Global firms tend to be systematically different from domestic firms. They are larger and have more market power; they are more productive and grow faster; they have broader international supply networks, and are often both the world’s largest importers and the world’s largest exporters.4 Looking at the list of the top 1 percent of US exporting companies, 36 percent of them also appear among the top 1 percent of US importers. Of the companies on the list of top importers, 53 percent are also top exporters (fig 7.3).
Figure 7.2: Multinational Companies Do the Vast Majority of All US Trade
Note: Data are for 2014, the most recent year with data available. Data source: US Bureau of Economic Analysis.
These facts have profound implications for the consequences of protectionist trade policies. Even if it were desirable to encourage exports and discourage imports, which Chapters 3 and 5 argue against, protectionist policies are likely to hurt the very same firms that they help, while simultaneously raising consumer prices and creating adjustment costs for the larger economy.
Figure 7.3: The Top US Exporters and Importers Are One and the Same
Source: J. Bradford Jensen, “Importers Are Exporters: Tariffs Would Hurt Our Most Competitive Firms.” Peterson Institute for International Economics. December, 2016. Reprinted with permission from Peterson Institute for International Economics.
Who Are They? Who Is Us?
Multinational corporations also confuse questions regarding companies’ nationality. Indeed, the most global companies act as if they have no nationality, as they spread their activities throughout the globe. In some cases, companies even split their headquarters activities across multiple nations.5 The very definition of a headquarters has been muddied: is it where the company’s stock is listed, where the company’s tax residence is, or where the company’s management and control take place? And what if management and control are scattered around the globe?
As Chapter 3 discussed, the production processes of many goods have become increasingly globalized, due to technological advances and the increased openness of many countries to international trade. Multinational companies use international supply chains to produce a single product across multiple countries. Boeing 787 airplanes are made up of complex parts sourced from the United Kingdom, Japan, Sweden, Australia, Canada, Korea, France, Italy, and elsewhere.
If one were determined to alter the US trade balance through one’s car purchase, it wouldn’t be immediately clear how to do so. Is it better to buy a Ford car that was designed in Michigan and assembled in Mexico with parts from Canada, Japan, Ohio, and China? Or a Japanese car that was designed in Japan and built in Ohio, also with parts from many countries? A 2011 analysis finds that the Ford Fusion has 20 percent American parts and the Honda Accord has 80 percent American parts, despite the fact that Ford is an American car company and Honda a Japanese one.6
While it is possible for a car buyer with nationalistic inclinations to find a content label listing the countries from which the largest sources of value originated, many other consumer products present a deeper mystery. One country of origin is stamped on the product, yet given globally fragmented production processes, it might not be the country where the majority of the product’s value was created. For example, iPhones imported from China have far more American than Chinese content. This can make trade data misleading, since such data capture the full prices of goods as they cross borders, not merely the value added in the sending country. A value-added measure of trade would make the US trade deficit with China far smaller.7
The Benefits of Large Global Firms
Multinational businesses come with tremendous advantages for both workers and consumers, and these are important to acknowledge before we turn to the policy challenges surrounding them. First, global corporations may heighten competition in many markets. When foreign firms enter the US market, or when US firms enter foreign markets, competition increases and domestic firms lose market power. Many countries of the world are far smaller than the United States, and these competitive effects may be especially important for them. Imagine if a country the size of Norway or Costa Rica had to rely on domestic firms for all of their mobile phones or airlines; they would likely be at the mercy of monopoly providers. It is unlikely that the scale of the country would support multiple domestic companies, so the Norwegians and Costa Ricans are better off due to the competitive influence of foreign companies. Even in large countries like the United States, foreign firms often provide useful alternatives to domestic firms. They are also a source of job opportunities, new technologies, and new products.
The world’s largest multinational corporations are typically successful for a reason. They make good products, and they spread information, technological progress, and innovation. They also provide variety to customers throughout the world.
For example, the world’s most profitable company in 2016 was Apple Computer. The popularity of its products is undeniable. Many consumers enjoy using Apple’s shiny, sleek products and shopping in stores that look like glass boxes. The products are famously user-friendly; a preteen can set up computing functions that used to puzzle PhD engineers. Apple’s innovative products have inspired its competitors to make better, more user-friendly, products. And Apple’s concern with maintaining its dominance has kept it ceaselessly seeking out additional ways to please its worldwide customers. Its products have spurred innovation both upstream (to parts suppliers that make their chips and screens) and downstream (as users utilize their devices as inputs to their own production processes).
Made in America (Thanks to Italy and Japan)
Jeep workers at the sprawling Toledo Assembly Complex in Ohio are quick to voice their economic patriotism: local efforts to “keep Jeep” in town are just one expression of a fierce loyalty to American products. Over 90 percent of the parts needed to produce fifty thousand Jeeps in Toledo each month are sourced from communities within fifteen hundred miles of the plant. But the ownership of this classic car presents a twist in the quest to “buy American”: since 2014, Jeep and its parent company Chrysler have been part of the Fiat family.
