Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data

Outsourcing and Insourcing Jobs in the
U.S. Economy: Evidence Based on
Foreign Investment Data
Updated May 13, 2008
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Outsourcing and Insourcing Jobs in the U.S. Economy:
Evidence Based on Foreign Investment Data
Summary
The impact of foreign direct investment on U.S. employment is provoking a
national debate. While local communities compete with one another for investment
projects, many of the residents of those communities fear losing their jobs as U.S.
companies seek out foreign locations and foreign workers to perform work that
traditionally has been done in the United States, generally referred to as outsourcing.
Some observers suggest that current U.S. experiences with outsourcing are different
from those that have preceded them and that this merits legislative actions by
Congress to blunt the economic impact of these activities. Other observers argue that
investing abroad by U.S. multinational companies impedes the growth of new jobs
in the economy and thwarts the nation’s investments in high technology sectors.
Some opponents also argue that mid-career workers who lose good-paying
manufacturing and service-sector jobs likely will never recover their standard of
living.
Economists and others generally argue that free and unimpeded international
flows of capital have a positive impact on both domestic and foreign economies.
Direct investment is unique among international capital flows because it adds
permanently to the capital stock and skill set of a nation, but it also challenges the
general theory of capital flows because of the presence of strong cross-border and
intra-industry investment. Supporters contend that to the extent that foreign
investment shifts jobs abroad, it is a minor component of the overall economic
picture and that it is offset somewhat by the investment of foreign firms in the U.S.
economy (referred to as insourcing), which supports existing jobs and creates new
jobs in the economy.
Broad, comprehensive data on U.S. multinational companies generally lag
behind current events by two years and were not developed to address the issue of
jobs outsourcing. Many economists argue, however, that there is little evidence to
date to support the notion that the overseas investment activities of U.S.
multinational companies play a significant role in the rate at which jobs are created
in the U.S. economy. Instead, they argue that the source of job creation in the
economy is rooted in the combination of macroeconomic policies the nation has
chosen, the rate of productivity growth, and the availability of resources. This report
addresses these issues by analyzing the extent of direct investment into and out of the
economy, the role such investment plays in U.S. trade, jobs, and production, and the
relationship between direct investment and the broader economic changes that are
occurring in the U.S. economy. This report will be updated as events warrant.

Contents
Overview ........................................................1
U.S. and Foreign Multinational Companies.............................5
Employment ..................................................7
Employment Trends............................................9
Employment by Sector and Area.................................11
Gross Product....................................................15
U.S. Multinational Companies...................................16
Foreign-Owned Firms.........................................17
Cyclical vs. Structural Changes......................................19
Trade ..........................................................26
Sales ...........................................................29
Sales of Services.............................................32
Research and Development.........................................33
Why Firms Invest Abroad..........................................34
Ownership-Specific Advantages.................................36
Location Advantages..........................................37
Commercial Benefits..........................................39
Conclusions .....................................................40
List of Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment
Abroad, Annual Flows 1990-2007 (in billions of dollars)...............2
Figure 2. Inward and Outward Global Direct Investment Position,
By Major Area, 2006...........................................3
Figure 3. Employment of U.S. Parent Companies and Their Foreign Affiliates,
1992-2005 (1990 = 100)........................................9
Figure 4. Employment of the Foreign Affiliates of U.S. Parent Companies as a Share
of the Total Employment of U.S. Multinational Companies, 1985-2005
(in percent shares)............................................11
Figure 5. U.S. and Foreign Direct Investment Position, Cumulative Position by
Country, 2005 (in billions of dollars).............................12
Figure 6. Employment of U.S. Foreign Affiliates and Affiliates of Foreign Firms
in the U.S., by Country or Region, 2005...........................13
Figure 7. Average Annual Percent Change in Gross Product of U.S. Parent
Companies and Their Foreign Affiliates, Selected Periods............20

Companies and Their Foreign Affiliates, Selected Periods............22
Figure 9. Average Annual Percent Change in Manufacturing Gross Product of
U.S. Parent Companies and Their Foreign Affiliates, Selected Periods...23
Figure 10. Average Annual Percent Change in Manufacturing Employment of
U.S. Parent Companies and Their Foreign Affiliates, Selected Periods...24
Figure 11. Intra-Firm MNC Trade as a Share of Total U.S. Exports and
Imports, 1990-2005...........................................27
List of Tables
Table 1. Global Annual Inflows of Foreign Direct Investment, By Major Area.4
Table 2. Select Data on U.S. Multinational Companies and on Foreign Firms
Operating in the United States, 2005...............................5
Table 3. Gross Product and Manufacturing Gross Product by U.S. Multinational
Companies, 1994-2005.........................................6
Table 4. Employment of U.S. Multinational Companies and the Affiliates of Foreign
Firms, 1985-2005..............................................8
Table 5. Employment of Non-Bank U.S. Foreign Affiliates by Major Sector and
Area, 2003-2005.............................................14
Table 6. Gross Product of U.S. Parent Companies and Their Majority-Owned
Foreign Affiliates.............................................16
Table 7. U.S. Direct Investment Abroad; Investment Outflows for Selected Regions
and Countries, 2002-2006......................................18
Table 8. Average Annual Percent Change in Gross Product and Employment of U.S.
Parent Companies and Their Foreign Affiliates For Select Periods......21
Table 9. Changes in Gross Product and Employment Among U.S. Parent Companies
and Their Foreign Affiliates for Selected Industries..................25
Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods, 1990-2005
...........................................................28
Table 11. Multinational Corporations’ Intra-Firm Imports of U.S. Goods, 1990-2005
...........................................................30
Table 12. Sales of Goods and Services by U.S. Foreign Affiliates by Destination and
Industry, 2005...............................................31
Table 13. Sales of Services by U.S. Foreign Affiliates by Destination and Industry,
2005 .......................................................32
Table 14. Sales of Services by U.S. Foreign Affiliates, Average Annual Rates of
Change for Selected Periods....................................33
Table 15. Expenditures on Research and Development by U.S. Multinational Firms
and by the Affiliates of Foreign Firms Operating in the United States....34

Outsourcing and Insourcing Jobs in the
U.S. Economy: Evidence Based on
Foreign Investment Data
Overvi ew¹
The United States is the largest foreign direct investor in the world and the
largest recipient of such investment funds.² On a historical cost basis, or book value
basis, the Department of Commerce estimates that by the end of 2006 U.S. firms had
accumulated $2.4 trillion worth of direct investment abroad, compared with the $1.8
trillion foreign investors had spent to acquire or establish businesses in the United
States.³ As Figure 1 shows, direct foreign investment flows increased sharply in

2006.⁴

¹ Data for this report were taken from the annual surveys conducted by the Bureau of
Economic Analysis on U.S. direct investment abroad and on foreign direct investment in the
United States. See U.S. Direct Investment Abroad: Operations of U.S. Parent Companies
and Their Foreign Affiliates; and Foreign Direct Investment in the United States:
Operations of U.S. Affiliates of Foreign Companies. Preliminary results appear in the
Survey of Current Business generally 18 months after the end of the reporting calendar year,
with the more detailed reports issued in the fall of that year.
² This is true on a historical cost, or cumulative position basis, but the sharp drop in foreign
direct inflows after 2000 has meant that other countries have occassionally displaced the
United States as the largest recipient of annual foreign direct inflows.
³ Ibarra, Marilyn, and Jennifer Koncz, Direct Investment Positions for 2006, Survey of
Current Business, July 2007, p 21. The position, or stock, is the net book value of U.S.
parent company’s equity in, and outstanding loans to, their affiliates abroad. A change in
the position in a given year consists of three components: equity and intercompany inflows,
reinvested earnings of incorporated affiliates, and valuation adjustments to account for
changes in the value of financial assets. The Commerce Department also publishes data on
the U.S. direct investment position valued on a current-cost and market value bases. These
estimates indicate that U.S. direct investment abroad increased by $320 billion and $808
billion in 2006, respectively, to reach $2.9 and $4.4 trillion. Abaroa, Patricia E., The
International Investment Position of the United States at Yearend 2006, Survey of Current
Business, July 2007, p.10.
⁴ The United States defines foreign direct investment as the ownership or control, directly
or indirectly, by one foreign person (individual, branch, partnership, association,
government, etc.) of 10% or more of the voting securities of an incorporated U.S. business
enterprise or an equivalent interest in an unincorporated U.S. business enterprise. 15 CFR
§ 806.15 (a)(1). Similarly, the United States defines direct investment abroad as the
ownership or control, directly or indirectly, by one person (individual, branch, partnership,
(continued...)

Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows 1990-2007

^$350Billions of dollars
^$300Foreign Direct Investment in the United States
^$250
^$200
^$150U.S. Direct InvestmentAbroad
^$100
^$50
^$0
^-$50
¹⁹⁹⁰¹⁹⁹²¹⁹⁹⁴¹⁹⁹⁶¹⁹⁹⁸²⁰⁰⁰²⁰⁰²²⁰⁰⁴²⁰⁰⁶
Year
^S^o^u^{rce: C}^R^S^f^r^o^m^U^.^S^.^D^e^p^a^rtm^eⁿ^t^o^f^C^o^m^m^{erce d}^a^ta
Note: the drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent
companies to take advantage of a one-time tax provision.
Foreign direct investment in the United States on an annual basis peaked at $320
billion in 2000 before plummeting to about $40 billion in 2002, according to⁵
Commerce Department data. Recent Department of Commerce data indicate that
Foreigners invested $180 billion in U.S. businesses and real estate in 2006, according
to data published by the Department of Commerce and invested more than $200
billion in 2007.⁶ New spending by U.S. firms on businesses and real estate abroad,⁷
or U.S. direct investment abroad, rose sharply in 2006 to $235 billion up from the
$8 billion net they brought home in 2005. New investments in 2007 likely exceeded
⁴ (...continued)
association, government, etc.) of 10% or more of the voting securities of an incorporated
business enterprise or an equivalent interest in an unincorporated business enterprise. 15
CFR § 806.15 (a)(1).
⁵ Bach, Christopher, L., U.S. International Transactions in 2007. Survey of Current
Business, April 2008. p. 48.
⁶ Ibid. Direct investment data reported in the balance of payments differ from capital flow
data reported elsewhere, because the balance of payments data have not been adjusted for
current cost adjustments to earnings.
⁷ The United States defines direct investment abroad as the ownership or control, directly
or indirectly, by one person (individual, branch, partnership, association, government, etc.)
of 10% or more of the voting securities of an incorporated business enterprise or an
equivalent interest in an unincorporated business enterprise. 15 CFR § 806.15 (a)(1).

$330 billion, according to balance of payments data by the Department of
Commerce.⁸
Globally, the total, or cumulative, amount of foreign direct investment reached
$12 trillion in 2006 (the latest year for which detailed data are available), as indicated
in Figure 2. Nearly three-fourths of this amount is invested in the most
economically-advanced developed economies. The developed economies not only
are the greatest recipient of investment funds, but they are also the greatest source of
those funds. Similar to the United States, those countries that are the largest overseas
investors also tend to be the most attractive destinations for foreign investments. The
clear exception to this general observation is Japan, which had invested $450 billion
abroad through 2006, but had received $107 billion in investment inflows. Among
the developing economies, Asia, which includes China, has accumulated $1.9 trillion
in direct investment, followed by Latin America ($908 billion) and Africa ($315
billion).
Figure 2. Inward and Outward Global Direct Investment Position, By
Major Area, 2006

Total = $12 Trillion
Wo rld^$12.0^$12.5
Developed economies^$8.5^$10.7
Western Europe^$5.4^$6.4
France^$0.8^$1.1
Germ any^$0.5^$1.0
Neth erlands^$0.5^$0.7
United Kingdom^$1.1^$1.5
United States^$1.8^$2.4
Au stra lia^$0.2^$0.2
Japan^$0.1^$0.4
Developing economies^$3.2^$1.6
Latin America^$0.9^$0.4
Af rica^$0.3^$0.1
Asia^$1.9^$1.2
0246810121416 0246810121416
Trillions of DollarsTrillions of Dollars
Inward StockOutward Stock
Source: United Nations
⁸ Bach, Christopher L., U.S. International Transactions in 2007. Survey of Current
Business, April 2008, p. 48. Direct investment data reported in the balance of payments
differ from capital flow data reported elsewhere, because the balance of payments data have
not been adjusted for current cost adjustments to earnings.

Global direct investment flows picked sharply after 2004, following three years
of reduced flows. According to the United Nations’ World Investment Report,⁹ the
largest 100 multinational corporations in the world experienced a stagnation of their
sales, employment, and growth in assets from 2000 to 2003, but global foreign direct
investment flows picked up in the 2004-2007 period, as indicated in Table 1. In

2005, 2006, and 2007 global direct investment flows grew by 27%, 38%, and 18%,

respectively, to reach $1.5 trillion. The rise in global direct investment flows was
driven by an increase in corporate profits worldwide and resulting higher stock prices
that raised the value of cross-border mergers and acquisitions. The developed
economies continue to absorb about two-thirds of global direct investment flows,
with the developing economies sharing the rest. Africa continues to receive the
smallest share, generally less than 3%, with Latin America receiving about 8% and
Asia getting between 18% and 22%. The United Nations estimates that foreign direct
investment should remain strong through 2009.¹⁰
Table 1. Global Annual Inflows of Foreign Direct Investment, By
Major Area
(in billions of dollars; percent shares)
2005 2006 2007 2005 2006 2007
Inflows of foreign directShare of annual foreign
investmentdirect investment inflows
(in billions of dollars)(in percent)
World $945.8 $1,305.9 $1,537.9 100.0% 100.0% 100.0%
Developed economies590.3857.51,001.962.465.765.1
Western Europe495.0566.4651.052.343.442.3
European Union486.4531.0610.051.440.739.7
Other Western Europe8.635.438.00.92.72.5
North America129.9244.4n.a.13.718.7n.a.
United States101.0175.4192.910.713.412.5
Other developed econ.-34.646.7n.a.-3.73.6n.a.
Developing economies314.3379.1438.433.229.028.5
Africa 29.6 35.5 35.6 3.1 2.7 2.3
Latin America75.583.7125.88.06.48.2
Asia 209.1 259.8 277.0 22.1 19.9 18.0
Other Europe41.269.397.64.45.36.3
^So^urce^: ^W^o^r^l^{d Inves}^t^m^ent^Repor^t^,²⁰⁰⁷^,^Uⁿⁱ^t^e^d^N^a^tⁱ^o^ns.^A^nne^{x t}^a^b^l^e^B^.¹^;^Fo^r^eⁱ^{gn D}ⁱ^r^e^c^t^I^nve^st^m^e^nt
^R^each^{ed New}^R^{ecord in}^{2007, UNC}^T^A^{D pres}^s^releas^{e, Jan}^u^a^ry^{8, 2008.}

⁹ World Investment Report 2007, United Nations, July 2007. P. 5.
¹⁰ World Investment Prospects Survey: 2007-2009. United Nations Conference on Trade
and Development, 2007.

