Research by Susan Feinberg and Gordon Phillips
OFF-SHORING. OUT-SOURCING. THESE ARE FIGHTING WORDS IN THE PUBLIC POLICY ARENA, WHERE THE CRY IS OFTEN HEARD TO “STOP SENDING AMERICAN JOBS OVERSEAS!” SMITH RESEARCHERS HAVE FOUND EVIDENCE THAT CONTRADICTS THE COMMON WISDOM ABOUT THIS HOT TOPIC. SURPRISINGLY, IT’S NOT AN EITHER/OR SITUATION. IT’S OFTEN A WIN/WIN SITUATION.
Multinational corporations are an increasingly important source of production and employment in industrialized countries. These firms have higher accounting profits, higher stock market valuations and higher advertising and R&D than firms that only produce and sell domestically. In their paper, “Growth, Capital Market Development and Competition for Resources within MNCs,” Susan Feinberg, assistant professor of international business, and Gordon Phillips, professor of finance, look at the factors that affect the growth of these firms. For the past two years, they have been working on an empirical study of the resource allocation patterns in multinational corporations (MNCs). They were particularly interested in whether MNCs systematically grow by allocating resources away from divisions in some countries to expand in others.
Feinberg and Phillips examined the association between the employment growth of a unit of the MNC and the attractiveness of the MNC’s growth opportunities in other markets. “There’s an assumption that there is a substitution effect— that more jobs overseas means fewer jobs in the United States,” says Phillips. “In fact, we find just the opposite. When U.S.-based MNCs have more attractive growth opportunities in their overseas subsidiaries, they experience higher growth in the parent company in the U.S.”
These findings are based on a statistical analysis of U.S.-based MNCs and their foreign affiliates from the Benchmark and Annual Surveys of U.S. Direct
Investment Abroad, administered by the Bureau of Economic Analysis, U.S. Department of Commerce. Containing detailed financial and operating data, these surveys produce the most comprehensive data available on the activities of U.S.- based MNCs and their foreign affiliates. The data used in this study included 864 U.S. MNC parents and more than 8,400 foreign affiliates from 1983 to 1996. Employment change in U.S. MNC parents and their foreign affiliates was used as a measure of growth. Since Feinberg and Phillips examine MNC growth in more than 40 countries, they needed to use a measure of growth that was less directly affected by changes in exchange rates than measures such as sales or assets. The researchers were surprised at the turn their findings took.
“When we examine the employment growth of foreign affiliates, we find that overall, there is less growth in these divisions when MNCs have attractive opportunities in the U.S. We call this ‘resource-constrained growth.’ In contrast, we find that employment growth in U.S. parents increases when parents have attractive growth opportunities in their foreign affiliates. MNCs with an efficient network of foreign subsidiaries in high-growth countries experience more employment growth in the U.S. than MNCs with less efficient foreign subsidiaries in relatively slow-growth countries,” says Feinberg.
Feinberg and Phillips find evidence that financial and knowledge-based resources are important to an MNC’s ability to grow with minimal competition for resources between divisions. Foreign affiliates of MNCs with higher levels of R&D and greater financial resources grow with no apparent constraints.
“The negative relationship between foreign affiliate employment growth and the growth opportunities of U.S. parents exists only among affiliates of low-R&D MNCs and MNCs with relatively limited financial resources,” notes Feinberg. Internal competition for resources within MNCs also varies with the characteristics of the host country in which an affiliate is located. “Affiliates in countries with small financial markets—where it’s harder to raise capital—face more resource constraints. Even in emerging markets, most of the affiliates raise capital in their local country, so if there isn’t much capital available, that represents a significant resource constraint,” says Phillips.
High capital market growth, on the other hand, allows affiliates to grow with no apparent resource constraints. As countries undergo capital market liberalization, affiliates face fewer internal constraints to growth, and their growth becomes more closely related to their own efficiency. In countries with less developed capital markets that do not undergo liberalization, affiliates continue to grow with resource constraints.
In future research, Feinberg and Phillips hope to examine how capital market development in an affiliate’s host country affects competition between affiliates and local firms, and the extent to which MNCs change their distribution of local costs and sales to hedge exchange rate exposure.
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