Below are excerpts from an online debate hosted by The Economist. The original debate is found here.
Once upon a time companies based themselves at home to serve nearby countries. Now there are hardly any big firms which have not sent important parts of their operations overseas. Some industries, such as consumer electronics, are almost entirely “outsourced” to Asia. But after the Great Recession, amid high levels of unemployment, politicians in the developed world are putting pressure on firms to bring work back home. Apple, a technology firm, recently responded to the political mood by saying it would bring some production of Mac computers from Asia back to America starting this year. Tim Cook, the firm’s chief executive, said Apple had a responsibility to create American jobs. Do you think that companies owe anything to the place they came from? Or is the notion of “home” now largely irrelevant for the corporate world?
Harry Moser — Opening Remarks:
Multinational corporations (MNCs) clearly have a responsibility to enhance shareholder return and obey relevant laws and regulations. I will show that MNCs also have a duty to maintain a strong presence in their country of origin. I define “strong presence” as investing, employing, manufacturing and sourcing at least in proportion to their sales in the origin country. I assume that a declining presence is generally due to a shift of focus to developing countries and to offshoring.
This duty has two sources. The first is a quid pro quo for the special benefits that their charter provides. The second is based on understanding that a strong presence is almost always in the interest of their shareholders.
The argument for the first duty is eloquently made by Clyde Prestowitz: “Corporations are not created by the shareholders or the management. Rather they are created by the state. They are granted important privileges by the state (limited liability, eternal life, etc). They are granted these privileges because the state expects them to do something beneficial for the society that makes the grant. They may well provide benefits to other societies, but their main purpose is to provide benefits to the societies (not to the shareholders, not to management, but to the societies) that create them.” Historically, the nature of American corporations has changed from having customised, societally focused charters in the early 1800s, to retaining an avowed societal obligation in the 1970s, to the condition today where we can seriously debate whether they have a duty to country.
This argument concerns the abstract nature of corporate purpose. You will agree or not, largely based on your world and business view.
The argument for the second duty is based on my practical observations of MNC behaviour: in their excessive focus on offshoring of manufacturing, many MNCs make suboptimal decisions, actually reducing the long-term return to their shareholders. Thus many MNCs will more fully maximise returns for shareholders if they maintain a stronger presence. The behaviours too often exhibited include:
• Incorrectly measuring current period costs: deciding on what to offshore based on labour rates, ex-works price or landed cost rather than on total cost of ownership (TCO). Preliminary data from users of the Reshoring Initiative’s free Total Cost of Ownership Estimator™ suggests that as much as 25% of what has been offshored would come back with higher profitability if the correct metrics were used. The widespread failure to use sophisticated analysis is incomprehensible. A high-level supply chain manager in one of the largest American MNCs told me there was “no interest” in TCO throughout the company. At another leading MNC, I was told that the company decided on American versus Chinese sourcing of a large component based only on ex-works prices, ignoring all other costs, including two round trips by air freight. A firm cannot effectively maximise profitability if it does not even measure costs correctly.
• Ignoring a whole range of medium-term risks: IP loss; impact on innovation; and loss of competence and control due to increasing reliance on offshore outsourcing firms. The further a firm is removed from the manufacturing of its products, the harder it is to evolve and make future related products.
• Ignoring longer-term catastrophic risks associated with shifting their presence offshore, including the decline in American economic, technological and military strength: risk of losing sales and assets in developing countries, especially when competing with local state-owned enterprises (SOEs); loss of the government-funded R&D that gives them a head start in many technologies; loss of strong origin-country defence and legal systems that protect the corporate charter; loss of “Pax Americana” that protects their trade around the world; and populist calls for anti-MNC political actions resulting from income inequality driven by a shrivelling middle class. The World Economic Forum highlighted many risks that logically could be exacerbated by MNC excesses, including chronic fiscal and labour market imbalances and severe income disparity, perhaps leading to a backlash against globalisation.
In addition to the direct negative impact on earnings, MNCs’ excessive offshoring indirectly harms their shareholders’ well-being. Seeking often illusory savings by offshoring and other short-term tactics, they cost their shareholders, and other citizens, by worsening employment, wage levels, government revenue and government expenditures.
A final thought for now: are America and European countries the origin of 72% of the largest MNCs by chance or are these companies the largest because they were fortunate enough to be founded in those countries? If the latter, then each company has a responsibility to the country that nurtured it and a self-interest in keeping that country economically strong.