U.S. and Foreign Multinational Companies
By the end of 2005, there were more than 2,300 U.S. parent companies with
24,000 affiliates operating abroad, as Table 2 indicates. In comparison, foreign firms
had about 5,300 affiliates operating in the United States. U.S. parent companies
employed nearly 22 million workers in the United States, compared with the 10.3
million workers employed abroad by U.S. firms and the 5.5 million persons
employed in the United States by foreign firms. Although the U.S.-based affiliates
of foreign firms employ fewer workers than do the foreign affiliates of U.S. firms,
they paid almost as much in aggregate employee compensation in the United States
as did the U.S. affiliates operating abroad. The foreign affiliates of U.S. parent
companies, however, had a third higher value of gross product than did the affiliates
of foreign firms operating in the United States. In addition, the foreign affiliates of
U.S. firms had total sales that were a third higher than that of the U.S. affiliates of
foreign firms. The foreign affiliates of U.S. firms, however, paid three times more
in taxes to foreign governments than did the affiliates of foreign firms operating in
the United States. The overseas affiliates of U.S. parent companies also paid nearly
twice as much in taxes relative to their sales as did U.S. parent companies and as did
foreign-owned affiliates operating in the United States.
Table 2. Select Data on U.S. Multinational Companies and on
Foreign Firms Operating in the United States, 2005
(in millions of dollars unless otherwise indicated)
U.S. Multinational CompaniesU.S. Affiliates
of ForeignParent
FirmsCom p ani e s Affiliates
Number of firms2,30324,4565,331
Employment (thousands)21,768.510,333.35,530.1
Employee compensation$1,288,871$391,846$363,340
Gross product$2,303,060$882,099$539,869
Total assets$16,767,078$9,951,716$6,848,777
Sales $7,588,306 $4,224,685 $2,755,941
T a xes $166,767 $168,811 $49,595
R&D Expenditures$NA$28,316$34,637
^So^urce^:^U^.^{S. D}ⁱ^r^ect^Inves^t^m^ent^Abr^{oad: O}^p^er^atⁱ^ons^of^U^.^{S. Par}^e^nt^C^o^m^pani^es^{and T}^h^ei^r^For^eⁱ^gⁿ
^Affiliates^,^Pr^eliminar^{y 2005 Es}^timates^{; an}^d^Fo^reigⁿ^{Direct I}ⁿ^v^e^s^t^m^eⁿ^{t in}^th^{e Un}^ited^S^t^a^t^es:
^Oper^ations^{of U.S. Affilia}^tes^{of For}^e^{ign C}^o^mpanies^{, Pr}^eliminar^{y 2005 Es}^timates^.
U.S. multinational companies also play an important role in the U.S. economy,
as indicated in Table 3. According to the total output of U.S. parent companies, or
gross product, they produced $2.3 trillion in goods and services in 2005, up slightly
from the $2.2 trillion dollars they produced in 2004. This amount comprised about
21% of total U.S. private industry gross product, a share of total gross product of
U.S. parent companies that has remained fairly consistent since the early 1990s
despite significant changes in the U.S. economy as a whole. The data also
demonstrate the impact the improvement in the U.S. economy after 2002 had on the
operations of U.S. multinational companies.

The manufacturing sector presents a similar picture. During the 1990s,
manufacturing production continued to decline as a share of U.S. parent company
gross product, falling from 53% of total output in 1994, to 45% in 2002, reflecting
the slowdown in the rate of growth in the U.S. economy and the decline overall in the
share of the U.S. economy devoted to the manufacturing sector. After the turnaround
in U.S. economic growth in 2003, the share of output arising from the manufacturing
sector rose to 45.7% in 2005 among U.S. parent companies, although the
manufacturing sector continued to slide as a share of overall U.S. gross product.
Within the U.S. economy, U.S. multinational corporations (MNCs) rank among
the largest U.S. firms. According to data collected by the Commerce Department’s
Bureau of Economic Analysis (BEA), when American parent companies and their
foreign affiliates are compared by the size structure of employment classes, 40% of
the more than 2,000 U.S. parent companies employ more than 2,499 persons each.
These large parent firms account for 95% of the total number of people employed by
U.S. MNCs. Employment abroad is even more concentrated among the largest
foreign affiliates of U.S. parent firms: the largest 2% of the affiliates account for 90%
of affiliate employment.¹¹
Table 3. Gross Product and Manufacturing Gross Product by
U.S. Multinational Companies, 1994-2005
(in billions of dollars and percent share)
Gross ProductManufacturing Gross Product
U.S. ParentU.S. PrivateParent Company Share of ParentShare of U.S.
CompaniesIndustriesShare of U.S.Company GrossPrivate Gross
Private GrossProductProduct
ProductBillions of dollars

1994 $1,313.8 $6,013.5 21.8% 53.1% 18.3%

1995 1,365.5 6,306.9 21.7% 53.0% 18.4%

1996 1,480.6 6,667.9 22.2% 51.6% 17.8%

1997 1,573.5 7,253.6 21.7% 49.0% 17.7%

1998 1,594.5 7,678.2 20.8% 49.0% 17.6%

1999 1,914.3 8,123.0 23.6% 48.6% 16.9%

2000 2,141.5 8,614.3 24.9% 46.5% 16.6%

2001 1,892.4 8,869.7 21.3% 43.8% 15.1%

2002 1,858.8 9,131.2 20.4% 44.6% 14.8%

2003 1,958.1 9,542.3 20.5% 44.2% 14.2%

2004 2,215.8 10,221.5 21.7% 45.6% 14.0%

2005 2,303.1 10,892.2 21.1% 45.7% 13.9%

^Source:^S^h^ares^dev^e^l^{oped by}^C^R^S^f^r^om^D^e^part^m^eⁿ^t^of^C^o^m^m^e^{rce dat}^a^.

¹¹ Mataloni, Raymond J. Jr. U.S. Multinational Companies: Operations in 1998. Survey of
Current Business, July 2000. pp. 26-45.

Employment
A major source of contention in the United States regarding foreign investment
focuses on the impact such investment is having on U.S. employment.¹² Some
observers argue that recent actions by U.S. parent companies are different from
previous experiences with foreign investment because the parent companies are
shifting jobs, capital, and technology offshore to their foreign affiliates in ways that
are distinctly different from previous periods, and thereby are reducing employment
in the United States. The Department of Commerce’s Bureau of Economic Analysis
provides the most comprehensive set of data on U.S. direct investment abroad and
on foreign direct investment in the United States. These data, however, were not
designed to link employment gains or losses in the United States, either for individual
jobs, individual companies or in the aggregate, with the gains and losses of jobs
abroad. The data in Table 4 indicate, though, that the employment trends of U.S.
parent companies are sensitive to economic conditions in the U.S. economy,
particularly during periods in which economic growth slows down, as it did in the
early 1980s, 1990s, and in the early 2000s.
Foreign investment data seem to indicate that, despite, or perhaps because of,
the growing international linkages between economies, an expansion or a contraction
in the rate of growth in the U.S. economy affects employment among U.S. parent
companies more than it affects employment among the overseas affiliates of these
parent companies. Nevertheless, changes in jobs among U.S. parent companies that
are related to the overall growth rate of the economy also affect the growth in
employment among the foreign affiliates, though not necessarily by the same
magnitude as indicated in Figure 3. As a result, the number of employees in the
parent companies and in the affiliates tend to rise and fall in a generally similar
pattern. While international linkages between U.S. and foreign economies mean that
economic conditions in the United States have an impact on economic conditions
abroad, there appears to be no distinct pattern between the creation or loss of jobs
within U.S. multinational companies and a commensurate loss or creation of jobs
among the foreign affiliates of those companies. Indeed, within most of the major
developed countries, those economic forces that spur direct investment inflows also
boost direct investment outflows. As a result, foreign direct investment may create
jobs in the foreign affiliate that substitute for jobs in the parent company, but foreign
investment may also positively affect job creation in both the parent company and the
foreign affiliates, which makes it difficult to identify any broad trend regarding
outsourcing.

¹² For a comprehensive look at how offshore outsourcing is affecting U.S. workers, see CRS
Report RL32292, Offshoring (a.k.a. Offshore Outsourcing) and Job Insecurity Among U.S.
Workers, by Linda Levine. Also, see Drezner, Daniel W., The Outsourcing Bogeyman.
Foreign Affairs, May/June, 2004; and Engardio, Pete, Aaron Bernstein, and Manjeet
Kripalani, Is Your Job Next? Business Week, February 3, 2003. P. 50-60.

CRS-8
Table 4. Employment of U.S. Multinational Companies and the Affiliates of Foreign Firms, 1985-2005
(in thousands, and percent share)
U.S. Multinational CompaniesU.S. Affiliates ofU.S. CivilianShares of U.S. Civilian Employment
Foreign FirmsEmploymentTotalParentsAffiliatesU.S. ParentCompaniesAffiliates of U.S.Parent CompaniesU.S. Affiliates ofForeign Companies

24,531.9 18,112.6 6,419.3 2,862.2 107,150 16.90% 5.99% 2.67%

24,082.0 17,831.8 6,250.2 2,937.9 109,597 16.27% 5.70% 2.68%

24,255.4 17,985.8 6,269.6 3,224.3 112,440 16.00% 5.58% 2.87%

24,141.1 17,737.6 6,403.5 3,844.2 114,968 15.43% 5.57% 3.34%

25,387.5 18,765.4 6,622.1 4,511.5 117,342 15.99% 5.64% 3.84%

ⁱ^{ki/CRS-RL32461}25,263.6 18,429.7 6,833.9 4,734.5 118,793 15.51% 5.75% 3.99%24,837.1 17,958.9 6,878.2 4,871.9 117,718 15.26% 5.84% 4.14%
^g/w24,189.7 17,529.6 6,660.1 4,715.4 118,492 14.79% 5.62% 3.98%
^s^.or
^le^ak24,221.5 17,536.9 6,684.6 4,765.6 120,259 14.58% 5.56% 3.96%

25,670.0 18,565.4 7,104.6 4,840.5 123,060 15.09% 5.77% 3.93%

^://wiki25,921.1 18,576.2 7,344.9 4,941.8 124,900 14.87% 5.88% 3.96%
^h^ttp26,334.0 18,790.0 7,544.0 5,105.0 126,708 14.83% 5.95% 4.03%

27,851.0 19,878.0 7,973.0 5,201.9 129,558 15.34% 6.15% 4.02%

28,003.6 19,819.8 8,183.8 5,646.1 131,463 15.08% 6.23% 4.29%

32,227.0 23,006.8 9,220.2 6,027.6 133,488 17.24% 6.91% 4.52%

33,598.2 23,885.2 9,713.0 6,429.2 136,891 17.45% 7.10% 4.70%

33,226.0 22,735.1 9,803.6 6,371.9 136,933 16.60% 7.16% 4.65%

30,597.3 22,117.6 9,776.0 5,420.3 136,485 16.21% 7.16% 3.97%

30,762.3 21,104.8 9,657.5 5,253.0 137,736 15.32% 7.01% 3.81%

31,405.5 21,377.5 10,028.0 5,562.3 139,252 15.35% 7.20% 3.99%

32,101.8 21,768.5 10,333.3 5,530.1 141,730 15.36% 7.29% 3.90%

^D^a^t^a^dev^e^l^{oped by}^C^R^S^f^r^om^dat^a^pu^blⁱ^s^h^e^{d by}^t^h^{e D}^e^part^m^eⁿ^t^of^C^o^m^m^e^{rce an}^{d t}^h^{e D}^e^part^m^eⁿ^t^of^L^a^bor.

Figure 3. Employment of U.S. Parent Companies and Their Foreign
Affiliates, 1992-2005 (1990 = 100)

160
150
Affiliates
140
130
120
110
Parents
100
90
1982 1986 1990 1994 1998 2002
1984 1988 1992 1996 2000 2004
Year
Source: Department of Commerce
The apparent lack of a direct linkage between job gains and losses among parent
companies and their foreign affiliates likely arises from the many factors that can
affect job gains and losses both within individual companies and within the economy
as a whole. Economists typically categorize unemployment as cyclical, structural,
seasonal, and frictional. Only the first two are relevant to the current discussion and
are likely to account for the largest share of unwanted job changes during any given
year. When cyclical and structural unemployment coincide it often is difficult to
distinguish one from another.
Long-term changes in the basic structure of the economy, especially in such
dynamic economies as in the U.S. economy, alter the composition of jobs in the
economy. Such changes occurred during the Industrial Revolution, when large
numbers of workers migrated from farms to the rapidly developing manufacturing
industries in northern cities. These structural changes represent the contraction and
expansion of individual industries within the economy that arise from changes in
technology and productivity that also direct changes in the composition of the
Nation’s trade activities and foreign investment patterns. Other job changes are
related to the impact of the business cycle on the economy. Such a cycle is
characterized by a general slowdown or expansion in the rate of growth in the
economy due to broad macroeconomic factors and generally affects large segments
of the economy.
Employment Trends
Both U.S. parent companies and their foreign affiliates lost employment during
the economic contraction of the early 1980s, as is indicated in Table 4 (page 8).