After completing its total acquisition of Chrysler, the Italian, London-headquartered Fiat Automobiles became the seventh-largest automaker in the world. Its Jeep Wranglers topped Cars.com’s 2017 American Made Index, joined by four Honda-produced vehicles. Six out of the ten “most American” cars (based on the source of their parts) are made by foreign firms. Large foreign involvement in American auto production is part of larger foreign direct investment trends; the United States receives more foreign direct investment than any other country, at $391 billion in 2016. The United States is also the largest source of foreign direct investment, sending $299 billion abroad in the same year.1
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1. See UNCTAD, World Investment Report 2017 (Geneva: United Nations Conference on Trade and Development, 2017); 2016 is the most recent year with available data.
As it turns out, Apple is also an exceptionally profitable company; its worldwide profits in 2016 were $45 billion. Many of these profits were booked offshore in tax havens. While much corporate tax avoidance is perfectly legal, it does indicate that our tax system is not working as advertised. Profit shifting diverts tax revenue from government treasuries, presenting a big challenge for policy-makers. (The recently enacted U.S. tax legislation, discussed further below, will not solve this problem.)
In short, the large, multinational companies that drive international business generate many benefits. But they also present important policy concerns regarding market power, effects on labor, regulatory competition, and tax competition. The next sections address these four areas of concern.
Concern 1: Multinational Firms are Becoming Larger and More Powerful
The concentration of economic activity in the hands of the largest and most powerful multinational companies has been increasing. McKinsey Global Institute calculates that the top 10 percent of the world’s public companies ea
rn 80 percent of the profits. Companies with more than $1 billion in revenues account for 60 percent of revenues and 65 percent of market capitalization.8
Two Global Giants on the New Silk Road
The Chinese company Alibaba got its name from the Arabian Nights tale of “Ali Baba and the Forty Thieves”; it evokes images of loaded caravans and vast treasure troves. Globally, the name now conjures internet marketplaces rather than souk stalls, but the treasure remains. The Alibaba Group is the largest e-commerce firm in China, and it handles a greater volume of transactions than eBay and Amazon combined. In 2017, the company launched in Singapore, Malaysia, Hong Kong, and Taiwan as part of an effort to reach two billion customers over the next fifteen years. If trends persist, Alibaba’s sales will soon exceed the dreams of even the forty thieves; the company’s 2016 Singles’ Day shopping festival was the biggest one-day retail event ever, hitting gross merchandise volume of $17.7 billion.
Alphabet, Google’s parent company, is pursuing knowledge and profit as relentlessly as Alibaba. Much of Google’s (and thus, Alphabet’s) revenue comes from search advertising. Alphabet controls 88 percent of the search advertising market, and in one recent quarter alone (ending March 2017) it drew profits of $5.43 billion. Big money means big projects, which come under Alphabet’s “Other Bets” division: the company has entered the broadband business (Google Fiber), the home automation space (Nest), and the self-driving phenomenon (Waymo and X). For Alphabet and Alibaba, the new Silk Road is made of silicon.
Annually, Forbes produces a ranked list of the largest two thousand public companies in the world (based on evaluation of their sales, profits, assets and market value). Comparing these lists reveals the increased profitability of the world’s largest companies in recent years. From the 2004 to the 2018 list, combined profits of the top two thousand companies increased over 400 percent, while sales of these companies increased about 200 percent. Although the sales of the top two thousand global firms increased at a rate commensurate with world GDP growth over this period, profits increased much faster—despite the collapse of profits in the years surrounding the Great Recession. By 2017, the Forbes Global 2000 collectively made a profit of about $3.2 trillion on $39 trillion in sales.
There is substantial evidence that market concentration is on the rise. In most sectors of the economy, the share of revenues earned by the largest firms is increasing. So are excess profits—profits above the normal (market equilibrium) return on capital—which are typically associated with firms’ market power. The market returns of the most profitable companies are larger than ever before, rising dramatically relative to those of typical firms (fig. 7.4).9 In the United States, estimates suggest that excess profits make up three-fourths of total corporate profits.10
Concern 2: The Power of Global Companies Creates Downsides for Workers
The multinational nature of large firms, as well as their dominant position, gives them more bargaining power with respect to suppliers, labor, and even governments. Intriguing new research by a team of researchers at MIT, Harvard, and the University of Zurich has established a relationship between the rising market dominance of large companies and the declining labor share of income.11 They find evidence that technological change increased the concentration of market share in the hands of a small number of companies, and they show that these mega-companies have lower labor shares of income than typical companies. (There are fewer workers relative to other factors of production.) Thus, as the world’s largest corporations become more and more dominant, and account for a larger share of national income, the labor share of income falls accordingly, since these companies use fewer workers to produce a given value of output.