Jagdish Bhagwati — Opening Remarks:
This motion is a throwback to the 1990s when Kenichi Ohmae talked about the “borderless world” and John Mickelthwait and Adrian Wooldridge, editors at The Economist, followed suit in their book, “A Future Perfect” (which I reviewed in Foreign Affairs, July/August 2000).
There always were criticisms of “cosmopolitan” multinational corporations (MNCs) which “lacked loyalty” to their home country, seeking to migrate where their returns were the greatest. There were also critics who argued that a country had to have “national champions”: how could Danone be allowed to become rootless, sold to the highest bidder who owed no loyalty to France and the French? Did Nokia not betray Finland when almost 90% of its shares were held by investors outside Finland? MNCs were also outsourcing worldwide, so it became increasingly difficult to think of a Volvo as a Swedish product (except in its origin) when its parts came from everywhere and were even assembled abroad in Mexico and not in Sweden.
The world has become more integrated since these criticisms surfaced in the 1990s, with MNCs and their products becoming less and less identifiable as American or French. One would have thought that, by now, reality and the benefits of closer integration would have silenced such criticisms, or at least muted them. But the motion suggests that the critics have found a new and superficially more reasonable voice. Yes, it says, MNCs can become cosmopolitan on several dimensions. But they owe it to their countries of origin to maintain a “strong presence” in them.
Doubtless this renewed concern and proposed solution are to be attributed to America’s anxiety about outsourcing—an anxiety regarding predominantly trade in services and goods and only partially MNCs investing abroad.
The outsourcing concerns related initially to outsourcing of services (such as back-office operations and reading radiology x-rays) but soon extended to corporations that imported components from abroad, with Senator John Kerry going so far as to call such corporations Benedict Arnolds. Not having grown up in America, I thought that Benedict Arnold must be an obscure British poet, a distant cousin of Matthew Arnold. Imagine my astonishment when Benedict Arnold turned out to be America’s greatest traitor. Pretty soon, Lou Dobbs at CNN had picked up the same refrain, saying on his TV programme that firms were guilty of treason prompted by greed when they imported components from abroad instead of buying them at home. So, in the Wall Street Journal I wrote that if firms were guilty of greed in buying components from abroad, he was guilty of gluttony, also one of the seven deadly sins, if he ate Camembert cheese imported from France instead of Kraft cheese slices. Mr Dobbs is no longer at CNN, but his views have been taken up by Barack Obama and many prominent Democrats, such as Nancy Pelosi, Barbara Boxer and Charles Schumer, who are obsessed with outsourcing.
This obsession—and attendant fears—also extends to MNCs investing abroad (which is distinct from the outsourcing of services and components by all our enterprises). The economics of MNCs investing abroad is of course different from that of the outsourcing of services and components, though Mr Obama typically mixes them up and encourages lobbying against them all.
Should we accept the motion before us? No. MNC investment abroad is good, not bad, for America unless it is a result of distorting tax policies that lead to overinvestment abroad. Asking MNCs to have a presence at home, and subsidising or forcing them under threat of penalties to do so, makes little sense unless you claim that this presence produces some externalities. For instance, will we then have R&D in Boston rather than in Bangalore? The benefits to the MNC, and hence to America most likely, will accrue regardless of where the MNC does R&D, in Bangalore or Boston. Indeed, we can knock down any claims that the supporters of the motion may make in its favour.
Harry Moser — Rebuttal Remarks:
To summarise the affirmative’s main position: it is in the self-interest of companies and their shareholders to maintain a strong presence in their home country. We do not question multinational companies’ right to invest offshore. Instead, we insist that they make better-informed investment and sourcing decisions: offshore versus home and long term versus short term. By doing so, they will benefit company, shareholders and home country. At the same time, the country has the obligation to be a hospitable home.
I found it interesting that both opening statements and the headline on the debate website focused on offshoring/outsourcing rather than on the legal issues of corporate responsibility. I believe the actual focus is to the advantage of the affirmative side since the evidence of offshoring’s negative impact on America is overwhelming and its impact on many MNCs is becoming increasingly clear, as evidenced by increasing reshoring.