These multinational companies apparently were affected more by the cyclical
changes than were purely domestic firms. As a result, the parent companies’ share
of total U.S. civilian employment declined until 2004, when it began to increase,
indicating that U.S. parent companies had at least stemmed the decline in their share
of U.S. civilian employment (the relative share of U.S. employment represented by
the U.S. foreign affiliates is provided only for comparison purposes). The affiliates
of foreign firms operating in the United States bucked this trend and added to their
absolute level of employment except in 2003, when they reduced the number of
workers and fell as a share of overall U.S. civilian employment. During the entire
period most of the workers added by the affiliates were added through acquisitions
of existing U.S. firms, rather than by establishing new enterprises.¹³ While such
acquisitions do not necessarily add to the total number of firms in the economy, they
do support existing jobs and may even add to the overall demand for workers. In

1985, U.S. multinational companies employed 24.5 million workers. Of this number,

18.1 million workers were employed by the parent company and 6.4 million workers
were employed abroad by the foreign affiliates of those parent companies.
Throughout the 1980s, an economic recession and a broad restructuring of the
economy caused U.S. parent companies to lose employment, while employment
among the foreign affiliates of these parent companies generally held even.
By 1989, U.S. parent companies reversed the downward slide in their
employment and began expanding their employment roles, a year behind the turn-
around in employment of their foreign affiliates. Prior to this turn-around, the parent
companies’ share of the U.S. civilian labor force had fallen from 18.8% to 16%
between 1982 and 1989. In comparison, the employment of U.S. affiliates abroad
fell from a representative share of U.S. civilian employment of 6.7% in 1982 to 5.6%
in 1989. During the same time, foreign firms were investing heavily in the United
States and their employment rose from 2.5 million workers in 1982 to 4.5 million in

1989, or from 2.5% of U.S. civilian employment in 1982 to 3.8% in 1989.

Employment among U.S. parent companies dipped again in the early 1990s and in
the early 2000s in response to economic downturns that occurred during those
periods. During each U.S. economic downturn, the level of employment of U.S.
parent companies declined more sharply than it did among their foreign affiliates and
the decline in employment lasted longer than it did among the employment of the
foreign affiliates. As a result, the share of employment represented by the foreign
affiliates increased from 26% in the 1980s to 30% in 2002 as a share of total U.S.
multinational company employment, as indicated by Figure 4.

¹³ McNeil, Lawrence R., “Foreign Direct Investment in the United States: New Investment
in 2006.” Survey of Current Business, June 2007, p. 44-51.

Figure 4. Employment of the Foreign Affiliates of U.S. Parent
Companies as a Share of the Total Employment of U.S. Multinational
Companies, 1985-2005
(in percent shares)

Percent Share
33
32
31
Affiliate Employment Share
30
of Total MNC Employment
29
28
27
26
25
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Source: Department of Commerce
The 1990s marked a major turn-around in employment for U.S. multinational
companies. In 1994, U.S. parent companies began to regain employment at a faster
rate than did the U.S. economy as a whole, thereby raising their share of total U.S.
civilian employment. By 2000, U.S. parent company employment had reached 23.9
million, an all-time high and was equivalent to 17.5% of U.S. civilian employment,
the highest share of such employment since 1983. Employment among the affiliates
of foreign firms operating in the United States also peaked in 2000, mirroring the
trend of U.S. parent companies. Employment among the overseas affiliates of U.S.
parent companies continued to add workers through 2001, before they also were
forced to reduce their total number of workers in 2002 due to slowing economic
growth abroad. Starting in 2004, employment picked up in all three categories of
firms as U.S. parent companies increased their employment and the foreign affiliates
of U.S. parent firms expanded their employment to the highest levels recorded.
Employment by Sector and Area
Department of Commerce data indicate that recent foreign investment activity
offers no evidence of a major deviation from well established long-term trends.
These trends indicate that over half of all the employment of the foreign affiliates in
2005 was in the manufacturing sector, as indicated in Table 5. (Data in this table are
for the non-bank U.S. affiliates rather than for the more inclusive category used
elsewhere in order to provide detailed industry-level data.) Within the manufacturing

sector, employment by the foreign affiliates of U.S. firms was concentrated most
heavily in the transportation equipment sector, including automobile production,
retail trade, chemicals, and computers and equipment. Employment in the services
sectors, mining, and the food sectors grew most rapidly from 2003 to 2005 among
the U.S. foreign affiliates. Sharp declines in employment were experienced in the
utilities sector, beverages and tobacco manufacturing, and broadcasting. Most other
sectors showed moderate increases in employment over the three-year period.
By country, over two-thirds of the investments and the employees of U.S.
overseas investors are in the most highly developed economies where labor
compensation, standards of living, and consumer tastes are most closely comparable
to those in the United States. These countries are also the largest foreign direct
investors and the largest foreign employers in the United States, as indicated in
Figures 5 and 6. U.S. direct investment abroad and employment have been heavily
concentrated in Europe since the end of World War II. This investment coincided
with the rapid expansion in economic activity that followed WWII and the formation
of the European Economic Community (EEC), now the European Union. Initially,
U.S. firms wanted to establish a foothold in Europe inside the tariff protection
created by the formation of the EEC and access to the European market continues to
draw U.S. direct investment. Moreover, with the enlargement of the European
Figure 5. U.S. and Foreign Direct Investment Position, Cumulative
Position by Country, 2005 (in billions of dollars)

U.S.Direct InvestmentForeign Direct Investment
Position AbroadPosition In the U.S.
Total = $1,790 Bil.Total = $1,378 Bil.
^$192^$105^Canada
^$963^$1,⁰⁰¹^Eur^o^pe
^$48^$143^France
^$80^$149^G^e^r^m^aⁿ^y
^$179^$146^Ne^the^r^la^nds
^$86^$113^Sw^itz^e^r^la^nd
^$273^$230^{United K}ⁱ^ng^dom
^$304^$70^L^a^tiⁿ^Am^eri^ca
^$19^$2^Af^ri^ca
^$17^$8^Mⁱ^ddle^East
^$294^$193^Asia
^$73^$159^Ja^p^aⁿ
^$0^$500^$1,⁰⁰⁰^$1,⁵⁰⁰^$500^$1,⁰⁰⁰^$1,⁵⁰⁰

Union,¹⁴ the largest share of U.S. direct investment abroad likely will remain focused
on this region for some time to come. Nevertheless, from 2003 to 2005,
employment by U.S. firms in Asia, particularly in China, Malaysia and Singapore
grew especially rapidly. In China, for instance, employment over the 2003-2005
period grew by 45% to reach 490,000. As a whole, employment by U.S. firms in
Asia accounts for one-fourth of the total employment by U.S. firms abroad.
Figure 6. Employment of U.S. Foreign Affiliates and Affiliates of
Foreign Firms in the U.S., by Country or Region, 2005

Employment of U.S.Employment of Foreign
Foreign AffiliatesAffiliates in the U.S.
Total = 10.3 Mil.Total = 5.5 Mil.
1.10.4Canada
4.33.7Europe
0.60.5 France
0.60.7 Germany
0.20.5 Netherlands
0.10.4 Switzerland
1.31.0 United Kingdom
2.00.4Latin America
0.20.0Africa
0.10.1Middle East
2.60.8Asia
0.60.7 Japan
0.01.02.03.04.05.0 1.0 2.0 3.0 4.0 5.0
Millions Millions
Source: U.S. Department of Commerce
¹⁴ For additional information, see CRS Report RS21344, European Union Enlargement, by
Kristin Archick, updated April 9, 2004.

Table 5. Employment of Non-Bank U.S. Foreign Affiliates by
Major Sector and Area, 2003-2005
(in thousands)
^I^ndus^trie^s²⁰⁰³²⁰⁰⁴²⁰⁰⁵
^{All indus}^tries⁸^,242.2⁸^,617.2⁸^,955.8
^Mⁱⁿⁱⁿ^g^92.9^102.1^122.6
^Ut^ilit^ies⁷⁴^.⁸⁶³^.³⁵⁰^.⁷
^M^aⁿ^u^f^actu^riⁿ^g^4,756.0⁴^,838.8⁴^,963.7
^F^ood^384.2^390.5^551.3
^Bev^e^rag^e^s^an^{d tobacco produ}^cts^204.6^208.7^130.2
^T^e^x^{tiles, ap}^p^a^r^e^{l, an}^d^leath^e^r^p^r^o^d^u^cts⁵⁹^.⁵⁵⁶^.⁴⁵⁴^.⁹
^Pet^r^ol^eu^m^an^{d coal}^produ^ct^s^132.7^136.5^156.9
^C^h^emⁱ^cal^s^747.0^734.5^748.8
^P^h^arm^aceu^ticals^329.0^321.8^327.5
^Met^a^l^produ^ct^s^257.1^252.3^232.7
^Machⁱⁿ^ery^317.3^325.8^309.1
^C^o^m^p^u^t^ers^an^{d el}^ect^ronⁱ^{c produ}^ct^s^717.2^774.0^743.4
^C^o^m^m^uⁿⁱ^catⁱ^oⁿ^s^equⁱ^pm^en^t^157.1^164.7^171.0
^S^e^mⁱ^con^d^u^c^t^o^rs^{, el}^ect^ronⁱ^{c com}^pon^en^t^s^223.8^265.1^328.9
^T^r^an^s^port^a^tⁱ^oⁿ^equⁱ^pm^en^t¹^,219.1¹^,227.0¹^,255.5
^W^h^ol^es^al^{e trad}^e^370.7^379.7^367.2
^Iⁿ^form^ati^oⁿ^344.9^339.1^351.7
^Broadcas^tⁱⁿ^g^an^{d t}^e^l^ecom^m^uⁿⁱ^catⁱ^oⁿ^s^124.3^94.2^106.6
^In^f^o^rm^atⁱ^oⁿ^s^e^rvⁱ^ces^an^{d dat}^a^proces^sⁱⁿ^g^135.8^147.8^139.6
^Fiⁿ^aⁿ^{ce an}^dⁱⁿ^s^u^ran^c^e^300.7^291.4^295.6
^Profes^sⁱ^on^al^{, s}^cⁱ^eⁿ^tⁱ^fⁱ^c^{, an}^d^techⁿⁱ^cal^s^ervi^ces^518.1^543.2^587.5
^C^o^m^p^u^t^{er s}^y^s^t^em^s^desⁱ^gⁿ^an^{d rel}^a^t^e^{d s}^e^rvⁱ^ces^312.9^329.9^361.9
^{Other indus}^tries¹^,784.1²^,059.6²^,216.7
^R^e^t^aⁱ^l^t^r^ade^637.0^639.9^756.7
^A^d^mⁱⁿⁱ^s^t^ratⁱ^oⁿ^,^s^u^pport^,^an^{d w}^a^s^t^{e m}^aⁿ^a^g^e^m^eⁿ^t^448.0^493.7^553.6
^A^ccom^m^odatⁱ^oⁿ^an^{d f}^{ood s}^e^rvⁱ^ces^385.7^197.7^534.5
^Countries
^A^l^l^couⁿ^t^ri^es^8,242.2⁸^,617.2⁸^,955.8
^C^aⁿ^a^d^a^1,060.5¹^,065.1¹^,079.1
^E^u^rop^e^3,703.8³^,879.3³^,906.9
^F^r^an^ce^547.2^562.8^584.1
^G^e^rm^an^y^578.4^601.7^590.0
^It^al^y^222.4^236.5^225.5
^N^e^t^h^erl^aⁿ^d^s^171.6^175.1^184.3
^S^p^aiⁿ^190.1^197.2^192.2
^Uⁿⁱ^t^e^{d K}ⁱⁿ^g^dom^1,153.1¹^,166.3¹^,160.6
^L^a^tiⁿ^A^m^eri^ca^1,572.9¹^,580.2¹^,689.7
^Brazi^l^347.8^345.8^393.3
^Mexⁱ^co^818.5^785.2^838.4
^A^f^ri^ca^149.8^160.8^154.0
^Mⁱ^d^d^l^{e E}^a^s^t^52.6^54.4^59.8
^A^sⁱ^a^an^d^Paci^fi^c¹^,702.6¹^,877.4²^,063.4
^A^u^s^t^ralⁱ^a^272.7^271.9^283.9
^C^hⁱⁿ^a^338.9^407.9^489.6
^Japan^235.9^227.6^242.0
^Mal^a^y^sⁱ^a^88.5^97.5^116.3
^Sⁱⁿ^g^a^pore^95.5^110.7^112.5
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.

Some U.S. observers are concerned that the U.S. economy is losing jobs to
developing countries where labor rates are considerably below those in the United
States, but the data show no appreciable change in the underlying trend that favors
investment and jobs in developed economies. In addition, U.S. foreign affiliates as
a whole lost employment in the early 2000s, similar to U.S. parent companies.
Employment losses were mostly concentrated among the highly developed
economies of Europe, because their close ties with the U.S. economy made them
highly susceptible to the slowdown in the U.S. economy. Among the developing
countries, U.S. investors have long been attracted to Latin America, likely because
of its close proximity to the United States. In 2005, U.S. affiliates in Mexico had
over 1 million employees, third behind affiliates in Canada with 1.1 million
employees and affiliates in the United Kingdom with nearly 1.3 million employees.
Between 2001 and 2002, U.S. direct investment employment in Latin America and
Asia increased, while employment in Africa and the Middle East dropped, leading
some observers to conclude that investment and employment among the developed
and developing countries represent two relatively independent groups and that little
employment is exchanged between them. This proposition would mean that
employment shifts occur primarily between developing countries, such as in Latin
American and Asia, and among developed countries, primarily within Europe and
between Europe and Japan and Canada.
On average, the U.S. economy created about 2 million civilian jobs per year
from 1982 to 1992 and about 1.7 million jobs per year from 1992 to 2002. From

2003 to 2006, the economy created an average of more than 2 million jobs per year.

