Brookings Trade Forum 2005 (2005) 135-163
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Trends in Employment at U.S. Multinational Companies:
Evidence from Firm-Level Data
Because of their networks of foreign affiliates and their well-established trade channels, U.S. multinational companies (MNCs) would be expected to play a leading role in the offshoring of production of goods and services. As a result, there has been much discussion about the impact of offshoring on employment at U.S. MNCs. In this paper, I use firm-level data from the Bureau of Economic Analysis (BEA) to examine the evidence on the extent of offshoring by U.S. parent companies to their foreign affiliates and then to determine if, and how, offshoring is associated with changes in U.S. parent employment.
While no standard definition of offshoring exists, the Government Accountability Office (GAO) recently defined the offshoring of services as generally referring to "an organization's purchases from abroad (imports) of services that it previously produced in-house or purchased from another domestic source."1 This definition could be adapted to apply equally well to goods. Such an expanded definition is applicable to all U.S. firms and is broad enough to encompass several different types of offshoring behavior. For example, it covers the case in which a U.S. parent company begins to purchase an input, either a good or a service, from a foreign affiliate or from an unaffiliated foreign supplier that it previously either produced in-house or purchased from a domestic supplier. It [End Page 135] would also cover the case of a U.S. parent company choosing to transfer to a foreign affiliate the production of a good or service produced domestically and exported to foreign markets.
This paper does not attempt to deal with all types of offshoring, but instead focuses on a very specific form of offshoring: the case in which a U.S. MNC chooses to produce a good or service at a foreign affiliate and then to import that good or service back to the U.S. parent company to use in its production or to resell. This setup is a specific form of vertical foreign direct investment (FDI), with production located in other countries to take advantage of differences in relative factor costs or to exploit economies of scale.2 On the opposite end of the spectrum is horizontal FDI, in which MNCs establish foreign affiliates whose production processes replicate those of the parents.3 A single MNC may demonstrate characteristics of both vertical and horizontal FDI. For example, it may expand horizontally by establishing an affiliate in Europe to serve the local market, and also vertically by establishing an affiliate in Mexico to assemble and re-export parts fabricated in the United States or by establishing an affiliate in India to provide accounting services to the U.S. parent.
Much of the discussion about offshoring by U.S. MNCs has centered on its impact on employment in the United States. It has been conjectured that as U.S. MNCs offshore there will be a negative impact on employment in the United States, either from production lost in the United States to foreigners or from forgone job creation. This conjecture, however, ignores the potential positive impact that offshoring can have on the MNC as a whole. If offshoring achieves cost savings, then the MNC's total sales may expand, resulting in increased demand for the goods and services still provided by the U.S. parent as well as by its foreign affiliates. In an extreme case, the cost savings from offshoring may enable the MNC to survive.
BEA has examined long-term trends in the aggregate data on U.S. MNCs.4 This analysis showed that worldwide operations of U.S. MNCs are concentrated in the United States, that the foreign operations of U.S. MNCs are centered in high-income countries, and that most of the output of foreign affiliates is sold in local or other foreign markets rather than exported to the United States...