Offshoring affects America and thus its MNCs as a major cause of: an unsustainable $550 billion per year trade deficit; a $200 billion per year trade deficit in high-tech products where America should have its best advantage; the loss since 2000 of about 5m manufacturing jobs, perhaps 10m-12m jobs in total; 2011 average American manufacturing worker compensation falling to 16th place, from 2nd in 2001, and showing the smallest annual percentage increase among 34 leading countries, ahead of only Greece. So, there are far fewer manufacturing workers making, relatively, less each. America’s worsening trade crisis has numerous causes, and American MNCs are clearly a significant one. In 2009 “the US operations of these firms accounted for 63% of their global sales” and from 1999 to 2009 “their exports grew more slowly than total exports, their imports grew more quickly than total imports, and the multinational sector as a whole moved from a net trade surplus in 1999 to a net trade deficit in 2009.” If American MNCs do not operate with a trade surplus for America, who will?
In view of the severity of offshoring’s impact on the American economy, Jagdish Bhagwati’s casual reference to “America’s anxiety about outsourcing” suggests either a lack of understanding of the situation or a total lack of concern for the millions who have suffered.
As I documented in my opening statement, most MNCs’ medium- to long-term profitability is negatively affected by basing their sourcing and investment decisions on labour rates, ex-works price or landed cost, ignoring 20% or more of total cost, for example quality, inventory, travel and warranty costs that go into the overhead silo, longer-term risks, opportunity costs, etc. When asked about those costs, supply chain managers often reply: “Those costs are not in my budget. I am judged on PPV (purchase price variance).” The approximately 20% of companies that are currently reshoring typically comment that: “The offshore costs were higher than our analysis suggested.”
A key fallacy in Mr Bhagwati’s position is highlighted by his statement that it makes no difference to America whether the R&D is “in Boston rather than in Bangalore”. He ignores the failure of many MNCs to invest in the home country’s “industrial commons” in proportion to the benefits they received from the commons. Gary Pisano and Willy Shih have referred to the “tragedy of the commons” to describe this phenomenon. Companies obtained great benefit from government research on aerospace, genomics, GPS, the internet, etc. In principle, the MNCs would pay the home country back via ongoing domestic R&D, manufacture of the products derived from the R&D and taxes paid by the MNCs, their employees and suppliers. This balance is being lost through a combination of shifting billions of dollars of taxable income to low-tax havens and offshoring much of manufacturing, services and R&D. America has accelerated the loss by failing to create an environment that nurtures the commons.
We agree that the home country must maintain a hospitable environment in which an MNC will consistently see that it is most profitable to serve the home market via home-country-based manufacturing and R&D. A hospitable environment includes: currency, K-12 education, skills training, corporate tax structure, value-added tax (VAT), reasonable regulations, etc. A VAT, replacing other taxes, would make America immediately a more hospitable environment. America does a poor job in meeting its obligation. Other countries, such as Germany and Switzerland, do far better, especially on skills training. I have been a champion of skills training for 25 years and am currently meeting with the US Department of Labor to help improve our competitiveness.
By making better sourcing decisions and helping their country become more hospitable, MNCs can serve their shareholders while maintaining a stronger home-country presence.
Jagdish Bhagwati — Rebuttal Remarks:
Harry Moser makes the claim that multinational companies have a duty to maintain a strong presence in their country of origin for two reasons. First, that it is a quid pro quo for the special benefits such as limited liability that they have derived from their charter; and second, because it is in the interest of their shareholders anyway. Neither claim is persuasive.
Take the first argument. Consider emigration as a parallel phenomenon to outgoing MNCs. When Mr Moser and Clyde Prestowitz (who is credited with this argument) were educated in America, they presumably derived benefits from scholarships and from public and private support for their university. Does this mean that they should not be allowed to emigrate? Or they should be compelled or induced by policy measures to retain a strong presence (through holding land or investments perhaps) in America, which is their “country of origin”?
Second, we must ask whether the proposed “compensatory” measure makes sense. This question has been discussed for nearly 40 years by eminent economists such as James Mirrlees and John Wilson, ever since I proposed an income-tax surcharge on the earnings in developed countries of the skilled emigrants from developing countries—the so-called “brain drain”—in the 1970s. Among other issues, restrictions on emigration violate human rights.
Similarly, we must examine whether Messrs Moser and Prestowitz are right to ask that MNCs which invest abroad should be required to give a quid pro quo for the benefits they received from their country of origin by retaining a strong presence in that country. Is this a sensible way to produce the required quid pro quo?
