Engine and wagon
By Max Fraad Wolff

Economic fear grips millions of American families. We are afraid of the recession that has arrived and the economic changes that have been taking shape. We are afraid for our absolute and relative performance. Unemployment, credit restrictions, rising food and energy costs are on our minds. Falling house prices and our position in the world economy lurk in news stories and our collective understanding.

The business of America has become business, particularly multinational business. Multinational enterprises (MNEs) employ one in five Americans in the private sector. These firms and their brands employ us, represent us around the world and dominate our public spaces and communications. Through advertising, billboards, political lobbying and public information campaigns

 

they sell us food, clothing, news, opinion, politicians and sense of the broader world.

The 10 most profitable firms, according to the 2008 Fortune 500 list, earned US$179 billion in profits in 2007 on $2.069 trillion in earnings. Another way to see this number is that the revenues of the 10 largest firms were equal to 15% of US GDP in 2007.

For the past several years the speed and size of delinking between the American macro-economy and our leading MNEs has been dramatic. The mirror image of this is the growing link between our MNEs and other economies. I believe this is reshaping domestic and world economic growth.

US, Japanese, euro zone MNE investment, sourcing, growth and operational decisions are moving opportunities, profits and incomes around the world. Foreign firms also employ more Americans, directly and indirectly, each year. Dominant firms have been a significant engine dragging the national wagon. Lately our leading firms have been dragging more of "their" macro wagon and proportionally less of our macro wagon. Delinking and new linking between leading firms and national economies is reshaping the world rapidly. The American employment, economic and opportunity landscape moves with the changing ties between economies and leading firms.

A look at the growth in off-shore operations of US MNEs and their affiliates reveals a reduction in the portion of US firms' activity in the US. Even during the boom years for domestic profit growth, 2003-2007, US MNEs increasingly looked offshore for expansion.

Our firms are a rising share of other economies. This suggests one interesting relinkage. Leading firms, driven by profitability and growth concerns, are shifting their attention and investments offshore. Like all economic prophecies, this one is self-fulfilling. We now live in a global economy and compete for jobs, sales, profits and technology through the same firms. Us and them, is increasingly a game of where the same firms grow operations and report income. The newest data from the Bureau of Economic Analysis (BEA) suggests this trend has been accelerating since 2002 and has intensified recently. (All the data and graphs below are based on or taken from BEA data.) 

Worldwide employment by US multinational companies, as the BEA terms them (or MNCs) increased 3.3% in 2006, to 31.3 million workers, following a 1.4% increase in 2005. Employment in the United States by US parent companies increased 2.7%, to 21.9 million workers, following a 0.8% increase. The employment by US parents accounted for almost one-fifth of total US employment in private industries. Employment abroad by the majority-owned foreign affiliates of US MNCs increased 4.7%, to 9.4 million workers, following a 3.0% increase. (BEA news release April 17, 2008. Summary estimates for multinational companies.)

The most recent BEA release indicates more rapid foreign growth. There is every indication that this trend accelerated since the end of the reported data. The US dollar has fallen and foreign economic growth has been higher than domestic growth.

Our firms and consumption are woven deep into the fabric of global economic growth. The newest patterns suggest changing international economic circumstances. Foreign integration with our firms has been growing rapidly. Deregulation, new technology and openness have created a single global economy defined by vastly divergent national performance and position.

The various and evolving firms, states and trends in the global economy delink, relink and shift constantly. Success and failure are visited on firms, regions and industries. We can argue over where or what will rise and fall. Arguing against interconnectedness is absurd. The profound trend has been one linking MNE growth to developing economies. The US remains the world's single largest national economy and market. We bought and borrowed so much we retained our place in the center of the great game. Falling credit, dollars and economic growth is beginning to question that position. This may be behind much anxiety.

MNE foreign profits rose by over 7.5% across 2007 and now account for more than 1 in 3 profit dollars by S&P500 firms. Another way to see that involves thinking about the other $2 of $3 that our leading forms made here. The consensus of forecasts from the Organization for Economic Cooperation and Development, the World Bank, International Monetary Fund and others suggests that foreign GDP and profit growth will be significantly above those of US for the next few years.