The foreign affiliates of U.S. parent companies created an average of about 24,000
jobs per year from 1982 to 1992 and about 300,000 jobs per year from 1992 to 2002.
In 2004 and 2005, these affiliates created more than 300,000 jobs per year, reflecting
the increase in economic activity abroad. There is no indication from the data,
however, how many, if any at all, of the jobs created abroad by U.S. affiliates may
have come at the expense of jobs created in the United States by U.S. parent
companies.¹⁵ Over both periods, about two-thirds of the jobs that were added were
in developed countries. As a result, U.S. foreign affiliates created on average about
100,000 jobs per year in low-cost developing countries during the 1992 to 2005
period, or about 6% of the average number of jobs created by the U.S. economy in
a year.
Gross Product
Another concern expressed about U.S. direct investment abroad is that as U.S.
parent companies shift jobs abroad, they also transfer economic production abroad,
thereby permanently replacing U.S. domestic production with foreign production.
This effect is partially muted by foreigners investing in the United States. A large
share of such investment is comprised of foreign acquisitions of existing U.S. firms.
Although such acquisitions can not be characterized as creating new jobs, they do
help sustain U.S. employment and production. There is bound to be some shifting of

¹⁵ See the following for availability of information on job loss associated with outsourcing:
CRS Report RL30799, Unemployment Through Layoffs and Offshore Outsourcing, by Linda
Levine.

jobs and economic activities within the U.S. economy and between economies as part
of the overall structural changes that occur within such dynamic economies as the
U.S. economy. In addition, such shifting occurs as a result of greater economic
specialization both within countries and between countries. As Table 6 indicates,
U.S. parent companies had a gross product, or total U.S. output, of $2.3 trillion in

2005, representing 72% of the total output of U.S. multinational companies,

compared with a gross product of their majority-owned foreign affiliates of $822
billion. As the U.S. economy expanded rapidly in the last half of the 1990s, U.S.
parent companies performed better than their overseas affiliates and increased their
share of total multinational company gross product from 74.6% in 1995 to 78% in
2000. Since 2000, however, output among U.S. parent companies has grown at a
slower pace than did that of their majority-owned foreign affiliates, which had grown
to account for nearly 28% of total output of the U.S. multinational companies.
Table 6. Gross Product of U.S. Parent Companies and Their
Majority-Owned Foreign Affiliates
(in millions of dollars and percent share)
Majority- Majority-
Total GrossParentOwned ParentOwned
P r oduct Companies F oreign Companies f oreign
Af f iliates Af f iliates
(millions of dollars)(percent shares)

1994 $1,717,488 $1,313,792 $403,696 76.5% 23.5%

1995 1,831,046 1,365,470 465,576 74.6% 25.4%

1996 1,978,948 1,480,638 498,310 74.8% 25.2%

1997 2,094,318 1,573,451 520,867 75.1% 24.9%

1998 2,100,773 1,594,504 506,269 75.9% 24.1%

1999 2,480,739 1,914,343 566,396 77.2% 22.8%

2000 2,748,106 2,141,480 606,626 77.9% 22.1%

2001 2,478,056 1,892,399 585,657 76.4% 23.6%

2002 2,460,411 1,858,805 601,606 75.5% 24.5%

2003 2,655,903 1,958,125 667,778 73.7% 26.3%

2004 2,991,723 2,173,467 818,256 72.6% 27.4%

2005 3,185,159 2,303,060 882,099 72.3% 27.7%

^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.
U.S. Multinational Companies
While U.S. MNCs used their economic strengths to expand abroad during the

1980s and 1990s, the U.S.-based parent firms lost market shares at home, in large¹⁶

part due to corporate downsizing efforts to improve profits. U.S. MNC parent
companies’ share of all U.S. business gross domestic product (GDP) — the broadest¹⁷
measure of economic activity — declined from 32% to 25% from 1977 to 1989.
This share stayed fairly constant at about 22% through much of the 1990s until 1998,

¹⁶ Mataloni, Raymond J. Jr., and Lee Goldberg. “Gross Product of U.S. Multinational
Companies, 1977-91.” Survey of Current Business, February 1994. P. 42-63.
¹⁷ Mataloni, Operations of U.S. Multinational Companies. p. 31.

when the parent companies experienced a short boost in their share of U.S. GDP as
they benefitted from the rapidly growing U.S. economy. The economic slowdown
in 2002 affected the parent companies disproportionately, as they lost shares of GDP.
These MNC parent companies increased their share of all U.S. business GDP in the
services sector, which rose from 6% to 8% of U.S. GDP during the period from 1989
to 1998. The MNC share of all other industries rose from 16% to 18% during the 10-
year period, but they lost shares in the manufacturing sector (from 62% to 58%) at
a time when the U.S. manufacturing sector as a whole was shrinking as a share of
national GDP (from 20% to 16%).¹⁸
U.S. parent companies continue to place the largest share of their annual
investments in developed countries, primarily in Western Europe, as indicated in
Table 7. This tendency increased from 1999 to 2003 when U.S. direct investment
shifted even more in favor of the richest developed economies: the share of U.S.
direct investment going to developing countries fell from 28% in 1999 to 25% in
2003. The shift in U.S. direct investment abroad over the last decade reflects
fundamental changes that occurred in the U.S. economy during the same period. As
investment within the U.S. economy shifted from extractive, processing, and
manufacturing industries toward high technology services and financial industries,
U.S. investment abroad mirrored those changes. Consequently, U.S. direct
investment abroad focused less on the extractive, processing, and basic
manufacturing industries in developing countries and more on high technology,
finance, and services industries located mostly in highly-developed countries with
advanced infrastructure and communications systems.¹⁹ Investments in the finance
and services sectors grew twice as fast, on the whole, as direct investment abroad
overall during the 1996-2000 period. Within the manufacturing sector, food
processing, chemicals, and metals lagged in growth behind the industrial machinery,
electronic, and transportation sectors.
Foreign-Owned Firms
On average, foreign-owned establishments operating within the United States
are outperforming their U.S.-owned counterparts. Although foreign-owned firms
account for less than 4% of all U.S. manufacturing establishments, they have 14%
more value added on average and 15% higher value of shipments than other
manufacturers. The average plant size for foreign-owned firms is much larger — five
times — than for U.S. firms, on average, in similar industries. This difference in
plant size apparently rises from the fact that there are no small plants among those
that are foreign-owned. As a result of the larger plant scale and newer plant age,
foreign-owned firms paid wages on average that were 14% higher than all U.S.
manufacturing firms, had 40% higher productivity per worker, and 50% greater
output per worker than the average of comparable U.S.-owned manufacturing plants.

¹⁸ Ibid., p. 31.
¹⁹ CRS Report RS21118, U.S. Direct Investment Abroad: Trends and Current Issues, by
James K. Jackson.

Foreign-owned firms also display higher capital intensity in a larger number of
industries than all U.S. establishments.²⁰
Differences between foreign-owned firms and all U.S. firms should be viewed
with some caution. First, the two groups of firms are not strictly comparable: the
group of foreign-owned firms comprises a subset of all foreign firms, which includes
primarily very large firms; the group of U.S. firms includes all firms, spanning a
broader range of sizes. Secondly, the differences reflect a range of additional factors,
including the prospect that foreign firms which invest in the United States likely are
large firms with proven technologies or techniques they have successfully transferred
to the United States. Small foreign ventures, experimenting with unproven
technologies, are unlikely to want the added risk of investing overseas. Foreign
investors also tend to opt for larger scale and higher capital-intensity plants than the
average U.S. firm to offset the risks inherent in investing abroad and to generate
higher profits to make it economical to manage an operation far removed from the
parent firm.
Table 7. U.S. Direct Investment Abroad; Investment Outflows
for Selected Regions and Countries, 2002-2006
(millions of dollars)
²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶
All Countries$134,946$129,352$257,967$-27,736$216,614
Canada 15,003 17,340 23,865 11,023 14,793
Eur o pe 79,492 87,509 120,382 -55,068 127,375
France 4,604 1,074 7,820 -579 4,886
Germany 2,416 4,376 9,432 6,047 8,275
Ir eland 10,700 7,408 8,336 -3,174 13,264
It aly 1,230 2,862 3,210 -652 3,184
Luxembourg 10,485 8,080 6,568 -16,755 15,127
Netherlands 14,790 15,502 26,489 -38,515 32,896
Spain 3,032 1,820 3,954 170 2,712
Sweden 2,520 2,270 2,520 434 2,954
Switzerland 7,924 14,462 9,468 -12,290 10,441
United Kingdom15,26526,73829,7553,11419,382
Latin America15,1923,90122,915-1,48922,273
Mexico 7,656 3,664 7,712 7,385 10,645
Bermuda 4,313 -3,778 2,856 -5,137 5,685
U.K. Islands6,1463,3147,927-11,208-4,635
Af rica -578 2,697 1,317 1,025 2,176
Egypt 127 470 570 621 630
South Africa12523230465287
Other -1,418 1,823 -127 1,144 2,091
Middle East2,5591,3151,6103,7694,956
Is rael 202 1,263 570 3,076 2,815
Saudi Arabia1,505-1,245-1,044-380593
United Arab Emirates40018654411,211

²⁰ Mataloni, Raymond J., Jr. “An Examination of the Low Rates of Return of Foreign-
Owned U.S. Companies.” Survey of Current Business, March 2000, p. 55-73; Mataloni,
Raymond J., Jr. “Real Gross Product of U.S. Companies’ Majority-Owned Foreign
Affiliates.” Survey of Current Business, April 1997, p. 8-17.

Oman -46 163 59 143 289
Qatar 677 665 1,170 997 -248
Asia and Pacific23,27716,59287,87813,00345,041
Australia8,0367,717(D) (D) 6,460
China 875 1,273 3,446 1,441 4,656
Hong Kong1,226-689(D) 3,5564,817
India 919 354 1,002 667 2,074
J a pan 8,711 867 11,974 6,998 12,241
K orea 1,681 1,231 3,598 1,831 2,402
Singapore5305,446(D) -9,6255,363
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.
Note: A (D) indicates that the data have been suppressed by the Department of Commerce
to protect the confidentiality of the foreign investor. The drop in U.S. direct investment
abroad in 2005 reflects actions by U.S. parent firms to reduce the amount of reinvested
earnings going to their foreign affiliates for distribution to the U.S. parent firms in order to
take advantage of one-time tax provisions in the American Jobs Creation Act of 2004 (P.L.

108-357).

Cyclical vs. Structural Changes
The Bureau of Economic Analysis publishes detailed data on a broad range of
industries represented by U.S. parent companies and their foreign affiliates. These
data are used to compare differences in performance between U.S. parent companies
and their foreign affiliates in terms of gross production and employment across a
range of industrial sectors during three time periods, representing two periods of fast
growth separated by a period of slower growth to measure the performance of U.S.
parent firms and their foreign affiliates during these periods. In particular, the data
are compared to determine if there has been any noticeable shift in production or jobs
from U.S. parent companies to their foreign affiliates in the 1999 to 2002 period,
when economic growth slowed in the United states, that is different from what has
happened during the 1995 to1998 period and 2003 to2005 period when growth was
relatively stronger. The data are then used to determine if shifts in production from
parent companies to foreign affiliates can be attributed to structural changes in the
economy or to cyclical changes that are associated with the business cycle. Structural
changes, for instance, can occur in industries that are maturing and experiencing
economies and improvements due to technological improvements, or in declining
industries that are shedding jobs and capital. It is not always possible to tell which
stage of economic change certain sectors are experiencing, but such a distinction is
important in order to understand how direct investment is affecting the economy, and
for determining what, if any, legislative prescription would be appropriate.
The data in Table 8 compare two periods of economic expansion -- 1995 to

1998 and 2003 to 2005-- with the economic slowdown in the 1999 to 2002 period.

