Recent Research: Multinationals, deindustrialization, and regional economic development

April 13, 2017
By: Jonathan Dworin

Much has been written – both here and elsewhere – about the role of trade and automation in declining U.S. manufacturing employment. Recently released preliminary research published by the U.S. Census Bureau’s Center for Economic Studies finds U.S. multinationals were responsible for a disproportionate share of manufacturing employment declines from 1993 to 2011. These results underscore the challenges facing economic development in deindustrializing regions, particularly those reliant on the branch plant economy.

In Multinationals, Offshoring, and the Decline of U.S. Manufacturing, authors Christoph Boehm and Nitya Pandalai-Nayar from the University of Michigan and Aaron Flaaen from the Federal Reserve Board of Governors, use a new dataset containing production and trade information for U.S. manufacturing firms, augmented with multinational ownership and affiliate information. The authors present three interrelated findings. First, the authors find that U.S.-based multinationals were responsible for a disproportionate share of the aggregate manufacturing decline. Second, they find that U.S. multinationals experienced lower employment growth than a control group of firms with similar characteristics. Third, they find that establishments transitioning into U.S. multinational status (e.g. companies that were merged or acquired) experienced prolonged job losses while the parent firm increased imports. Relatedly, the authors find evidence that imported intermediaries act as a substitute for U.S. employment.

Taken together, the authors suggest that the actions of multinational firms had an oversized impact on manufacturing job loss in the United States. These findings introduce a slew of challenges to contemporary economic development policy.

First, the findings illuminate an uncomfortable reality around job creation. While economic development professionals consider regional employment among their top priorities, commentary from the Nieman Foundation for Journalism at Harvard University argues that corporations and multinationals in particular are in the business of profit maximization, not job creation, and capitalism rewards profit, not employment. Additionally, as author Henry Banta notes, “there is a serious hostility in the corporate world to any discussion of the tax advantages enjoyed by multinational firms even though these advantages, in effect, subsidize the export of American jobs.” Although Americans increasingly work for large employers, catering to wants and needs of multinational firms is by no means a guarantee that they will create the jobs sought by economic developers.

Similarly, evidence continues to mount that the benefits of tax incentives offered by state and local governments to attract and retain multinationals and other businesses may be negligible at best and destructive at worst. Recent research by Timothy Bartik of the Upjohn Institute finds that most incentives are costly, ineffective, and lack transparency. A recent Washington Post Monkey Cage commentary by Brown University’s Josh Pacewicz and U.C.-Davis’ Stephanie Lee Mudge takes this one-step further, decrying this race to the bottom as the “real problem” facing deindustrialized communities. Beyond jobs that are fleeing the country, Pacewicz and Mudge note, the jobs that are staying do not offer the same wages or benefits that they once did. Furthermore, they argue, the United States does not have the policies in place nationally that prevent corporations from pitting cities and states against each other.

Because the tendencies of multinationals (e.g., increased trade, increased automation) are at direct odds with manufacturing employment, a case can be made for multinational corporations enduring the bulk of community ire. While many critics argue that automation is to blame for the majority of manufacturing job losses, economist David Adler, writing in City Journal, argues that it is “much easier for pundits and politicians to worry about futuristic issues like the tradeoff between robots and humans rather than do something about the grimy, real problems of deteriorating manufacturing output and competitiveness.”

The question then turns to the best way to address these “real problems.” Boehm, Pandalai-Nayar, and Flaaen conclude their report by suggesting that policies encouraging globalization and integration take into account potential impacts on manufacturing workers. While the authors do not highlight specific initiatives, programs such as the Department of Labor’s Trade Adjustment Assistance program may be worthy of consideration. Recent research from Brookings, however, finds major issues with U.S. efforts: they are poorly funded compared to international efforts, overly segmented, and are reactive, not proactive.

Prioritizing policies that help firms of all ages, sectors, and sizes grow and scale, as opposed to merely calling for the creation of new businesses, would be advantageous to policymakers, according to research from the World Economic Forum. Programs such as NIST’s Manufacturing Extension Partnership, which seek to make small and medium sized (SME) manufacturers more competitive, have had a positive impact – and return on investment. A recent evaluation by the Upjohn Institute finds that every $1 invested by the federal government in the program yields nearly $9 in return, based on conservative economic models.

Bartik, as cited in a recent Governing article, suggests that effective efforts to positively support state and local economies take time. Education initiatives such as early childhood schooling, community college training programs, and technology-based economic development activities such as incubators or research grants, may lead to longer-term job gains. These policies are not “something where you’re going to be able to snap a finger and affect things in a couple years,” Bartik says in the article.

Although more than 90 percent of imported goods in the United States are imported by multinationals, according to Boehm, Pandalai-Nayar, and Flaaen, many firms are beginning to alter their behaviors. . Recent research led by professors at Ohio State University finds that firms “reshore,” or migrate from a low-cost to a high-cost location, for a variety of reasons beyond cost, such as access to an industry cluster and being closer to customers. The manufacturing interest group ReshoreNow finds that, without considerable productivity increases, “Eliminating the trade deficit by substituting domestic production for imports (reshoring) or exporting more will bring back 3.35 million jobs at current levels of productivity.” Walmart’s $250 billion commitment to support American manufacturing by working across the company’s supply chain may present a model for corporate involvement beyond reshoring.

Deindustrialization and manufacturing unemployment has had a profound impact on community development. Research suggests that globalization led multinationals to disinvest from local communities in favor of locations with more favorable labor, environmental, or tax environments. Places that operated as part of the branch plant economy such as Flint and Youngstown were particularly hurt by deindustrialization. These cities, which researcher Aaron Renn calls “shadow cities,” face particularly stark challenges because they are increasingly subject to structural macroeconomic changes that exceeded their influence or control. The relationship between deindustrialization and social anomie is also explored in recent books on Ohio cities such as Glass House, which discusses Anchor Hocking and Lancaster, and Hillbilly Elegy, which touches on the former importance of Aramco jobs in Middletown.

Boehm, Pandalai-Nayar, and Flaaen conclude their report with two caveats on their research’s potential shortcomings. First, they note that gains from cheaper manufactured goods accrue to consumers, so their findings do not necessarily imply aggregate welfare decreases. This is what Enrico Moretti refers to as the “productivity paradox” in his seminal book A New Economy of Jobs, where “the very people who have been hit the hardest in terms of jobs have gained more as consumers.”

Relatedly, because the authors solely focus on manufacturing industries, it is likely that foreign sourcing is also complementary to employment in U.S. service industries. Service industries do not pay as well as manufacturing, and they do not have the same multiplier effect as manufacturing or innovation-based jobs. The economic restructuring from a manufacturing-led to a service-based economy has been a drawn out, painful process for many deindustrializing communities in the Rust Belt and beyond. In the absence of multinationals, many of these communities are pinning their hopes that research oriented institutions such as hospitals and universities – which overwhelmingly employ service workers – can act as anchors for future economic development opportunities.

Overall, focusing the deindustrialization conversation around multinational firms illuminates the trajectory of regional economic development. The approaches of traditional development – tax incentives geared toward attraction and retention – have proven helpful for maximizing profits but ineffective for job creation. Economic development policies that get to the heart of job creation, such as manufacturing extension focused on increasing SME competitiveness, could potentially advance better prospects for the future. Most of all, policies that address individuals – such as educational opportunities, workforce training, adjustment assistance programs, and programs offering entrepreneurial support – may offer the best prospect for boosting the livelihoods of citizens in deindustrialized regions.  

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