Thus, a future of dramatic shifts in linkage is nearly assured. The unease Americans feel is likely a combination of concern over our present and near term economic performance coupled with a growing anxiety over our place the world. Figure 1 graphically illustrates the growth in foreign income.

Figure 1: US direct investment abroad majority-owned foreign affiliates, net income aggregate totals 1997-2005

 

Figure 2 reveals the trend in US employment to be the mirror image of growth off-shore. MNEs (MNCs) have been decreasing their share of US employment.

Figure 2: US parent share of employment by non-bank US multinationals, 1988-2006



The trends in growth onshore and offshore are hard to avoid seeing. There has been a rapid rise in the non-US share of MNE growth. The more rapid growth in offshore activity seems correlated to declining hiring in the US. A sharp decline in US consumption is now universally predicted. This should further reduce American focus by leading firms.

The rapid increase in foreign investment, especially in India and China, is likely to rise in proportional terms. Most metrics suggest that there are very direct and potent links between US firms and foreign growth. In other words, partial delinking of US MNEs and the American economy will continue. Our firms, our economy and their economies are all in this together, ever more together. Our place in the mix is shifting. China and India have been particularly popular investment destinations.

Figure 3: US direct investment abroad, capital outflows without current-cost adjustment by country (major countries) 1998-2006

 

Figure 4: US direct investment abroad, all foreign affiliates,
net income. Aggregate totals 2000-2005

 

Engine slows in the global economy
The linkages between US MNEs and foreign economies have grown more potent, not less. MNE-related growth outside the world has been booming. MNEs remain largely based in the US, EU and Japan. These firms face four sets of growing problems.

First, there are growing protectionist sentiments around the world. Home markets, such as the US, are full of essential consumers who are angry and blame MNEs for weak employment and earnings growth. Export host nations are filled with growing nationalism exploited by local politicians and domestic competitors.

Second, profit conditions are under pressure around the world. Resource shortages, basic material price spikes and nationalism are placing great pressure on all who import energy, food and materials. Export restrictions and protectionist opposition to imports are mounting simultaneously. All of this is to say that the world is becoming more protectionist just as MNEs become more dependent on long and vulnerable supply and demand chains. This suggests the MNE-driven developing nation growth is imperiled by US and EU weakness and the likely reactions to it.

Third, rising prices of food and basic materials mean rising wage pressures and capital costs. For millions of Americans, food and energy costs are rising rapidly as the economy slows. Rapid currency shifts and cost increases disrupt and alter price structures and profit expectations. Prices rise as dollars loss value and others compete for resources. Long-deferred wage demands grow as food costs rise, energy costs soar and inflation emerges.

This places growing pressure on households and businesses, here and abroad. Low cost labor, cheap materials, free trade and easy credit made for great MNE growth and profit. All these pillars are being rattled.

Fourth, the end of the long credit glut means that credit is harder to come by and more expensive. The next few years will see more-cautious financing extended at greater cost. American consumers will be pinched by rising food, energy and currency adjusted costs. So will American MNEs.

Developing world consumers are also being pressured by food and energy costs. All are vulnerable to the health of MNE balance sheets. The twin risks involve loss of position in the world economy and a slowing world economy. Both look likely to confront America across the next few years. Thus, much anxiety makes sense and it is unlikely to be restricted to the US. Like the global economy that is shaping this reality, the slowdown is likely to be global.

Here and abroad skittish publics will face higher costs and increased insecurity as the global economy slows and opportunity shifts. Americans and their MNEs will be at the center of the changes. Anger at loss of position and reduced purchasing power is already building here and abroad. Many will be attracted by us-versus-them thinking.

The anxiety driving people's anger makes perfect sense. The sense of insecurity makes sense. Yet blaming others and ignoring the basic dynamics of the global economy is both unwise and unlikely to produce beneficial change. In order to move forward toward building a prosperous and vital American future, we need a real handle on what is and has been driving change.

Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst, and editor of the website GlobalMacroScope.

(Copyright 2008 Max Fraad Wolff.)