These three periods are useful for comparing the overall economic performance of
U.S. parent companies and their foreign affiliates by examining their rates of growth
in output and employment during the first and third periods when the U.S. economy
grew at an annual average rate of more than 3% per year and the later period when
the economy grew at an average annual rate of about 2.5%. If U.S. parent companies
are prone to outsourcing more jobs during periods when the U.S. economy is growing
more slowly, then industries that are experiencing long-term structural decline would
be expected to show relatively poor economic performance by the parent company

in both periods relative to a more robust performance by the foreign affiliates. In
contrast, industries that are experiencing strong growth during the expansion part of
the business cycle would be expected to show stronger growth in gross product and
employment by the parent firms than by the foreign affiliates.
The period between 1999 and 2002, however, shows the impact a slowdown in
the U.S. economy has on the operations of U.S. parent companies. During this
period, the U.S. parent companies’ average annual gross product decreased by 1%,
while the average annual gross product of U.S. foreign affiliates rose by 2.6%,
slightly below the average annual rate of growth they experienced in the 1995 to
1998 period. Employment fell among parent companies, mostly in the 2000-2002
period as a result of the slowdown in the U.S. economy, while employment grew on
average at a 1.7% average annual rate among the affiliates, a rate that is about one-
third the 4.8% average annual rate the affiliates experienced in the 1995 to 1998
period and far below the average annual rate of 12.7% increase in employment the
affiliates experienced in the 2003 to 2005 period. In contrast, during the 1995-1998
period, parent company’s gross product grew at an average annual rate of 5.6%,
about twice the rate of the foreign affiliates, although employment among the parents
grew by 2.2% during the period, or half the rate of the growth in employment among
foreign affiliates as indicated in Figures 7 and 8. These trends make it difficult to
detect a general shift of jobs abroad by U.S. parent companies. In many cases, both
employment and gross product of the parent firms and the foreign affiliates seem to
move in the same general direction. This partial synchronization may reflect the
overwhelming impact the U.S. economy has on the global economy.
Figure 7. Average Annual Percent Change in Gross Product of U.S.
Parent Companies and Their Foreign Affiliates, Selected Periods

Average annual percent change
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
%Chg. 1995 to 1998%Chg. 1999 to 2002%Chg. 2003 to 2005
Parent CompaniesAffiliate Companies
Source: U.S. Department of Commerce

CRS-21
verage Annual Percent Change in Gross Product and Employment of U.S. Parent Companies and Their
Foreign Affiliates For Select Periods
(in percent change)
Average Annual Percent ChangeAverage Annual Percent ChangeAverage Annual Percent Change
1995 to 19981999 to 20022003 to 2005
Gross ProductEmploymentGross ProductEmploymentGross ProductEmployment
Parents Af f iliates P arents Af f iliates P arents Af f iliates P arents Af f iliates P arents Af f iliates P arents Af f iliates
i ndust r i e s 5.6% 2.9% 2.2% 4.8% -1.0% 2.6% -0.9% 1.7% 8.8% 13.2% 1.6% 12.7%
as extraction78.1-4.838.044.813.9-16.02.96.130.540.420.5NA
ⁱ^{ki/CRS-RL32461}acturing2.71.1-2.01.1-3.73.6-2.40.310.812.80.09.0indred products-0.62.3-11.4-5.4-2.0-1.53.12.623.095.81.933.7
^g/whemicals and allied products2.54.0-4.11.53.24.20.11.218.48.13.22.7
^s^.orary and fabricated metals0.73.60.8-1.21.32.0-1.20.79.61.20.7-2.4
^le^ak
puter and office equipment-1.7-4.70.04.7-3.79.70.9-3.0-2.35.3-4.43.2
^://wikient 6.5 -1.4 1.0 -4.2 -6.9 -5.9 -7.3 -5.9 21.1 43.5 8.5 35.5
^h^ttpransportation equipment6.85.51.16.4-12.6-7.3-7.23.67.48.10.29.4
ehicles and equipment1.35.5-4.22.6-10.6-3.9-3.8-33.33.25.9-1.9NA
extile products and apparel3.62.6-1.9-0.4-11.3-7.9-11.9-0.914.910.92.0-2.8
esale trade26.61.216.632.93.1-4.20.15.221.614.316.62.4
16.7 20.4 3.9 9.5 9.5 3.7 0.5 6.2 -1.1 4.9 -9.9 12.7
-3.0 16.0 -2.8 1.3 10.4 5.3 -0.6 6.0 8.2 9.6 -7.5 1.6
3.8 21.0 3.2 233.0 6.2 10.8 9.1 1.3 59.1 27.5 13.6 75.7
e 10.3 5.6 8.1 NA 6.7 24.1 1.0 12.3 9.5 4.7 5.0 17.1
14.4 17.3 11.4 17.1 0.9 0.2 -1.3 0.9 14.0 11.8 10.4 9.5
^D^a^t^a^{are f}^r^om^t^h^{e D}^e^part^m^eⁿ^t^of^C^o^m^m^e^rce;^percen^t^ch^an^g^e^s^dev^e^l^{oped by}^C^R^S^.

Figure 8. Average Annual Percent Change in Employment of U.S.
Parent Companies and Their Foreign Affiliates, Selected Periods

Average annual percent change
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
%Chg. 1995 to 1998%Chg. 1999 to 2002%Chg. 2003 to 2005
Parent CompaniesAffiliate Companies
Source: U.S. Department of Commerce
Gross product in the manufacturing sector fared poorly over the first two
periods, but showed strong gains in the 2003 to 2005 recovery as output by U.S.
parent companies increased by 10.8% on an average annual basis, while output
among the foreign affiliates increased by 12.8%, as indicated in Figures 9 and 10.
This performance illustrates the impact a temporary slowdown in the business cycle
has on industrial sectors that also are experiencing long-term structural changes.
From 1995 to 1998, manufacturing gross product among parent companies increased
at an average annual rate of 2.7%, more than twice the rate among the overseas
affiliates. Employment among the parent companies, however fell at an average
annual rate of 2% as the U.S. manufacturing sector continued to experience structural
changes and a robust increase in productivity. In contrast, employment among the
foreign affiliates increased at an average annual rate of 1%, commensurate with their
rate of growth in gross product. During the period 1999 to 2002, when U.S.
economic growth slowed, gross product in the manufacturing sector among parent
companies fell at an average annual rate of 3.7%, and employment fell at an average
annual rate of 2.4%, or fell at a slightly faster rate than in the previous period, likely
reflecting the effects of the slowdown in growth combined with the advanced stages
of structural retrenchment that had already occurred. In comparison, U.S.-owned
foreign manufacturing affiliates experienced a 3.6% increase in average annual gross
product, but only a average annual increase in employment of 0.3%. During the
recovery of 2003 to 2005, however, gross product among U.S. parent companies

increased at an average annual rate of 10.8%, while the foreign affiliates experienced
an increase of 12.8%. Despite this strong recovery in output, U.S. parent companies
experienced no measurable growth in employment, while the foreign affiliates
expanded their employments roles by an average annual rate of 9%.
In other major industries, the results are mixed. The impact on wholesale trade
shows the impact of the economic slowdown in the 1999 to 2002 period, as indicated
in Table 8 (page 21). In the 1995 to 1998 period, as the U.S. economy expanded,
gross product in the wholesale trade sector among parent companies grew at an
average annual rate of 26.6% and employment grew at an average annual rate of
16.6%. Among the foreign affiliates in the wholesale trade sector, gross product
increased at an average annual rate of 1.2%, but employment increased at an average
annual rate of 32.9%. In the 1999 to 2002 period, when the rate of economic growth
had slowed, gross product among parent companies increased at an average annual
rate of 3%, while employment stayed even. Among affiliates, gross product fell at
an average annual rate of 4%, but employment increased by an average annual rate
of 5%. In the 2003 to 2005 period, however, both U.S. parent companies and their
foreign affiliates experienced a resurgence in the average annual rate of growth
(21.6% and 14.3%, respectively), but employment grew at a much slower average
annual rate among the affiliates (2.4%) than among the U.S. parent companies
(16.6%).
Figure 9. Average Annual Percent Change in Manufacturing Gross
Product of U.S. Parent Companies and Their Foreign Affiliates,
Selected Periods

Average annual percent change
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
%Chg. 1995 to 1998%Chg. 1999 to 2002%Chg. 2003 to 2005
Parent CompaniesAffiliate Companies
Source: U.S. Department of Commerce

Figure 10. Average Annual Percent Change in Manufacturing
Employment of U.S. Parent Companies and Their Foreign Affiliates,
Selected Periods

Average annual percent change
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
%Chg. 1995 to 1998%Chg. 1999 to 2002%Chg. 2003 to 2005
Parent CompaniesAffiliate Companies
Source: U.S. Department of Commerce
Finance, a sector where the United States is generally believed to have a
competitive edge, shows a different pattern. In the 1995-1998 period, gross product
among U.S. parents in finance grew at an average annual rate of 16.7% and
employment expanded by 3.9%. Affiliates in finance experienced similarly robust
growth: gross product increased at an average annual rate of 20.4% and employment
grew at an average annual rate of 9.58% as U.S. finance firms used their expertise to
capture market shares abroad. The finance sector was affected by the slower growth
in the economy in the 1999 to 2002, as average annual gross product among parent
companies grew by 9.5%, compared with an increase of 3.7% for foreign affiliates.
During the same period, employment among U.S. parent firms in the finance sector
grew by 0.5%, while employment among the affiliates grew at an average annual rate
of 6.2%. The response during the recovery period, 2003 to 2005 by both the U.S.
parents and the foreign affiliates is unique: while gross product among U.S. parents
fell at an average annual rate of 1.1% and employment fell at an average annual rate
of 9.9%, gross product among the foreign affiliates grew at an average rate of 4.9%
and employment grew by 12.7%.

In 1999, the Bureau of Economic Analysis changed the composition of
industries in its survey to include more high-tech service sectors. Twenty of these
sectors are listed in Table 9, with data for the 1999 to 2002 period and for the 2003
to 2005 period. During the first period, average annual gross product by parent
companies fell in eight of the sectors, reflecting the lower overall rate of economic
growth during the period of lower economic growth. Not all of these eight sectors,
however, experienced lower average annual losses in employment. Indeed, in twelve
of the sectors, the average annual rate of gross output for the parent firms increased
over the 1999 to 2002 period, with most of those sectors experiencing positive
increases in employment.
Table 9. Changes in Gross Product and Employment Among
U.S. Parent Companies and Their Foreign Affiliates for Selected
Industries
^{1999 to 2002}^{2003 to 2005}
^Av^era^g^e^a^nnua^{l percent}^Av^era^g^e^a^nnua^{l percent}
^ch^an^ge^ch^an^ge
^G^r^os^s^Prod^u^c^t^E^m^p^l^oym^en^t^G^ros^s^Prod^u^c^t^E^m^p^l^oym^en^t
^Par.^Affl^.^P^ar.^A^ffl^.^Par.^Affl^.^P^ar^Affl^.
^C^o^m^p^u^t^ers^an^{d el}^ect^ronⁱ^{c produ}^ct^s^-^3.7%^9.7%^0.9%^-³^.0%^-^2.3%^5.3%^-⁴^.4%³^.2%
^C^o^m^p^u^t^ers^an^{d equ}ⁱ^pm^en^t⁰^.1^24.4⁵^.5^-⁸^.4^-^21.1^-^14.1^-^4.7^-^15.7
^C^o^m^m^uⁿⁱ^catⁱ^oⁿ^s^equⁱ^pm^en^t^-^3.8^-^0.4^-^9.9²^.8^-¹^.7^9.3^-^11.1⁶^.4
^A^u^di^{o an}^{d v}ⁱ^{deo equ}ⁱ^pm^en^t^-^16.9^-^20.6^-^14.6^-^33.3^-^7.8^40.7^-^18.9^-^12.5
^S^e^mⁱ^con^d^u^c^t^o^rs^an^{d com}^pon^en^t^s^-^17.5^-^4.1^-^4.9^-^1.0^11.8^29.9³^.7^25.9
^N^a^vⁱ^g^a^tⁱ^oⁿ^a^l^an^{d ot}^h^e^{r i}ⁿ^s^t^ru^m^eⁿ^t^s^84.6^73.7^64.8⁴^.7^-¹^.6^4.3^-^3.3^-^11.5
^Magⁿ^e^tⁱ^c^an^{d opt}ⁱ^cal^m^e^di^a^-^12.0³^.0^-⁸^.2^-^33.3^15.1^11.5⁷^.1^8.3
^Prof^es^sⁱ^on^al^s^e^rvⁱ^ces^0.9⁰^.2^-¹^.3^0.9^14.0^11.8^10.4⁹^.5
^A^r^ch^itectu^r^{al an}^{d en}^gⁱⁿ^eerin^g^s^e^rv^.¹^.6^-²^.1^-²^.9^-⁷^.3^49.2^17.8^38.5¹^.2
^C^o^m^p^u^t^{er s}^y^s^t^em^s^desⁱ^gⁿ^-¹^.4^-¹^.8^-²^.3^2.1⁵^.7^9.0¹^.7^-^50.0
^Man^a^g^e^m^eⁿ^t^an^d^coⁿ^s^u^ltin^g⁸^.7²³^.⁶⁴^.0⁰^.³^-⁸^.⁰¹²^.⁵^-¹⁴^.⁶⁴^.6
^A^d^v^e^rtⁱ^sⁱⁿ^g^an^{d rel}^a^t^e^{d s}^e^rvⁱ^ces^10.1⁰^.4^2.2¹^.4^-¹^.0^3.4^-^4.1^-^5.6
^O^t^h^e^r^-^1.1²^.2^-²^.2^3.4^33.2^47.7^28.0^-^50.0
^Man^g^.^ofⁿ^oⁿ^b^an^k^com^p^anⁱ^e^s^-^56.2^17.6^30.9^32.9^-^18.8⁹^.3^101.0^107.4
^A^d^mⁱⁿⁱ^s^t^ratⁱ^v^{e s}^u^pport⁴^.9^-¹^.8^-⁵^.8^1.7^22.4^19.9^-^8.1^-^50.0
^H^eal^t^h^{care an}^{d s}^o^ci^al^as^sⁱ^s^t^an^ce^7.8^72.4³^.1^10.7^-^6.8^-^6.5^-^15.9^-^19.1
^A^ccom^m^odatⁱ^oⁿ^an^{d f}^{ood s}^e^rvⁱ^ces^3.5^-^1.1⁵^.5^1.9¹^.8^22.5⁰^.9^37.7
^A^ccom^m^odatⁱ^oⁿ³^.4^-¹^.5^5.8¹^.2^-⁰^.7^8.4^-^0.4^22.0
^F^{ood s}^e^rvⁱ^ces^3.6^-^1.0⁵^.3^2.0³^.6^25.1¹^.5^38.8
^Mi^s^cel^l^aⁿ^e^ou^s^s^e^rvⁱ^ces^7.7^-^5.4^14.5^-^2.4^32.9^35.9^24.8^-^50.0
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.
The pattern of the foreign affiliates closely resembles that of the parent firms,
with the affiliates experiencing positive rates of growth and employment in about a
dozen sectors. Some sectors, though, experienced falling rates of output and
employment during the 1999-202 period and during the 2003-2005 period, reflecting
a broader scale of economic decline that extended beyond the economic downturn.
The computers and electronic products sector and the audio and video equipment
sector experienced declines in the average annual rate of growth and in employment
among both the parent companies and among the foreign affiliates. Overall, the
foreign affiliates appeared to have recovered positive growth in eighteen sectors

during the 2003-2005 period, while parent firms experienced positive average annual
rates of output in ten sectors. Both parent companies and foreign affiliates
experienced a rebound in employment about 10 sectors, mostly the same sectors,
which makes it difficult to track a trend of outsourcing by U.S. parent companies to
their foreign affiliates.
Trade
Another aspect of foreign direct investment that causes concern is the impact
foreign direct investment has on the amount of foreign trade associated with those
investments. Some observers argue that U.S. direct investment abroad supplants
U.S. exports, jobs, and research and development funds, thereby reducing
employment and wages in the U.S. economy. Others are concerned that outward
direct investment alters the industrial composition of domestic production and trade
flows, which can affect the sectoral and regional distribution of employment and the
relative demand for skilled and unskilled labor.²¹ According to this scenario, as firms
invest abroad, they shift production abroad, thereby eliminating jobs in the United
States. As production shifts abroad, jobs are lost in the United States and goods once
produced in the United States are now imported from abroad. Most studies indicate
that, on balance, direct investment abroad increases U.S. exports and helps sustain²²
employment and wages at home.
If foreign direct investment is a substitute for trade and replaces jobs in the
parent company, it would be reasonable to expect the share of intra-firm trade to
increase over time along with the flow of foreign investment. Such intra-firm trade
represents trade between U.S. parent companies and their foreign affiliates and the
U.S. affiliates of foreign firms and their foreign parent company. In particular, if
foreign investment is displacing jobs and domestic production, or outsourcing jobs,
it would be reasonable to expect imports from U.S. foreign affiliates to the U.S.
parent company to increase over time. There is little doubt that some firms do indeed
replace domestic production with production from abroad, which would shift trade
patterns, but the share of U.S. trade represented by U.S. parent companies and their
affiliates during the 1990s did not increase as would be expected. Instead, as
indicated in Figure 11, intra-firm exports and imports fell as a share of total U.S.
exports and imports during the 1990s. From 2000 to 2003, intra-firm trade, both
exports and imports, increased as a share of total U.S. exports and imports
respectively, but since 2003, intrafirm trade in exports and imports fell as a share of
total U.S. exports and imports.

