990 and 2008, the number of employed workers in the United States grew from approximately 122 million to 149 million. Of the roughly 27 million jobs created during this period, 98 percent were in the nontradable sector, with government and healthcare accounting for 40 percent. Unfortunately, during that eighteen-year period, the value-add figures for nontradable jobs only increased by $8,000—from $72,000 to $80,000—a measly .07 percent annual increase.

Meanwhile, the tradable sector added only 600,000 U.S. jobs, but the value-add went from $79,000 to $120,000 per worker, a 2.8-percent annual increase, and a 52-percent increase overall compared to the 12 percent overall increase in the nontradable sector over the same period of time. In the tradable sector, there was significant movement of job classes up the value chain, average salaries have risen in accordance with U.S. economic growth, and are rising even faster in recent years. This trend is likely to continue as developing economies keep moving up the value chain too.

According to Spence, if the tradable sector does not drastically increase jobs and if the nontradable sector continues to shed jobs, the U.S. will endure a long period of high unemployment. Considering current policies and the increased competition in the global work force, the idea that the tradable sector is going to add jobs in the U.S. anytime soon is fantastical.

Take Apple and IBM, for instance. Both companies are emblematic of many trends in American business. They often lead in innovation, technology, business strategy and practice. Apple, an iconic “tradeable” company, just surpassed Exxon Mobile as the largest company in the U.S. in market cap. Yet in terms of employee head count, it is far from the largest company in the United States. In mid-2008, Apple reported 35,100 employees worldwide, 13,600 of whom worked in retail. By the summer of 2010, Apple had grown to 46,600 employees, and now 30,600 were in retail. So Apple has added jobs since 2008, but the vast majority of them have been low-paying positions. Even though Apple does not publish its U.S. employment statistics (and neither do its competitors), this is a statistic that suggests that Apple may have cut or offshored higher paying jobs in the U.S. overall.

Then there is a company called Foxconn. Very few Americans know about it, even though it is an important aspect of Apple’s impact on the global employment market. Foxconn runs Apple’s production in China, and figures suggest that 250,000 Foxconn employees are dedicated to producing Apple products—five times as many workers than the global corporate headcount. When a consumer in the United States purchases an Apple product, part of that money is going straight to Foxconn and its employees, and only a fraction of it remains in the U.S. economy. This is nothing new—Walmart has been enabling this kind of wealth and job flow for years, and Dell and other large electronics manufacturers maintain similarly sized production operations with Foxconn—but the practice shows that labeling Apple as an American company is questionable. Apple trades on a U.S. Stock Exchange and has retail stores around the country, but in reality it is a global enterprise with, aside from its research and design operations, diminishing ties to the U.S.

In 2007, IBM reported having 121,000 workers in the United States. By 2009, this number had shrunk to 105,000, due to layoffs and outsourcing. But IBM is rapidly expanding its global workforce. Through a similar period in 2007, the company had 386,558 employees globally, a number which has since grown to 426,751. But we don’t know how many U.S. employees it now has; IBM stopped publishing domestic statistics in late 2009, saying that it was no longer necessary because none of its competitors did.

It would be simple to fix this domestic job reporting problem, but to date there are no enforcement mechanisms set up by the U.S. government or the Securities and Exchange Commission that would require companies to submit their by-country employment statistics in quarterly reports. This poses many challenges for policy makers who are trying to work on solutions to the employment crisis. Another problem is the government’s failure to create a strong enough tax incentive system that would encourage corporations to add jobs to the US economy. An incentive system of this type could not involve loopholes, though it would have to provide a measurable tax break on payroll taxes for those companies that add a certain number of workers above a certain salary level per year.

Our largest companies have transformed themselves, remaining American in name and tax jurisdiction only, and sometimes not even that.

In the spring of 2006, at the height of the economic boom, Sam Palmisano, the CEO of IBM, wrote an article for Foreign Affairs calling for governments and civil societies around the world to embrace the new “Globally Integrated Enterprise” by continuing to relax international tariff and tax law while combating xenophobia and the protectionist economic measures at their root. His argument was based on “the general good” that a globally integrated enterprise could do for the world. For the millions of people who have been lifted out of relative poverty in developing countries where political stability and democratic processes are also strengthening, it is difficult to deny the positive benefits of globalization. However, Palmisano did not acknowledge any of the harm that the globally integrated enterprise could potentially inflict on individual nations or communities.

But the U.S. is now at the point of reckoning. The unintended negative effects of globalization have settled in and are generally thought to be irreversible, because protectionist laws and higher tariffs would likely lead to a more severe global recession in the short term. The high spending rate by the American people and the government has certainly contributed to the U.S. economic problem, but this may be just a trend, and it is one that can be reversed much easier than globalization.

The corporation’s original charter was to perform specific duties on behalf of the government. This changed in the 19th century when corporations in Britain and the United States were granted limited liability and treated as “individuals.” Companies began to operate internationally with a simple hub-and-spoke network, forming trade routes and relying on their home state’s armed forces for protection.

During World War I, trade routes and supply chains were disrupted. In the aftermath, the international corporation changed to face the increasing tariffs and protectionist laws prevalent in the 1920s and 1930s. This was when the multinational corporation was born, creating manufacturing operations in other countries and selling to those countries’ local markets in order to circumvent high tariffs and taxes in their own jurisdictions.

The “country-less” multinational corporation that has emerged over the last thirty years relies on relative world peace, strengthening democratic institutions, and a global agreement that tariffs are counterproductive to economic growth and political security. It easily adjusts to find the lowest labor costs to perform critical functions and services. As a result, our largest companies have transformed themselves, remaining American in name and tax jurisdiction only, and sometimes not even that. Apple, IBM, and other American MNCs are able to post record profits without re-hiring American workers. Given the current policies governing their behavior in today’s markets, who can blame them? With the lack of incentive to do otherwise, they are acting rationally.

The picture that is emerging is an American workforce that is downwardly mobile. The top-end sectors of finance and computer design, as well as the top management positions at multinational companies, have seen an increase in hiring and a rapid salary increase. But only the high paying positions, staffed by top (mostly well-educated) talent, are seeing any growth in income or opportunity.

There is hope—the American economy has continually proven to be the most resilient economy globally, and we still have a dynamic and creative workforce that is perhaps unparalleled in openness and flexibility. There will surely be setbacks and unforeseen hurdles in policy making, but to begin to create jobs in the short term and deliver return on investments in the long term, the government needs to close tax loopholes and spend money on targeted infrastructure development. The government also needs to invest in technologies, like renewable energies, that could boost growth in tradable sector jobs.

For this to be done effectively, there will need to be a very close collaboration between the government and private sectors. Discussion needs to be elevated beyond where to spend and what to cut; there has to be an honest national dialogue about who we are as a nation, and what we’d like to be going forward. But without that vision, without a government that can create, articulate, and implement that vision, the prospect of recovery is specious at best.

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Nick Zagaria is earning an M.A. in International Relations and European Studies at the Central European University in Budapest, Hungary. He is focusing on how the financial crisis is affecting democratic institutions in Greece. Previously, he worked as a Business Continuity Consultant at a large Multinational Corporation in New York City, where he was primarily supporting customers in the financial services sector.

View all posts by Nick Zagaria →

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