This argument for a strong presence by MNCs at home may be supplemented by a different rationale: that their going abroad harms the country of origin. One rationale asks for “compensation” for benefits obtained by the MNCs; the other (which is not altogether absent from Mr Moser’s sentiments) seeks recompense for the harm they allegedly do to their country of origin when they invest abroad.
Compelling an American MNC to retain a strong presence in America would be the wrong prescription no matter which of the two rationales you accept. If we want American MNCs to “pay” America for the benefits they received from their charter or in other ways, the simplest method is to levy a tax on their earnings: which in fact we do. Forcing them to produce at home when that makes them uncompetitive in world markets is surely the wrong prescription: it makes them uncompetitive in markets which today are fiercely competitive.
But Mr Moser must also run into the problem that what is sauce for the goose is also sauce for the gander. If America subsidises or compels local production, others can do the same. Besides, aware that every member state can play this game and all would generally be worse off, the World Trade Organisation explicitly prohibits policies that will produce a bias in favour of local production. How then does Mr Moser expect his recommendation to work in practice?
As for the second argument, that a strong local presence is in the interest of the shareholders, it raises the inevitable question: if so, why do the MNCs not do it anyway?
Besides, if you say that being forced to have a strong presence at home in the “national interest” is in any case to your advantage, you are essentially arguing that virtue has no cost: that you can eat your cake and have it too. Thus, I have heard proponents of corporate social responsibility (CSR) argue that it will help them when someone like Naomi Klein decides to target them. Or it cannot have escaped George Soros’s attention that he was spared retribution by the Occupy Wall Street demonstrators when they marched up Madison Avenue (where he lives) because he is known not as the speculative financier that he is, but as a “philanthropist”.
In any case, the issue of having MNCs produce at home rather than abroad is receding in America as the two factors that contributed to this outcome have diminished in recent years, much as I among others had predicted in refuting the exaggerated claims by Alan Blinder (in Foreign Affairs) that we faced a tsunami of outgoing activity. First, China’s wages have been moving up. Second, the disadvantages of producing elsewhere or outsourcing services are now visible: local availability of “electronic plumbers” who manage your computers, rather than having a firm in Bangalore fix your problems at long distance, is now considered more efficient.
Messrs Moser and Prestowitz, and indeed Barack Obama, are therefore asking for policies to bring about what is increasingly happening anyway.
Harry Moser— Closing Remarks:
To summarise the affirmative’s primary position, one that believers in profit maximisation should accept: it is in the self-interest of companies, and thus their duty to shareholders, to maintain a presence in their home country at least in proportion to their sales in that country. We neither question multinational companies’ right to invest offshore nor propose any compensation or laws to prevent them from doing so. Instead, we insist that they make better-informed investment and sourcing decisions: offshore v home and long term v short term. By doing so, they will benefit company, shareholders and home country. That said, the country has the obligation to be a hospitable home. America needs to do dramatically better in this regard, as outlined earlier.
Our secondary position is that MNCs do have a natural duty to country. I refer readers to an excellent summary of this position by Ralph Gomory and Richard Sylla. If you accept either position, the affirmative has proven the motion.
I was pleased that Jagdish Bhagwati accepted my position that it is in the interest of companies to reconsider their offshoring. As I have repeatedly documented, approximately 60% of companies make sourcing and investment decisions based on labour rates, ex-works price or landed cost, ignoring about 20% or much more of the total cost including quality, regulatory violations, intellectual property theft and, most of all, reputation damage (child labour, plant fires, etc), which erodes shareholder value. Preliminary analysis of data from users of our Total Cost of Ownership (TCO) Estimator suggests that whereas the American ex-works price is on average 69% above the Chinese price, the American TCO is on average 4% lower than the Chinese TCO. MNCs far too often do not see past the low price to the higher total cost.
Mr Bhagwati and I did both study at MIT. Otherwise we come to the debate from different backgrounds. He is a distinguished and eloquent academic, an expert in his field. I was a successful manufacturing executive, often leading American divisions of companies that, coincidentally, brought manufacturing technology to America from Europe. Mr Bhagwati is keenly aware of how India has benefited from globalisation. My grandfather and father were managers at Singer Sewing Machine’s Elizabethport, NJ, factory, which was once the largest building in the world; the company has now left the country, as have so many machine-tool-makers and users with whom I worked for 45 years. Mr Bhagwati has seen the upside of globalisation. I have experienced much more of the downside.