²¹ International Investment Perspectives: 2006 Edition, the Organization for Economic
Cooperation and Development. p. 99.
²² Ibid., p. 101; Brainard, S. Lael, and David A. Riker, Are U.S. Multinationals Exporting
U.S. Jobs? NBER Working Paper 5958, National Bureau of Economic Research, March

1997.

Figure 11. Intra-Firm MNC Trade as a Share of Total U.S. Exports
and Imports, 1990-2005

Percent share
50
40
30
20
10
0
1990 1992 1994 1996 1998 2000 2002 2004
ExportsImports
Source: Department of Commerce
As Table 10 indicates, the share of U.S. exports shipped by U.S. parent
companies peaked at 67% in 1994, but dropped to 54% in 2005. Similarly, the share
of U.S. exports shipped by the U.S. affiliates of foreign parent companies fell from

23% in 1990 to 19% in 2005. In addition to the decline in the overall share of U.S.

exports, intra-firm trade, or exports from U.S. parent companies to their foreign
affiliates, fell from 27% of U.S. exports in 1990 to 20% in 2005, as exports to firms
not associated with the parent firm increased. The exports of U.S. affiliates of
foreign firms to their foreign parent companies fell from 10% of U.S. exports in 1990
to 9% in 2005. Similarly, total intra-firm exports fell from 37% of U.S. exports in
1990 to 28% in 2005. The intra-firm share of U.S. exports remained relatively stable
during the economic downturn in the early 2000s, suggesting that such intra-firm
trade is more stable than exports as a whole, so that its share rises or falls as U.S.
exports fall or rise, respectively, with business cycle conditions.

CRS-28
Table 10. Multinational Corporations’ Intra-Firm Exports of U.S. Goods, 1990-2005
(in millions of dollars)
Exports By U.S. Parent CompaniesExports By Foreign AffiliatesIntra-MNC
Total U.S.Intra-MNCExports as
Exports ofBy OthersExportsShare ofShareShare of To
GoodsTotal U.S.Totalof TotalTo ForeignTotalTotalForeign
Expor t sU. S. Af f iliates U. S. P arent
Expor t s Expor t s Gr o u p
$392,923 $241,285 61% $106,426 $92,308 23% $37,764 $59,330 $144,190 37%
ⁱ^{ki/CRS-RL32461}421,763 257,861 61% 115,311 96,933 23% 42,222 66,969 157,533 37%
^g/w448,166 265,915 59% 105,999 103,925 23% 48,767 78,326 154,766 35%
^s^.or465,090 274,666 59% 113,762 106,615 23% 47,350 83,809 161,112 35%
^le^ak512,626 344,504 67% 136,128 120,683 24% 51,147 47,439 187,275 37%

584,742 374,002 64% 152,666 135,153 23% 57,246 75,587 209,912 36%

^://wiki625,075 405,721 65% 161,751 140,886 23% 60,831 78,468 222,582 36%
^h^ttp689,182 441,272 64% 186,526 141,305 21% 63,025 106,605 249,551 36%

682,138 438,292 64% 185,372 151,005 22% 57,565 92,841 242,937 36%

695,797 435,192 63% 162,503 153,572 22% 59,881 107,033 222,384 32%

781,918 448,807 57% 182,719 165,321 21% 65,342 167,790 248,061 32%

733,583 419,014 57% 197,967 157,459 21% 65,897 314,569 263,864 36%

682,422 399,781 59% 184,799 137,037 20% 61,530 282,641 246,329 36%

713,415 408,600 57% 183,976 147,643 21% 71,186 304,815 255,164 36%

807,516 438,193 54% 164,344 155,507 19% 74,784 369,323 239,128 30%

894,631 485,627 54% 174,743 169,238 19% 78,799 409,004 253,542 28%

^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.

On the import side, intra-firm trade has also declined as a share of total U.S.
imports, but such trade has remained fairly stable as s share of total U.S. imports as
indicated in Table 11. Imports shipped to U.S. parent companies fell from 43% of
total U.S. imports in 1990 to 36% of U.S. imports in 2005. Similarly, U.S. imports
by the U.S. affiliates of foreign firms fell from 37% of U.S. imports in 1990 to 27%
of U.S. imports in 2005. In addition, intra-firm imports, or imports from the foreign
affiliates of U.S. parent companies to those parent companies fell from 21% of total
U.S. imports to 13% of U.S. imports from 1990 to 2005, which raises serious
questions concerning the concept of U.S. outsourcing of production abroad. During
the same time, imports from foreign parent companies to their U.S. affiliates fell
from 37% to 27% of U.S. imports, so that intra-firm imports as a whole fell from
48% of total U.S. imports to 35% over the 1990 to 2005 period, due in part to
imports shipped to importers outside the intra-firm trade relationship. These data do
not seem to conform with the argument that U.S. firms have shifted some production
facilities abroad and have supplanted domestic production with imports. At the same
time, data are not conclusive and may also indicate that foreign investment can
stimulate foreign sales, which boosts domestic production and mitigates the
economic impact of foreign outsourcing.
Sales
Another way of viewing the impact foreign direct investment has on U.S. jobs
is by examining the sales patterns of U.S. multinational companies. If U.S. parent
companies are embarking on a more extensive effort to outsource jobs abroad, it is
reasonable to expect that this pattern would affect the sales from these foreign
affiliates to the U.S. parent company or that sales to other U.S. persons by foreign-
sourced goods would increase over time. In addition, some observers are concerned
that certain types of service jobs are being moved abroad with service activities being
outsourced to foreign workers. The BEA data on sales of U.S. multinational
companies, however, follows a pattern similar to that of the trade patterns of these
companies and does not offer conclusive evidence of an increase in jobs or activities
being outsourced abroad.
As Table 12 indicates, the foreign affiliates of U.S. parent companies had $3.7
trillion in sales in 2005. The largest share of affiliate sales — about two-thirds —
is in the local market where the affiliate is located. U.S. parent companies also use
their foreign affiliates as a springboard to increase sales in neighboring areas or
countries. Such sales to other foreign countries in 2005 accounted for about one-
fourth of the affiliates’ sales. European affiliates, which accounted for slightly over
half of all affiliate sales, also accounted for the lowest share of their sales back to the
United States, where over one-third of their sales is to other foreign countries, mostly
to other countries within the European Common Market. Out of all U.S. affiliate
sales, 9% of those sales was shipped back to parent firms in the United States, a share
that has remained quite stable over the last decade, and another 2.1% of their sales
were to other U.S. persons, or to importers that are not directly associated with the
parent company.

CRS-30
Table 11. Multinational Corporations’ Intra-Firm Imports of U.S. Goods, 1990-2005
(in millions of U.S. dollars)
Imports Shipped to U.S. ParentsImports Shipped to ForeignAffiliatesIntra-MNC
Total U.S.FromIntra-MNCImports as
Imports ofOthersImportsShare ofShareShareFrom the
GoodsTotal U.S.Totalof TotalFromTotalof TotalForeign
ImportsU. S. Af f iliates U. S. P arent
Imports Imports Gr o u p
$495,978 $213,358 43% $102,150 $182,936 37% $137,458 $99,684 $239,608 48%
ⁱ^{ki/CRS-RL32461}488,450 212,642 44% 102,783 178,702 37% 132,166 97,106 234,949 48%
^g/w532,663 219,676 41% 93,893 184,464 35% 137,799 128,523 231,692 43%
^s^.or580,659 223,901 39% 97,112 200,599 35% 150,789 156,159 247,901 43%
^le^ak663,256 256,820 39% 113,415 232,362 35% 174,641 174,074 288,056 43%
^://wiki743,543 289,941 39% 122,273 250,824 34% 191,222 202,778 313,495 42%
^h^ttp795,289 326,200 41% 137,160 268,673 34% 197,656 200,416 334,816 42%

869,704 350,822 40% 147,452 264,924 30% 202,355 253,958 349,807 40%

911,896 355,976 39% 158,146 292,046 32% 205,181 263,874 363,327 40%

1,024,618 388,480 38% 164,449 324,994 32% 229,857 311,144 394,306 38%

1,218,022 446,016 37% 191,150 366,647 30% 272,374 404,224 463,524 38%

1,177,644 437,133 37% 216,899 347,823 30% 266,451 392,688 483,350 41%

1,167,377 427,559 37% 217,673 324,578 28% 256,691 415,240 474,364 41%

1,264,307 471,132 37% 232,522 356,756 28% 290,492 436,419 523,014 41%

1,477,094 540,904 37% 217,216 394,463 27% 320,268 541,727 537,484 36%

1,681,780 603,345 36% 220,522 452,968 27% 360,026 625,467 580,548 35%

^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.

Table 12. Sales of Goods and Services by U.S. Foreign
Affiliates by Destination and Industry, 2005
(millions of dollars, percent share)
OtherOther U.S.
TotalTo U.S.parentsLocalforeignPersons
countries
Millions of $Percent Share
Sales by Destination
All countries$3,693,7598.8%61.0%26.1%2.1%
Canada 478,595 18.8 74.6 2.2 4.3
Europe 1,920,132 5.2 56.4 37.1 1.3
Latin America408,62716.557.922.03.5
Africa 60,079 13.1 52.8 28.0 6.1
Middle East24,62713.248.932.35.6
Asia and Pacific801,6997.066.525.11.4
Sales by Industry
All industries$3,693,7598.861.026.12.1
Mining 167,151 11.8 52.6 30.1 5.5
Utilities 40,453 N.A. N.A. 0.8 N.A.
Manufacturing 1,708,791 10.7 56.4 30.9 2.1
Wholesale trade941,5868.356.234.31.2
Information 117,128 2.7 69.0 26.3 2.1
Finance and insurance262,2197.765.823.63.0
Services 120,521 7.1 79.9 11.6 1.4
Other industries335,909N.A.N.A.9.6N.A.
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.
Affiliates located in the Middle East, which accounted for the lowest amount
overall of affiliate sales, sent 13% of their goods back to the United States. A large
part of these sales originated in Israel, which has had a free trade agreement (FTA)
with the United States since 1985. In fact, among all the regions, sales by affiliates
in the Middle East are most evenly spread among sales to the United States, local
sales, and sales to other foreign countries. Canada represents the most unequal
distribution of sales, with about 75% of affiliate sales taking place in Canada. Sales
by European affiliates are heavily concentrated within Europe: sales either in the
local area or to neighboring countries account for 93% of all sales by European
affiliates. Sales by affiliates in Africa and Latin America are similar in that about

55% of their sales are in their local markets, about 15% is sent to the United States,

and nearly 30% is sent to other foreign countries, likely within the region.
Sales by industry indicate that manufactured goods account for about half of all
affiliate sales and that about 11% of these goods are shipped back to the United
States. The largest share of sales by industry that are accounted for by sales to U.S.
parent companies is in the mining industry, as U.S. parent companies have invested
abroad in order to gain access to raw materials. All other industries show low levels
of sales back to the U.S. parent, with a heavy concentration of sales in the local
market and to other foreign countries.