Figure 7.4: The Most Successful US Companies Pull Away from the Pack
Note: Lines show the performance of US firms in terms of their return on capital invested, excluding goodwill, in percentages. Source: Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality,” presented at “A Just Society” Centennial Event in Honor of Joseph Stiglitz, Columbia University, October 16, 2015.
Declining labor shares have also been associated with large increases in cash stockpiles by corporations.12 More and more of worldwide income takes the form of corporate profits and retained earnings, disproportionately held by a small number of highly successful companies. In the United States, corporate profits in recent years are higher as a share of GDP than they have been at any point in the last fifty years, in either before-tax or after-tax terms. Since 1980, corporate profits after tax have increased dramatically, from about 6 percent of GDP to over 9 percent of GDP.13
And the cash stockpiles of the world’s most successful companies are not necessarily fueling the sorts of investments that ultimately benefit workers by raising their productivity. In fact, greater market concentration has been associated in recent years with lower investment.14 Many prominent macroeconomists worry about an excess of savings relative to investment—among them, Ben Bernanke, who worries about a “savings glut,” and Larry Summers, who is pessimistic about “secular stagnation.”15
When companies earn outsized returns, this squeezes the returns for other factors of production throughout the economy. Workers in the most successful firms often do just fine, but as more and more of national income accrues to the most successful firms, workers in other companies experience greater competition and lower real wage increases.
David Weil has argued that the workplace is becoming increasingly “fissured” so that non-core tasks (such as janitorial services and payroll processing) are often outsourced to other companies, and even offshored to other countries. These more routine jobs face intense competition; employers with lower profit margins and a labor-intensive product have intense pressure to keep labor costs under control.16
The increased market power of the world’s largest multinational corporations has important consequences for both efficiency and economic inequality.17 In terms of efficiency, one can never be certain that companies with market power make economic decisions that are consistent with the social interest; they might squelch innovations by less powerful competitors, or hike prices excessively in the absence of sufficient competitive pressures.
There are also large implications for wealth and income inequality. Among workers, pay disparities are exacerbated by the fact that the most successful companies’ workers are more highly compensated. More important are the rents generated by the market power of these companies, which disproportionately accrue to the well-to-do.18 Company shareholders and executives take the lion’s share of the excess profits associated with market power, and capital gains and dividends are far more concentrated in the hands of those at the top than labor income is.19
In part due to large corporations’ market power, but also due to social norms and tax policy, CEO pay has skyrocketed in recent decades. Since the late 1970s, CEO pay has grown by over 900 percent (in inflation-adjusted dollars), and it now averages $15 million a year. CEO pay is three hundred times that of typical company workers, a ratio that has increased tenfold just since 1980, when CEOs earned thirty times the average salary of their companies’ workers.20
Concern 3: How Can National Governments Regulate Global Firms?
Supersized global companies raise concerns about harmful effects on consumers due to market power. Still, there are policy tools available to willing governments. Antitrust laws, while made and enforced at the national level, often have global reach. The Federal Trade Commission and the US Justice Department have authority over all companies that wish to operate in the United States, or sell to US consumers, regardless of the nationality of their corporate headquarters.
Similarly, the European Commission has authority over those companies that wish to sell in the European market. Indeed, they have asserted this authority in many high-profile cases. When Boeing and McDonnell Douglas were planning their merger, the Europeans were initially unwilling to allow it, fearing anticompetitive effects
on the global commercial aircraft market. (The two companies could have merged anyway, but they would have risked their access to the large and wealthy European market by ignoring the objection.) Only after meeting several preconditions set by the European Commission, including the voiding of previously negotiated long-term contracts with airlines, was the merger allowed to proceed. The Europeans have also challenged the competitive practices of Microsoft, Google, and other major US multinational corporations.
Jurisdictions with large and rich markets, like the United States and the European Union, have the ability to regulate multinational companies, since companies have strong incentives to keep their access to such markets. Smaller countries, like Belgium and Costa Rica, may have less power over large firms. This provides an additional rationale for larger regional agreements like the European Union, beyond the previously noted gains from international trade and smoother international relations. European Union member countries like Belgium have more sway over global companies if they work together as part of a larger, supranational market.
At the same time, given the mobility of international businesses, there are concerns about national governments competing to attract them. For example, if multinational mining companies respond to environmental regulations by forsaking countries with environmental regulations in favor of countries that allow environmentally hazardous production methods, that can lead to a “race to the bottom,” where countries try to outdo one another by lowering regulatory burdens and cutting taxes in hopes of winning businesses’ favor. Evidence suggests that a race to the bottom may be of particular concern in the case of extractive industries such as oil drilling and mining, especially in developing countries. In the past, this race to attract extractive industries has led to excessive resource depletion and toxic pollution, made all the more painful by disappointing gains in job creation and economic growth.21
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