Ricardian comparative advantage suggests that all parties to free trade benefit, that India and America should have both come out ahead. Perhaps because trade is not free, the reality has not fitted the theory. David Autor, a professor at MIT and a research associate at the National Bureau of Economic Research, has shown that for America the benefits of lower prices do not exceed the harm from increased unemployment, higher welfare payments and lower taxes paid.
Do MNCs have a duty to the world, if not to their home country? Mr Bhagwati ignores the environmental impact of offshoring. MNCs that might otherwise claim to be profit maximisers generally have accepted a level of environmental responsibility, trumpeting their green initiatives. At the same time they offshore production to China, often to use processes that are environmentally unacceptable in the developed countries, where the electricity is primarily coal fuelled and pollution controls are weak. Air particulates in Beijing have recently repeatedly measured 30-45 times the level recommended by the World Health Organisation. China then “offshores” the problem: 29% of air particulates in San Francisco are believed to originate in China.
Advice to MNCs: when in China, do as the affluent Chinese do—leave. As Michael Pettis, senior associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, says: “in 2011 found that 14 percent of China’s high-net-worth individuals had either emigrated or were in the process of doing so. In addition, 46 percent were considering permanently moving overseas.” If wealthy Chinese are fleeing China, how wise is it for MNCs to have so much of their assets and technology there?
The duty of MNC to country is perhaps best judged at the extreme. In the second world war did American and British MNCs have a duty to their home countries? I believe almost all would say “yes”. How much manufacturing, IT and other services does America have to lose to offshoring, how big do the resulting trade and budget deficits have to grow, how much does its defence industrial base have to erode, before a similar duty-creating crisis exists? The affirmative position calls primarily for using objective self-interest-based sourcing decisions now to avoid reaching that crisis level later.
Jagdish Bhagwati — Closing Remarks:
Harry Moser’s rebuttal does not meet any of the objections that I made to his proposal that multinational companies going abroad should maintain a “strong” national presence.
In particular, he simply reiterates his view that outgoing MNCs damage America’s interest hugely. He gratuitously adds that I do not understand the issues at hand (which is possible but not probable) or that I display “a total lack of caring for the millions who have suffered”.
He also now says that the outgoing MNCs should think of the “long-term” implications of their decisions; and that their investment decisions are based on “short-term” considerations. In the latter regard, he takes me to task for thinking that R&D location by an MNC abroad, rather than at home, is not a cause for concern. But he is wrong on both counts.
First, he asserts that outgoing MNCs are “the major cause” of “an unsustainable $550 billion per year trade deficit”. This is wrong at several levels. At the outset, against the outgoing MNCs, there are the incoming MNCs. It is common to forget this. Thus, in a BBC radio programme, I was debating with the angry mayor of the French town that Hoover had moved out of in order to relocate in Britain. I told him that Hoover was an American firm and that he had not complained when it located itself in his town. Similarly, we know that Route 495 has a segment which is called “the Autobahn” because several German MNCs have moved into South Carolina while the old textile firms have moved south.
Moreover, the overall ex-post trade deficit has to do with macroeconomic factors. To illustrate, if Greece keeps spending in excess of its income, it will inevitably end up with a trade deficit. Neither currency devaluation nor trade policy can ameliorate the situation. Also, when many in America were criticising Japan in the 1980s for being a wicked trader that subsidised exports and excluded imports, a common argument was: look at its huge trade surplus. But Japan had a trade deficit when its barriers were high, not low.
Second, the competitiveness of a specific sector will determine whether it exports net or imports net. But this competitiveness is hardly likely to be undermined by MNCs investing abroad. In fact, by investing abroad, American MNCs generally manage to reduce their costs of production and hence increase their competitiveness, not reduce it. (That this may not always work, for reasons that I spelled out in my opening statement, is of course true. But that it will never work, or is likely to fail, is not true.)
Next, consider Mr Moser’s assertion that I do not understand that R&D must be located in the home country of the MNC. This is the fallacy of misplaced concreteness. Why should the fruits of R&D, undertaken by the MNC at home or abroad or on the Moon or on Mars, be not available to the MNC? Walk into any R&D lab, in Cambridge or in Chennai, and you will see nationals from different countries working in them. Mr Moser is behind the curve: his nationalism is not shared by the young scientists who travel far and wide for work and experience.