Sales of Services
For some observers, another concern is that U.S. parent firms have started
moving service jobs offshore, or outsourcing, in sectors that once were thought to be
immune to such activities.²³ As Table 13 indicates, U.S. foreign affiliates had $574
billion in services sales in 2005. Of this amount, 5.5% consisted of service sales
back to the U.S. parent company. The largest share — 77% — of sales of services
were made in the local market. This share is substantially higher than the comparable
share for sales of goods and services combined and is consistent with the general
view that the distinguishing feature of services is that they are consumed where they
are produced. Africa and the Middle East are the areas with the highest share of sales
back to the U.S. parent companies, while Asia and Europe represent the areas with
the lowest share of services sales back to the U.S. parent. The Commerce
Department has suppressed a large amount of the data on sales of services by industry
in order to protect the confidentiality of individual firms, but the highest share of
service sales is in the area of finance and insurance. The strong sales of financial
services is not unusual, however, given the general conclusion that U.S. financial
services companies are among the most competitive in the world.
Table 13. Sales of Services by U.S. Foreign Affiliates by
Destination and Industry, 2005
(millions of dollars, percent share)
OtherOther U.S.
TotalTo U.S.ParentsLocalForeignPersons
Countries
Millions of $Percent share
Sales by Destination
All countries$574,6665.5%76.6%15.3%2.5%
Canada 63,041 7.4 87.4 1.0 4.1
Europe 297,621 5.4 76.2 16.5 1.9
Latin America66,6236.464.126.33.2
Africa 7,754 9.3 59.2 18.1 13.4
Middle East4,07710.471.915.62.1
Asia and Pacific135,5504.079.813.92.3
Sales by Industry
All industries574,6665.576.615.32.5
Mining 16,330 N.A. N.A. N.A. N.A.
Utilities N.A. N.A. N.A. N.A. N.A.
Manufacturing 12,011 7.1 77.8 13.2 1.9
Wholesale trade26,3930.00.029.90.7
Information N.A. N.A. N.A. N.A. N.A.
Finance and insurance150,4166.868.223.11.9
Se r vi c e s N.A. N.A. N.A. N.A. N.A.
Other industriesN.A.N.A.N.A.N.A.N.A.
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.

²³ Lohr, Steve. “High-End Technology Work Not Immune to Outsourcing.” The New York
Times, June 16, 2004, p. C1.

Although the dollar amount of sales of services back to the United States by
U.S. foreign affiliates is low compared to the overall amount of sales of services, as
Table 14 indicates, the rate of growth in the sale of services back to the U.S. parent
has been among the highest of service sales to all areas. Between 1999 and 2002,
when the U.S. economy was slowing, the average annual rate of growth in the sales
of services back to the U.S. parent company grew by 11%, based mostly on sales by
affiliates in Europe. The average annual rate of growth in the sales of services from
affiliates in Africa fell by 11%, while sales from other areas rose slowly.
In the 2003 to 2005 period in which the pace of U.S. economic growth picked
up relative to the previously period, the overall average annual rate of growth in the
sales of services rose by nearly 10%. Similarly, sales of services to U.S. parent
companies rose by 23%, or at double the rate experienced in the previous period.
The average annual rate in the sale of services back to the United States grew at
especially rapid pace from affiliates in Canada and Africa. Overall, the average
annual rate in the sales of services to the local markets grew by about 8%, still more
than double the rate experienced in the previous period. Sales to other foreign
countries, however, fell from 37% to 11% as sales to the U.S. parents and in the local
market absorbed the largest share of production of services.
Table 14. Sales of Services by U.S. Foreign Affiliates, Average
Annual Rates of Change for Selected Periods
(percent change)
^T^o^tal^T^{o U.S. parents}^L^o^cal^{Other foreign}^countries
^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ^A^vg.^Aⁿⁿ
^Tⁱ^m^e^peri^od^{% Chg}^{1999 t}^o^{% Chg}^{2003 t}^o^{% Chg}^{1999 t}^o^{% Chg}^{2003 t}^o^{% Chg}^{1999 t}^o^{% Chg}^{2003 t}^o^{% Chg}^{1999 t}^o^{% Chg}^{2003 t}^o
²⁰⁰²²⁰⁰⁵²⁰⁰²²⁰⁰⁵²⁰⁰²²⁰⁰⁵²⁰⁰²²⁰⁰⁵
^A^l^l^couⁿ^t^ri^es^6.7%^9.8%^11.2%^23.3%^3.6%^7.9%^36.6%^11.0%
^C^aⁿ^a^da^5.0^18.9²^.5^97.7⁵^.1^15.8^103.1^-^9.5
^Eu^rope^5.7⁷^.9^28.2^16.9⁰^.7^7.9^42.4³^.0
^L^a^tⁱⁿ^A^m^eri^c^a⁸^.1^5.2¹^.3^17.8⁷^.9^-⁰^.2^11.5^17.1
^A^f^ri^ca^5.1^34.2^-^11.0^43.6²^.0^19.3^925.6^39.0
^Mi^ddl^{e Eas}^t^-^14.8^23.44.07.0^-^16.2^19.0⁹^.8^65.2
^A^sⁱ^a^an^{d Paci}^fⁱ^c^11.0^11.5⁰^.7^17.2⁹^.5^7.4^49.3^35.0
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.
Research and Development
National governments and many state and local governments spend considerable
amounts of money attracting foreign direct investment under the belief that such²⁴
investment has a positive impact on their respective economies. Although various
academic studies have found that such “spillover” effects appear to be small, a 2003

²⁴ Incentives. United Nations Conference on Trade and Development, United Nations, 2004.

study challenges these conclusions.²⁵ The authors argue that technology spillovers
from foreign direct investment to U.S.-owned manufacturing firms accounted for
about 11 % of the growth in productivity in the U.S. firms between 1987 and 1996.
In addition, as Table 15 indicates, foreign firms spend more on high-technology
research and development within the United States than U.S. firms spend abroad. All
three types of firms indicated in the table experienced a slowdown in R&D spending
in 1991and in 2002 in response to the slowdown in economic growth in that period.
Other than those two years, however, R&D spending in nominal terms has increased
every year by all three types of firms. In addition, affiliates of foreign firms operating
in the United States outspent the foreign affiliates of U.S. multinational companies
in every year, making the United States a net recipient of R&D expenditures.
Table 15. Expenditures on Research and Development by U.S.
Multinational Firms and by the Affiliates of Foreign Firms
Operating in the United States
(millions of dollars)
U.S. Multinational CompaniesU.S. Affiliates of
Foreign FirmsParent CompaniesAffiliates
1990 $72,802 $10,417 $12,593
1991 67,366 9,396 11,872
1992 72,107 11,084 13,864
1993 74,176 10,954 14,199
1994 91,574 11,877 15,566
1995 96,500 13,238 17,542
1996 100,551 14,039 17,984
1997 106,800 14,593 17,216
1998 113,777 14,664 22,375
1999 126,291 18,144 24,027
2000 135,467 20,457 26,089
2001 143,546 19,402 26,415
2002 137,968 21,151 25,453
2003 139,884 22,793 29,803
2004 164,189 25,840 29,900
2005 178,542 28,316 31,694
^Source:^D^e^p^a^r^t^meⁿ^t^o^f^C^o^mme^r^c^e^.
Why Firms Invest Abroad
Foreign direct investment challenges a number of concepts economists hold
about international capital flows. Most explanations of such capital flows argue that
direct investment is just another form of international capital flows and that capital
flows to locations where the rate of return is the highest. While this may be true in

²⁵ Keller, Wolfgang, and Stephen R. Yeaple, Multinational Enterprises, International Trade,
and Productivity Growth: Firm-Level Evidence From the United States. IMF Working
Paper WP/03/248, International Monetary Fund, December 2003.

a general sense, the bulk of foreign direct investment takes place between highly
developed countries where rates of return are very similar. In addition, those
countries that are large investors are also recipients of large amounts of direct
investment and investment flows into and out of these countries seem to move
together, so that those economic conditions that encourage inflows of direct
investment also promote outflows of direct investment.²⁶
Economists generally believe that firms invest abroad to increase their profits.
They are less certain about which factors trigger the initial investment decision, about
why firms choose to invest where they do, and about what distinguishes firms that
invest abroad from those that remain purely domestic. In most cases, economists
conclude that a broad range of factors influence a firm’s decision to invest abroad
that include far more than a simple search for low-cost labor. The United Nations
characterizes the major determinants of foreign direct investment as the confluence
of three sets of determining factors that exist simultaneously: the presence of
ownership-specific competitive advantages in a transnational corporation, the
presence of locational advantages in a host country, and the presence of superior
commercial benefits in an intra-firm as against arm’s-length relationship between
investor and recipient.²⁷
For some, foreign direct investment seems to be characterized by a relatively
simple process of firms seeking out low-cost production locations and low-cost
resources, including low-cost labor. Multinational firms, however, are motivated by
more than a single factor, and likely invest abroad not only to gain access to a low-
cost resource, but to improve their efficiency, or to improve their market share. In
all, direct investment is a complex activity that involves a long-term commitment to
a business venture in a foreign country that requires the coordination and
management of considerable resources and assets across countries. The relative
importance of characteristics that determine where investments are located depend
on a broad range of factors that can change over time and with economic conditions.
Although low-cost abundant labor is a principal resource that some firms seek,
academic studies of foreign direct investment indicate that it is always labor plus
other advantages, particularly industrial infrastructure, that influence a firm’s
investment decision. Based on observations through 1998, the United Nations
concluded that investments based solely on low-cost labor have been highly mobile
and have increased dramatically the risk of losing any locational advantage based on
just that factor alone.²⁸
According to the United Nations, technological improvements in the area of
telecommunications and computers make it possible for firms to extend their
efficiency strategies across national borders. When firms undertake competitiveness-
enhancing foreign direct investment, they seek not only cost-reductions and bigger

²⁶ Lipsey, Robert E., Interpreting Developed Countries’ Foreign Direct Investment. NBER
Working Paper 7810. National Bureau of Economic Research, July 2000. P. 3-4.
²⁷ World Investment Report 1998: Trends and Determinants. United Nations, New York,

1998. P. 89.

²⁸ Ibid, p. 118.

market shares, but also access to technology and innovative capacity, which can be
highly influenced by national policies. Nations that are successful in attracting direct
investment generally possess such infrastructure facilities as high-quality
telecommunications links, reliable transportation systems, and such skills as
accountancy, legal services, purchasing and marketing, finance and R&D capabilities,
and large markets.²⁹
At times, economists have puzzled over the presence of foreign direct
investment, because it seemed unthinkable to most of them that nations would
simultaneously import and export the same good and that investments would occur
within the same industry between two different trading countries and by the same
company. For some economists, trade and investment were thought to be opposites;
therefore, as long as international trade was free, there was no reason for international
investment to occur. These economists based their conclusions on the argument that
free trade caused commodity prices between countries to converge. Such a
convergence was expected eventually to equalize wage rates and rates of return on
investments and to make investing abroad of little economic value.³⁰ These
observations have not been borne out over time as foreign direct investment has
become a prominent feature of the globalization process. This suggests that a
complex set of factors account for the continued presence of foreign direct
investment.
Ownership-Specific Advantages
Economists generally argue that foreign investment is a viable option for some
firms due to economic advantages that arise from a unique set of characteristics that
are related to specific types of firms. These characteristics include managerial
ability, technical advantages, or market strength, which give firms an incentive to
invest abroad and to provide the advantages necessary to be competitive in markets
at home and abroad.³¹ These analysts conclude that market imperfections and firm-
specific factors³² give some firms economic advantages over their competitors that

²⁹ Ibid, p. 108-109.
³⁰ This result, known as the factor-price equalization theorem, is a fundamental result in the
theory of international trade. It states that, under certain conditions, free trade will equalize
the prices of goods between trading countries. When goods’ prices are the same, this
theorem states, the prices of the factors of production (labor and capital) will also be
equalized. This result is based on a number of assumptions: nations share similar
production technology; there is a free international flow of capital and labor; there are
perfectly competitive goods and price clearing markets; and consumer tastes do not change
with changes in income. For a detailed presentation, see Silberberg, Eugene. The Structure
of Economics. New York, McGraw-Hill, Inc., 1990. p. 553-554.
³¹ Mundell, Robert A. International Trade and Factor Mobility. American Economic
Review, June 1957. p. 321.
³² Horst, Thomas. Firm and Industry Determinants of the Decision to Invest Abroad: An
Empirical Study. The Review of Economics and Statistics, August 1972. p. 258-266; Caves,
Richard E. Causes of Direct Investment: Foreign Firm’s Shares in Canadian and United
Kingdom Manufacturing Industries. The Review of Economics and Statistics, August 1974.
(continued...)

allow them to attain an oligopolistic position in their home and in foreign markets
and to increase their market shares. Such firms possess a competitive advantage over
their foreign competitors or they would be incapable of overcoming the
disadvantages of operating in a foreign market — additional costs associated with
managing an enterprise at some distance, and added political and economic risks.
Some of the potential advantages that firms might enjoy could arise from market
imperfections and from firm specific advantages that arise from producing in large
quantities (economies of scale),³³ the market power of the firm,³⁴ the absolute size of
the firm,³⁵ cost advantages that arise from patents or other special advantages, or
from product-specific advantages (product differentiation).³⁶
Location Advantages
Foreign direct investment may also be one step in a series of actions
multinational firms take to grow or to remain competitive by gaining access to new
markets.³⁷ Some of these actions may be related to gaining access to markets that are
protected by high tariffs or by other economic barriers.³⁸ In some cases, foreign
investment is driven by a product cycle process that starts in the introduction of a
new product and in the growth of market shares.³⁹ At this early stage, product

³² (...continued)
p. 279-293; Grubaugh, Stephen G. Determinants of Direct Foreign Investment. The Review
of Economics and Statistics, February 1987. p. 149-152; Ethier, The Multinational Firm,
p. 805-833; and Benvignati, Anita M. Industry Determinants and “Differences” in U.S.
Intrafirm and Arms-Length Exports. The Review of Economics and Statistics, August 1990.
p. 481-488.
³³ Root, Franklin R. International Trade and Investment Cincinnati, South-Western
Publishing Co., 1984. p. 457-458; Markusen, James R. Multinationals, Multi-Plant
Economies, and the Gains From Trade. Journal of International Economics, May 1984;
Haldi, John, and David Whitcomb. Economies of Scale in Industrial Plants. Journal of
Political Economy, August 1967. p. 373-385; and Kim, H. Youn. Economies of Scale in
Multi-Product Firms: an Empirical Analysis. Economica, May 1987. p. 185-206.
³⁴ Dunning, John H.,and Alan M. Rugman. The Influence of Hymer’s Dissertation on the
Theory of Foreign Direct Investment. American Economic Review, May 1985. p. 228.
³⁵ Glickman, Norman J., and Douglas P. Woodward. The New Competitors. New York,
Basic Books, Inc., 1989. p. 80-90.
³⁶ Caves, Richard E. “International Corporations: The Industrial Economics of Foreign
Investment.” Economica, February 1971. p. 3-11; and Bergsten, C. Fred, Thomas Horst, and
Theodore H. Moran. American Multinationals and American Interests. Washington, The
Brookings Institution, 1978. p. 215-216. For an overview of empirical studies, see Stevens,
Guy V.G. “The Determinants of Investment.” In Dunning, John H., ed. Economic Analysis
and the Multinational Enterprise. New York, Praeger Publishers, 1974.
³⁷ Lipsey, Robert E., and Merle Yahr Weiss. Foreign Production and Exports of Individual
Firms. The Review of Economics and Statistics, May 1984. p. 491.
³⁸ Helpman, Elhanan, and Paul R. Krugman. Market Structure and Foreign Trade.
Cambridge, The MIT Press, 1985. p. 247-259.
³⁹ Vernon, Raymond. “International Investment and International Trade in the Product
(continued...)

innovations serve as a basis for market advantages over competitors and production
is centered in the home country, with foreign subsidiaries acting primarily as
marketing agents.
In later phases, competition increases as the innovation is acquired by other
producers. In this stage, businesses invest abroad in order to maintain the market
shares they gained through exporting. As a result, the transition from exporting, to
assembling, to producing in the foreign market may be a natural process, with foreign
investment being the facilitating link. While some of the motivation for shifting
production abroad may be to avoid tariffs, or other export restraints, lower
transportation costs and proximity to the foreign market are important
considerations.⁴⁰ This shift is apparent in U.S. direct investment abroad where large
shares of foreign production are consumed in the local market or shipped to
neighboring countries, rather than being exported back to the United States.
Evidence indicates that there is little empirical basis for expecting a universal
linkage between foreign investment and trade.⁴¹ If there is a tendency for overseas
production to substitute for some exports from an area, it appears to be offset by
influences that tend to increase exports of related products or services.⁴² Studies
show that the higher the level of output by a U.S. firm in a foreign area, the higher
are the firm’s exports from the United States to that area and the smaller are the
exports of other foreign firms. This pattern may be influenced by the host country’s
trade policy, which may discourage imports, thereby encouraging the affiliates of
foreign companies to produce locally.⁴³ Moreover, multinational companies may
gain added economic flexibility as a result of their foreign subsidiaries, which allows
the parent companies to alter their sources of inputs in response to cheaper imports:
instead of altering prices of domestically produced goods to remain competitive,

³⁹ (...continued)
Cycle.” Quarterly Journal of Economics, May 1966. p. 190-207; and Wells, Louis T. Jr.
“Test of a Product Cycle Model of International Trade: U.S. Exports of Consumer
Durables.” Quarterly Journal of Economics, February 1969. p. 152-162.
⁴⁰ Stevens, Guy V.G., and Robert E. Lipsey. Interactions Between Domestic and Foreign
Investment. Cambridge, Mass., National Bureau of Economic Research, 1988. (Working
Paper No. 2714) p. 11; and U.S. Department of Commerce. Bureau of Economic Analysis.
Survey of Current Business, May 1986. U.S. Merchandise Trade Associated With U.S.
Multinational Companies, by Betty L. Barker. p. 56.
⁴¹ Kahley, William J. Countervailing Advantage and Foreign Direct Investment in the
United States. Federal Reserve Bank of Atlanta, 1988. Working Paper Series. (Working
Paper 88-1) p. 9; Stevens, and Lipsey, Interactions Between Domestic and Foreign
Investment, p. 29; and U.S. Library of Congress. Congressional Research Service. Foreign
Direct Investment: Effects on the U.S. Trade Balance. Report No. 89-416 E, by James K.
Jackson. Washington, 1989.
⁴² Lipsey, Robert E., and Merle Yahr Weiss. “Foreign Production and Exports of Individual
firms.” The Review of Economics and Statistics, May 1984. p. 305; Williamson, Peter J.
“Multinational Enterprise Behavior and Domestic Industry Under Import Threat.” The
Review of Economics and Statistics, August 1986. p. 359; and Horst, Thomas. “American
Multinationals and the U.S. Economy.” American Economic Review, May 1976. p. 149.
⁴³ Lipsey, and Weiss, Foreign Production and Exports in Manufacturing Industries, p. 490

multinational firms shift the source of their production to their offshore
subsidiaries .⁴⁴
Commercial Benefits
The decision to invest abroad also represents a critical strategic move for a
company operating in a global industry — a move that the company determines
jointly with the use and development of its production and distribution facilities
worldwide.⁴⁵ Such macroeconomic factors as monetary and fiscal policies have been
found to be prime determinants not only of U.S. trade performance but also of a
firm’s investment behavior through their influence on exchange rates, prices, and
wage and productivity behavior.⁴⁶ These and such other external conditions as
relative growth rates among national economies, exchange rate movements,
productivity, trade restraints, and the desire to acquire technology⁴⁷ are among the
most important factors in determining foreign investments. As a result of these
market conditions,⁴⁸ multinational firms compensate for such market failures as
poorly developed or non-functioning capital or labor markets, by investing abroad
and by shifting resources among their foreign subsidiaries. The importance of these
factors in motivating direct investment varies over time and among companies and
foreign markets. For example, economists trace much of the surge of U.S. direct
investment into Common Market countries in the late 1950s and the 1960s to
attempts by U.S. companies to avoid trade barriers, to expectations of an increased
rate of economic growth in these countries, and to efforts to overcome the perceived
overvaluation of the dollar. Once these initial investments were established, a high
level of earnings from them continued to be reinvested, probably to maintain market
shares and profit margins.⁴⁹
Additional analyses indicate that foreign investment and, therefore, foreign
production, may allow corporations to reduce such risks as bad weather, national

⁴⁴ Williamson, Peter J. “Multinational Enterprise Behavior and Domestic Industry
Adjustment Under Import Threat.” The Review of Economics and Statistics, August 1986.
p. 365; and Alder, Michael, and Guy V.G. Stevens. “The Trade Effects of Direct
Investment.” Journal of Finance, May 1974. p. 657.
⁴⁵ Caves, Richard E. and Sanjeev K. Mehra. “Entry of Foreign Multinationals into U.S.
Manufacturing Industries.” In Porter, Michael E., ed. Competition in Global Industries.
Boston, Harvard Business School Press, 1986. p. 473.
⁴⁶ Lipsey, Robert E., and Irving B. Kravis. The Competitive Position of U.S. Manufacturing
Firms. Cambridge, Mass., National Bureau of Economic Research, 1985. (Working Paper
No. 1557). p. 2; and Aliber, Robert Z. “A Theory of Direct Foreign Investment.” In
Kindleberger, Charles P. The International Corporation. Cambridge, Mass., The M.I.T.
Press, 1970.
⁴⁷ Lipsey, and Kravis, The Competitive Position of U.S. Manufacturing Firms, p. 2; and Ray,
Edward John. The Determinants of Foreign Direct Investment in the United States: 1979-

1985. Cambridge, Mass., National Bureau of Economic Research, 1988. p. 2.

⁴⁸ Root, International Trade and Investment, p. 464.
⁴⁹ Ibid., p. 3.

business cycles, strikes, and changes in government policies.⁵⁰ Recent analysis
suggests that the establishment of foreign subsidiaries can give multinational
companies added flexibility in setting their prices in response to increased
competition or to such other factors as changes in exchange rates.⁵¹ This may include
the ability to switch among their various subsidiaries in supplying major markets to
maintain their competitive position without altering the market price of their goods.⁵²
As a result, local prices may grow less sensitive to changes in the costs of imports.
Linkages between the foreign affiliates and the parent companies apparently allow
the affiliates to curtail price changes, which might erode their price competitiveness,
during periods of fluctuating exchange rates in order to maintain or even to enlarge
their market shares in foreign countries.⁵³
Conclusions
This report utilizes a broad collection of data on direct investment published by
the Bureau of Economic Analysis of the U.S. Department of Commerce to assess the
impact of U.S. direct investment abroad and foreign direct investment in the United
States on the U.S. economy. These data were analyzed to determine if U.S. parent
companies are shifting jobs abroad in a way that is different or unique from previous
experiences with such investment. Data published by the BEA are the most
extensive set of published data on foreign investment activities, but they were not
developed to address the issue of jobs outsourcing and it is not possible with the BEA
data to track job losses or gains in specific industries, specific companies, or specific
plants with changes in jobs abroad. Broad, comprehensive data on U.S. multinational
companies published by the BEA lag behind current events by two years, which
means that assessing these activities may seem to be out of sync with the more
limited anecdotal examples that appear in the popular press and raises questions
about the relevancy of the data to assessing short-term developments compared with
long term trends.
Despite these caveats, the data offer no conclusive evidence that current
investment trends are substantially different from those of previous periods. A
comparison of gross product and employment between U.S. parent companies and
their foreign affiliates over three distinct time periods indicates that U.S. business
cycles have a stronger impact on U.S. parent companies than on the foreign affiliates,
but that even the affiliates are affected. Any long-term structural changes that are

⁵⁰ Little, Jane Sneddon. “The Industrial Composition of Foreign Direct Investment in the
United States and Abroad: A Preliminary Look.” Federal Reserve Bank of Boston New
England Economic Review, May-June 1984. p. 38-39.
⁵¹ Helpman and Krugman, Market Structure and Foreign Trade, p. 67-83; and Mann,
Catherine L. “Prices, Profit Margins, and Exchange Rates.” Board of Governors of the
Federal Reserve System. Federal Reserve Bulletin, June 1986. p. 366-379.
⁵² Williamson, Multinational Enterprise Behavior and Domestic Industry Adjustment Under
Import Threat, p. 60.
⁵³ Ohno, Kenichi. Exchange Rate Fluctuations, Pass-Through, and Market Share. IMF Staff
Papers, June 1990. p. 294-309.

occurring in the economy apparently are reinforced by the business cycle in the
economy, but these same business cycles affect the foreign affiliates. As a result of
this partial synchronization effect, U.S. direct investment abroad and foreign direct
investment in the United States generally move in the same direction. From the data
examined, it is not apparent that U.S. parent companies are outsourcing jobs at a
faster pace or in a manner that is fundamentally different or distinct from previous
periods. An increase in economic growth in the U.S. parent companies relative to the
rate of growth in the foreign affiliates likely increases pressure within the economy
to complete structural changes and to shift capital and labor from declining sectors
to expanding sectors. Such changes may also lead to a greater number of jobs being
outsourced, but this effect likely would be muted by the overall strong demand for
jobs within the economy and by new foreign investments in the economy.
On the other hand, an economic slowdown among U.S. parent companies
relative to the rate of growth among foreign affiliates likely would lead to an overall
decline in employment throughout the economy. This overall decline in employment
would make it difficult to distinguish between those sectors that are undergoing long-
term structural changes compared with those sectors that are experiencing short-term
job losses due to the relatively slower rate of economic growth. U.S. parent
companies may or may not respond to the economic slowdown by outsourcing jobs
abroad because the dominating presence of the U.S. economy in the world economy
means that an economic slowdown in the United States likely reduces economic
growth abroad as well and that the foreign affiliates of those parent companies may
not be a position to add more jobs. The uneven effect of an economic slowdown
among U.S. parent companies on their investment behavior abroad likely means that
jobs outsourcing may appear to be more acute during periods in which the long-term
structural changes in the economy coincide with the short-term economic
adjustments that arise from a slowdown in the rate of growth of the U.S. economy.
Trade and sales data also indicate that there is no perceptible change in previous
patterns that would signal a shift toward a greater emphasis on foreign production
and imports. In fact, BEA data indicate that intra-firm trade has declined over the
last decade. Although not conclusive, this result is contrary to what would be
expected if U.S. parent companies were outsourcing a greater share of their
production abroad and importing more goods from their foreign affiliates. These
results also seem to challenge estimates that predict a large shift of jobs abroad over
the next half decade.
Concerns about the currency of BEA do not seem to be warranted. One
characteristic of U.S. direct investment abroad and foreign direct investment in the
United States is the relative stability in the patterns of that investment over time.
This pattern is unlikely to change over a short period of time, so that the lag in
publication of BEA data is unlikely to alter appreciably any general conclusions
about the role of direct investment in the economy. A large share of U.S. direct
investment abroad remains concentrated in the most highly developed economies and
the share of jobs supported by the foreign affiliates comprises a small share relative
to the U.S. economy. Employment and jobs in the U.S. economy continue to arise
from economic factors that are unique to the U.S. economy and to U.S. economic
policies. On average, U.S. foreign affiliates are expected to continue to produce

about 300,000 jobs a year, a small share of the average number of jobs produced by
the U.S. economy during any given year.
For Congress, the data on direct investment seem to indicate that the number of
jobs created by U.S. parent companies and by the foreign affiliates of those parent
companies is tied closely to the overall performance of the U.S. economy. Such
economic measures as employment, trade, and investment will rise and fall among
U.S. parent companies and their foreign affiliates generally in tandem. Swings in the
rate of growth in the economy that are associated with the business cycle tend to
affect U.S. parent companies more than they affect their foreign affiliates and more
than those U.S. firms that are purely domestic firms. Policies that ameliorate the
business cycle, especially the downside of the cycle when the economy is
experiencing a slow rate of economic growth, likely would do the most to help U.S.
parent companies. Furthermore, Congress may choose to address the economic
plight of those workers and communities that experience a disproportionate share of
the adjustment costs that are associated with the business cycle by providing
specialized assistance or other types of short-term support.
Workers and communities that are involved with economic activities that are
facing long-term structural decline may require support to assist displaced workers
regain employment or to find new business partners to sustain economic development
in those communities. Workers in industries that are undergoing long-term structural
decline may well see production and jobs move abroad. Addressing such long-term
structural decline, however, is especially challenging, because the economic forces
that are working against such industries can be immense.